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L.A.'s Boston Group Suspends Trading

Securities: Penny stock brokerage's capital drops below minimum. Its chief blames illegal short selling.

March 14, 1997|TOM PETRUNO | TIMES STAFF WRITER

A Los Angeles penny stock brokerage was forced to suspend trading operations Thursday after its capital fell below minimum requirements.

Boston Group LP stopped making markets in dozens of stocks, including Jerry's Famous Deli, Diedrich Coffee and five other issues it has brought public since 1995.

"There's no business to be done [by Boston Group] because they don't have the capital to be an active broker/dealer," said a spokesman for the NASDR, the regulatory arm of the National Assn. of Securities Dealers in Washington.

Calls to Boston Group's senior executives weren't returned. But Bloomberg News quoted the firm's chairman, Robert A. DiMinico, as blaming "illegal short selling" by unnamed traders for pushing down some of the shares in which Boston Group held large positions, in turn slashing the firm's capital base.

For the Record
Los Angeles Times Friday April 18, 1997 Home Edition Business Part D Page 3 Financial Desk 2 inches; 37 words Type of Material: Correction
Boston Group--A March 14 story referred to Los Angeles brokerage Boston Group LP as a penny-stock brokerage. The firm says it does not engage in the penny-stock business, according to the Securities and Exchange Commission's technical definition of a penny stock.

Many of the stocks in which Boston Group is the primary dealer began tumbling early this week. Los Angeles-based Jerry's Famous Deli, for example, sank from $5.125 on Monday to $3.94 by Thursday's close on Nasdaq, a 23% decline.

AutoBond Acceptance, an Austin, Texas, financier of used-car loans, fell 32% from $7 on Monday on Nasdaq to $4.75 by Thursday.

AutoBond, and several other companies affected, said Thursday that they didn't know why their shares were sinking.

But at least two of the firms that Boston Group brought public in 1996--Irvine-based Diedrich Coffee and Cerritos-based Craig Consumer Electronics--made announcements this week that helped depress their shares.

Craig, a maker of audio products, said Monday that it will restate 1995 earnings lower because of "accounting irregularities." On Wednesday, coffee retailer Diedrich said its chief executive quit.

But whether those announcements triggered the interest of short sellers is unclear. Short sellers are traders who try to find stocks that are poised to decline, often because of problems in the business.

In a short sale, a trader borrows stock from a brokerage's inventory and sells it in the open market. If the share price then declines, the short seller can eventually buy back the stock cheaper in the market and return the borrowed shares to the lending brokerage.

The short seller's profit--or loss--is the difference between the initial sale price and the price paid when the stock is bought back.

Stock market rules governing short selling prohibit traders from ganging up on a stock to drive it lower: Short sales are supposed to occur only on "upticks"--a higher price than a stock's previous trade.

Some professional short sellers questioned Thursday whether illegal (i.e., "downtick") short sales were responsible for the declines in Boston Group's key stocks. Because Boston Group is the primary market maker in the little-known stocks, and few big investors hold any of them, the shares would probably be difficult to borrow for a short sale, some traders said.

Others noted that the stocks' declines could have occurred if Boston Group customers--who are almost exclusively individual investors--simply tried to unload their shares to Boston Group or via other brokerages.

Boston Group sprang up in 1995 and quickly hired more than 100 brokers to pitch primarily low-priced stocks to individual investors. DiMinico, 37, had previously worked for A.S. Goldmen & Co. and D.H. Blair, both aggressive marketers of high-risk penny stocks.

Boston Group can't resume trading unless it raises additional capital, the NASDR spokesman said.

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