DJ: File Sharing: The FBI Agent, The Stock Trader And Secret Data ---
(Wall St. Journal Full Text 08/22 02:04:15)
Investigator Allegedly Helped Manipulate Securities Targeted for Short Selling
--- Mr. Royer Sought New Career ---- By Ianthe Jeanne Dugan, Michael Schroeder
and Aaron Elstein
On Jan. 2, 2001, Jeffrey Royer, a special agent with the Federal Bureau of
Investigation in Gallup, N.M., asked a bureau clerk to do what seemed like a
routine search of an FBI database to see if a man named Richard McBride had
a criminal record.
The agent was told that a Florida court in 1998 sentenced Mr. McBride to six
years of probation for pocketing $40,000 business owners had paid for
advertising. Convictions are public information, but the FBI's National
Crime Information Center database is supposed to be used only for
law-enforcement purposes. Mr. Royer allegedly had other motives.
He passed the information on to a notorious stock-market player, Amr Ibrahim
"Tony" Elgindy, who wrote on his popular Web site the next day that Mr.
McBride, the founder of a small underwater-camera maker in St. Petersburg,
"is a felon on probation."
The posting helped drive down SeaView Video Technology Inc.'s stock -- and
Mr. Elgindy made a handsome profit. Three weeks earlier, he had sold the
stock short, meaning he had bet the price would drop. By Jan. 8, when he
completed the transaction, the price had fallen to $1.69, from $4.50, giving
him a 166% profit.
This May, in a racketeering indictment unsealed in Brooklyn, N.Y., federal
prosecutors alleged an extraordinary case of an FBI agent joining forces
with the sort of criminals he was assigned to police. The indictment accuses
Messrs. Royer and Elgindy of repeatedly using confidential FBI databases to
guide short-selling strategies. Mr. Elgindy is also charged with extorting
executives of small companies and manipulating their stock prices. The
scheme allegedly involved urging government investigators to go after
certain companies or threatening to do so. Three other people were also
indicted, including another FBI agent who was Mr. Royer's girlfriend.
Messrs. Elgindy and Royer have pleaded not guilty. Their respective camps
argue that the information Mr. Royer supplied was publicly available, so
leaking it wasn't a crime. Mr. Elgindy has denied the extortion and
stock-manipulation counts, as well. "Elgindy's goal and Royer's goal was to
expose these phony companies," says Mr. Elgindy's lawyer, Gerald Lefcourt.
"They should be seen as heroes."
The case illuminates the dark side of the relationship between law enforcers
and short sellers, investors who trade on intimations of corporate trouble.
Short sellers borrow shares from a broker and immediately sell them in hopes
the price will fall. If there is a drop, the short sellers can replace the
shares with cheaper ones and keep the difference. If the price rises, the
shorts lose. Although short selling is legitimate and legal, it is
controversial. Some shorts specialize in volatile stocks of tiny companies
and profit by dishing dirt on them.
Short sellers can play a valuable role in law enforcement, scouring
financial statements for fraud and blowing the whistle to other investors
and investigators, says Ronald Long, former head of the SEC's Philadelphia
regional office. But when pursuing their tips, "I would hold my nose," he
adds, because he feared "being fed false information and having an
investigation send a small company's stock into a tailspin."
The indictment depicts the ultimate corruption of one such alliance. It says
that Messrs. Elgindy and an associate, Derrick Cleveland, curried favor with
Mr. Royer by providing him with tips on suspicious companies and then
enticed him to help them profit on tidbits from government files. The lure
Mr. Royer allegedly grabbed at was the chance to join the world of
free-wheeling stock traders under the tutelage of Messrs. Elgindy and
Cleveland.
Mr. Royer, 35 years old, has been released on bail, pending trial, but is
confined to his parents' home in Norwood, Colo. Mr. Elgindy, 34, is being
held in a Brooklyn jail. Two other defendants have denied wrongdoing and are
out on bail. Mr. Cleveland has pleaded guilty to participating in a
racketeering conspiracy and is cooperating with authorities. He has a
sentencing hearing scheduled for Dec. 6.
Mr. Royer grew up far from the world of financial intrigue, the child of a
blue-collar family in the tiny western Colorado town of Norwood. He played
trumpet, starred as an athlete and was named co-valedictorian of his high
school class of 23. He prepared carefully for his dream job as an FBI agent,
his ex-wife, Barbara Royer, says. After earning a college business degree,
he served in the Marines and obtained a master's degree in criminal justice.
