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Ex-Ladenburg chairman agrees to pay $5.5M and sell most of his stake

Ladenburg Thalmann has severed most of its ties with its onetime chairman as he seeks to resolve an SEC pump-and-dump case.

Tarnished billionaire investor and dermatologist Phillip Frost agreed to pay $5.5 million and limit his ownership stake in the 4,300-advisor independent broker-dealer network's parent to settle with the regulator.

The SEC filed the proposed final judgment of its civil case against Frost and two affiliated entities in U.S. District Court in New York on Dec. 27. The agreement came days after Miami-based Ladenburg announced that its ex-chairman had sold back most of his principal stake in the firm for more than $130 million.

Ladenburg Thalmann IBD Network

One of the defendants — Frost Gamma Investments Trust — also terminated its $40-million revolving credit agreement with Ladenburg’s parent firm. Frost remains CEO and chairman of the other entity, healthcare firm OPKO Health.

The settlements “will end a potentially expensive, contentious and time-consuming litigation and I am happy that we can focus on an exciting and productive 2019 for OPKO Health,” Frost said in a statement issued by the firm. OPKO also agreed to pay a $100,000 penalty.

Macroeconomic trends and matters of convenience will move advisors, assets and markets next year in the ever-changing wealth management space.
December 11

Representatives for the regulator didn’t immediately respond to inquiries on the status of the nine other individuals and eight other entities — including one other company co-owned by Frost — charged in connection with the alleged $27-million microcap scam. A federal judge must approve the settlements.

Frost retired from Ladenburg’s board in September after the SEC accused him and the entities of running afoul of antifraud, beneficial ownership disclosure and registration laws in sales of penny stocks over five years. The proposed settlements include a bar on trades involving penny stocks for Frost and Frost Gamma.

He “has additionally consented to the imposition of a permanent injunction against future violations of Securities Act Section 5 and is disgorging his ill-gotten gains and paying a penalty,” SEC attorney Nancy Brown wrote after the agreements in a letter to District Judge Edgardo Ramos.

Frost would pay a fine of $5 million, disgorgement of $433,000 and interest of $90,000 . The settlement also restricts his securities holdings to the number of shares held on the date of the final judgment, but it doesn’t bar him from trading Ladenburg’s stock.

The stock buyback agreement, however, includes an “ownership covenant” provision stating that neither Frost nor any of his affiliates can own more than 4.9% of Ladenburg’s outstanding shares. As principal shareholder, Frost had controlled roughly a third of Ladenburg’s stock prior to the SEC case.

Ladenburg spokesman Joseph Kuo declined to comment on the SEC’s allegations, stating in an email that they “were unrelated to Ladenburg, its subsidiaries and business, as well as Dr. Frost’s former board responsibilities or role as a shareholder of Ladenburg.”

The stock repurchase is “a step that Ladenburg’s board and management believe is in the best interest of our company, shareholders, financial advisors, strategic partners and employees, while also reflecting the board and management’s confidence in Ladenburg’s future,” he wrote.

Ladenburg paid the legendary pharmaceutical entrepreneur $2.50 per share to repurchase 50.9 million shares and cancel his options to buy up to 3.6 million more shares. The firm says it paid $53.9 million in cash and $76.4 million in 7.25% senior notes due in ten years.

In a note following the buyback announcement, Barrington Research President Alexander Paris called the price “a significant discount” on the stock’s 50-day average of $3.17 and 200-day average of $2.74.

Paris describes the firm’s financial position as “rock solid” with more than $200 million in cash in the business and a book value higher than $250 million. The Barrington analysts — the only ones listed as covering Ladenburg — reiterated their “outperform” rating for the stock.

The buyback “helped eliminate any distraction that could have arisen from the final resolution of the SEC charges,” Paris said, adding that it also “removes any overhang that could have occurred from the sale of Dr. Frost’s shares into the market over time.”

A smaller shareholder in Ladenburg named Vector Group, better known as the parent of tobacco firm Liggett Group and real estate firm Douglas Elliman Realty, increased its ownership to 10.4% from 7.7% after the repurchase, according to a separate filing by Ladenburg with the SEC on Dec. 24.

Vector Group disclosed that Frost was the beneficial owner of more than 15% of its stock in its last annual report. A spokesman declined to comment when asked about Frost’s position in Vector and the restrictions on his ownership in Ladenburg under the buyback.

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