Zi booster cops a plea in Operation Bermuda Short case
Securities and Exchange Commission
Fri 22 Aug 2003
Street Wire
See (ZIC) Street Wire
CANARY PARADE
by Lee M. Webb
Zi Corp., entangled in a controversy and lamenting the negative media
coverage involving U.S. Securities and Exchange (SEC) target Michael Lauer
and his allegedly fraudulent Lancer Group, may face more unflattering
public exposure following the Aug. 21 plea bargain of key Lancer figure
Bruce Cowen in connection with charges arising from Operation Bermuda
Short. Mr. Cowen was one of Zi's principal boosters.
It should be noted at the outset that Zi is not implicated in any
wrongdoing in connection with either the SEC probe of the allegedly
fraudulent activities of Mr. Lauer and his purported $1-billion (U.S.)
Lancer Group, which was shut down by the SEC on July 10 of this year, or
Operation Bermuda Short, a joint FBI-RCMP undercover sting that led to the
arrest of 60 penny stock players including Mr. Cowen last year. However, Zi
has several connections to Mr. Lauer and Mr. Cowen.
Mr. Cowen, identified in the grand jury indictment as a managing director
of the Lancer Group and chairman of Capital Research Ltd., entered his plea
of guilty to one count of conspiracy to commit securities fraud, wire fraud
and mail fraud before Judge Cecilia Altonaga of the U.S. District Court for
the Southern District of Florida yesterday.
After entering his plea, Mr. Cowen sat next to his lawyer and answered
Judge Altonaga's questions with respect to whether he understood the
details of his plea agreement. While not noted in the Aug. 21 news release
issued by the U.S. Attorney for the Southern District of Florida, Mr.
Cowen's plea bargain included an agreement to co-operate with authorities.
Mr. Cowen answered affirmatively when Judge Altonaga asked whether he would
co-operate with further government investigations, including "working in an
undercover role," if requested.
The defendant sat silently as the prosecutor read out the factual basis of
what the government would have proven had the case gone to trial. Once the
prosecutor was finished reading the factual basis to the court, Judge
Altonaga asked Mr. Cowen whether he agreed with the recital. Mr. Cowen
again answered affirmatively, and with that the judge accepted his guilty
plea.
Mr. Cowen faces a maximum prison sentence of five years, to be followed by
a term of supervised release, a fine of up to $250,000 (U.S.), and payment
of court costs. A status conference has been scheduled for Feb. 9, 2004.
As summarily laid out in the Aug. 21 news release, in the sting that netted
Mr. Cowen, the Federal Bureau of Investigation, using an undercover agent
posing as a corrupt securities dealer for a fictitious foreign mutual fund
unearthed a larger conspiracy whereby Mr. Cowen, the Lancer Group and
others defrauded investors by manipulating and controlling the stock of
Lighthouse Fast Ferry Inc.
Mr. Cowen and his co-conspirators effected the conspiracy in two ways:
first, by artificially inflating the market price of Lighthouse to enable
Lancer to fraudulently claim that its holdings of the stock were more
valuable than they truly were; and second, by agreeing to pay and then
paying undisclosed kickbacks to the FBI agent and two fictitious officers
of the equally fictitious foreign mutual fund to buy a large amount of
overpriced Lighthouse stock, allowing Mr. Cowen and his associates to take
an undisclosed payment on the deal for themselves.
According to the prosecution, Lancer employees rigged the month-end prices
of Lighthouse from April through December of 2001 by running the fraudulent
trades through Shamrock Partners Ltd. and Hermitage Capital Corp.
By July of 2001, Mr. Cowen and his co-conspirators negotiated a
stock-purchase-and-kickback deal with the undercover FBI agent whereby the
fictitious foreign fund would buy $5-million (U.S.) worth of restricted
Lighthouse stock in exchange for sharing a $1.5-million (U.S.) undisclosed
side-payment, with $900,000 (U.S.) going to the undercover agent and
$600,000 (U.S.) going to Mr. Cowen and his associates.
A $16,000 (U.S.) test transaction was conducted in which $10,000 (U.S.) was
kicked back to the undercover agent. After that deal was concluded the
undercover agent cancelled the larger $5-million transaction, but by then
the FBI had what it needed.
It is not likely that Mr. Lauer will take any of this as good news;
assuming that it is news to him and that he has heard it. Neither the
original indictment filed last May nor a superseding indictment file this
May contained specific allegations of Lancer's involvement in manipulating
the price of Lighthouse stock. Moreover, neither indictment contained
specific mention of Hermitage Capital, which is run by Lancer director John
Bendall.
