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Brokerage Firm Stifel Gets Tagged for $4.0 Million in NASD Arbitration

Dow Jones Newswires, November 6, 2002 (Lynn Cowan)

An arbitration case that recently forced Stifel Financial Corp. (NYSE:SF-News) to take a $3.5 million charge involved a broker who admitted to stealing from customers while working for a branch manager who had been suspended from supervisory responsibilities at a prior firm, arbitration documents show.

Stifel provided few details about the case when it announced the National Association of Securities Dealers arbitration panel decision last month, a ruling that resulted in Stifel taking the third-quarter charge. However, arbitration documents obtained by Dow Jones Newswires offered more information on the case.

About a week before reporting third-quarter earnings, Stifel issued a brief press release concerning the NASD arbitration panel award of more than $4 million in compensatory damages to two customers of subsidiary, Stifel, Nicolaus & Co. Stifel said the case involved the activities of a former broker in its Pikeville, Ky., office. The company also said it plans to ask a federal court to overturn the award.

Arbitration documents show the case involved broker Regald B. Smith, 57 years old, who was jailed in 2001 on one count of wire fraud for stealing at least $5 million from his clients at the Pikeville branch office. The arbitration documents portray a broker who stole and lied to his customers for almost two years before a grand jury subpoena arrived notifying the firm that he was under investigation in a check-kiting scheme. Even then, according to arbitration documents, Stifel didn’t terminate Smith until four months later when he confessed to senior officials that he stole from customers.

The arbitration complaint was filed by David May and his son, David Franklin May II, the owners of a family mining operation in Kentucky. Smith admitted to Stifel officials that he conned the Mays and other clients into buying fictitious bonds and then used the money himself, according to arbitration documents. The Mays lost $500,000 to Smith through his scheme.

In addition, Smith told the Mays that he had sold shares of Qualcomm Inc. for them in March 2000, when he had not, according to arbitration documents. Smith admitted during a pre-hearing deposition for the arbitration that he told the Mays to ignore their brokerage statements showing the Qualcomm stock still in their portfolios, saying at first that the statements didn’t reflect an end-of-the-month trade, then later saying a block trader had made a mistake that would be fixed. He said that he kept hoping the stock would go up so that he could get the Mays out of the stock at a higher price; it never did, and they ended up losing $1.54 million on their investment.

Similarly, Smith lied and told the Mays that he had purchased CMGI Inc. stock for their accounts with a limit “floor” on the security to protect them from the stock’s downside, according to arbitration documents. But he never placed any type of a limit on the stock, losing them $4.5 million on the holding. Because the Securities and Exchange Commission had already obtained a conviction against Smith and appointed a receiver for him, the arbitration panel could not make an award against him.

Smith, who was sentenced to serve two years behind bars on the related SEC charges, is no longer in the securities industry. He now works as a used car salesman in Kentucky, said the Mays’ attorney, Andrew Stoltmann of Maddox Hargett & Caruso in Chicago.

But Stoltmann and fellow attorney Mark Maddox argued that Stifel Nicolaus should be held accountable for Smith’s actions while he was its employee. They said the firm should have known all was not well with Smith: 26 customer complaints were filed against him, Smith’s bank provided early warning to Stifel of a check-kiting scheme that Smith later admitted to, and Stifel received a grand jury subpoena related to those activities four months before terminating him.

In addition, Smith’s branch manager, who was dismissed from the arbitration complaint, had been suspended and fined for failing to properly supervise brokers at a prior firm, according to the arbitration complaint. The arbitration panel awarded the Mays $4.47 million on their claim against Stifel. Stifel refused to comment on the arbitration case beyond its original statement that it would go to court to attempt to overturn it. In that original statement, Stifel’s general counsel, Tom Prince, said that the firm believed the award “was in disregard of the applicable law.”

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