NASD said on Monday that it has charged Scott W. Ryan and his firm, Ryan & Company, with engaging in an impermissible short-selling scheme on behalf of three hedge fund clients.

In June 2004, Ryan, a Bryn Mawr, Pa. resident, was barred from the securities industry and RYCO, headquartered in West Conshohocken, Pa., was expelled by an NASD hearing panel for failing to cooperate in the investigation that led to the charges. However, the decision was appealed to NASD's national adjudicatory council, prompting Ryan's bar and RYCO's expulsion to be stayed until the outcome of the appeal.

NASD has now charged the pair with carrying out a scheme to create and maintain short positions in over-the-counter stocks on behalf of three hedge fund clients. The hedge funds were unable to sell the stocks short themselves because they could not meet "affirmative determination" requirements under Rule 3370, the regulatory agency said in a release.

In order to skirt the restrictions, RYCO would register as a market maker in the stock and sell it short under the guise of market maker status. In each instance, NASD said, RYCO sold the stock short without making and annotating an affirmative determination that the firm could borrow shares of the stock or provide delivery of it by settlement date. As a result of the alleged illicit behavior, RYCO took in a substantial profit, NASD said.

Both Ryan and RYCO voluntarily withdrew their registration as a broker/dealer on April 30, 2004.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.