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NASD Regulation Hearing Panel Orders Josephthal & Co, Inc., Two Execs To
Pay $3.3 Million In Fines And Restitution For Fraud And Unfair Dealing With
Customers
An NASD Regulation Hearing Panel has ordered Josephthal & Co., Inc. of New
York City and its two top executives to pay $3.3 million in fines, restitution, and
interest to more than 360 customers defrauded in a scheme using what the Panel
called "tactics typically associated with 'boiler room' operations." The Panel ruled
Josephthal violated federal securities laws and NASD conduct rules during a
massive sales effort in 1996 aimed at selling the firm's position of approximately
one million common shares of VictorMaxx Technologies, Inc.
Josephthal and its then-CEO, Daniel D. Purjes, were ordered to pay close to $1.5
million in restitution plus interest, currently more than $750,000, to defrauded
customers. Josephthal, Purjes, and Josephthal's President, Paul H. Fitzgerald, also
were fined $500,000, $500,000, and $100,000, respectively. Together with the
accrued interest on restitution, which will also be paid to investors, the total
monetary sanctions exceed $3.3 million.
Purjes was suspended in all capacities until he requalifies as a General Securities
Representative and a General Securities Principal. If he fails to requalify within
two years from the date the decision becomes final, his suspension will be
converted into a permanent bar from the industry.
The Hearing Panel said Josephthal engaged in the massive sales effort aimed at
selling its VictorMaxx position in May 1996. As the underwriter of VictorMaxx's
initial public offering and dominant market maker for the stock, Josephthal
supported the stock from August 1995 until the beginning of May 1996 by
continuing to buy up available amounts in the marketplace. By mid-May 1996,
however, the firm had suffered actual losses trading the stock of more than $2.5
million, with another $1.3 million in unrealized losses on huge positions held by
the firm and its holding company.
In an effort to cut its losses, Josephthal--acting through Purjes and Fitzgerald--
decided to sell the position to the firm's customers. However, the firm's
representatives had shown little interest in retailing the stock until mid-May. To
induce the sales force to move the stock, Purjes and Fitzgerald made the stock
available to them at a quarter-point below the then-current bid of $1.75. This
"special" resulted in gross commissions of about 29 percent of an investor's total
purchase price for the stock--substantially more than the sales force stood to make
selling any other product. The result of this "selling blitz" was "immediate and
dramatic" according to the Panel, and created a "stampede" on the part of the sales
force. As a result, from May 17 to May 31, 1996, Josephthal's sales force
aggressively recommended VictorMaxx stock to its customers using "tactics
typically associated with 'boiler room' operations," including baseless price
predictions, failing to disclose their huge compensation arrangement,
unauthorized trades, and other sales practice abuses. In fact, confirmations
received by customers indicated that the stock was being sold without any
markup.
During these 10 business days, Josephthal brokers sold almost one million shares
in over 400 transactions at an average price of $2.10 per share. Sales during this
10-day effort represented nearly 36 percent of the tradable shares of the common
stock. Josephthal remained a market maker in the security throughout the
fraudulent sales effort. After exhausting its entire inventory, Josephthal's sales
force continued selling, going short another 277,000 shares, which it covered with
shares held by Josephthal's holding company.
Shortly after Josephthal sold its position, the market price of VictorMaxx
tumbled. Within a month, it was below $1, and continued to fall even more as
additional time passed. On October 24, 1996, the stock failed to meet minimum
listing criteria and was delisted from the Nasdaq SmallCap Market. Thus, an
investor who purchased during the May sales effort and held onto that stock for no
more than 45 days would have incurred more than a 50 percent loss. The Panel
found that Josephthal, Purjes, and Fitzgerald violated their obligation of fair
dealing by neglecting to disclose to their customers that they planned to quickly
dispose of their losing inventory position through a massive retail sales effort.
NASD Regulation did not allege that VictorMaxx knew that Josephthal was
selling off its stock in the marketplace or engaged in any wrongdoing.
In assessing the sanctions it imposed, the Hearing Panel expressly found that the
Josephthal's, Purjes', and Fitzgerald's misconduct was egregious, resulting in
considerable harm to more than 360 individual investors. The seriousness of the
violations was compounded by false testimony given by Purjes and Fitzgerald at
the hearing concerning, among other things, their knowledge of and involvement
in the fraud. Moreover, just days before the start of the VictorMaxx sales effort,
Josephthal and Purjes had settled with the NASD a case involving similar
violations. The Panel also found that Josephthal's disciplinary history and Purjes'
failure to comply with promises he made in connection with the earlier settlement
reflected "a grave disregard for their compliance obligations, which warrant[ed]
the imposition of more severe sanctions than the maximum suggested by the
[NASD Sanction] Guideline[s]."
Josephthal was ordered in the most recent decision to hire a qualified independent
consultant, approved by NASD Regulation, to review the firm's policies,
practices, and procedures with particular attention to its procedures regarding
compliance with Regulation M, the federal anti-manipulation statute, and to adopt
and implement any proposed changes.
In this instance, the complaint against Josephthal was filed in December of 1999.
In general, after a complaint is filed and served, a Hearing Panel, appointed by the
Chief Hearing Officer, conducts the hearing(s) and issues a decision.
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