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Regulators scrutinizing brokerage’s stock deal

Questions arise about Jesup & Lamont effort to raise $11m in 2008

By Beth Healy
Globe Staff / June 22, 2010

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It was far from a blue-chip investment: an old brokerage firm with a history of run-ins with regulators trying to raise about $11 million to shore up its finances from its own brokers and investment clients. Shares were going for 80 cents apiece.

No one expected a windfall from Jesup & Lamont Inc.’s private placement in the summer of 2008. But neither did anyone predict the way things played out.

Two years later, federal securities regulators are investigating the New York firm for allegedly taking investors’ money and failing to deliver the stock that was promised in return. In some cases the stock took more than a year to materialize; some shares never showed up, according to several investors who did business with the firm’s Boston office, e-mails documenting the stock deal, and two people briefed on the inquiry.

The US Securities and Exchange Commission is leading the investigation, and FINRA, the Financial Industry Regulatory Authority that oversees brokers, also is aware of Jesup & Lamont and its financial struggles. Public records show that FINRA disciplined the firm in 2009 for operating without sufficient capital, and in April cited Jesup for failing to respond in a timely manner to its request for documents and information.

Last Friday, authorities slapped a notice of insufficient capital on the firm, barring it from conducting business other than placing client sell orders until the situation is resolved. The firm reported a loss of $7.4 million for 2009, on top of a $16 million loss in 2008.

Jesup and its chairman, Steve Rabinovici, did not return numerous requests for comment on the SEC investigation.

In a news release yesterday, Jesup said it disputes the regulators’ action relative to its capital but it was taking steps to “demonstrate that it has regained compliance.’’ Shares closed at 16 cents.

Jesup was once a firm of some stature on Wall Street. Founded in 1877, it says it provided brokerage services to Standard Oil and helped finance the construction of Rockefeller Center in New York City. But the firm’s reputation has long since faded to one of a lower-tier concern with cash and regulatory problems, including two current inquiries by Secretary of State William F. Galvin. It has nine offices around the country.

Paul Aronson is a longtime broker who was about to retire when he followed a colleague to Jesup’s Boston office for a short stint in 2007.

“I was startled that after placing money with the company, they did not deliver the stock. And they took moneys out of escrow,’’ Aronson, 83, said in an interview. “They did not deliver the stock for over a year, and even after that, did not register the stock and warrants as stipulated in the contract.’’

Aronson and his clients acknowledged in interviews that Jesup was a risky investment, trading below $1. But they believed the firm’s turnaround story, after Aronson met with executives at the firm’s midtown Manhattan office. Jesup was looking to rebuild, Aronson recalls, and to grow. The firm also said as much in public filings.

One of Aronson’s best friends, his summer golf partner in Stockbridge, agreed to put in $50,000. Aronson’s nephew, a New York businessman, put in $100,000. And several others joined as well, for a total of about $1.5 million. Similar groups put together funding in other locations, the investors said.

Over the next year, dozens of pages of e-mail correspondence obtained by the Globe show, Aronson and his clients repeatedly badgered the firm’s top executives for their shares, including Rabinovici and Jesup’s chief executive at the time, Jim Fellus. Fellus resigned last month to “pursue other opportunities.’’

In a complaint filed with FINRA last November, Aronson’s nephew, David Graff, told regulators that he ultimately spoke with Rabinovici directly about getting the shares he had purchased in August 2008.

Upon asking for a refund, Graff said, Rabinovici told him that “my investment was already put into working capital at the firm and I was not entitled to receive my money back.’’ Graff said the money was supposed to be held in an escrow account until the stock was delivered.

In February 2009, Graff wrote in the complaint, Rabinovici told him that the offering had not been properly registered with the American Stock Exchange and was being refiled. Another six months passed, he said, “despite constant calls and requests,’’ before he received roughly half his 231,884 shares.

Graff got all his money back, he said, by relentlessly pursuing the firm. Aronson’s other clients weren’t so fortunate. While Aronson tried to sell as many shares as he could to get people out of the stock that they did receive, he said, Jesup shut him off before he could finish the job.

By October 2009, Jesup’s president, Donald A. Wojnowski Jr., was warning Aronson to stay out of the office when he came to town, according to an e-mail. “I would appreciate your absence from the office next week while I am in Boston. You have worn your welcome out with me and most of Jesup,’’ he wrote. By November, Aronson was fired.

Wojnowski did not return requests for an interview.

Meanwhile, Aronson and his clients are still waiting to be made whole.

“These guys had no interest in developing a company,’’ he said. “It was purely a stock play.’’

Beth Healy can be reached at bhealy@globe.com.