Biltmore Securities Expelled for Fraud; to Pay $7 Mln
Washington, Feb. 11 (Bloomberg) -- The Biltmore Securities Inc. brokerage was expelled from the securities industry, and the firm and its two principal owners agreed to pay a $7.1 million penalty to settle stock fraud charges.
The unusually large penalty, which includes $6.1 million for investor refunds, was imposed by the National Association of Securities Dealers as part of a broader effort to crack down on small-stock fraud.
Biltmore, a penny-stock firm based in Fort Lauderdale, Florida, defrauded investors and made illegal profits in trading five Nasdaq Stock Market securities from 1993 to 1995, the NASD's regulatory unit alleged.
The NASD also permanently barred the Biltmore owners, Elliott A. Loewenstern and Richard B. Bronson, from the securities industry.
''What's unusual here is that we were able to recover money for investors while also expelling a firm and barring its owners,'' said NASD Regulation executive vice president Barry R. Goldsmith. ''More typically, the money is gone and the expelled firm and its brokers don't have a large incentive to create a fund for investors.''
The NASD alleged Biltmore defrauded investors out of $1.6 million and made $4.5 million in illegal profits.
Disciplinary History
Biltmore, which has an extensive disciplinary history, has agreed to sell its assets to the FAS Wealth Management Services brokerage in Sarasota, Florida. Biltmore and its owners neither admitted nor denied wrongdoing. Loewenstern, 36, has been the firm's chief executive, and Bronson, 44, its president.
Biltmore, which had $45.7 million in revenue in 1996, has had as many as 100 brokers in offices in Florida, New York and Maryland, said Ira Sorkin, the lawyer for the two owners.
''Mister Loewenstern and Mister Bronson cooperated with NASD because they wanted to do the right thing,'' said Sorkin, a partner with Squadron, Ellenoff, Plesent & Sheinfeld in New York. ''They had good defenses, in my view, but they didn't want to litigate this for three years. They intend to pay what they're obligated to pay.''
Loewenstern and Bronson, 44, bought controlling stakes in Biltmore in 1992 after both worked at the now-defunct Stratton Oakmont Inc. brokerage in Lake Success, New York. Stratton was expelled from the securities industry by the NASD in 1996 for fraudulently marking up securities and flouting securities rules.
The settlement provides for Biltmore and its owners to pay a total of $1 million in fines. The firm will pay $600,000, Loewenstern is to pay $300,000, and Bronson is to pay $100,000. The fines will be paid only after the $6.1 million is provided for investor refunds, a process that could take as long as 13 months, Goldsmith said. Some investors who lost money have already been designated by NASD for refunds. Others can apply for mediation of their claims to seek money from the settlement.
IPO Trading
Biltmore drove up prices of two stocks immediately after underwriting their initial public offerings by acting as a trader before completing the IPO distribution, the order alleged. The firm also took excessive underwriting pay without disclosing to investors the arrangement made with the companies, the NASD contended.
Finally, Biltmore's owners and many of its brokers failed to disclose that they were selling their own securities at the same time they were urging customers to buy them, the NASD alleged. The owners had obtained these securities as free bonuses from Biltmore.
Sorkin said the NASD case alleged disclosure violations and misallocation of IPO shares, ''not blatant price manipulation from a boiler-room operation, pump-and-dump schemes, or payoffs.'' The latter allegations have been made by regulators against Stratton Oakmont and other penny-stock firms in recent years.
Biltmore and its owners have already paid $4.2 million for the investor refunds, and provided $1.6 million in promissory notes supported by collateral, Goldsmith said.
Stocks Cited
The five stocks cited in the NASD case were: CSI Computer Specialists Inc., a computer hardware company; Healthcare Imaging Services Inc., a healthcare management company; Licon International Inc., now Emerald Capital Holdings Inc., which acquires and manages businesses; Terrace Holdings Inc., now Terrace Foods Group Inc., a food distributor; and United Restaurants Inc., now Grand Havana Enterprises Inc., which runs cigar rooms and restaurants.
All have market values below $13 million and have been trading at less than $1.12 a share.
Biltmore has been repeatedly sanctioned by regulators. The firm agreed to surrender $1 million in 1995 to settle a U.S. Securities and Exchange Commission fraud lawsuit. It also has been penalized for its sales practices by California, Indiana, Alabama, and Arkansas -- including a $670,000 penalty imposed by Indiana regulators in 1997.
Regulatory Questions
FAS Wealth, which is buying Biltmore's assets, already has run into trouble with regulators. Alabama officials alleged in September that the firm ''has effectively adopted the business policies of Biltmore demonstrated in Biltmore's disciplinary history,'' a copy of the state's order shows.
Alabama regulators, who are is seeking to suspend or revoke FAS Wealth's license, alleged that the firm has hired 12 former Biltmore brokers, including nine with disciplinary histories. FAS Wealth used to be called Executive Wealth Management Services Inc.
The NASD's regulatory unit under Mary L. Schapiro has joined forces with Securities and Exchange Commission Chairman Arthur Levitt and Mary Jo White, the New York U.S. attorney, to assail fraud in the buying and selling of small, thinly traded securities. This kind of manipulation has snowballed as the bull market has attracted more money and investors, SEC officials have said.
Of the two main Biltmore owners, Bronson has cut the higher public profile in south Florida. He has launched a glossy fashion magazine called ''Channel'' and a trendy Miami Beach night club called ''Shadow Lounge'' in the last two years.
''I've had a history of getting involved in ventures that were high risk,'' the Miami Daily Business Review quoted Bronson as saying last year.
Bronson also bought a beach-front villa for $1.75 million in 1994, Miami New Times reported. He has been driving a Ferrari, an Aston Martin, and a Harley-Davidson, and has contributed $1 million to the Miami City Ballet, the newspaper said.
The Biltmore president is ''as close to a real-life Bruce Wayne as mortal men get,'' Miami Herald night-life columnist Tara Solomon wrote in October.
16:20:35 02/11/1999
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