Written By: Phil Feigin
In the last two segments, I discussed the beginning of NASAA’s modern era, and in particular, its Enforcement Committee and my first dealing with group. I turn now to what brought me to Denver for the first time, opening new doors I could not have anticipated.
As memory serves, we in Wisconsin and several other jurisdictions were investigating a rather significant and sophisticated national tax shelter scam called “Gold for Tax Dollars” run by a guy named Gerald Rodgers. I was frustrated by the case, because it cried out for a coordinated national effort yet the SEC was not particularly interested in exotic scams (sound familiar?) and individual state efforts were ineffective when crucial records were strewn across the country. I prepared a long letter to Rick Tucker urging him to revisit the idea of joint state investigations with travel, room and board to be funded by NASAA. Unbeknownst to me, Royce Griffin had also petitioned Tucker for help in dealing with his big problem, the penny stock industry in Denver. Colorado had adopted (in my view) the weakest state securities law in the country in 1981, for one thing, stripping the Commissioner of the authority to require licensing of, or regulate, brokerage firms and reps that were registered with the NASD. In Royce’s view, penny stock brokerage firms and their reps in Denver were doing business in states where they weren’t licensed, and committing securities fraud to boot.
It was April or so of 1982. We were at the annual spring meeting at the Hyatt Regency in Washington, D.C. The Enforcement Committee was meeting in one of the lower level conference rooms, and I remember that Ed Greene, then of the SEC, was giving a presentation on the new Regulation D that the SEC was in the process of adopting.
I was pulled out of the meeting by forensic accountant Nancy Jones of the Arkansas staff. My letter and Royce’s entreaty to Tucker had prevailed. Nancy had been recruited by Tucker and Royce to put together what would be NASAA’s first “special project.” She sought my help, along with that of several other enforcement types. We would put together a team of examiners from states where selected/suspected Denver penny stock firms were registered/licensed, thus giving them inspection authority, and these examiners would gather evidence the firms and reps were conducting business in states where they were not licensed. The evidence gathered would then be distributed it to the offended states. To be honest, at the time, I really didn’t know what a “penny stock” was. I had to ask one of my Wisconsin mentors, Ron Burtch, when I got back to Madison.
Back then, it was pretty unusual for state securities agencies to conduct onsite examinations of the headquarters of firms licensed/registered in their states but located elsewhere, particularly out west. It was one thing for a Boston-based Massachusetts examiner to inspect a Providence-based, Rhode Island firm just down the road; it was quite another matter for a Boise-based Idaho examiner to check out a Salt Lake City firm. They simply didn’t have the budget, even though they had unquestioned authority, to do so.
NASAA funding made it possible, particularly if an issue of regional or national concern presented itself. That was the case with Denver’s penny stock firms. The team of 16 or so staffers, including me, flew into Denver the first week of July 1982. (Among team members was Ralph Lambiase, at the time, an examiner from Connecticut, who would later become the state’s long time administrator and a NASAA President, and Lee Polson from Texas, who would become NASAA’s General Counsel a few years later.)
We had arranged for our own rented copying machines to be delivered to each firm that Tuesday morning. Back then, some firms would complain about examiners using their xerox machines, and insisted on having their own people make copies of requested documents. That of course allowed the firms to identify which documents were of interest. Bringing in our own machines obviated that problem.
As I recall, the team conducted exams of about 12 firms. Virtually all of them would go out of business over the next few years. Some I recall were Blinder, Robinson & Co., N. Donald & Co., E.J. Pittock & Co., Vantage Securities, Wall Street West, First Financial, Rocky Mountain Securities & Investments, Hanifen Imhoff (probably shouldn’t have been on our list), S.W. Devanney & Co. and R.B. Marich. The team left for a week and then returned for a second week of exams later that July.
