The Utah Securities Division has issued an order effectively halting trading in the stock of U.S.A. Medical Corp. within the state following a federal judge's finding that it was trading illegally.
The state's action Wednesday was a summary order denying a registration exemption for the stock. A hearing will be held if one is requested, said Patricia Louie, director of registration for the division.She said the division had been contacted by Johnson-Bowles Co. Inc., a local stock brokerage that is suing U.S.A. Medical and several other defendants in federal court.
State personnel monitored a hearing Monday and Tuesday before U.S. District Judge J. Thomas Greene, in which Johnson-Bowles sought a preliminary injunction that would have stopped trading.
Greene found that U.S.A. Medical's stock had been unlawfully issued and was trading illegally "as part of a fraudulent scheme and device to manipulate and artificially inflate the price of that stock in violation of the securities laws."
But the judge denied the injunction, saying Johnson-Bowles had been in a position to know and either did know or should have known about the alleged irregularities.
The brokerage had complained that some of the defendants had conducted a classic "box job" scam in which they secretly controlled the majority of the supposedly free-trading stock of U.S.A. Medical and manipulated it to pump up the price.
Richard Leedy, attorney for U.S.A. Medical, said his client denies any involvement in fraud. He said Johnson-Bowles simply elected to sell the stock "short" - or, in other words, sell shares it did not own, figuring the price would drop and it could buy at a lower price to cover its sale within the legally allowed seven-day grace period.
But the stock price went up and Johnson-Bowles got caught, and now the brokerage is trying to do in court what it couldn't in the market, he said.
If Johnson-Bowles succeeds, the people who'll be hurt are the 150 or so investors who bought the stock in the past month, Leedy said.
Johnson-Bowles' complaint alleges that one of the people secretly controlling the U.S.A. Medical stock was Michael W. Strand, "a several-time convicted felon, such felonies relating to tax fraud, securities fraud, mail fraud, criminal conspiracy and criminal aiding and abetting."
Strand's lawyer, John Caine, said his client denies any involvement in fraud with respect to U.S.A. Medical. He said Strand, a stock promoter, was just asked to promote what was represented to him as a legitimate company with free-trading stock, and that's what he did.
Johnson-Bowles alleges that people involved with U.S.A. Medical omitted key information from their disclosures about the company. The brokerage also says it was maneuvered unfairly into a "short" position on the stock and then "squeezed."
When a brokerage sells short, someone who effectively controls the supply can squeeze the brokerage or force it to pay its asking price.
Johnson-Bowles had said that unless the court issued an injunction, the company would suffer "the irreparable harm of being forced out of business as an NASD dealer." The NASD is the National Association of Securities Dealers, which has minimum capital requirements for its member brokers.
Johnson-Bowles attorney Jay Gurmankin said he was not sure what the company's current financial position is.
"The state's order significantly helped us, and I think that the judge's findings significantly help us," he said.