A former broker at Duke & Co., which is under investigation by federal and state regulators, has accused the brokerage firm’s principals of many suspect practices, including the refusal to execute trades and ordering the use of sales scripts.
In a sworn declaration given in connection with an arbitration claim, the broker, Howard M. Blumenau, became the first person to allege that the firm’s managers engaged in misconduct, contradicting earlier assertions made by Duke officials The declaration also offers an inside view of alleged practices that regulators claim are classic warning signs of fraud in small stocks — a serious problem facing today’s bull market.
Regulators, including the Securities and Exchange Commission and the National Association of Securities Dealers, are now investigating New York-based Duke for possible trading abuses. Earlier this week, Indiana state securities regulators filed an administrative complaint alleging that Duke engaged in “a pattern of fraud,” according to a press release. Amid the regulatory scrutiny, Duke, which earlier this year had about 200 employees, has been winding down its retail brokerage operations. It has consistently denied any wrongdoing.
Mr. Blumenau, 30 years old, gave the declaration in connection with a complaint filed with the NASD by six former Duke clients who claim the firm, its principals, and several brokers caused wrongful losses of about $870,000 in several small stocks. Their complaint is one of several filed against the firm, alleging wrongful losses in excess of $2 million.
In return for his testimony, Mr. Blumenau’s name was dropped from the complaint, according to Philip M. Aidikoff, an attorney who represents the six investors. Mr. Blumenau worked at Duke & Co. from October 1995 until his resignation in April 1997. He now works at Cambridge Capital LLC. He said he had “no comment.”
Duke officials described his testimony as “nonsense.”
“These are self-serving statements motivated by both his eagerness to have the case against him dismissed and his animosity toward Duke,” the company said in a statement released through its attorneys.
In his declaration, Mr. Blumenau alleged that Jeff Honigman, a Duke principal, and Gregg Thaler, Duke’s president, refused to sell shares in Paravant Computer Systems Inc., a small, Melbourne, Fla., portable-computer maker whose initial public offering Duke underwrote in 1995.
Instead, Mr. Blumenau claimed, he was told to find another buyer for the stock, a practice that regulators say in interviews may violate a firm’s duty to treat customers fairly.
“Mr. Honigman told me that he would not effect the sale of the 3,150 shares of Paravant and told me that I should try to cross trade this sale with a purchase for one of my other clients,” Mr. Blumenau said in his declaration that was released with the investors” consent. He continued: “Mr. Thaler also told me that he would not effect this transaction unless I found one of my other clients to be a buyer for these shares.”
Mr. Thaler, through an attorney, described Mr. Blumenau as “a disgruntled ex-employee” made bitter toward the firm after Duke refused his request to pay him tax-exempt commissions. Mr. Honigman wasn’t available for comment, the attorney said. Although Duke’s first three IPOs — Renaissance Entertainment Corp., Sel-Leb Marketing Inc., and Paravant — have performed poorly, Mr. Blumenau said brokers “would be told to use scripts which contained no reference to any risk disclosures or any negative information about the company or the stock.”
Regulators say scripts, though not in themselves illegal, raise serious questions about whether investors are fully informed of the risks involved in investing in speculative stocks.
A copy of one typed script, appended to Mr. Blumenau’s declaration, touts Paravant’s big-league customers and says: “Based on that and earnings which are due out shortly, I’ve positioned every single one of my clients into large blocks of this stock, I’d like to do the same with you — we step in — we buy.” In an interview in February, Duke officials denied that brokers used scripts.