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A takeover attempt against a bulletin-board brokerage, Sharpe Capital Inc., has raised allegations of down-and-dirty dealings not only at Sharpe, but among the high-profile Wall Street firms on which the New York market maker depends. A barrage of scandalous allegations was prompted by a lawsuit filed Sept. 26 in the New York State Supreme Court in Manhattan by New York-based Sharpe Capital against one of its former executives, Judy Payer. Also named as defendants in the suit are John Fiero, a new business partner of Payer’s, and the brokerage Fiero Brothers Inc., which Sharpe describes as a competitor. Sharpe, with more than 300 employees and gross revenues of about $100 million, is one of the nation’s largest market makers, trading in 498 Nasdaq securities, 415 small-cap stocks, 551 bulletin-board stocks and nearly 6,400 pink sheet stocks. According to the Sharpe Capital petition and affidavits provided by the firm’s owners, George Santangelo and Larry Hoes, Payer and her husband, William Kirincich, co-managed the company’s over-the-counter trading department. The suit describes this department, which generates nearly two-thirds of the brokerage’s revenues, as “the heart and soul of the firm.” The petition alleges that Payer “abruptly announced” in August that she was divorcing her husband and that she and Fiero wanted to take over Sharpe, relegating Santangelo and the others to minority holdings. AN OFFER HE COULDN’T REFUSE When Santangelo flatly rejected the offer, Payer allegedly threatened to walk out with the firm’s traders and to liquidate all of her market positions. Santangelo, under pressure, agreed to consider a revised offer, but in the meantime, according to the petition, Payer and Fiero proceeded with their plans to poach the company’s best brokers for their own operation, as evidenced by recorded telephone conversations and intercepted electronic messages. Sharpe has filed for injunctive relief against Payer as well as damages relating to her alleged breach of fiduciary duties. The lawsuit and its follow-up offer a look into the complex, often seamy relationships among competitors in the world of bulletin-board brokerages, including their relationships with larger Wall Street firms. The most sensational allegations came to light earlier this month when a columnist for MSNBC.com, Christopher Byron, reported that during a series of interviews, Payer told him of widespread cocaine abuse at Sharpe and of “kickbacks” paid in the form of drugs in exchange for business from the trading desks of at least three major brokerages. Kirincich not only bought drugs for himself and others, but also procured women to cultivate friendly relations with traders from other firms, Byron reported. SEX, DRUGS AND STOCK BROKERS Cocaine and sex. It all sounds so … so 80s! But behind the lurid details a larger question looms: What, in fact, is the relationship between wholesale market makers such as Sharpe Capital and the powerful wire houses of Wall Street? “The wire houses are their lifeblood,” said a broker from a small firm who spoke on condition of confidentiality. Market makers like Sharpe get most of their order volume from major firms. “But how do you cultivate these relationships?” he continued. “No one ever wants to touch on this question.” According to this broker, the cultivation depends on precisely the kind of payoffs Payer described — not necessarily cocaine and women, but a routine bestowal of gifts to ensure the flow of trade processing orders continuing unabated. “It all depends on who you take to dinner, who you give tickets to the Broadway show or the Sinatra concert, or even an envelope full of cash,” the broker said. “I’ve seen people taken on shopping sprees at Christmas. I’ve seen paid vacations to South America. No one talks about this because it would hurt you as a firm, it would hurt your business. … The regulators can’t investigate because no one admits it, and there’s no way to prove it.” The key, the broker added, is being in a position to pay kickbacks. “You have to be a member of the club. You can’t just call up these guys for dinner. The wholesale brokerages have a few people whose job is to go to all the traders’ conventions and charity events to form these relationships. Sometimes they’re called ‘salesmen,’ sometimes ‘contact people,’ depending on what’s politically correct at the time. It’s the dark side of the business.” KICKBACKS OR PR PAYOUTS? SEC regulations require disclosure of any “payment for order flow,” in cash or kind, in relation to a specific transaction. But what about “public relations” gifts to encourage long-term business from a brokerage? “That’s when you hire a lawyer — to make these distinctions,” SEC spokesman John Heine said. But “if you have to ask the question, you know it’s illegal,” said another finance professional, who has worked for one of the big brokerages Payer mentioned, although not on the trading desk. The professional, who commented on condition of anonymity, said bribes were common on Wall Street, and not only between brokers. “Everyone rationalizes it and convinces himself that no one is hurt. In fact, you can’t really put your finger on who is hurt,” he said. Joseph Messina, vice president for compliance at M.H. Meyerson & Co. Inc., a market maker based in Jersey City, N.J., said his firm guards against the offering of kickbacks through telephone recordings and other methods, but he declined to comment on its prevalence. “I can’t say I don’t know what goes on in the market, but I can’t comment on rumors and speculation,” he said. Apart from relationships between wholesale market makers and major brokerages, the Sharpe case also highlights the dog-eat-dog relationships among the various market makers themselves. The petition outlines the use of stock manipulation to push rivals into financial ruin by driving down the price of a stock in which a competitor holds a strong position or driving up a stock a competitor is shorting. Such methods have come up in previous lawsuits, including some involving Fiero Brothers. STOCK MANIPULATION FOR FUN AND PROFIT In 1998, the National Association of Securities Dealers charged Fiero Brothers and three defunct brokerages with colluding to drive down the prices on 10 stocks sold by another brokerage, Hanover Sterling & Co., which collapsed in February 1995. John Fiero was suspended from the securities business for six months for initially refusing to testify, but the suspension was overturned on appeal. Subsequently, Fiero himself successfully sued two California brokerages, Waldron & Co. of Irvine and Wedbush Morgan Securities of Los Angeles, for artificially boosting the share price of a stock Fiero was shorting. Directly related to this kind of manipulation is the movement of key people between firms, taking not only talent but also sensitive proprietary information with them. Payer’s alleged raid on the Sharpe trading desk is not her first encounter with such accusations. In 1996 Payer and Kirincich were sued in an arbitration claim by their former employer, Hill Thompson Magid & Co., when they left to join Sharpe Capital. Ultimately the NASD awarded $39,000 to Payer and Kirincich after finding that Hill Thompson President Anthony Broy amended Kirincich’s U-5 filing with false and damaging information. Of additional interest is Payer’s allegation that more than one-third of the employees working on Sharpe’s trading desk are not licensed to trade. TRADING WITHOUT A LICENSE NASD records indicate that of the 14 brokers mentioned in the Sharpe petition, most are registered. However, one employee, Francis Murphy, described in the petition as Sharpe’s “largest producer on the agency desk,” is not registered with the NASD, although he does have a Central Registration Depository number indicating he has been registered or is seeking registration. According to an NASD spokeswoman, a person not currently registered may not make trading decisions. Murphy, who has worked at Sharpe since February 1997, has worked at two other brokerages since 1994. In the world of the bulletin boards and pink sheets, where fortunes can so easily be made and lost, emotions often run high, and some of the participants are the type who make their displeasure known. Both Sharpe Capital and Fiero Brothers have reported instances of intimidation to the authorities. Business Week quotes a confidential police report relating an incident in 1996 in which three burly men went to the Sharpe office and slapped someone in the head while warning, “Don’t f–k with our stock.” Byron reports that Payer spilled the dirt on Sharpe in a preemptive attempt to protect herself from being implicated in revelations that might result from the lawsuit. But according to an acquaintance, she now regrets having taking her allegations to the press. Both Payer and Fiero declined comment on the case. Copyright (c)2000 TDD, LLC. All rights reserved.

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