If Mr. Lauer has his ear to the ground, he may also find some other recent
rumblings unsettling. There are persistent rumours circulating that
individuals associated with companies in the Lancer portfolios have
recently been served with grand jury subpoenas, drawing speculation that
more indictments may be in the offing.
There are also unconfirmed reports that Mr. Lauer, who is of course as free
to travel as any other law-abiding citizen, may currently be travelling
outside of the U.S., perhaps visiting an eastern European country.
Mr. Cowen's plea bargain and any new attention it might draw to Mr. Lauer
and his funds may also be unwelcome news for Zi, which is already reeling
from the recent disclosure of Lancer's surprising stake in the company.
As reported by Stockwatch on Aug. 6, court documents filed in support of
the SEC's civil complaint against Mr. Lauer and the Lancer Group that
resulted in the freezing of the funds' assets and the appointment of a
receiver indicate that Lancer Partners LP, Lancer Offshore Inc. and
Omnifund Ltd. collectively controlled a staggering and previously
undisclosed 18.7 million shares of Zi, almost 50 per cent of the
outstanding shares, as of April 30.
Since the Stockwatch report was published, Zi chief executive officer
Michael Lobsinger has publicly claimed that the company is "as surprised as
anyone at the alleged percentage ownership of the Lancer Group" in Zi. It
is possible, however, that Mr. Lobsinger may have unwittingly overstated
the company's surprise or underestimated the surprise of some investors,
particularly those who relied upon disclosures in Zi's regulatory filings.
In a May 20 SEC filing, for example, Zi claimed that, based on a report
from its transfer agent CIBC Mellon, 187 registered shareholders in the
U.S. held approximately 24.86 million shares or 64.7 per cent of the
company's stock at Dec. 31, 2002. In the same filing, Zi put the Lancer
holdings at approximately 3.7 million shares or 9.7 per cent of the
outstanding shares, noting that it had been unable to obtain an update on
the Lancer position and was reporting the figure supplied for the previous
year.
In an Aug. 11 statement regarding the Lancer controversy, Zi contradicted
its own claim regarding the number of registered shareholders reported in
the SEC filing. In the Aug. 11 news release, Zi claimed that the vast
majority of its shares were not registered but held in investment dealer
book entry form. Stockwatch pointed that inconsistency out in an article
published the same day.
The company did some backpedalling with respect to its conflicting claims
regarding the number of registered shareholders when the contradiction was
brought directly to its attention during an Aug. 15 conference call. In
spite of the fact that the claim in the May 20 SEC filing was quite
explicit with respect to 187 registered shareholders, Zi's chief financial
officer insisted that the reference was actually to 187 investment dealers
"because that's what we meant when we wrote it."
The Aug. 11 damage control news release also suggests that Zi may have had
some concerns about the size of the Lancer holdings prior to filing its
Form 20-F annual report with the SEC on May 20. According to the Aug. 11
statement, during the course of preparing its annual report, Zi "observed
what appeared to be a concentration of its shares held at a major brokerage
firm" and asked its lawyers to obtain an update on the Lancer holdings, to
no avail.
Given the company's observation of a major concentration of its shares held
by an unidentified brokerage firm, its apparent concern with respect to the
Lancer holdings prior to May 20 and the peculiar meaning it now claims with
respect to the purported 187 registered shareholders, Zi may not have been
as surprised at reports of the alleged massive Lancer stake as shareholders
who relied upon the company's inaccurate and, regardless of intent,
misleading disclosures regarding the matter.
In the midst of some unflattering press and shareholder unrest over the
Lancer controversy, the Aug. 21 plea bargain of Mr. Cowen may present
another public relations challenge for Zi. In addition to being one of Zi's
principal boosters, a purported major shareholder who participated in a
number of the company's conference calls along with Mr. Lauer, Mr. Cowen
was also a key figure in priming the American Stock Exchange-listed
Lancer-controlled shell that purchased Magic Lantern from Zi last November
in a share and promissory note transaction.
Mr. Cowen was arrested last August, well before Zi completed the sale of
Magic Lantern, along with co-accused James T. Kelly and Joseph R. Huard on
charges of conspiracy to commit wire, mail and securities fraud. Even
before being nabbed in the Operation Bermuda Short undercover sting, Mr.
Cowen and Mr. Kelly were packing some regulatory baggage.
In 1999 the SEC enjoined, fined and barred Mr. Cowen from acting as an
officer or director of any public company for five years for his fraudulent
conduct, including misallocating securities to himself while acting as
chief financial officer and then president of TRC Companies Inc.
