|SEC upholds lifetime ban over Mitton's H&R trading|
2005-08-17 14:42 ET - Street Wire
Also Street Wire (C-*BCSC) BC Securities Commission
by Stockwatch Business Reporter
Florida broker Robert J. Prager, flying to New York on Sept. 26, 1997, apparently realized he had done something really wrong. The broker was on his way to answer for hundreds of thousands of shares he apparently sold to Vancouver brokerage Wolverton Securities Ltd. that failed to clear.
The shares, as it turned out, were part of the H&R Enterprises Inc. scheme, the 1997 stock fraud perpetrated by Vancouver's very own con man Michael Mitton and Florida stock tout David S. Heredia.
Seven years after that flight the NASD barred Mr. Prager from the securities industry for life for his part in the H&R scheme. His employer, Saperston Financial, went out of business over the fiasco.
Mr. Prager's version of events, however, did not surface until he pleaded with the U.S. Securities and Exchange Commission this summer to overturn the lifetime ban.
The ban stays
The SEC upheld the NASD ban. The regulator said Mr. Prager's conduct in the H&R scam was "extremely reckless." The H&R scheme, although developed by known fraudster Mr. Mitton and his Florida sidekick Mr. Heredia, was boosted by Mr. Prager's help, according to the SEC.
Mr. Heredia recruited Mr. Prager on Aug. 6, 1997, offering to pay him a three-cent commission for buying H&R and selling to specific accounts at other firms. The trading started off relatively small, with Mr. Prager buying blocks of less than 25,000 shares from Aug. 6, 1997, to Sept. 19, 1997.
H&R, which traded on the OTC Bulletin Board as a shell, steadily rose as Mr. Prager filled Mr. Heredia's buy orders, according to the decision.
"The trading that occurred between September 22 and 24, 1997, caused the inside bid price for H&R stock to soar from $2.21 to $6.09 per share, an increase of almost 175 per cent," the SEC said in its decision. (All figures are in U.S. dollars.)
The SEC said Mr. Prager was responsible for over half of the upticks on those days.
Wolverton discussed over dinner
According to the SEC, on Sept. 19, 1997, exactly one week before Mr. Prager was hauled up on the carpet in New York, Mr. Heredia apparently mentioned Wolverton to Mr. Prager for the first time. The pair were discussing business over dinner on a Friday night in Orlando.
"Heredia ... told Prager that he represented a $50 million institutional account at Wolverton Securities, Ltd., a Canadian firm, and that he would be directing Prager to make large purchases of H&R stock for the account in the coming week," the SEC said.
As it turns out, those large purchases doomed Mr. Prager's employer. The buying began within days of the Friday dinner.
"On Tuesday, September 23, 1997, at Heredia's direction, Prager bought more than one million shares of H&R stock from various broker-dealers," the SEC said.
The next day, Sept. 24, Mr. Heredia apparently instructed Mr. Prager to buy over five million shares, and to sell at least some of those shares to Wolverton. Mr. Prager did his best to fill the large order, substantially bidding up H&R in the process.
"The stock opened at $3.56 and closed at $6.09 [that day]," the SEC says.
The vicious circle
That was, however, where Mr. Prager and his employer's troubles first surfaced, according to the SEC. It seems the trades Mr. Prager negotiated with Wolverton and another brokerage used by Mr. Heredia, Equitrade Securities Corp., were having problems clearing.
"Prager learned that Equitrade and Wolverton were refusing to accept purchases of some 3.2 million shares of H&R stock from Saperston," the SEC says.
"On Friday morning, September 26, 1997, Saperston's back office informed Prager that 1.3 of the two million shares of H&R stock sold to Wolverton on September 24, 1997, still had not compared," the SEC said. "Prager was instructed to fly to Buffalo that evening to meet with officials of Saperston and its clearing firm," the SEC added.
The market for H&R collapsed shortly thereafter, leaving Saperston with a $9-million loss it could not absorb. The brokerage closed its doors the next business day, and its clearing firm was obligated to cover the loss.
Mr. Prager, in his defence, testified he did not realize H&R was being traded in a "circular nature" until he was flying to Buffalo to answer for what happened. He said his part in the circle involved buying from a brokerage named Hill Thompson and selling to Wolverton.
"We're buying [H&R stock] from Hill [Thompson], you know. It's a lot of stock. Where's Hill [Thompson] getting the stock from? They're getting it from Wolverton ... And then we're selling to Wolverton who is selling to Hill [Thompson] who is selling to us and so on and so on," Mr. Prager testified.
The SEC, in denying Mr. Prager's request to be reinstated, said he should have realized something fishy was going on.
"As Prager acknowledged, the circular trading in H&R stock was a 'red flag' that he should have heeded," the SEC admonished.
Wolverton was not accused of any wrongdoing in the H&R scheme.
James Alexander remains suspended
The SEC, in the same decision, also declined to overturn an earlier NASD decision suspending James Alexander, president of Los Angeles brokerage J. Alexander Securities Inc., for two years.
The NASD suspended Mr. Alexander last summer for failing to properly supervise one of his Florida brokers who played a smaller role in the H&R scheme.
Citing Mr. Alexander's "substantial disciplinary history," the SEC said the NASD was proper in barring the 70-year-old broker.
"Alexander, through his supervisory failures, allowed [his employee] to participate in an extensive market manipulation," the SEC said.
(Coincidentally, Mr. Alexander's firm was used in an unrelated SEC case earlier this year involving Vancouver brokerage Research Capital Corp. In that case, the SEC said former Colorado broker Jeffrey Hayden made a series of wash trades between accounts he controlled at Research Capital and J. Alexander Securities.
J. Alexander Securities also turned up in the case of disbarred securities lawyer Thomas Eck. In that case the SEC said Mr. Eck used J. Alexander Securities and Vancouver firm Union Securities Ltd. as unknowing conduits in the M&A West Inc. pump-and-dump.
There was no indication any of the brokerages used by Mr. Eck or Mr. Hayden knew anything was amiss, and none of them were accused of any wrongdoing.)
Michael Mitton could face lifetime ban
Mr. Mitton, the Canadian who perpetrated the H&R scheme, is currently subject to a 20-year trading ban in B.C. handed down by the B.C. Securities Commission in 1988. In light of Mr. Mitton's failure to abide by the ban, the BCSC is considering making the ban permanent, although it is not clear such a ban would make much difference to Mr. Mitton.
Mr. Mitton, who has over 100 criminal convictions to his name, made headlines in 2000 when he was jailed for four years for violating the BCSC's 20-year ban.
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