Carefull TRAV:NASD Panel Orders Duke to Pay More Than $6.2 Million to Investors By JUDITH BURNS Dow Jones Newswires
WASHINGTON -- Duke & Co., under investigation by civil and criminal
authorities, was ordered to pay $6.2 million Thursday to an elderly
Oregon couple who lost more than a half million dollars in high-risk
investments touted by the New York brokerage firm.
A National Association of Securities Dealers arbitration panel found that
Duke and three of its principals violated securities laws, "acted with
malice," and "showed a reckless and outrageous indifference" to the
couple, and awarded them $5 million in punitive damages.
Additionally, the panel ordered the principals to repay $568,000 in
investment losses, plus interest, and reimburse the couple for their legal
fees and expenses, bringing the total to $6.2 million -- the third-largest in
U.S. history.
Duke & Co. is already under the gun, facing criminal investigation by New
York state authorities, and civil probes by federal and state securities
regulators eyeing possible trading abuses involving "microcap" stocks of
firms closely tied to Duke.
"There's no way you can make money with these stocks," complained
Robert S. Banks, Jr., a Portland attorney who represented the retired
couple. He said the two are "completely out of the stock market now" and
"very happy" with the arbitration award.
While hefty, the award isn't Duke's first: In July, the firm and a handful of
top officers were ordered to pay $1.1 million to a St. Louis investor.
Many complaints are pending against the firm, which closed up shop in
April, and attorneys expect a dozen or more such cases may follow. The
firm and its principals have denied wrongdoing. In fact, Duke chairman
Victor Wang sought to sever himself from the NASD arbitration panels in
St. Louis and Portland until criminal investigations are completed.
"There is a grand jury investigation" in New York, which undermined Mr.
Wang's ability to defend himself in the arbitration hearings, said Norman B.
Arnoff, of Capuder & Arnoff, in New York, who represented Mr. Wang
until earlier this month.
A spokesman for the New York City District Attorney's office declined to
comment; New York state authorities didn't return calls.
Arbitrators in the Oregon case denied Mr. Wang's motion, and found him
liable along with Duke president Gregg Thaler, and principal Charles
Thornton Bennett. All three men previously worked at Stratton Oakmont,
a Lake Success, N.Y., brokerage firm shut by regulators in 1996 for
securities violations.
Stratton Oakmont holds the record for arbitration awards. This month,
former executives were ordered to pay $13.1 million, including $10 million
in punitive damages, to an Indiana investor. Stratton was ordered to pay
$10 million in another case, the second-highest award.
Mr. Banks, who argued the Oregon couple's case, alleged that Duke ran a
classic "boiler room operation," similar to Stratton's, luring investors by
talking up blue-chip stocks, then convincing them to buy low-priced, highly
speculative microcap issues, typically in companies whose initial public
offerings were underwritten by Duke.
Mr. Banks' elderly clients opened an account with Duke & Co. in 1995,
after receiving a cold call from Scott Harris, a broker who allegedly told
them he would treat them like his own parents. After first recommending
they invest in McDonald's Corp. and Merck & Co., the couple said Mr.
Harris suggested Duke's "house stocks."
Following the Duke broker's advice, the couple invested more than
$500,000 in stocks and warrants in Bristol Technology Systems, Paravant
Computer Systems, Renaissance Entertainment, and Sel-Lab Marketing,
Inc. Paravant, a Florida computer manufacturer, is listed on the Nasdaq
National Market. Renaissance, a Colorado-based theme-fair organizer,
trades on Nasdaq's Small-Cap Market.
"Once they put them into the house stocks, they could never get out
again," Mr. Banks said.
Indeed, he said Duke & Co. made unauthorized stock purchases on the
couple's behalf, some of which weren't reversed, compounding their
losses.
Although the couple questioned whether they should sell their shares, their
broker urged them to stay the course, telling them the shares were good
investments. And, Mr. Banks said the broker disregarded a March 1997
letter ordering him to sell the stocks. The couple's portfolio wasn't
liquidated until October 1997, prompting them to seek a recovery of
losses that racked up over the six-month delay.
"High-risk, microcap stocks are not for everybody, and certainly not for
people in their eighties," concedes Mr. Arnoff, former attorney for Victor
Wang, Duke's chairman. If nothing else, Mr. Arnoff said, the couple "fell
through the cracks of the compliance and supervisory system."
However, Mr. Wang wasn't the couple's broker and "nothing was brought
to his attention to indicate that this was a problem account," Mr. Arnoff
said. He also took issue with the hefty damages imposed by the arbitration
panel, saying generally, "when you have these staggering awards, people
don't cooperate," perhaps because they can't cough up the cash.
For his part, Mr. Banks believes Duke's principals have sufficient funds to
pay the award. He estimates the firm earned in excess of $70 million on
the initial public offerings of the four stocks his clients bought, and
increased profits by marking up the shares, sometimes 5% to 10%, when
selling to clients in after-market trading.
"Somebody made a lot of money," he said.
While Duke and its principals have a right to appeal the $6.2 million
arbitration award, it isn't clear if they will. Mr. Thaler's attorney declined to
comment. Mr. Bennett, who represented himself in the matter, has an
unlisted telephone number. Unless it is contested, the principals must pay
the award within 30 days, or risk disciplinary action by the NASD.
Two Duke & Co. brokers, Scott Harris and Jeffrey Honigman, and
Duke's clearing firm, Hanifen, Imhoff, weren't included in the arbitration
award; they previously settled with the couple for a total of $135,000.
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