VSE's Canaccord central in another SEC prosecution
Wed 17 Nov 99 Street Wire
by Brent Mudry
Over the years, Peter Brown's Canaccord Capital has established itself as
the top brokerage on the Vancouver Stock Exchange, the soon-to-be-gone
exchange known formerly as the Scam Capital of the World. In recent years,
Canaccord, like other Vancouver brokerages, has made up for lost VSE
business by venturing onto the U.S. OTC Bulletin Board market.
After watching much-smaller Vancouver rival Pacific International get
snared in a string of United States Securities and Exchange Commission
prosecutions this year, Canaccord's Peter Brown declared in a rare media
interview with The National Post two months ago that the U.S. bulletin
board market is "fundamentally the most crooked market in the world."
Canaccord's knowledge of the murky and sometimes crooked world of the
bulletin board seems drawn, at least partly, from first-hand experience.
Last week, the Vancouver brokerage was cited by the SEC as a key conduit in
the Windswept affair, with three key clients heading a scheme which
generated $8-million (U.S.) in illicit proceeds from mid-1994 through 1996.
While the Windswept scheme was in its infancy, another and much bigger
bulletin board fraud was peaking, with Canaccord serving as the key
conduit. The Sky Scientific case has been a public secret for the past
eight months. In May, Canaccord was toasting its merger with long-time
associate T. Hoare & Co., a London brokerage, announced on May 6 by the
VSE.
Two months and one day earlier, Canaccord's name popped up scores of times
in a less-flattering document, a 51-page SEC initial decision in the matter
of Sky Scientific, dated March 5. While Canaccord was not named as a
defendant, its role as a conduit was invaluable to the Sky Scientific
perpetrators.
The Sky players and their friendly brokers had been awaiting the SEC
decision for some time. After an extensive investigation, the SEC launched
an extended hearing on Aug. 25, 1997. After eight days of hearings in
Denver, the proceeding moved to Los Angeles and Fort Lauderdale for one-day
stints in November, before capping with a finale in Richmond, Va., on Jan.
20, 1998.
The Sky Scientific bulletin-board scheme was vintage VSE, mirroring the
elements and modus operandi of numerous Canadian promotions which have made
the Vancouver exchange so well known over the years. Sky featured a
book-valued bundle of $29.7-million (U.S.) of grossly-overvalued mining
properties, $40-million (U.S.) in totally worthless Russian certificates of
deposit and a well-oiled promotional machine. "At least 95% of the assets
reported on Sky's 1994 annual report were illusory," states the SEC.
In its March 5 decision, the SEC levied a whopping $13.85-million (U.S.) in
disgorgement orders and $1.22-million (U.S.) in fines against Sky
Scientific, a network of 13 U.S. promoters, brokers and associates, and
five companies, including troubled brokerage Gilbert Marshall & Co. In the
pump-and-dump scheme, Sky Scientific's shares surged from 75 U.S. cents to
$4.50 (U.S.) in the spring of 1993, and the ring kept the promotion going
through much of 1994.
Canaccord was the dominant conduit in the distribution of unregistered
shares of Sky Scientific. The company issued a whopping 30 million shares
on 107 Form S-8 filings. The key promoters and their assorted nominees sold
at least 19 million of these shares through Canaccord. The SEC notes that
$12.59-million (U.S.) was raised from the sale of Sky shares from Canaccord
accounts.
The Sky rig job was well orchestrated. The SEC notes that Gilbert
Marshall's Denver office concentrated almost entirely on selling Sky stock.
The Denver office sold $5.4-million (U.S.) worth of Sky shares to customers
from March 24, 1994, through Nov. 4, 1994, in 862 transactions. These sales
accounted for 65 per cent of the total dollar volume of sales at that
office, and 78 per cent of its total transactions.
The SEC notes that Gilbert Marshall acquired 97 per cent of its inventory
from the Canaccord accounts. Promoter Thomas Patrick Meehan routinely
called Gary Boldt, Gilbert Marshall's trader, to let him know that
Canaccord would be calling to offer Gilbert Marshall a block of Sky stock,
according to the SEC.
"A few minutes later, Canaccord would call Boldt to complete the
transaction ... Usher knew about this pattern, regarded it as unusual, and
claims someone at Gilbert Marshall called Canaccord to find out more about
the source of the stock. Usher testified that Canaccord refused to identify
the sellers of the stock. That was the extent of Usher's investigation into
the unusual arrangement between the Denver office and Canaccord," states
the SEC. (On Aug. 16, Gilbert Marshall and its president and chief
executive, Michael Usher, were ordered in a consent settlement to pay
disgorgement of $5.43 million (U.S.). Mr. Usher was also barred from any
association with any broker or dealer, and Gilbert Marshall, the brokerage,
was shut down.)
Canaccord's star client, the acknowledged ringleader of the Sky scheme, was
Robert Schlien, an experienced penny-stock promoter who owned and
controlled American Capital Network, a Florida company. Although Mr.
Schlien is referred to as a "financial consultant" who helps his clients
"grow their companies," the SEC has a different characterization of his
work. "Schlien promotes his clients' stock by inducing broker-dealers to
sell it to their customers," states the SEC.
Mr. Schlien is no stranger to regulators. In a settlement with the SEC in
August of 1989, he was barred from any association with any broker-dealer,
municipal securities dealer, investment adviser or investment company, with
liberty to reapply after 18 months. Soon after, the State of Florida
ordered Mr. Schlien permanently barred from any association with any dealer
of investment adviser doing business in that state.
