This is the first time NASD has used its temporary cease and desist authority, which was approved by the SEC in June 2003.
In its complaint, NASD charged that at least 15 brokers in at least eight LH Ross branch offices in Florida and New York have made material misrepresentations and failed to provide important information to investors in connection with private sales of LH Ross stock in 2003 and 2004. Since January 2003, LH Ross has raised more than $7 million by selling its own securities to more than 140 customers throughout the country. More recently, the firm has also solicited customers to lend the firm money on a short-term, unsecured basis using false and misleading statements.
"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. "NASD must act now to protect investors and must use every tool at its disposal and therefore is seeking a temporary cease and desist order against LH Ross to immediately stop its improper activities."
NASD charged that among the misrepresentations that LH Ross brokers made to customers were: that the firm would pay a dividend ranging from 5 percent to 9 percent on the stock; that LH Ross was going to engage in an initial public offering (IPO) of the stock in the near future, and that self-offering shares that customers bought were a short-term investment that could be sold for a quick windfall after the firm's IPO. Many customers were given a specific price prediction for the stock ranging from $17 to $60 per share. Most were also told that their investments in the firm had already appreciated. All of the representations were untrue.
NASD charged that LH Ross also failed to disclose important information to prospective investors in the firm's stock. For example, investors were not told that the firm had lost more than $6 million since 2001. They were not told about the firm's extensive and serious disciplinary history, including disciplinary actions filed by NASD and several state regulators. The firm rarely provided investors with the offering documents it was required to give customers before selling them stock in the firm. Most of the investors who did receive the documents received them weeks or months after the date of purchase and sometimes in incomplete form.
NASD also charged that several LH Ross brokers invested customer funds in the firm's stock without the customers' knowledge or consent, and in some instances refused to cancel or reverse the purchases even when the customers complained.
If the Temporary Cease and Desist Order is granted, it will generally 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 currently the subject of three 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, and 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.
Last month, NASD filed a fraud action against another brokerage firm - Investprivate of New York, NY - in connection with self-offerings (see www.nasdr.com/news/pr2004/release_04_041.html). At the same time, NASD issued an Investor Alert on the issue (see NASD Investor Alert - Brokerage Firm Private Securities Offerings: Buying Your Brokerage).
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 2.9 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.