He joined an FBI violent-crime unit in 1996 in Oklahoma City, switching to
white-collar investigations two years later. In 1998, he recruited Mr.
Cleveland, a local money manager, as a paid informant, according to people
with knowledge of the arrangement. Paying informants isn't unusual. Mr.
Cleveland, who is also a convicted cocaine dealer, provided the FBI agent
with information for a stock-manipulation investigation of an Oklahoma
broadband company, but the probe didn't lead to charges.
Now 34, Mr. Cleveland went off the government payroll after a few months,
but he and Mr. Royer became friends. They commiserated over their divorces
-- Mr. Royer's was in 1998 -- played golf and watched University of Oklahoma
football games. Mr. Cleveland continued to provide Mr. Royer with informal
tips about stock fraud, the indictment says.
While investigating the broadband case, Mr. Royer learned of other so-called
pump-and-dump schemes. In these frauds, insiders hype their company's
prospects with false information to drive up the stock price and then sell
shares at a profit. The agent spent months in 2000 preparing a proposed
sting operation aimed at pump-and-dump promoters in Texas and Oklahoma,
court filings show.
The pump-and-dump schemes, it turned out, were of more than just
investigative interest to Mr. Royer.
Though his divorce two years earlier had been relatively amicable, alimony
and child-support payments had left Mr. Royer financially strapped by the
summer of 2000, his ex-wife says. He decided to try to supplement his
federal pay of $77,300 a year by trading stock. Using an E*Trade online
account, he invested a total of $43,464 in 13 low-priced companies in 2000.
He sold all of the stock that year for a net loss of $8,710, according to
records in the court file in Brooklyn.
Two of the stocks he bought were the subject of his pump-and-dump
investigation, prosecutors say. It is illegal to use confidential government
information for personal benefit, but the government, at least so far,
hasn't charged Mr. Royer in connection with these two investments.
He also allegedly persuaded his girlfriend at the time -- Christy Sarkey,
then a 25-year-old clerk in the FBI's Oklahoma City office -- to invest in
one of the companies. She lost thousands of dollars on those trades,
"apparently because the manipulations were not successful," prosecutors say.
Ms. Sarkey, now a police officer in suburban Oklahoma City, has told FBI
investigators that at least two other agents invested in the companies,
based on Mr. Royer's urging.
Barbara Royer, who is in touch with her ex-husband by telephone and says she
believes his claim of innocence, depicts his motives for the trading as an
honest effort to provide for his broken family. Ms. Sarkey has told the FBI
otherwise -- that Mr. Royer was "totally driven by money" and "had an
extreme attraction to big houses, expensive cars and other expensive
material possessions," court filings show.
Mr. Cleveland, who had met Mr. Elgindy in Texas in 1997, at some point
introduced the short seller to the FBI agent as a possible tipster, court
records show. Mr. Elgindy was born in Cairo but grew up in the U.S. He
briefly sold Chevrolets after college and then became a securities trader,
working for brokerages in Texas, Florida and California. He left a trail of
legal tangles.
In 1993, his mother complained to the National Association of Securities
Dealers, alleging unauthorized trading on her pension account at a San Diego
firm that Mr. Elgindy owned. Mr. Elgindy blamed the firm's former owner and
paid his mother $30,000 to resolve the dispute, NASD records show.
While working for brokerages in Texas in 1994 and 1995, he collected
disability checks, a fraud for which he was convicted in 2000 in federal
court in Fort Worth and sentenced to four months in jail. Along the way, he
became a popular online stock guru, hailing his legal troubles as
credentials. Just before heading to jail, he promised patrons of the Silicon
Investor Web site he would "use my own knowledge of how these scumbags work,
because I used to be a scumbag."
In October 2000, after Mr. Elgindy was released from jail, Mr. Royer flew to
San Diego to try to persuade him to become a paid informant. Mr. Elgindy
picked up Mr. Royer in a limousine, and they went to brunch to discuss the
proposal, a person familiar with the meeting says.
The FBI agent sought Mr. Elgindy's help in establishing the pump-and-dump
sting operation, the person adds. Mr. Elgindy declined to become a paid
informant, but he agreed to alert Mr. Royer to stock frauds. Mr. Royer later
passed along some of Mr. Elgindy's hunches to other FBI offices so they
would launch criminal investigations into companies, the indictment alleges.
