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Penny Stock Dealer Stuart-James, Executives, Appeal Sanctions

October 9, 1996

WASHINGTON (AP) _ Several former executives of defunct penny stock dealer Stuart-James Co., described as a ``factory for fraud,″ appealed their expulsion from the securities business Wednesday, and accused regulators of mishandling their cases.

Stuart-James was one of the biggest penny stock dealers until it closed in 1990. Penny stock refers to inexpensive shares in little-known companies, which fell victim to widespread manipulation and fraud throughout the mid-1980s and 1990s.

Securities and Exchange Commission attorney Robert M. Fusfeld said the Denver-based Stuart-James was one of the biggest and notorious penny stock dealers. It had $100 million in annual revenue and 50 branch offices at its peak.

More than 6,000 customers were defrauded, providing the firm with millions of dollars in profits, the SEC said.

``Stuart-James presented a catalog of the worst abuses of the penny stock era that is now behind us,″ Fusfeld told the four-member SEC, which heard the appeal. ``The record clearly shows this was nothing but a factory for fraud.″

In 1990, Stuart-James was censured and fined $1.9 million by the National Association of Securities Dealers Inc. for improper stock dealing. Later, the NASD ordered Chatfield Dean & Co. Inc., the company which purchased Stuart-James in 1990, to pay $1.9 million to former Stuart-James customers. The firm, which didn’t admit or deny wrongdoing, entered into a $1.3 million settlement with the SEC over similar issues shortly thereafter.

Both the SEC and attorneys for the executives _ Stuart Graff, former chairman; C. James Padgett, former president; and Dirk Nye, regional vice president _ were appealing aspects of a March, 1993 administrative law judge’s decision in the case.

Graff and Padgett were barred from the securities industry for creating a scheme of prearranged trades that netted huge profits for the firm, according to the judge’s ruling. And they were charged with failing to properly supervise other brokers, particularly concerning so-called ``tie-ins,″ illegal agreements which require customers to buy shares in one company in order to participate in a lucrative initial public offering of a separate firm.

Michael Schoeman, attorney for Graff and Padgett, said the prices charged to customers were reasonable because they were based on the trading in the broader, wholesale market. He denied the two executives helped orchestrate prearranged trades or that Stuart-James dominated trading in 1986 of two companies in question, UMB Equities Inc. and Find SVP Inc.

A review of the actual trading in UMB and Find shows a wide dispersion of prices, and that the market was ``moving away″ from Stuart-James, meaning the firm was facing losses due to the trading trends. Schoeman also denied the SEC’s ``tie-in″ allegations.

Schoeman also charged that SEC enforcement attorneys changed their allegations throughout the case, making it difficult to defend the charges.

Brian Cook, attorney for Nye, accused a key witness in the case of lying about his client’s activities. And Cook accused the SEC staff with selective prosecution, since Nye was one of dozens of executives singled out.

The administrative law judge suspended Nye for six months from employment at a brokerage firm for failure to supervise brokers. The judge barred Nye from acting as a supervisor, but he could reapply for supervisory duty after 18 months.

Four other Stuart-James branch managers also appealed the judge’s decision, but they didn’t have attorneys present at the hearing.

Fusfeld urged the commissioners to uphold the expulsions of Graff and Padgett and asked the SEC to increase Nye’s punishment to a permanent bar. The SEC took the case under consideration.

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