April 13, 2004

Candidate's brokerage subject to fines, warning
Tim Phillips, who is seeking the Republican 1st Congressional District nomination, says no rules were knowingly broken

by LAURA GUNDERSON

A brokerage firm owned by a Republican candidate in the 1st Congressional District, Phillips & Co. Securities, has paid $21,500 in fines and been warned by the state about its business practices.

In addition, clients who blamed Tim Phillips' company for losing their money received more than $250,000 in two insurance settlements in the past year. Separately, a third client received a $30,000 arbitration award.

Phillips said neither he nor his company knowingly broke the rules.

As for the money awarded after arbitration and the insurance settlements, Phillips said, "These are people that lost money in one of the worst bear markets in the history of the stock market.

"These were generally meritless cases, but the cost to defend them from the insurance perspective was simply too much."

During the past 12 years, the state and a national regulatory industry group have levied seven disciplinary actions against Phillips & Co., ranging from warning letters to a censure and midrange fine of $20,000.

A three-day audit completed this month by state regulators found Phillips & Co. is in compliance. Still, regulators and securities experts said the earlier fines and settlements should concern investors looking for a place to put their money.

"These aren't garden-variety violations, but they're also not accusations of fraud, deceit or theft," said David Tatman, who leads the securities enforcement division for the Oregon Division of Finance and Corporate Securities. "I think this is a reflection of their business model; they are fairly unique and aggressive."

Phillips, 37, is a first-time candidate who lives in the Cedar Mill area of Washington County. He is running against Goli Ameri and Jason Meshell in the May 18 Republican primary. The winner faces Democratic incumbent Rep. David Wu.

Phillips' 50-employee stock brokerage and money management firm has 12,000 individual and business clients across the nation. About 70 percent of Phillips' clients are solicited through phone calls, he said. The Oregonian found no actions against the company in other states.

Phillips & Co., founded in 1992, hires college graduates -- often from Oregon schools, Phillips points out -- whom he teaches the trade, from stock sales to money management.

The company sells stocks by targeting clients by demographics, such as income, age and occupation -- a practice made popular in the 1990s market boom. To help with sales, Phillips & Co. provides employees with scripts to follow.

State regulators and securities experts say the tactics are legal, yet aggressive and in the past have left Phillips & Co. skating close -- and sometimes crossing -- lines set up to protect investors.

Compared with others in his industry, Phillips said his company's record is rather clean, with four Oregon and federal violations, two settlements and an arbitration.

But Bob Banks, a Portland securities lawyer who reviewed Phillips & Co.'s record with the National Association of Securities Dealers, called the violations cause for concern.

"These types of violations are serious; it's not like, 'Gee, you entered a trade and forgot to write down the time of execution,' " said Banks, who also helps write arbitration policy for the NASD, the disciplinary arm of the Securities and Exchange Commission.

The Oregon Division of Finance and Corporate Securities officials fined Phillips $1,500 in 1993 for doing business without an Oregon license. The maximum fine he could have faced was $5,000. The state also issued a warning letter to Phillips in 1995, when he accepted payments for a stock before it was registered with the SEC.

In 2002, three or four people complained to the state after receiving phone calls from Phillips & Co. representatives selling stocks, said Tatman of the Oregon securities enforcement division.

Tatman said call recipients told the state they agreed to consider the stock deals but did not commit. However, they later were mailed sales confirmations from Phillips & Co. When people complained, company representatives told them their calls had been recorded, that the tapes proved they made verbal agreements and that if they did not pay, the brokerage house would report them to credit companies, Tatman said.

Copies of tapes requested

State officials requested copies of the tapes but were told they were lost, destroyed or recorded over, Tatman said. Without proof either way, the state sent a warning letter, Tatman said, and no other action was taken.

Phillips stands behinds his company's actions.

He said taping conversations adds security -- both for the client and his company. About 2 percent of his company's clients renege on deals, a percentage that Phillips said is lower than many firms.

State officials recently finished a routine three-day audit of the company that looked at Phillips and Co. reports and files dating back as many as three years.

"Phillips seems to have improved their compliance in this limited examination," said Dale Laswell, chief of licensing and registration whose division is auditing all of Oregon's 38 broker-dealers.

Along with state regulations, securities dealers also must abide by federal Securities and Exchange Commission and National Association of Securities Dealers rules.

NASD regulators fined the company $20,000 and censured it in 1995 for failing to include information in the scripted sales pitches.

Fines for breaking NASD rules concerning fair dealings with customers range from $5,000 to $75,000, and fines for breaking public communication rules range from $1,000 to $15,000.

NASD regulators found that Phillips & Co.'s scripts did not "disclose certain risks" and failed to offer additional investment information. The company paid the fine in 1997 and agreed to submit scripts to the agency for review for a year.

"Scripts are a legitimate and solid training tool," said Phillips, saying that the information left off the scripts was technical. In some cases, he said, employees were told to offer information to clients, though it was not written in scripts.

Complaints made
Three clients complained to the dealers association during the past year about how Phillips' firm handled their money, in one case citing unsuitable recommendations and misrepresentation.

A NASD arbitrator awarded $30,000 to one Phillips & Co. client, who had asked for $168,000 to replace losses from 2000 to 2002, according to the dealers association reports. Banks, the securities lawyer, called the $30,000 award below average.

Phillips said he chose to have his insurance company settle with two other clients instead of using arbitration. In one case, a couple asked for $455,000, but negotiated for $176,950. A broker with Phillips & Co. paid $25,000 in that deal. In another case, the negotiated settlement was $100,000.

None of three clients who negotiated claims with Phillips & Co. could be reached for comment.

Banks and other securities lawyers say an average negotiated settlement in similar cases is $100,000.

Phillips and his company denied wrongdoing in all three cases.

"I wouldn't be surprised to see a lot of civil lawsuits, this is a ripe industry for claims," said Tim Dozois, a securities lawyer with the Portland law firm Davis Wright Tremaine. "It's a little more unusual and surprising to see a lot of government enforcement actions."

Last year, NASD handled 1,658 arbitration cases and awarded monetary damages in 893, or 54 percent of them. This year, NASD has handled 289 arbitration cases. None has been filed against Phillips & Co. this year.