Will securities regulators finally shut down Robert E. Brennan? After 16 years of fighting the penny-stock trader, Securities & Exchange Commission officials were jubilant last week. New York Federal District Court Judge Richard Owen ruled that Brennan and his firm, First Jersey Securities, had engaged in "massive and continuing fraud" in a case filed in 1985. "Brennan has done everything possible to postpone the day of reckoning," exulted Thomas C. Newkirk, associate director of the SEC's enforcement division. "But his day finally came."
Truly? For sure, it was the first time Brennan and First Jersey have been found liable for fraud, and the $71 million penalty is far higher than anything Brennan has been stung with in the past. The ruling also allows the SEC to press efforts to ban Brennan from the industry. And his legal troubles may be on the rise: A long-delayed New Jersey complaint alleging that his associates--and perhaps Brennan himself--manipulated stocks during the early 1990s likely will be filed soon.
"THREE STEPS AHEAD." But even as the noose looks to be tightening, few securities regulators believe Brennan is down for good. "Brennan is like the tax evader who continually finds loopholes in IRS rules," says Howard Sirota, a lawyer who spent years investigating Brennan for the National Association of Securities Dealers. "He's always three steps ahead."
Brennan once seemed the stuff of American entrepreneurial dreams. Starring in his own TV ads, he built First Jersey into a national firm. Later, he became a player in horse racing, while polishing his image with extensive charitable donations. Recently, he bid for New Jersey's Meadowlands sports complex and the Stanley Cup champion New Jersey Devils.
But according to Owen, the federal judge, Brennan built his fortune while simultaneously buying and selling overhyped stocks to unwitting retail customers. Typical was the trading in tiny Sovereign Chemical & Petroleum Products. In November, 1992, First Jersey sold customers units consisting of three Sovereign shares and one warrant for $3. Days later, First Jersey bought the units back for $3.50, split them, and sold the components to others for $8 total.
Regulators thought they had stopped Brennan in 1987, when he sold off First Jersey's retail operations. But First Jersey has continued to trade for Brennan's account--and according to the SEC and Owen, Brennan has very much remained in business. Owen ruled that Brennan appeared to have used First Jersey, his privately held investment company Austin Bernet, as well as his close links with brokerage firms F.N. Wolf, Hibbard Brown, and L.C. Wegard, to continue manipulating stocks. "Ultimately, we're looking at hundreds of millions of dollars" in excessive profits, claims Mark Reilly, acting chief of enforcement for the Massachusetts Securities Div.
First Jersey's lawyer, W. Hunt Dumont, denies such allegations and says Brennan will appeal his fine. In the meantime, the SEC has begun proceedings to revoke First Jersey's license and to bar Brennan from the securities business. SEC investigators also will soon dig through First Jersey's records in search of further manipulation.
That alone could prove a gold mine. In just the six companies examined by the court, the SEC estimated that illegal markups totaled $27 million. Yet regulators think First Jersey underwrote and traded upwards of 50 companies in that time. Moreover, Brennan signed a consent decree in 1984 enjoining him from securities-law violations. So violations could bring criminal contempt charges.
For now, federal and state actions against Brennan all have concentrated on trades he is alleged to have orchestrated at First Jersey before 1987. But state and federal securities regulators have amassed extensive evidence alleging that he has since continued to manipulate stocks. According to Owen, Austin Bernet acquired 1.45 million units of a company called Future Funding Corp. for roughly 11 cents a share in early 1991. After changing the name to Site-Based Media, Austin Bernet sold the units through an intermediary to broker Hibbard Brown for $4. Brennan's profit: $25 million.
SLOWING DOWN? Regulators allege that similar trading has occurred with other companies Brennan has controlled in recent years--allegations Brennan vigorously contests. "He denied he controlled any stocks that Hibbard was marketing," says Dumont. "Any charge of manipulation or of excessive markups is denied."
So far, neither the SEC nor the states have acted against Brennan for the more recent trades. That could change with New Jersey's anticipated filing of stock manipulation charges concerning Site and other shares. Sources close to the SEC believe New Jersey will name Brennan directly in the complaint. But for now, securities police have moved simply to shut down Wolf, Hibbard and other brokers that have spun out shares in companies Brennan allegedly controls.
Recent examples: The SEC audited trading records at several branches of Dickinson & Co., a Des Moines brokerage that has underwritten two companies with ties to Brennan (Dickinson officials deny any connection.) An SEC investigation of L.C. Wegard, where many former First Jersey and Hibbard brokers have moved, is also under way.
There are signs that all these investigations are finally slowing Brennan. With its investigation into trading of Chef's International, which has had ties to Brennan, in the works, the SEC has blocked registration of new shares. Over the past several years, the SEC has hindered attempts to register shares in several blind pools with heavy Brennan ownership. "We haven't seen much activity on new shares from Brennan for the last year," says Stanley Whitten, a recently retired SEC investigator. "Whether that means he's been slowed or he has found new front companies, we don't know."
But few think the battle is over. "We're not even close to seeing the end of Brennan," says Newkirk. "But we are at the beginning of the end." Unfortunately, it's hardly the first time that has been said of Brennan.