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Stuart-James Penny-Stock Fraud Trial to Begin

October 30, 1989

DENVER (AP) _ The nation’s largest penny-stock brokerage went before a Securities and Exchange Commission judge here today to face allegations of defrauding thousands of investors out of millions of dollars in trading two stocks.

The trial of Englewood, Colo.-based Stuart-James Co. is expected to last six months with sessions both in Denver and Miami.

The SEC is trying to prove that Stuart-James charged excessive commissions, made deceitful telephone sales pitches and its brokers refused to sell customers’ stock without an agreement to buy even more shares.

A key issue in the hearing is how much a brokerage legally can mark up the price of stock. Stuart-James is accused of marking up the prices of New York- based Find-SVP and Milwaukee-based UMB Equities by as much as 200 percent.

Although the SEC has no regulation on what a fair markup is, case law shows that no more than 10 percent is considered legal.

″These are things we find frequently as abuses in the penny-stock markets,″ said Robert Davenport, SEC regional administrator in Denver. ″We think it’s an abuse of customers.″

Penny stocks are speculative securities traded for less than $5 per share. They generally are not on a major exchange but instead are listed in pink sheets, a book of daily stock quotes circulated among brokers.

Colorado is a longtime center for the penny-stock industry, which has branched out to the East Coast, Europe and Asia in recent years.

Last month, state securities officials told Congress that consumers are losing $2 billion annually to penny-stock fraud and that organized crime has crept into the business.

Penny stocks, the officials said, are the No. 1 threat to small investors.

Last year, Stuart-James had profits of about $6 million on revenue of $113.6 million. The firm has more than 1,300 brokers and offices in 22 states.

SEC Administrative Law Judge Max O. Regensteiner will preside over the hearings in Denver. There is no jury, both sides will have opening arguments and each side will present its case.

The case is expected to move to Miami for hearings in January, then return to Denver for closing argmuemnts in the spring.

Stuart-James president James Padgett, 46, and former chairman Stuart Graff, 47, were named defendants along with none other present or former executives.

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