Under the terms of the TCDO, the Boca Raton, FL-based firm was ordered to cease raising funds for itself through two unregistered private placements as well as through the sale of promissory notes. The firm was also ordered to stop opening new branch offices and to stop paying bonuses or other compensation to brokers or branch managers as an incentive for joining the firm. And the firm was ordered to collect $2 million from a parent company within one month and deposit the funds in escrow. The panel ordered this and other relief to "benefit customers by protecting them from exposure to additional serious violations and further dissipation or conversion of assets."
Late last month, NASD's Department of Enforcement filed for a TCDO against LH Ross, seeking an immediate halt to ongoing fraudulent and illegal sales activities relating to unregistered private placement self-offerings that to date have raised more than $10 million for the firm (see http://www.nasdr.com/news/pr2004/release_04_050.html). This is the first time NASD has used its temporary cease and desist authority, which was approved by the SEC and went into effect in June 2003.
"LH Ross is engaging in an ongoing campaign of deceit designed to lure unsuspecting and unqualified customers into making highly risky private investments based on misleading and incomplete information," said NASD Vice Chairman Mary L. Schapiro. "Using its temporary cease and desist remedy, NASD acted promptly to force LH Ross to stop its ongoing fraudulent conduct and to stop victimizing investors."
In its decision and order, the Hearing Panel found that LH Ross's brokers made oral misrepresentations to investors, many of whom were elderly. The panel found that the brokers "stood to benefit from their material misrepresentations and omissions and high-pressure sales tactics [and] intended to deceive, manipulate or defraud investors…" Among the misrepresentations: that investors could "double, triple or quadruple their money" once the firm went public soon, when in fact the firm had not taken substantial steps to have its stock publicly traded. There was no reasonable basis for their prediction that the stock's price would rise given the firm's financial problems and regulatory issues. In addition, brokers told customers that their investment would pay dividends that exceed current interest rates, when the firm had not paid dividends since 2001 and suffered continuous net operating losses.
The panel also noted that it was "greatly disturbed" by the financial relationship between the firm and its holding company, both of which were controlled by the same person. The panel found that as the LH Ross raised funds from investors it transferred those funds from the firm, "whose books and records are subject to inspection by the NASD and other regulators," to the holding company "that is beyond scrutiny."
The panel found that LH Ross' conduct violates federal securities laws and NASD rules, and that allowing that violative conduct to continue would likely result in significant harm to investors before disciplinary proceedings against LH Ross are completed. The TCDO will remain in effect until the underlying disciplinary action against the firm for this misconduct has been resolved. NASD may seek to suspend or expel a firm for violating a TCDO.
LH Ross is the subject of four other actions pending before NASD disciplinary panels: CAF030055, filed October 10, 2003, alleging a scheme to illegally manipulate the market in Trident Systems International stock; CAF040042, filed May 26, 2004, alleging that LH Ross and its president, Franklyn Michelin, failed to timely pay an arbitration award; C07040054, filed July 7, 2004, alleging that LH Ross and Michelin participated in a fraudulent scheme to profit at the expense of its customers through unauthorized trades; and, C07040074, filed August 26, 2004, alleging that LH Ross and Michelin failed to respond to NASD requests for information.
Under NASD rules, the individuals and firms named in a complaint can file a response and request a hearing before an NASD disciplinary panel. Possible sanctions include a fine, an order to pay restitution, censure, suspension, or bar from the securities industry.
Investors can obtain more information and the disciplinary record of any NASD-registered broker or brokerage firm through NASD's BrokerCheck. NASD makes BrokerCheck available at no charge to the public. In 2003, members of the public used this service to conduct more than 2.8 million searches for existing brokers or firms and requested almost 180,000 reports in cases where disclosable information existed on a broker or firm. Investors can link directly to the program by going online to www.nasdbrokercheck.com. Investors can also access this service by calling 1-800-289-9999.
NASD is the leading private-sector provider of financial regulatory services, dedicated to bringing integrity to the markets and confidence to investors through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business — from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and registered firms. For more information, please visit our Web Site at www.nasd.com.