Mr. Lefcourt, the Elgindy lawyer, says his client had a First Amendment
right to make comments about a company to other investors or to the
government. "It's not stock manipulation if you believe it to be true," the
lawyer adds.
By the second half of 2000, Mr. Royer had grown frustrated with the FBI, his
ex-wife says. Higher-ups had shelved two investigations he had worked on:
the pump-and-dump sting and a probe aimed at Middle Easterners in Canada
suspected of laundering money for terrorists, people with knowledge of the
situation say. The FBI declines to comment.
Mr. Royer's ex-wife says he was further irritated when the FBI turned down
his request to be transferred to Denver, where she and their three children
lived. The bureau gave him his second choice of moving to its small outpost
in Gallup, N.M., three hours from Denver.
Two weeks after arriving in Gallup, Mr. Royer went on a blind date at a
country-and-western bar with Lynn Wingate, an agent with the FBI's
Albuquerque office. She had worked as a school psychologist before joining
the FBI in 1999 as a trainee "profiler" of serial killers and other
criminals.
The two agents started spending weekends together, biking and hiking. They
discussed quitting the FBI, getting married and settling in Denver, near his
children. Mr. Royer aspired to start a securities-research firm. Ms. Wingate
hoped to open a psychology practice and do forensic consulting with police.
On Nov. 28, 2000, Mr. Cleveland wired Mr. Royer $8,500, the first of four
payments totaling $30,425 over a five-month period. Mr. Royer's ex-wife says
he has told her that the first three payments were proceeds from investments
Mr. Cleveland had made on his behalf. The final payment -- $7,000 on May 31,
2001 -- was a loan so Mr. Royer could buy a pickup truck, Barbara Royer
adds. The former FBI agent was paying that off, $150 a month, until he was
arrested, she says. Mr. Cleveland's lawyer, Robert A. Manchester, describes
the payments the same way.
The indictment, however, says the money was intended as a "corrupt
inducement" for the agent to pass along law-enforcement information. The
government isn't trying to prove that the money amounted to a bribe but
instead that it is evidence of how Mr. Cleveland ingratiated himself with
the FBI man.
About two weeks after the first payment, Mr. Elgindy began short selling
shares of SeaView, the stock that tanked after Mr. Royer allegedly helped
Mr. Elgindy expose that the company's CEO had a criminal record. After
SeaView's stock swooned, Mr. McBride resigned as CEO. His replacement later
announced that the company had misstated its earning for 2000. The SEC is
now investigating. Last September, Mr. McBride died of a heart attack at 48.
In May 2001, Mr. Elgindy paid $423 to fly Mr. Royer to Las Vegas for his
annual conference for short sellers, according to a person familiar with the
situation. Mr. Elgindy suggested that Mr. Royer quit the FBI and become one
of his paid securities researchers. Pronouncements from a former FBI agent
would have more credibility than those of a convicted felon, Mr. Elgindy
said. The offer meshed nicely with Mr. Royer's plans to get into securities
research, his ex-wife says.
In August and September, Mr. Royer three times obtained secret information
about small, thinly traded companies from a separate FBI database known as
the Automated Case Support system, the indictment alleges. (The charges
don't include the companies' names.) The password-protected ACS database,
accessible only to agents from their desktop computers, details FBI
investigations going back to 1994. Mr. Elgindy, Mr. Cleveland -- or both --
shorted each company's stock within days after Mr. Royer had gathered
confidential information about it, the indictment says. The charges don't
say whether the stocks fell and the short sellers made profits.
After the Sept. 11 attacks, the FBI was inundated with tips about Mr.
Elgindy, and he became one of thousands of Muslims of Middle Eastern descent
who came under government scrutiny. No evidence surfaced that he has any
ties to terrorism. But the FBI learned of his short selling and began
looking into that.
Mr. Royer, meanwhile, apparently became nervous. Last Oct. 4, he again
logged onto the FBI's Automated Case System and typed the single search word
"Elgindy," the indictment says. The government alleges that Mr. Royer
searched for the name five more times in the next month -- twice after the
U.S. Attorney's office in Brooklyn launched a grand-jury probe of Mr.
Elgindy's trading activities on Oct. 25. Finding references to the
investigation, Mr. Royer was able to tell Messrs. Elgindy and Cleveland
where the probe was headed, prosecutors say.
