U.S. Charges 11 Stockbrokers in Cheating Probe : Securities: Action is first federal criminal prosecution of alleged ‘rogue’ dealers. The Justice Department and SEC complaints include allegations of defrauding elderly, stealing from clients’ accounts.

WASHINGTON —  Felony charges have been lodged against 11 stockbrokers around the country who allegedly cheated elderly customers, the first of what Atty. Gen. Janet Reno said Thursday will be a wave of federal criminal prosecutions of “rogue” brokers.

The charges, in the form of indictments and criminal informations, were returned over the past two days against brokers in 10 states, Justice Department officials said. Several of the brokers had worked for major Wall Street firms, including Merrill Lynch, Prudential Securities and PaineWebber. Securities and Exchange Commission Chairman Arthur Levitt said all have been fired.

The charges include stealing money from customer accounts, forging clients’ signatures on checks and selling fake certificates of deposit and other bogus securities. Some of the alleged illegal activity occurred as long ago as the late 1980s.

The move to prosecute brokers stemmed from creation of a joint task force earlier this year of Justice Department and SEC lawyers.

The SEC began an investigation following a 1992 series in The Times on dishonest brokers, and Levitt has made removing them from the industry a top priority. The criminal cases were based on information gained in recent SEC civil enforcement investigations and inquiries by stock exchange investigators, officials said.

Reno said at a news conference that the prosecutions were meant to show that “brokers who seldom risked more than dismissal and restitution [of stolen funds] can now expect to be criminally prosecuted and indicted if they cheat their customers.”

John Arterberry, assistant chief of the Justice Department’s fraud division, said that only a lack of resources prevented the department from seeking criminal prosecutions in many more cases developed by the SEC.

Until now, the department has generally left criminal prosecutions to state and local authorities. The SEC can only bring civil cases, which may lead to fines and banishment from the industry but not jail terms.

Justice Department officials said about half of those charged this week were expected to plead guilty. Among them is Michael J. Paetzold, formerly the manager of a Prudential Securities office near Harrisburg, Pa., who is accused of stealing $114,000 in client funds over a four-year period.

The department alleges that Paetzold took the money “from clients who were infirm or inattentive.” Paetzold did not respond to a phone message seeking comment.

The Justice Department said that Alan E. Handy, 48, of Largo, Fla., who had worked as a broker for Sun America and Anchor National Financial, had also agreed to plead guilty. The charges stem from allegations that he defrauded 42 clients, mainly elderly women and widows, of more than $950,000 by selling them counterfeit securities. Handy could not immediately be found for comment.

In recent years, securities industry officials have strongly denied that the problem of dishonest brokers was widespread, even as they moved to substantially toughen their internal compliance departments to weed them out.

In congressional testimony in September, 1994, Mark E. Lackritz, president of the Securities Industry Assn., denied that rogue brokers existed. Lackritz was said to be in a meeting away from his office Thursday and could not be reached for comment.

But Alvin B. Krongard, head of Baltimore brokerage firm Alex. Brown & Sons and the current SIA chairman, said in a written statement that the organization applauds the joint Justice Department and SEC initiative. “Only the toughest penalties should be sought” by federal prosecutors, he said.

At the joint news conference with Reno, Levitt said he believes that most brokers are honest. But he has said that weeding out the bad ones is essential to preserving investor confidence in brokerage firms.

In addition, an independent task force appointed by Levitt recommended last year that the way brokers are paid be changed to reduce financial incentives for cheating customers. Many brokerage houses have adopted these changes, which include eliminating bonuses for selling in-house products.

The Times series reported that brokers with long records of cheating often had little difficulty getting hired at major firms. But Levitt said Thursday that this has changed as a result of heightened industry vigilance.

The SEC last year sent examiners to big brokerage firms to find evidence of dishonest brokers. In May, 1994, it reported that 25% of the branch office examinations found wrongdoing severe enough to warrant referrals to the SEC’s enforcement division for action.

The SEC, the National Assn. of Securities Dealers and the New York Stock Exchange then launched a similar sweep of smaller firms. But the report is months late, and Lori Richards, the SEC’s director of compliance and inspections, said it would not be issued for “a couple of months.”