Shutting down bad-apple market makers can be a slippery business. Nearly three years ago the NASD began investigating La Jolla Capital, a 140-broker firm in La Jolla, Calif., for numerous penny stock trading violations. Meanwhile, La Jolla took center stage in the May 1996 run-up of Comparator Systems, a now-defunct Nasdaq SmallCap Market company later found by the SEC to have fraudulently misstated its financial condition (see "Cyber Scam," June '97, RR, Page 91).
As La Jolla President Harold Gallison bragged to the press about making its clients millionaires in Comparator, the NASD announced a new investigation of the firm's trading in Comparator during the Internet-fueled run-up.
But by April 1997, the NASDR had filed no complaint in the Comparator case. Regulators disciplined 22 La Jolla brokers and supervisors in the meantime in connection with its investigation of other trading. But no one was permanently barred from the industry, and La Jolla and Gallison were still free to do business as usual.
In September 1997, the NASDR finally completed its original investigation of La Jolla: The brokerage firm was charged with circumventing investor protection laws in 140 trades involving 15 stocks and was barred permanently from the penny stock business.
But the NASDR didn't throw anyone out of the business. It could only find the firm guilty of requiring investors to sign a "misleading" document that said trades were exempted from the SEC's penny stock rules. While five La Jolla Capital senior executives were fined a total of more than $950,000, the misdeeds were only serious enough to permanently bar Gallison and Christopher Knight, a La Jolla branch manager, from management and from participating in penny stock trades.
Yet Gallison and two other executives named in the September action still are employed by the firm, and the firm still is in business pending an appeal to the NASD's National Business Conduct Comittee.
The SEC tried to get Gallison out of the penny stock business before he started La Jolla Capital. SEC documents show that in 1995, the enforcement division wanted to permanently bar him from penny stock trading and suspend him from the business for a year for activities that occurred in 1990. An administrative law judge in a Jan. 26, 1996, decision, approved only a cease-and-desist order, concluding that the recommended penalties were "too harsh." The judge agreed with Gallison's argument that his new firm, La Jolla Capital, "could easily go out of business if he were suspended for any significant period of time."
What about the investigation of La Jolla's involvement in the Comparator run-up? The NASDR never filed a complaint.
The NASDR would not comment on its investigation of La Jolla Capital.