Morgan, Olmstead Expects $700,000 Loss in 4th Quarter : Securities Firm Cites Trading ‘Irregularity’ by Employee

Morgan, Olmstead, Kennedy & Gardner Capital, a Los Angeles-based securities firm, said Wednesday that it expects to report a loss of about $700,000 in the fourth quarter, at least partly stemming from a previously announced stock trading “irregularity” involving an employee.

Company President Bryan L. Herrmann would not say how much of the loss was due to the irregularity, which, he said, involved an employee using company funds to accumulate a large position in a certain stock that later had to be sold for a loss. The transaction violated company policy but apparently did not involve fraud, insider trading or other illegalities, Herrmann said in a telephone interview Wednesday. The employee, whom Herrmann refused to identify, has since been fired.

Flat Earnings Prospect

The quarterly loss will result in earnings for all of 1986 approximately equaling the $1.02-million profit earned in 1985, Morgan, Olmstead said. The company earned $1.72 million in the first nine months of 1986. The quarterly loss also includes a previously announced $370,000 pretax charge stemming from certain stock-loan activities during 1982.

Morgan, Olmstead first disclosed the stock-trading irregularity Dec. 5, saying at the time that it could result in a “significant adverse impact on the company’s earnings but will not impair its capital for regulatory purposes.”

Herrmann said Wednesday that the firm has an “excellent” chance of recovering some or all of the loss from insurance or third parties. However, it has not sued the former employee, he said.

No SEC Probe

Herrmann also said that the Securities and Exchange Commission and the National Assn. of Securities Dealers remain aware of the situation, but neither has initiated a formal probe.

Irving M. Einhorn, regional administrator in Los Angeles for the SEC, confirmed Wednesday that the agency is aware of the matter. But because the problem apparently does not involve fraud and does not endanger the financial solvency of the firm, the agency has not formally investigated it, he said.

“If clients were involved or the firm was in jeopardy or they used customers’ funds, we would be on them like locusts,” Einhorn said, adding that handling of such a matter would be more appropriate for such self-regulatory bodies as the New York Stock Exchange or the NASD.