The National Association of Securities Dealers announced today that it has charged a former brokerage firm with engaging in a long-term, widespread scheme of impermissible short selling activity on behalf of three hedge fund clients.

Scott Ryan was barred from the securities industry and his firm Ryan & Company LP (RYCO) was expelled by an NASD hearing panel in June 2004, for failing to cooperate in the investigation that led to the charges announced today. Ryan’s registration with NASD and RYCO’s registration as a broker-dealer were both voluntarily terminated on April 30, 2004.

That hearing panel decision has been appealed to NASD’s National Adjudicatory Council. Ryan’s bar and RYCO’s expulsion have been stayed pending the outcome of that appeal.

The regulator has now charged Ryan and his firm with carrying out a scheme to create and maintain short positions in OTC equity securities on behalf of three RYCO client hedge funds. It says that the hedge funds were unable to sell the stocks short themselves because they could not satisfy NASD’s affirmative determination requirements. To circumvent these restrictions, RYCO would register as a market maker in the security, and then, under the guise of its market maker status, sell the stock short at the behest of the hedge funds.

The NASD claims that RYCO sold the stock short without making and annotating an affirmative determination that the firm could borrow the security or otherwise provide for delivery of the security by settlement date. It also charged the firm with failing to correctly report short sale transactions. Ryan and RYCO also face charges of failing to report option positions and of supervisory failures. None of these charges have been proven.

Under NASD rules, a firm or individual named in a complaint can file a response and request a hearing before an NASD disciplinary panel. Possible remedies include a fine, censure, suspension, or bar from the securities industry, and disgorgement of gains associated with the violations.