A widening regulatory inquiry into potentially illegal short selling by hedge funds has led to the expulsion of a small Pennsylvania brokerage from the securities industry.
An NASD hearing panel issued an administrative order barring from future securities business
Ryan & Co.
and its principal partner, Scott W. Ryan, for failing to cooperate with an ongoing investigation. The hearing panel took the action after Ryan failed to produce documents sought by regulators, who are looking into allegations the firm engaged in "impermissible short selling activity on behalf of three hedge fund clients."
NASD spokesman Herb Perone declined to identify the hedge funds under scrutiny, or comment on the investigation. The ruling can still be appealed.
An attorney for Ryan did not return a telephone call. A person answering the phones at Ryan & Co., located outside of Philadelphia, declined to comment.
Shorting is a market bet that a stock will fall in price. While there's nothing inherently wrong with shorting -- indeed, most say short sellers provide a necessary check-and-balance on the market -- regulators are becoming increasingly concerned about allegations that some hedge funds are trying to manipulate stock prices.
The NASD, for instance, made it more difficult this spring for hedge funds to engage in "naked shorting," an unsavory practice in which traders place short bets without actually borrowing shares from a broker, as normally occurs. Critics say naked shorting lends itself to potential abuse, because it enables the dishonest trader to short a stock more heavily than would be permitted.
The development in the NASD's short-selling investigation, which began in December 2002, comes at a time the
Securities and Exchange Commission
is looking into potential illegal shorting by hedge funds in the $14 billion PIPEs market -- an acronym for private investments in public equity market.
first reported in May that the SEC sent subpoenas and requests for documents to 20 brokerages that are major players in arranging PIPE deals for cash-strapped companies and finding hedge funds to invest in them.
The SEC investigation is focusing on allegations that some hedge funds improperly used advance knowledge that a company is planning a PIPE deal to short the company's stock. The stock of a company issuing a PIPE often falls after the deal is announced because the hedge funds that invest in these transactions get to buy shares at sharply discounted prices.
Much of the regulatory interest in illegal shorting stems from the SEC's investigation into
, an unregistered investment advisory firm charged with manipulating the stock of
, a tiny software company, following a $3 million PIPE deal. In February 2003, the SEC fined Rhino $1 million and alleged the now-defunct firm improperly shorted the stock on behalf of a hedge fund that had purchased a $3 million convertible note from Sedona.
Federal prosecutors in New York subsequently charged the principals of Rhino, Thomas Badian and Andreas Badian, with conspiracy to commit securities fraud.
This is not the first time the Ryan brokerage has run into problems with regulators because of its dealings with short sellers. In 1997, regulators fined the firm $4,000 for violating short selling rules. The 57-year-old Ryan also is no stranger to the NASD, having served previously on the self-regulatory agency's small-firm advisory board.
Corporate filings also list Ryan as chairman of
, a used furnishings company that trades on the largely unregulated Pink Sheets. He has been a director of the Arizona-based company since 1994, and is a former president and chief executive of the company.
Ryan also had been a director of the
National Investment Banking Association
, a 10-year-old association for small brokerage firms. An official with the association said Ryan, whose term ran through this year, resigned in the fall of 2003, after failing to attend several meetings.
Frank Hart, another member of the investment banking association's board, also is a director of Reconditioned Systems. Hart, who runs several investment partnerships out of his Atlanta office, did not return a phone call about the NASD's disciplinary action against Ryan.
Dirk Anderson, Reconditioned Systems president and chief executive, did not return a telephone call.