NASD Charges Online BrokerWith Secretly Inflating Prices. Securities regulators have brought fraud charges against a deep-discount online broker, pointing up the dangers investors might face when they go looking for ever-cheaper stock trades on the Net.
The regulatory arm of the National
Association of Securities Dealers said
Wednesday U.S. Rica Financial and its chief
executive, Vinh Huu Nguyen, deceived
customers by secretly inflating prices on stock purchases.
The NASD said that U.S. Rica Financial lured investors with $4.95
commissions and even special "commission-free" trading days, but was in
many cases selling customers stock out of its own proprietary account.
According to regulators, U.S. Rica regularly purchased stock on the open
market for itself and then in turn sold the shares to its customers at a mark
up -- sometimes as much as 29% of the price. Vinh Huu Nguyen, U.S.
Rica's chief executive, also was named in the complaint.
In each case, the NASD said, the San Jose, Calif., firm told customers
they were getting the best price available. Indeed, securities laws require
brokerage firms to execute their customer's trades at the best available
market prices.
"I think it's important that, given the prominence of advertising from online
brokers about low cost, people realize that some things may not always be
as they're portrayed," said Barry Goldsmith, head of enforcement for
NASD Regulation. "You need to read the fine print, read the disclosures
and pay very close attention to your trading confirmations."
For his part, Mr. Nguyen said that his company has done nothing wrong,
and will fight the charges. "We continue to take care of our customers.
That's really all we can say," he said.
U.S. Rica's Web site (www.usrica.com) plays up its deep-discount
commissions. In addition to $4.95 stock trades, U.S. Rica also offers an
unlimited-trading plan for $29.95 a month -- referred to as a "low-cost,
worry-free commission plan." In both cases, investors are assessed a
$2.50 "service charge" per trade.
The NASD said those low commissions disguised a scheme to sell
customers overpriced stock, with some of the purchases dating back as
early as December 1998.
According to the complaint, in just under one month in early 1999, U.S.
Rica funneled 263 trades through its own account, netting the firm
$37,132.95 in illegal profits.
On Feb. 17, 1999, the NASD said, U.S. Rica advertised a
"commission-free day." But many trades on that day weren't executed on
the open market, and customers again were sold shares at inflated prices
from U.S. Rica's own account, according to the NASD.
The NASD alleged that U.S. Rica pocketed $2,156.25 from mark-ups
during the promotion.
In some cases, the discrepancies between what U.S. Rica charged
customers for stock and the price the firm actually paid were small, yet still
added hundreds of dollars to the cost of the trade. For instance, the
NASD said that in one trade, Mr. Nguyen purchased a stock for $22.375
through U.S. Rica's inventory account, and then sold the shares to a
customer for $23 apiece. The customer's confirmation statement indicated
the shares had been acquired on the open market for $23, plus the $4.95
commission charge. But the customer actually was charged a mark-up of
$312.50.
And in some cases, the broker's allegedly illegal profits were huge. The
NASD said that in December 1999, a customer placed an order to buy
10,000 shares of Oxis International, a Portland, Ore., maker of medical
devices. The customer was told the trade went through at $7.50 a share,
the NASD said, when in reality U.S. Rica obtained the shares for $5.80
each -- adding a whopping $17,000 to what the customer should have
paid for the purchase.
The NASD said U.S. Rica also cheated investors on stock sales, telling
customers that their shares sold for less than U.S. Rica actually sold them
for in the market. In many cases, the complaint alleged, the difference was
hundreds of dollars.
In its complaint, the NASD noted that U.S. Rica was ranked among the
top 10 brokers for overall low cost by Gomez Advisors, a Lincoln, Mass.,
consulting firm that tracks online brokers and other e-commerce
companies. According to the review posted on Gomez' Web site
(www.gomez.com), "If you are looking for a cheap, no frills broker with a
no-minimum deposit, U.S. Rica may be for you."
Dan Burke, senior brokerage analyst for Gomez, declined to comment on
the firm's ranking, but said NASD actions are taken into account when
evaluating firms. "Investors should definitely be looking at issues other than
just cost when they pick an online broker," he said.
U.S. Rica was ranked 8th on the Gomez Web site in the cost category, but
ranked 52nd out of 53 firms overall.
Bradley Skolnik, an Indiana securities regulator and president of the North
American Securities Administrators Association, said that the dramatic rise
in the number of online brokerage firms -- particularly little-known firms --
demands that investors be more diligent when choosing a broker.
"It would be premature to comment on this case since all of the facts aren't
known, but at the very least I hope it shows investors that they need to do
their homework and not select a broker only on price," he said.
U.S. Rica was established in May 1995. According to NASD records,
there have been no other disciplinary actions against either the firm or Mr.
Nguyen. |
