There is the 61-year-old financial analyst who works at the Bureau of Indian Affairs in Washington, D.C., and the small business owner from southern New Jersey.
Then there is the soft-spoken, 55-year old California woman who is carefully saving her money, but not for retirement. She is making a midlife career change, moving from a marketing job at a high-tech firm to enroll in divinity school.
They represent a sampling of American investors. But, all three people have a common financial experience: Over the last year-and-a-half, they have lost thousands of dollars buying stocks they say were aggressively pushed on them by brokers at Walsh Manning Securities Inc., a controversial Manhattan brokerage firm under scrutiny from state authorities.
“I’ve lost $30,000. My entire first year of seminary is gone,” said the California woman. Her recent brokerage-account statements show that in just nine months, her portfolio of three stocks she said were recommended to her by John M. Meyers, a Walsh Manning broker, have plummeted 89% in value.
Although she made money with Hain Food Group Inc. (HAIN), the woman’s holdings in Jersey City, N.J., securities firm M.H. Meyerson & Co. (MHMY) and American Healthchoice Inc. (AHIC) – an unprofitable operator of health clinics in the South – have lost thousands in value.
Other investors, including Orville Hood, the financial analyst, and Bernie Haas, the New Jersey businessman, are in similar straits, despite the enormous returns many Americans have enjoyed during the recent bull market.
And they all have strikingly similar stories to tell: Walsh Manning brokers called them on the phone out of the blue, they say, and convinced them to buy a money-making, blue-chip stock. Then, the brokers used what the investors call high-pressure sales tactics to hawk other, riskier issues.
In some cases, the brokers called their clients as often as every other day, according to stories recounted by eight current and former Walsh Manning clients. Other brokers told inexperienced investors that the firms’ “big accounts” were clamoring for shares of almost unheard-of companies such as American Healthchoice, which now trades for about 28 cents a share, and U.S. Automotive Manufacturing Inc. (USAM), a money-losing company that makes brake pads.
Many of investors say they should have known better. Some never requested financial information about the companies in which they invested. But, “it’s hard to believe how fast (the brokers) talk unless you’ve actually heard the spiel,” said one investor, a university researcher from Ohio. He is bitter over his paper losses in U.S. Automotive, which he said he also bought at the suggestion of Meyers.
The researcher’s brokerage statements show he lost more than $15,500 on his Walsh Manning portfolio in just one month this spring.
Meyers didn’t return a call seeking comment. Walsh Manning officials Frank J. Skelly III and James Shanley also didn’t return calls. In the past, however, both men have said the firm’s business is above-board. When asked last month about the recent, precipitous declines in the values of many stocks in which Walsh Manning makes a market – such as U.S. Automotive and American Healthchoice, which the firm traded until earlier this year – Skelly blamed short-sellers, those investors who try to profit by taking advantage of anticipated price declines in shares.
But, investors who lost money with Walsh Manning are suspicious about why they were all pitched the same, tiny stocks in the same way. Many also said they had trouble selling their shares once they decided to unload them.
Bernie Haas finally closed his account at the firm last week, but only after demanding in writing that his broker, Joseph J. Papeo, sell his 2,000 shares of U.S. Automotive – which Haas bought when the company was called R.T. Industries – for $1 a share. Haas bought shares of the Tappahannock, Va., company when they were near their 52-week high of 5 3/8, his records show.
Two Walsh Manning brokers, Papeo and Greg Mezzapesa, encouraged his investment even as the stock’s price slid, Haas said. “Every step of the way, they told me to buy more, buy more, average down, that type of stuff,” he recalled.
Papeo didn’t return a call seeking comment, and Mezzapesa couldn’t be reached. According to NASD records, Mezzapesa left Walsh Manning in August and then moved to Seaboard Securities Inc., where he worked until January. No one answered the phone at that firm’s Hauppage, N.Y., office, the only office for which there is a current listing on Long Island.
Haas and Hood, however, have contacted the National Association of Securities Dealers, which polices brokerage firms, to complain about Walsh Manning’s tactics. Haas, who estimates he lost about $8,000 with the firm, received a letter back from the NASD’s New York office in April saying regulators would investigate his complaint. He hasn’t heard from them since.
An NASD spokeswoman said the association follows up on all investor complaints, but she declined to elaborate.
As part of a wider investigation into micro-cap stock fraud, New York’s Bureau of Investor Protection and Securities is investigating Walsh Manning and several other brokerage firms, said Andrew Kandel, chief of the bureau.
