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GAO Faults Overseer of Penny Stock Firms

February 05, 1993|SCOT J. PALTROW | TIMES STAFF WRITER

NEW YORK — The General Accounting Office criticized the National Assn. of Securities Dealers on Thursday for lax enforcement of a new law designed to prevent penny stock abuses.

GAO investigators, in a study commissioned by Congress, found that the NASD files away large numbers of customer complaints without investigation, often fails to refer suspected criminal activity to law enforcement agencies and doesn't adequately monitor the branch offices of penny stock firms.

From 1988 to 1991, the report says, the NASD brought more than 200 disciplinary cases against brokers who sell penny stocks, which are low-priced shares in small firms.

But the investigators said that when the industry group finds wrongdoing by stockbrokers--who have often been accused of misleading investors and manipulating prices in penny stocks--it most often responds with "informal" disciplinary measures that are never disclosed to the public.

The study was requested last summer by the House subcommittee on telecommunications and finance, partly in response to a series of articles in The Times. The series found that the NASD was secretive about brokers with bad records and that the NASD and New York Stock Exchange were slow to act against those who habitually cheated customers.

Rep. Edward J. Markey (D-Mass.), chairman of the subcommittee, sent a letter Thursday demanding that the NASD respond to the deficiencies outlined in the report.

John Pinto, the association's executive vice president for regulation, said he received both the GAO report and Markey's letter late Thursday and hadn't had a chance to examine them in detail.

But he took strong exception to some of the findings. According to Pinto:

* The NASD lately has stepped up its investigation of penny stock firms' branch offices.

* The group in recent years has taken only formal disciplinary action against penny stock firms, all of which is disclosed to the public.

* NASD's policy is to cooperate with state and federal prosecutors.

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