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Expelled Stock Dealers Appeal Sec Contends 6,000 Customers Lost Money

Rob Wells Associated Press

Several former executives of defunct penny stock dealer Stuart-James Co., described as a “factory for fraud,” appealed their expulsion from the securities business Wednesday, and accused regulators of mishandling their cases.

Stuart-James was one of the biggest penny stock dealers until it closed in 1990. Penny stock refers to inexpensive shares in little-known companies, which fell victim to widespread manipulation and fraud throughout the mid-1980s and 1990s.

Securities and Exchange Commission attorney Robert M. Fusfeld said the Denver-based Stuart-James was one of the biggest and most notorious penny stock dealers. It had $100 million in annual revenue and 50 branch offices at its peak.

More than 6,000 customers were defrauded, providing the firm with millions of dollars in profits, the SEC said.

“Stuart-James presented a catalog of the worst abuses of the penny stock era that is now behind us,” Fusfeld told the four-member SEC, which heard the appeal. “The record clearly shows this was nothing but a factory for fraud.”

In 1990, Stuart-James was censured and fined $1.9 million by the National Association of Securities Dealers Inc. for improper stock dealing. Later, the NASD ordered Chatfield Dean & Co. Inc., the company which purchased Stuart-James in 1990, to pay $1.9 million to former Stuart-James customers. The firm, which didn’t admit or deny wrongdoing, entered into a $1.3 million settlement with the SEC over similar issues shortly thereafter.

Both the SEC and attorneys for the executives - Stuart Graff, former chairman; C. James Padgett, former president; and Dirk Nye, regional vice president - were appealing aspects of a March, 1993 administrative law judge’s decision in the case.

Graff and Padgett were barred from the securities industry for creating a scheme of prearranged trades that netted huge profits for the firm, according to the judge’s ruling. And they were charged with failing to properly supervise other brokers, particularly concerning so-called “tie-ins,” illegal agreements which require customers to buy shares in one company in order to participate in a lucrative initial public offering of a separate firm.

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