Kandel confirmed that two of those firms are Foster Jeffries Securities LLC of Westbury, N.Y. and J.B. Sutton Group LLC of Great Neck, N.Y. Both firms trade many of the same stocks in which Walsh Manning makes a market, NASD records show.
And on Internet message boards, such as those on the Yahoo! Inc. (YHOO) Web site, investors have recently complained about the way in which brokers from all three firms have aggressively sold some of their stocks, including American Healthchoice, U.S. Automotive and Jenna Lane Inc. (JLNY). Walsh Manning underwrote that firm’s initial public offering last year, and shares of the New York women’s clothing maker shot up to 13 7/8 in December.
Shares of Jenna Lane closed Friday at 3 15/16, unchanged but up from the 52-week low of 3 reached May 19. Eight of the 19 issues in which Walsh Manning makes a market, including Jenna Lane, have hit 52-week lows in the last three weeks. Foster Jeffries also makes a market in all eight of those stocks and warrants, the NASD confirmed.
A lawyer for J.B. Sutton, Gregg Evangelist, said the firm declined to comment on the complaints posted on the Internet.
Mark Silverstein, a manager for a computer consulting company in Reston, Va., said he bought shares of Jenna Lane and U.S. Automotive after a broker from Foster Jeffries, Jason Ash, cold-called him about a year and a half ago.
Silverstein made some money on the Jenna Lane shares, he said, but had trouble getting his broker to sell it. “They were just giving me grief left and right,” he recalled.
Silverstein later moved his 9,000 shares of U.S. Automotive – which are now worth about $27,500 less than when he bought them, he said – to another brokerage firm. “I just saw a big hunk of my retirement money go down the tubes,” he lamented.
Foster Jeffries broker Ash, reached at the firm, said he remembered client Silverstein but declined to comment on his complaints. Ash referred questions to George Goldman, who said he was a consultant to the brokerage firm. NASD records show George R. Goldman Jr. worked at Foster Jeffries until May 11.
“There’s just nothing to discuss,” Goldman said. “If you need any information at all on why (Silverstein) lost money on this company, which would be U.S. Automotive, why don’t you call them.” Goldman said he had no comment on Foster Jeffries’ sales methods.
The chairman of U.S. Automotive, John W. Kohut, said his comany’s stock could be down because of the loss it reported in April for 1997. He added that said some investors had told him that short-sellers often latch onto stocks associated with troubled brokerage firms – and that his company’s shares began falling after a press report appeard about New York state’s investigation of Walsh Manning.
Like all the other investors who contacted Dow Jones, Silverstein said his broker pitched him a solid, money-making stock before recommending smaller, riskier companies such as Jenna Lane and U.S. Automotive. Two investors said they bought shares of investment bank Lehman Brothers Holdings Inc. (LEH), while New Jersey businessman Haas bought shares of casino company Aztar Corp. (AZR). Both of those stocks trade on the New York Stock Exchange.
In Haas’ case, he recalled, his broker then said, “You made some money on that. What if we try something different?”
The tactic is similar to one that was employed at the notorious Stratton Oakmont Inc., the Lake Success, N.Y., brokerage firm that was shut down by securities regulators in 1996. A lawyer who has successfully sued Stratton on behalf of more than 40 investors, Philip M. Aidikoff of Beverly Hills, Calif., calls the coupling of a blue-chip with a “house” stock the “Stratton two-step.”
“The Stratton two-step is the typical method that these second-tier firms use” to build investors’ trust, said Aidikoff, who last year obtained a $10 million punitive-damage award against four former Stratton officers on behalf of a California doctor.
About eight to 10 former Stratton brokers now work at Walsh Manning, firm officials have said. Both of Haas’ brokers, Mezzapesa and Papeo, are Stratton alumni, as is Meyers, the broker for the Ohio university researcher and the California woman headed to divinity school, according to NASD records.
Walsh Manning officials have said none of the alleged stock manipulation that occurred at Stratton happens at Walsh Manning. The firm’s chief operating officer, James Shanley, once told Dow Jones the firm’s business is “squeaky clean.”
But, that is little consolation to investors who say they feel cheated by the brokers at the firm. As Haas wrote in a May 20 letter to Papeo: “The fact that I am taking a big loss on this stock serves as a lesson for me never to do business with fast-talkers over the phone.”