National Holdings facing lawsuit for allegedly retaliating against whistleblower

Chief compliance officer claims she was fired for investigating insider trading by the company's chief executive

Jul 16, 2019 @ 2:35 pm

By Jeff Benjamin

A fired chief compliance officer is suing National Holdings Corp., claiming her 16-year career with the brokerage firm was terminated when she started investigating alleged insider trading by executives of the firm.

A lawsuit filed last week in U.S. District Court for the Southern District of New York by Kay Johnson claims she was fired for her research into insider trading by National Holdings executives, including chairman and chief executive Michael Mullen.

The suit, which names as defendants 12 individuals, along with National Holdings businesses National Securities Corp. and National Asset Management, goes far and wide in detailing unprofessional and misogynistic actions by the firm. And it draws a direct line between the insider-trading investigation that began in late 2018 and the firing of Ms. Johnson in March 2019. But the lawsuit also states that company executives said Ms. Johnson was fired as part of a reorganization.

Both Ms. Johnson and her lawyer declined to comment for this story, but the suit claims the firing was an abrupt shift away from prior comments and recognition regarding Ms. Johnson's work at National Holdings, home to about 700 registered reps and advisers.

According to the suit, just two months before she was fired, "Ms. Johnson received her largest-ever bonus, which was nearly double the size of her next-largest bonus."

The suit also quotes from Ms. Johnson's January 2018 performance review by Mr. Mullen: "Kay will not retire as chief compliance officer as long as I am around. I told Kay I have a two-year plan. She needs to train her heir apparent to replace her as CCO and I will move her upstairs ... I envision Kay as president, chief operating roles and even beyond."

Neither Mr. Mullen nor National Holdings responded to a request for comment for this story.

The goodwill between National Holdings and Ms. Johnson likely started to unravel in September 2018, when a clearing firm alerted Ms. Johnson to suspicious trading activity related to TG Therapeutics, a company whose CEO is on the board of Fortress Biotech, which owned National Holdings until February of this year.

Ms. Johnson's complaint alleges that on Sept. 12, 2018, Mr. Mullen opened an options account and purchased 470 put options on TG Therapeutics for $114,745.52.

A put option is a bet that the company's stock will go down in value. Ms. Johnson alleges that this was the only option trade Mr. Mullen engaged in since opening the account.

On Sept. 13, 2018, a regional supervisor at the National Securities clearing firm approved the trade, and on Sept. 25, 2018, TG announced disappointing clinical test results. Its stock dropped by about 44%, from $11.90 a share to $5.15 a share, over two weeks.

Also on Sept. 25, 2018, Mr. Mullen sold his put options, realizing a profit of more than 200% in just two weeks.

Fortress, which has since sold its stake in National Holdings to R. Riley Financial, declined to comment. R. Riley Financial did not respond to a request for comment for this story.

Brandon Reif, a securities and litigation attorney who is not involved in this lawsuit, described it as a "very dangerous type of case for a company."

"If the timeline lines up that the employee was investigating misconduct and the termination followed that date, that creates a case that would survive summary judgment that the termination was retaliatory in nature," he said.

Regarding the lawsuit's expansive details alleging various forms of sexual harassment and gender discrimination, Mr. Reif said that is all part of a strategy to make the executives running the firm look bad.

"That's adding salt to the wound," he said. "In the court of public opinion, she's saying Mullen and his team ran this firm like it was right out of 1980s."

According to the lawsuit, at a dinner meeting with new management, Ms. Johnson and another female executive were "dismissed" when it was announced that the rest of the group would be going to a strip club.

The suit also claims that earlier this year a woman quit after just two days on the job after she was "sexually harassed," and that the company awarded her approximately $75,000.

Andrew Stoltmann, a securities lawyer who is not involved in this case, said the lawsuit alleges a "jambalaya of chicanery" that throws a "Molotov cocktail into the lap of National Holdings."

"Those charges open the firm up to discovery, and no brokerage firm wants discovery on that stuff," Mr. Stoltmann added. "It's Wall Street's dirty little secret, which is probably not as bad as it was 20 years ago, but it's still alive and kicking."

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