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Sanctioned stockbroker says he's the victim

A former Medford stockbroker sanctioned by the National Association ofSecurities Dealers for overcharging accounts says he's the target of a vendettaby his former employers.

Lew Aytes said Smith Barney managers were fully aware of his tradingin limited partnerships while he was with the firm.

He contended he was singled out for investigation because he left in1995 to manage a new office for Merrill Lynch, which competes fiercely withSmith Barney.

He said Smith Barney co-manager Bill Smith tried to persuade him to stayand, when that wasn't successful, threatened to destroy him professionally.Smith referred calls to a Smith Barney spokeswoman in New York who is preparinga response.

The NASD suspended Aytes and former broker Charles Duquette for 18 months.It fined Aytes $100,000 and Duquette $50,000. The NASD fined Smith $20,000for failure to adequately supervise the two brokers.

Aytes said his 63 transactions were a small part of the 1,500 secondarylimited partnerships processed in nine years by the Medford Smith Barneyoffice. He said other brokers involved were not investigated.

Aytes said he made a total of $159,091 as a dealer or agent in markupsand commissions on the 63 transactions.

The brokers were functioning as dealers for limited partnerships withinthe Smith Barney office, Aytes explained, but the firm was not handlingthe securities.

It was a business within a business, he said, in which they'dbuy limited partnership units at a discount for resale. Aytes inheritedDuquette's clients in 1992 when that broker left the firm to sail aroundthe world. The firm kept his license active through January 1996, when theinvestigation began and he was terminated.

Duquette said he normally sold the units out of an escrow account. Ayteskept the shares in an account he controlled, in the name of Janice and WilliamWatson, his wife's sister and brother-in-law. He said a manager told himnot to accept checks for units held in those accounts in his own name asa matter of office procedure.

I didn't realize this was not proper until I was studying for mymanager's license, he said.

Aytes and Duquette said Smith Barney did not want to handle the partnershipsbut encouraged the brokers to trade in them because it attracted investments.

Brokers were eager to sell the units for an 8 percent commission, comparedwith 2 or — percent for bonds and stocks. Smith Barney managers were requiredto review each transaction, although the firm did not share in commissions.

The allegation of overcharging is based on the markups.

The broker-dealers were permitted to mark up the price of the units becauseof the risk involved in holding the securities, Aytes and Duquette say.

The difference between a dealer and an agent is the same as thedifference between a car dealer and the car salesman, Duquette said.The salesman gets the commission on every car he sells, but the dealerhas to make the investment and risk a loss.

The NASD says the markups ranged from zero ­ the courtesy chargeto other brokers, including Smith, said Aytes ­ to up to 90 percent.The commission and markup averaged 14.6 percent on all the transactions,he said.

What's perceived as profit includes a commission on the sale and a commissionon the purchase, plus the markup or spread, Aytes said.

The practice is common in the securities industry. A stock you can sellto a dealer for $9 may cost you $10 to buy ­ the $1 difference is thespread. With — percent commissions, the net to the seller in that exampleis 18 percent less than the purchaser pays.

The NASD guidelines say markups should not normally exceed 5 percent,but Aytes noted there are provisions for higher markups in certain circumstances,including the assumption of risk.

Aytes said the fair market value of the units he sold isestablished by an outside appraiser. He said he always sold the units toclients at less than that figure.

(That) value has some bearing, but it is a matter of supply anddemand, said Paul Frain, principal in Frain Asset Management, whosold some of the partnerships to Duquette and Aytes.

Frain said he works as an agent for the seller and calls around to getthe highest price he can find for the units. He charges a markup of up to5 percent as an agent. He said one who takes ownership may be justifiedto mark it up higher because of the added risk.

The NASD action only ends one part of the dispute, which continues throughlawsuits filed by Aytes and Smith Barney in Jackson County Circuit Court.

Seventeen of 18 Smith Barney allegations ­ including forgery, fraudand racketeering ­ were dismissed last week by Circuit Judge Mark Schively.The remaining count alleges Aytes is attempting to conceal assets in a familytrust.

Aytes is suing Smith Barney and its managers for $16 million, contendingthe firm's allegations forced him from Merrill Lynch job and attacked histrustworthiness.

Sandra Sawyer, Aytes' attorney who was accused by the Oregon State Barof ethical violations in connection with the case, said she isn't guiltyand will be exonerated.

No trial dates have been set.

Aytes recently completed the 18-month suspension, but said it will bedifficult for him to find work in the industry because of the publicityover the case. He will only have to pay the $100,000 fine if he can returnto the securities business.

He said he was not ordered to pay restitution because his clients didn'tlose money. Aytes wasn't barred from securities trading.

He said he agreed to the NASD settlement to save the $200,000 cost ofpursuing a hearing; he figures he spent $50,000 in legal fees during theinvestigation.

Our house is being foreclosed, he said. I'm out ofmoney.

Duquette lives near Portland and is pondering what to do with his future.

The sheer terror is a burden you can handle for a while,he said. But after 18 months it wears you down.