On Dec. 19, two days before leaving the FBI. Mr. Royer checked the criminal
history database for information about Paul M. Brown, founder of Meridian,
Idaho-based Nuclear Solutions Inc., which is trying to develop ways to
generate electricity from nuclear waste. Two hours after the computer
search, Mr. Elgindy e-mailed his subscribers, "Paul Maurice Brown is a
convicted felon." The next day, Mr. Elgindy began spreading the word
elsewhere on the Internet.
The allegation was false. According to the sheriff's office in Ada County,
Idaho, Mr. Brown had been charged with illegal drug possession, but the
charge was dismissed in May 1991.
Nevertheless, the damage was done. Over the next month, Mr. Elgindy sold the
stock short six times, and Mr. Cleveland did so once, the indictment says.
Mr. Elgindy encouraged his subscribers to do the same. By Jan. 30, the stock
had fallen to less than $2 a share, from more than $4 in mid-December. Mr.
Elgindy almost certainly made a healthy gain.
All the while, Mr. Elgindy repeatedly called Mr. Brown, sometimes several
times a day, a person close to the company says. "You're going to jail," he
told the executive, according to audio tapes company officials made of the
calls. The indictment labels this as extortion, without going into detail.
According to the person close to Nuclear Solutions, Mr. Brown responded by
agreeing to sell company shares to Mr. Elgindy at a discount. Mr. Brown died
in a car crash on April 7.
Mr. Lefcourt, the Elgindy lawyer, says the extortion charge "simply is not
true." His client, who thought Mr. Brown had a criminal record, "didn't
intend any wrongdoing," the attorney adds.
Mr. Royer left the FBI last Dec. 21. He soon began an apprenticeship with
Mr. Elgindy at his San Diego trading company, Pacific Equity Investigations.
Mr. Elgindy waived the $5,000-a-week fee he usually charged acolytes for
observing him in action, according to a person familiar with the situation.
Mr. Royer lived nearby, in a rented condo he shared with Mr. Cleveland. The
ex-agent attended lavish parties at the Encinitas house Mr. Elgindy bought
last year and which a government filing values at $2.2 million.
Mr. Elgindy set up a joint trading account with Mr. Royer that gave the
ex-agent a 40% share of any profits or losses, Barbara Royer says. During
the next four months, Mr. Royer made $11,000 in profits and was amazed at
how easy it could be to make money shorting stocks, his ex-wife says. Mr.
Royer also "actively sought" additional FBI information from law-enforcement
personnel for trading purposes, the indictment says.
Among those who allegedly helped him was Ms. Wingate, who was still working
for the FBI in Albuquerque. On March 4, 2002, she logged onto the ACS
database to check on the chief executive of a Nasdaq-listed company, the
indictment says. According to a person with knowledge of the matter, the
company was ImClone Systems Inc., the biotechnology company currently
embroiled in an insider-trading scandal. ImClone had said in January that
the SEC and U.S. Justice Department had initiated inquiries into whether the
company misled investors over the prospects of a cancer drug. ImClone now
says it is cooperating "with all ongoing investigations." Ms. Wingate's
lawyer, Richard Tanner, couldn't be reached for comment.
On April 18, Ms. Wingate ran ACS searches on Messrs. Elgindy and Royer and
discovered information concerning documents that had been subpoenaed during
the Brooklyn grand jury's investigation of the two men, prosecutors say.
That same day, she allegedly informed Mr. Royer, who quickly passed the word
on to Messrs. Elgindy and Cleveland, prosecutors say. Five days later, Ms.
Wingate queried the database for her own name, the indictment says. By this
point, investigators were watching the situation closely. Within weeks, the
FBI closed in to arrest Mr. Royer and the others.
---
Using FBI Data in a Short Sale
Here is how FBI agent Jeffrey Royer allegedly provided information used by
stock trader Tony Elgindy to push down the price of one small company's
stock and profit on a short sale.
Dec. 15, 2000: SeaView Video Technologies Inc. is trading at $4.50 a share.
Mr. Elgindy sells the stock short, meaning he borrows shares and sells them
that day, with a promise to return the stock to the broker at a later date.
If the price falls, he profits.
Jan. 2, 2001: FBI agent Royer searches an FBI database and finds criminal
history of SeaView CEO Richard McBride.
Jan. 3, 2001: Mr. Elgindy posts on his Web site that Mr. McBride "is a felon
on probation."
Jan. 8, 2001: SeaView stock falls to $1.69. Mr. Elgindy buys shares at
lower price, returns them to his broker and pockets the difference, for a
166% profit. |
