A major brokerage house and two stock brokers were accused yesterday of playing roles in a stock manipulation scheme carried out in 1978 and early 1979 by a group of prison inmates.
The securities and Exchange Commission censured Loeb, Rhoades, Hornblower & Co. (now called Shearson Loeb Rhoades Inc.) and Myer Berg, a former saleman in its Boca Raton, Fla., office. The SEC also censured Barry L. Lefko, a former broker in the Baltimore office of Dean Witter Reynolds, Inc.
The brokerage firm was charged with not properly supervising Berg. Lefko, without admitting or denying the allegations by the SEC, agreed to 120-day suspension as broker-dealer. Berg did not settle with the commission.
The SEC alleged that the stock of CHB Foods, Inc., a small southern California food processor, was manipulated by inmates of the minimum security federal prison atg Eglin Air Force Base, Fla.
The alleged mastermind of the deal was James Corr III, then serving time in prison for securities fraud, perjury, filing a false loan application and criminal contempt.
Neither Corr, who is 43 years old, nor the other 11 inmates allegedly involved are named in the SEC's civil action.
The SEC said that a federal grand jury here has been investigating Corr and his wife, Neica, since July 1980. The Commission said the grand jury is seeking to determine if the Corrs are in criminal contempt of a permanent injunction entered in 1975 when Corr was sentenced to Eglin. His wife, Neica, was given a suspended sentence for playing a role in Corr's manipulation of the stock of American Agronomics Corp. and Jerome Mackey Judo Studios, Inc.
In a June 18, 1979, account of the Eglin affair, The Washington Post reported that Corr's known inmate-investors were serving time for smuggling or peddling quantities of the milder varieties of drugs.
The SEC confirms that much of stock was paid with large amounts of cash delivered to Loeb, Rhoades brokerage office.
When the CHB Foods stock collapsed, a number of inmates lost their investments. One investor, Robert Merchand of Boston, who was in Eglin for a year for distributing marijuana, filed suit against the brokerage, Berg and Corrs to recover $150,000.
Merchand reportedly is a leading witness against Corr before the grand jury.
Corr got out of Eglin in October, 1978, after serving a 2 1/2-year sentence. Trading in CHB Foods by Corr and other inmates continued after he left prison.
According to the SEC, between May 1978 and June 1979, Corr and his fellow investors acquired as much as 16 percent of the publicly traded stock of CBH Foods, a family-controlled company which has a relatively small number of shares traded in the stock market.
"As a result of this activity," the SEC said, "the price of CHB rose from a low of $7.63 per share during July 1978 to a high of $16.88 per share during January 1979."
The SEC said Corr set up a trading account with Berg, using his wife's maiden name. This was done by Berg, the commission alleges, to hide from the brokerage that Corr -- then a prison inmate -- was his real customer.
In opening accounts for other Eglin inmates and their relatives, the SEC said that Berg "placed false information concerning identities, addresses, occupations, income and net worth . . . to conceal that [the customers] were incarcerated . . . at the same address."
One inmate bought about 40,100 shares of CHB Foods, and the SEC said that almost all the orders were placed by Corr, "although Corr did not have written authorization."