Auric, what do you know about Josephthal & Co., Inc? Seems like the kind of Chop Shop business week had discribed?
TTR INC filed this 10-K on 03/30/2000.
10.1 Financial Consulting Agreement with Josephthal & Co., Inc.(4)
tenkwizard.com
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stockpatrol.com
JOSEPHTHAL – SELLING BUT NOT TELLING
What happens when a brokerage firm owns, or controls, a significant portion of a company’s public float? Just what must the brokers tell their customers when that firm decides to liquidate its position? These problems routinely confront brokerage firms who have underwritten relatively small public offerings and continue to make a market in the shares of such companies in order to support the stock.
What is the potential for abuse in such situations? NASD Regulation identified at least one area of concern on January 20, 2000, when it announced that a complaint had been filed against Josephthal & Co., and three of its top executives, charging fraud and unfair business practices. According to the NASD complaint, Josephthal, a New York based brokerage firm, dumped almost 1 million shares of a Nasdaq Small Cap company on the public without making proper disclosure to the purchasing customers.
According to the NASD, Josephthal engineered a major sales campaign in May 1996 in order to dispose of its inventory of VictorMaxx shares. Josephthal, which underwrote the Victormaxx IPO, was a major market-maker in that Company’s stock, accumulating substantial positions in its inventory, and suffering losses on those shares of $3 to $4 million. The NASD alleges that Josephthal’s Chief Executive Officer, Dan Purjes; Managing Director of Capital Markets, Paul Fitzgerald; and former Senior Managing Director for Equity Marketing, Matthew I. Balk, then concocted a scheme to cut the firm’s losses by selling Josepthal’s VictorMaxx position to the public.
Apparently, the Josephthal sales force had shown little interest in recommending VictorMaxx shares to their customers after the IPO. This all changed, according to the NASD, when Josephthal offered to pay its brokers extremely high commissions on sales of VictorMaxx stock – those commissions would equal about 29% of each sale. That apparently did the trick. During the 10 business days between May 17 and May 31, 1996 the Josephthal brokers sold almost 1 million shares to 400 customers at an average price of $2.10 a share.
Once this extraordinary sales effort was completed, and Josephthal had cleared its inventory position, VictorMaxx shares began their descent, dropping to less than one dollar within one month. By late 1996 the shares were trading at lows of 1 cent. In October 1996 the shares no longer met Nasdaq listing criteria and were delisted from the Nasdaq Small Cap Market.
What were Josephthal’s customers told about VictorMaxx while they were gobbling up the firm’s inventory? Not enough, according to the NASD. Josephthal, which continued to make a market in the shares throughout the sales campaign, never told its customers that it was dumping almost 36% of the Company’s stock on an unsuspecting public or that its sales force was receiving an extraordinarily high sales credit for their aggressive efforts. Of course, if customers had known those facts, would they ever have purchased the shares?
Should Josephthal have known better? The NASD reports that Josephthal and Purjes had settled a previous case alleging similar violations just days before the Victor Maxx scheme was perpetrated.
How can investors protect themselves against falling victim to such schemes? A few thoughts.
1. Be skeptical if your regular broker suddenly recommends a stock aggressively, particularly if the broker refuses to take no for an answer.
2. Be wary of telemarketing brokers who want you to open an account at their firm so that you can participate in their firm’s new hot recommendation.
3. If you have never heard of a company before (or aren’t familiar with its business) ask the broker to send you written information about that company before you invest. Is it a "house stock" – a company that this particular brokerage firm recommends or focuses upon, but which has little following elsewhere?
4. Ask your broker to provide you with a schedule of his or her firm’s commission rates. Make sure that this also includes the amount of sales credit that the broker gets for selling stock that is held by the firm in its inventory.
5. Even if you know the firm’s commission rates, ask your broker what the sales credit will be on each transaction. If the broker declines to tell you, or suggests that he or she isn’t privy to that information, you might be best advised to walk away.
6. Review every purchase and sales confirmation to see how much you are paying in commissions or sales credits. Unfortunately, when you are purchasing stock from a firm’s inventory, the confirmation will generally not tell you how much the firm paid for those shares. So ask the broker.
7. Check out a company’s trading history. Is the broker pushing you to buy shares of a stock that has seen little activity previously? If so, ask why the stock has gained sudden attention.
The sad reality is that, in the end, you may still be unable to determine whether a brokerage firm is scheming to dump shares on the public. Still, your best protection is to ask questions, and to insist on answers. Remember - Buyer be Wary!
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