Penny Stocks

For individual investors, the micro-cap universe may seem filled with opportunity. After all, with 6,300 companies to choose from, you're bound to hit a winner. But you're bound to hit a loser too--and probably more than one. That's why the typical mutual fund that invests in these tiny companies is 58% riskier than the average fund that invests in large U.S. companies, according to the mutual fund tracker Morningstar.

The Securities and Exchange Commission on Thursday charged 58 defendants with penny stock manipulation, in one of the largest stock fraud cases ever. The SEC filed four civil fraud lawsuits in New York and one in Salt Lake City. The suits allege that penny stock promoters and executives of small, publicly traded companies bribed brokers to get them to sell the companies' stocks to brokerage customers.

A San Diego brokerage Thursday was ordered permanently barred from the "penny stock" business and, along with five executives, slapped with fines and restitution that could approach $1 million. The sanctions against La Jolla Capital Corp., which was involved in last year's highly publicized surge and crash of the stock of tiny Comparator Systems, came in an unrelated case in which the firm allegedly dodged federal securities disclosure rules by having customers sign misleading forms.

Prosecutors and securities regulators in 20 states Thursday unveiled a series of enforcement actions intended as a crackdown on high-pressure penny-stock sales abuses by small brokerages. Fourteen firms were named in a total of 37 enforcement actions, officials said. None of them are based in California. It was the biggest nationwide crackdown ever by state authorities against brokers selling stocks over the telephone, according to North American Securities Administrators Assn.

In one of the largest securities arbitration judgments ever, a Pasadena physician won a $10-million punitive damage award against four principals of the defunct penny-stock brokerage Stratton-Oakmont Inc. Philip M. Aidikoff, attorney for Dr. F. Clark Gardner, said he believes it is the largest punitive award that an individual investor has ever won in an arbitration case before the National Assn. of Securities Dealers.

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.

Hibbard Brown & Co. was fined $10 million by the National Assn. of Securities Dealers, one of the largest ever against a brokerage, for overcharging more than 6,000 investors in the sale of companies' stocks. The New York-based penny-stock firm, which filed for Chapter 11 bankruptcy protection in October 1994, also was censured and expelled from membership in NASD, which in effect shuts it down. Firms must be members of NASD, which polices all 5,000 U.S. brokerages, to operate.

The Securities and Exchange Commission's chief administrative law judge has taken the unusually harsh action of permanently banning from the securities industry three Southern California brokers who had been affiliated with a now-defunct penny stock brokerage. All three had worked in Orange County or San Diego in the late 1980s for Stuart-James Co., a penny stock brokerage. Stuart-James folded in 1990 after paying $1.9 million to settle civil charges of defrauding customers. Judge Warren E.

Two Orange County men are among 12 people sued by the federal Securities and Exchange Commission in an action accusing them of running a $1.6-million penny-stock fraud. The commission accuses Ramon D'Onofrio of Anaheim Hills and his son, Mark, of Huntington Beach of running up the price of Kinesis Inc. stock so they could sell their holdings at inflated prices. The Kirkland, Wash., company makes athletic shoes.

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.