The Securities and Exchange Commission said yesterday it censured Prudential-Bache Securities Inc. for tolerating fraudulent behavior by six of its employes in two separate cases that led investors -- some of them elderly and unsophisticated -- to put their money at risk.
Officials said it was one of the toughest enforcement actions of its kind against a stock brokerage firm. Prudential-Bache and four of the employes or former employes agreed to accept sanctions without admitting or denying guilt. A fifth person charged denied the accusations, and a sixth is negotiating a settlement, lawyers for the employes and other sources said.
For Prudential-Bache, the seventh-largest securities dealer in the country, the sanctions include the appointment of an outside consultant to reorganize the company's supervision of brokers in its 300 offices nationwide.
The SEC ordinarily does not seek monetary penalties in cases of this kind, and officials said that turning over management decisions to an outside consultant is an unusually strict remedy.
The company promised to follow the consultant's recommendations. The SEC also officially censured Prudential-Bache and said it will review the recommendations and subsequent consultant reports on whether they have been implemented.
"It's the only case I'm aware of in recent years where we have brought a failure-to-supervise case against a major brokerage firm and required extensive remedial relief," said the SEC's director of enforcement, Gary Lynch.
Prudential spokesman Peter Costiglio said the actions detailed by the SEC occurred several years ago and that, since that time, "One of the foremost goals of the firm over the last several years has been to eliminate any such deviations. To do so, it has consistently worked to strengthen its compliance procedures. . . . We believe that today the firm's controls are among the industry's finest."
Last month, Prudential-Bache was fined $100,000 by the National Association of Securities Dealers, a self-regulatory industry group, for allegedly manipulating trading in the stock of Crown Books Inc. in 1984.
The SEC said in its complaint yesterday that the firm and its earlier corporate incarnation, Bache Halsey Stuart Shields Inc., also had "failed in their supervisory responsibilities" on four other occasions since June 1982.
The two cases settled yesterday involved instances where Prudential-Bache brokers had jeopardized their clients' money or placed it in unwise investments, even though they had been warned to change their behavior by the company's internal compliance division, the SEC said.
In the Jacksonville office, Sam Kalil Jr., assistant manager of the branch, engaged in trading on behalf of uneducated and unsophisticated customers -- some of whom did not speak English -- that the SEC called "unauthorized, unsuitable and excessive."
Kalil juggled about $2 million from one customer account to another in unauthorized transactions, and tried to cover losses with his own money when they grew excessive, the SEC said.
In one case, Kalil invested the entire net worth of an 82-year-old retiree who had requested a safe investment in so-called "naked options," under which the entire amount can be lost. Those losses in June 1983 alone amounted to $380,000, the SEC said.
Kalil, who is serving a 26-month term in state prison for those and related activities, agreed under the settlement to be permanently barred from any association with securities brokers.
A colleague in the office, James Moore, forged customer signatures and letters of authorization so that Kalil could move money out of accounts, the SEC said. Moore agreed to the SEC censure and suspension from any association with a brokerage for 60 days.
The branch manager of the Jacksonville office, John Solomon, failed to investigate Kalil's conduct, even after the compliance division suggested he do so, and ignored evidence of Kalil's activities, the SEC said. Moore also was censured and suspended for 60 days.
In the other case, the SEC said two brokers in the Atlanta office recommended purchase of the stock of two seafood restaurants "by means of unfounded price predictions and other material misrepresentations and omissions to state material facts."
For example, the SEC said, one agent, David Lawrence Scharps, told clients that he had inside information about the securities because his father was president of the firm that owned the restaurants.
Scharps intends to fight the accusation in an SEC administrative proceeding, according to his attorney, Wallace L. Timmeny. Timmeny said the SEC "has an inflated notion of the seriousness of the [Scharp's] conduct."
The other Atlanta broker, Robert A. Scarmazzo, who was accused of making the same optimistic predictions about the stock's price, was said by several sources to be negotiating a settlement. His lawyer could not be reached for comment.
Richard K. Saccullo, who was then branch manager of the Atlanta Prudential-Bache office and now is the firm's regional manager for the Southeast, was accused by the SEC of ignoring repeated requests by the firm's compliance division to stop trading by the branch office in the restaurants' stock. He agreed to a censure and a 45-day suspension.