In 1992, the U.S. District Court for the Southern District of Florida
issued a permanent injunction prohibiting Mr. Schlien from future
securities violations. In a subsequent administrative proceeding, the SEC
again barred Mr. Schlien from any association with any broker, dealer,
investment company or investment adviser. "Despite these frequent and
serious clashes with securities regulators, when he testified before the
Commission in September 1994, Schlien pretended to have only a dim
recollection of his recent troubles," states the SEC.
The No. 2 Sky man was Melvin L. Levine, a good friend and business
associate, who was recruited by Mr. Schlien in 1993 to work on the Sky
project. Mr. Schlien told regulators that Mr. Levine "knows everybody in
the business." "Levine was able to draw upon his extensive store of
business contacts to recruit several so-called consultants, including
Michael Todd, David Moon, Joseph Wythe and William Morris, whose names were
used to liquidate Sky stock," states the SEC.
Mr. Schlien kept a firm handle on his fronts. He told Mr. Levine that Sky
would pay these consultants with stock, but he had to have power of
attorney over the consultants' accounts to liquidate the shares, otherwise
they would not be hired. The SEC notes that Mr. Schlien in fact did secure
powers of attorney allowing him to trade in his four fronts' accounts at
Canaccord.
The No. 3 Sky man was William David Jones, who had a nine-year career as a
broker after graduating from college in 1983, and joined in the Sky project
in mid-1993, near the end of his career as a broker. The SEC notes that Mr.
Jones gradually stopped selling securities and went into the business of
selling leads, doing business as Best Brokerage Leads.
Mr. Jones prefers to downplay his contributions, although he and Best
Brokerage received over $4.5-million (U.S.) from the sale of Sky shares out
of the Canaccord accounts, as well as directly from Mr. Schlien's American
Capital Network. "While he admits he sold leads to Schlien and ACN, and
knew that these leads were in turn being passed on to brokers, he testified
that his only connection to Sky was accidental and indirect, namely, that
through "hanging around" with his friend Schlien he occasionally allowed
Schlien to use his cellular telephone," states the SEC.
Like Mr. Schlien, Mr. Jones is known to the stock market police. In April
of 1989, Mr. Jones was censured and fined a modest $1,000 (U.S.) in a
consent settlement with the National Association of Securities Dealers.
When Mr. Jones subsequently applied to the State of Florida for
registration as a broker, the state regulator allowed him to register but,
citing the recent NASD sanctions, imposed significant restrictions on his
business activities.
In May of 1993, around the time Mr. Jones was winding down his brokerage
career and winding up his sucker list business with Sky, the SEC, in an
administrative proceeding, barred him from acting in a supervisory capacity
for any broker or dealer for two years. The SEC also notes that Mr. Jones
was recently convicted in the U.S. District Court for the District of
Nevada of securities fraud, conspiracy and wire fraud.
The list of Sky securities violators extended well beyond Mr. Schlien and
Mr. Jones, with prior offences on record long before Sky shares flew
through the Canaccord conduit.
Co-defendant Philip Georgeson, who began his brokerage career in 1982,
worked for eight different firms in various positions, including stints as
a retail broker and a wholesale trader. Mr. Georgeson was censured and
fined by the NASD on Sept. 12, 1989. On July 5, 1990, the SEC barred him
from any association with any broker-dealer, investment adviser or
investment company, with liberty to reapply after a year. That same day,
the U.S. District Court for the District of Columbia issued a permanent
injunction prohibiting him from future securities violations.
With a nudge or two from the regulators, Mr. Georgeson, like Mr. Jones,
felt it was time for a career change, and Mr. Schlien's Sky project looked
like a winner. Mr. Georgeson was eager to move out of trading securities
and into public relations, and Mr. Schlien hired him to help distribute the
sucker list leads to a network of brokers, and monitor their activities.
Mr. Georgeson figures he spent 1,000 to 1,500 hours promoting Sky over a
13-month period, and he received about $273,572 (U.S.) for his efforts.
Gilbert Marshall, Canaccord's Sky counterpart brokerage in the U.S., has
had its own tangles with the law in recent years. From October of 1995
through January of 1997, Gilbert Marshall was sanctioned by securities
regulators in Arizona, Texas, Colorado, Massachusetts, Virginia, Alabama
and Ohio. In addition, the NASD has fined and censured Gilbert Marshall
three times.
Smith Benton & Hughes, another Sky brokerage, was censured and fined by the
NASD in February of 1997. In June of 1998, the U.S. District Court for the
Central District of California issued a permanent injunction against Smith
Benton based on its violations of the registration and antifraud provisions
of federal securities laws.
Four other Sky brokers had their own regulatory troubles. Michael Zaman was
censured and fined by the NASD on Feb. 4, 1997. In June of 1998 he was
enjoined in California, along with Smith Benton. On Sept. 29, 1998, he
entered into a consent settlement with the SEC.
George Hellen was censured and fined by the NASD in 1991. Michael Usher has
been sanctioned for violating Colorado and Alabama state securities laws,
and he has been disciplined by the NASD twice.
Daniel Lehl was sanctioned by the NASD's National Business Conduct
Committee in May of 1993 for charging excessive markups. He appealed and
lost several times. On Nov. 16, 1996, he was censured and fined by the NASD
in connection with the practices he used in flogging Sky's stock.
The identity of Canaccord's key Sky broker remains a mystery. |
