Again, JB Oxford Finds Itself Caught Up in Market Scandal
By KATE BERRY
The joint Securities and Exchange Commission-New York Attorney General’s investigation into market timing by hedge funds has ensnared JB Oxford Holdings Inc., a discount brokerage firm in Beverly Hills that still owes the government part of a $2 million settlement stemming from a federal criminal probe three years ago.
New York Attorney General Eliot Spitzer has named JB Oxford as one of 10 brokerages that allegedly facilitated improper trades made by hedge fund Canary Capital Partners LLC to “time” the mutual fund by making after-market trades that take advantage of changes in mutual fund prices.
The legality of the practice is the subject of debate in the securities and legal communities, and it can hurt other mutual fund investors.
The National Association of Securities Dealers is also investigating the firm, The Wall Street Journal reported.
In an interview, Christopher Jarratt, JB Oxford’s chairman and chief executive, did not discuss specific allegations other than to say: “We always have and always will completely cooperate with any relevant agency or authority.”
Even before these latest allegations, JB Oxford has fallen from the high-flying days of 1999, before a series of scandals cast a stigma on the stock.
The shares peaked on April 15, 1999, at a split-adjusted high of $196.88 each; on Nov. 12 they closed at $3.40. (The company executed a 1-for-10 reverse split in October 2002.)
In 2000, JB Oxford agreed to pay $2 million in fines to the U.S. government to settle an investigation into a consultant at the company, Irving Kott, who had been convicted previously of securities fraud.
Earlier this year, the U.S. Attorney’s office in Los Angeles agreed to extend the due date on a $500,000 payment that was part of the settlement. JB Oxford paid $50,000 toward the amount in March and is working to get an additional extension past Feb. 14, 2004.
In October 2000, the firm was also fined $10,000 by the National Association of Securities Dealers and ordered by the industry group to pay customers $10,416 plus interest in restitution for allegedly charging excessive commissions in connection with the purchase and sale of options.
More recently, JB Oxford has struggled to find a way to cash in on the stock market rally that has buoyed shares of better-known discount brokers like Charles Schwab Corp. and Ameritrade Holding Corp.
The company has lost money in each of the past 10 consecutive quarters, despite the purchase of six online brokerages that increased its potential customer base and trading volume. At the same time, it has shed half its workers, leaving it with about 65 employees.
“The last couple of years have been very difficult from an operational standpoint,” Jarratt said. “We’ve been cutting costs and realigning our business to take advantage of the rebound we’ve been waiting for.”
Combined, the six firms represented at least 34,000 customer accounts and the right to service $895 million in client assets, according to press releases.
As of Nov. 12, JB Oxford had not released its third quarter earnings. For the second quarter ended June 30, the company narrowed its loss to $1.8 million, or $1.19 a share, from a loss of $3.5 million, or $2.47 a share, in the like year-earlier period. Revenue fell 15 percent, to $5 million.
JB Oxford does not have an institutional sales or research staff, but it operates as a brokerage, making markets in 200 companies. It also provides online sales and options trading.
A major obstacle for the company appears to be its unusual relationship with management, which owns 60 percent of JB Oxford’s stock.
Jarratt and Jamie Lewis, the firm’s president and chief operating officer, are principals of Third Capital Partners, a Nashville-based merchant bank that became involved with JB Oxford by buying $5.4 million of the company’s subordinated debt in 1998. Oxford pays 9 percent interest to Third Capital to service the notes, which mature at the end of December.
Neither executive receives a salary from Oxford, but they are being paid indirectly, regardless of the company’s performance, through consulting and advisory fees of $85,000 per month paid to Third Capital Partners.
In addition, Oxford paid more than $900,000 in each of the last three years to Third Capital for the services of Jarratt and Lewis, plus expenses for the two executives that reached $216,600 last year.
Jarratt referred questions about the arrangement to the company’s SEC filings.