Industry panel levies penalty against brokerage.
(National Association of Securities Dealers; Gilford Securities Inc.)
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Supervision of broker becomes focus of complaint
DOWNTOWN L.A. - Gilford Securities Inc. has been hit with a $905,000 penalty, including rare punitive levies, after a tripartite industry panel concluded it did not properly supervise a Los Angeles broker with a history of disciplinary problems.
The case again raises questions about the brokerage industry's ability to regulate itself and remove problem brokers, said the plaintiff's attorney.
An in-house attorney at New York-based Gillford Securities expressed disappointment in the NASD ruling. "We do not believe the award accurately reflects the facts of the case," said general counsel Joel Levinson.
The National Association of Securities Dealers arbitrators, in a decision which became public on June 27, awarded three local investors more than $900,000 - $580,000 in compensatory damages, and $325,000 in punitive damages - for the churning, improper crafting and other improprieties in their accounts, according to NASD documents and James Herman, lawyer for the three investors.
Punitive damages have been rare in arbitration hearings in the Los Angeles area, according to local securities lawyers, although the NASD said there are no official records on the topic.
The three investors charged a stockbroker at the now-closed Los Angeles branch of Gilford, Elias Argyropoulos, with unauthorized buying and trading or stock, including stocks on margin, which resulted in substantial losses.
Complaint fried
in February 1994, the investors brought their complaint before a three-person NASD arbitration panel, as is mandatory (investors with complaints against stock brokerages do not have recourse to the civil court system). The three NASD panelists were Henry Pollard, Michael Burnett and David Menaker.
According to the complaint, in the early 1990s Argyropoulos had invested clients' portfolios heavily into stocks touted by New York's Robert Blech, the so-called "Pied Piper of Bio-Tech" stocks. The broker received a special 5 percent commission and stock warrants for selling the stocks, according to the complaint.
Those stocks, in general, fell in value.
Evidently in efforts to recoup the losses, Argyropoulos traded heavily, bought stock on margin (while exceeding margin limits, called over-margining) and engaged in a practice known as "free-riding," according to documents filed with NASD arbitrators.
(In free-riding, a broker buys stock for a client, and, if the stock price goes up, sells the stock before five days has elapsed, which is the settlement period. In this way, a customer never has to put up account money to acquire a stock, yet a profit is posted. The problem arises when the stock goes down, and there are not sufficient funds to buy the stock.)
He also promised the clients he would bring the account values up, if allowed to trade in the stocks at will, according to the complaint.
Argyropoulos could not be reached for comment, and his counsel in the case, Timothy McGonigle of the Los Angeles-based law firm Ruben & McGonigle, did not return calls last week.
Memo written
Former branch manager Christopher Benz noted Argyropoulos' actions in a Dec. 11, 1992 memo he sent to Gilford Securities Chairman Ralph Worthington.
"There is no doubt that most of Elias's (Argyropoulos) clients are unaware of the illegality or potential consequences of not meeting FED (margin) calls on purchases. I believe Elias is free-riding for his clients in an attempt to make up losses from earlier in the year," the memo stated.
Despite the memo, Gilford Securities kept Argyropoulos employed for another year.
"I think that's why the panel gave the punitives," said Herman. "I have never seen a large punitive on the West Coast. But I think that the fact that this broker had a disciplinary record, and was hired and then not properly supervised, convinced the panel that a punitive damage was warranted."
Argyropoulos has been a broker for almost 20 years, having previously worked for Oppenheimer & Co., Shearson Lehman Bros., Drexel Burnham Lambert, Blyth Eastman and Merrill Lynch.
The NASD barred Argyropoulos from the industry in July 1994, after he consented, without admitting or denying, to findings of "manipulations and deceptive practices," in connection with the Gilford Securities matter.
The NASD censured Argyropoulos once, in 1988, for depositing personal funds into a client's account, to cover losses. He was simultaneously fined $500.
Part of the problem with NASD record-keeping is that arbitration cases, if settled prior to a ruling, do not become part of a broker's disciplinary record, according to one official at the NASD who did not wish to be identified.
Ironically, that results in the most clear-cut cases of wrongdoing, in which the brokerage house settles rather than going the full arbitration route, not becoming a part of a broker's or brokerage's record.
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