Broker on hot seat with new issues ends retail sales

Like a Roman candle, John Muir & Co. has dazzled Wall Street with weekly hot new stock offerings and phenomenal growth. Now, however, the Roman candle has fizzled and Muir has announced that it will withdraw from the retail brokerage business but remain an underwriter.

According to the company, the main reason for the action, which could result in the transfer of as many as 80,000 customer accounts, is the "continuing adverse publicity" it has received from lawsuits involving new issues the firm underwrote. In the first five months of 1981, according to Going Public: the IPO Reporter, Muir, the busiest underwriter of new corporate stocks, had been the main investment banker for 16 new issues with a value of more than $55 million.

The problems of the brokerage house, which has around 500 employees, didn't upset its competitors. Muir was run by Raymond Dirks, who was considered a maverick in the financial community. He antagonized the Wall Street establishment with his tactics. These included rewarding retail and institutional brokers with much fatter commissions than anyone else, tipping his customers to the scandal at Equity Fund Corporation before notifying the Securities and Exchange Commission (SEC), and hiring Jerry Rubin, the former Yippie, as an analyst-public relations person. Mr. Rubin has since left to begin his own consultant business. Mr. Dirks also hired many top-notch research analysts at salaries much higher than they received elsewhere.

Dirks's sloppy appearance provoked even more scorn on Wall Street.The chubby broker's shirttail was often loose and his hair relatively long. But it was also widely admitted that he was brilliant. He built up Muir's accounts from 5, 000 to 80,000 in five years. Institutional commission income soared to more than $30 million, from $1 million. New offices were opened in Florida, Michigan , Denver, Arizona, Texas, and Virginia.

To inspire brokers to sell stocks, Dirks increased the percentage of the commission going to them. Normally, an institutional broker receives 10 to 15 percent of a commission, with the rest going to the brokerage house. At Muir, both institutional and retail brokers received 50 percent of the commission. The Wall Street Journal reported that 10 of Muir's brokers made over $500,000 last year and the firm's 150 brokers averaged $125,000 each.

The atmosphere at Muir's main office on Wall Street was described by Institutional Investor as "frenzied," as brokers operated under pressures the magazine noted were also present in the used-car business. In December the magazine commented: "The place is a mess -- cigarette ash and paper are scattered everywhere; telephones ring unanswered; and perspiring employees rush around cramped space with ties loose and sleeves furled."

When brokers weren't selling listed securities, they were often on the phone touting one of the highly speculative new issues the company was marketing. These issues, often floated at $1 a share, usually involved companies in an extremely early stage of development. It was the new-issues market that got Muir in trouble.

For example, investors who bought Basic Earth Resources, a Denver-based oil and gas company, discovered after the offering that the company reduced its reserve estimates by 40 percent. The stock fell sharply and a group of shareholders is suing Muir, claiming the prospectus was faulty. Muir says it relied on the advice of outside experts, petroleum engineers.

Still other activities involving other new issues have sparked the interest of the SEC. According to the Wall Street Letter, some of Muir's top institutional salesmen were leaving the company because their large customers were reluctant to deal with Muir over the considerable adverse publicity it was getting.

Dirks and other Muir executives have not returned phone calls, and switchboard operators reported they were tied up in meetings. The New York Stock Exchange indicated that Muir was not in any danger in its net capital position. And a spokesman at the Securities Investor Protection Corporation said it was following the situation. A spokesman at the SEC said the agency had no co mment to make.

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