Collectively, the exams collected evidence that the firms and their reps had hundreds of accounts in dozens of states where they and their reps were neither registered nor exempt from the requirement. For some reason, the Vantage numbers stick in my mind. Per NASD records, they were only authorized to do business in Colorado, but our team examiners found they had something like 693 accounts in 39 other states. (Paul Hurtado, who ran Vantage, was murdered years later here in Denver. I don’t think the crime was ever solved.)
Even more glaring than the 693 accounts in states where Vantage wasn’t licensed was the fact that team examiners noted the NASD Denver District office had inspected Vantage twice in the last few years, and had noted the fact in their reports. Even so, the NASD had not done anything on its own to make Vantage correct the problem, and had not notified any of the state securities agencies in the offended jurisdictions. When we brought that to the attention of Georgia securities director H. Wayne Howell, now NASAA’s President, sparks flew. I wish I had copies and recordings of the communications between Wayne and Gordon Macklin, the head of the NASD back then. This issue and other similar bones of contention helped forge the attitudes of a generation of state securities regulators toward the NASD and SROs in general. Things got a bit better in later years, but my sense is the distrust is pretty hard-wired and genetically imprinted in state securities regulators.
A wave of enforcement actions followed in the wake of the distribution of the evidence the team gathered in the two weeks of examinations. I think the count was about 110 cease and desist orders and the like. As I recall, Wisconsin was the first state to enter into a consent order with Blinder. A dozen or so other states took action against Blinder based on the project evidence as well, a statistic that was later cited by a federal judge in granting injunctive relief against the contentious firm in a hard fought SEC action. Colorado had been the jurisdiction to examine S.W. Devanney & Co., and they took Colorado to court in an attempt to preclude the Division from distributing the evidence of violative conduct to other jurisdictions. Eventually, Devanney would lose the case,* and ironically, strengthen the Commissioner’s powers under the Colorado act in doing so.
During my two weeks in Denver, I spent most of the time in “headquarters,” the Colorado Securities Division office, and got to interact with Royce Griffin. It was not long afterwards that he offered me the job of Assistant Commissioner. I was ready for a change, and took on the challenge, moving to Colorado in November 1982.
I had no idea what lay ahead for me. My state regulatory career gave me the opportunity to testify in Congress on many occasions, I would represent Colorado and NASAA traveling to almost every state and Canadian province, Cambridge and Oxford Universities, London, Tokyo, Paris, São Paulo and Montevideo. I would be named to a federal advisory committee, work on the drafting of two Uniform Securities Acts, the Model State Commodity Code, a bunch of federal legislation, and NASAA model statutes, rules and policies. I would go on to be named and serve as Colorado’s Commissioner for ten years, chair NASAA committees and sections, serve on NASAA’s Board, as its President and later, Executive Director, speak at more conferences than I can remember, work on national cases against Salomon Brothers and Lloyd’s of London, and forge friendships for the ages. It all traces back to Nancy Jones plucking me out of that Enforcement meeting about Regulation D that Spring day in 1982.
State awareness of the penny stock problem was certainly raised by the Denver effort. Soon, the NASD would, grudgingly, begin advising states of firm problems with state registration they uncovered in their exams. National publications started covering firms like Blinder, with the famous Forbes story entitled, “Blind ‘em and Rob ‘em.” While I have always held that New York, New Jersey and Florida had far more of a penny stock problem than Denver, at least by number of firms, they had lots of legitimate firms as well. With the predominance of Denver’s penny firms in this market, they stood out like a sore thumb.
Over the next decade or so, the combination of bad publicity, NASD efforts (particularly those of Frank Birgfeld and his staff here in Denver), the SEC’s dogged pursuits, U.S. Attorney actions, Colorado efforts, national, Colorado and Utah legislation and combined enforcement efforts and private litigation combined to end the bulk of penny stock abuses in Denver. I like to think what became known as the “Denver Project” was the beginning of the end for the worst of the Denver penny stock market. It also laid the groundwork for the dozens, if not hundreds, of “special projects” that NASAA has funded in the cause of investor protection.
* Griffin v. Devanney, 775 P.2d 555 (Colo. 1989)