Mr. Kelly and Mr. Huard were also well known to securities regulators, as
was their Pennsylvania-based brokerage firm Shamrock Partners, which just
happens to share the same address as Mr. Cowen's Capital Research. Indeed,
Mr. Kelly is reportedly a principal of Capital Research as well as an
officer of Shamrock.
Shamrock's colourful, though far from illustrious, history includes serving
as a key conduit for a ring of mob-linked penny stock promoters that
allegedly used extortion, threats, and violence to coerce brokers and
co-conspirators while running penny stock rig-jobs through boiler rooms,
according to several U.S. indictments.
In one case, spanning from November of 1995 or April of 1996 through to
November of 1998, New York-area defendants Peter Liounis, Christian Rizzo,
Walter Culkin, Vladimir "Vinny" Shtutman (also known as Vinny Shtuts), Oleg
"Alex" Feldman and Shaun Neal flogged Sports Vision and Surequest shares
from a boiler-room office in Manhattan. The ring allegedly received more
than $8-million (U.S.) from the sale of Sports Vision shares and more than
$2-million (U.S.) from the sale of Surequest shares through nominee
accounts at Shamrock and a few other accommodating brokerages.
In an unrelated matter, on Nov. 12, 1998, the SEC administered a wrist
slapping to Mr. Kelly and Shamrock for violating the National Association
of Securities' Dealers Rules of Fair Practice by charging clients excessive
markdowns. The SEC assessed a joint fine of $15,000 (U.S.) against Mr.
Kelly and Shamrock, restitution of $10,000 (U.S.) and payment of hearing
costs.
Shamrock is perhaps best known for its former star broker Rafi Mohamad
Khan, a close associate of notorious boiler-room operator and paperhanger
Irving Kott. Mr. Kott, who has been involved in shady deals from Canada to
the Netherlands to the U.S., has been at the centre of a multiyear SEC
investigation that leads right to Howe Street, home to many dubious
Vancouver stock promotions. Mr. Khan, the former Shamrock star, flipped to
become a star witness for the U.S. Department of Justice in 1998 and is
believed to have shed some light on Mr. Kott's activities.
In April of 2001, the SEC fined Shamrock and Mr. Kelly for their roles in
Mr. Khan's 1995 rig job of L.L. Knickerbocker Co. Inc., a Nasdaq-listed
stock that soared from $6 (U.S.) to $52 (U.S.) per share before collapsing.
While Mr. Khan walked away from the Knickerbocker scam with a five-year
brokerage ban and no fine, Shamrock was subsequently fined $50,000 (U.S.)
and Mr. Kelly was tagged with a $25,000 (U.S.) fine and suspended from
acting in a supervisory capacity at any brokerage for six months.
Mr. Kelly and his Shamrock associate Mr. Huard added yet another chapter to
the firm's colourful history when they were indicted last year along with
Mr. Cowen. All three first entered pleas of not guilty, but Mr. Huard was
the first to abandon the notion that hanging together might be better than
running the risk of hanging separately.
On Dec. 18, 2002, Mr. Huard flipped and changed his plea to guilty in a
plea bargain that included an agreement to co-operate with government
authorities, including aiding in the prosecution of Mr. Kelly and Mr.
Cowen.
Five months after Mr. Huard flipped, a superseding indictment containing
details of the month-end price rigging of Lighthouse and other information
that was absent from the original indictment was filed against Mr. Cowen
and Mr. Kelly.
Following the superseding indictment, the trial of Mr. Cowen and Mr. Kelly
was scheduled for Sept. 22. Facing the prospect of 25 years in prison if
convicted, Mr. Cowen apparently had a change of heart and decided that he,
too, would cut a deal, leaving Mr. Kelly alone proclaiming his innocence.
Given that Mr. Huard was already singing, it seems likely that Mr. Cowen
knew a ballad or two of interest to the U.S. prosecutors. It remains to be
seen just who, if anyone, will be invited to dance to Mr. Cowen's tunes.
At this point it is not known whether U.S. securities regulators or law
enforcement agencies have any interest in Mr. Lauer's previously
undisclosed massive Zi stake, for which the Lancer funds reportedly peeled
off more than $97.6-million (U.S.), the respective major stakes of Lancer
and Zi in Magic Lantern, or Mr. Cowen's role in priming the
Lancer-controlled AMEX shell that acquired Magic Lantern from Zi last year.
As it happens, Mr. Kelly was also involved in setting up that AMEX shell,
then operating as Stage II Apparel Corp. In fact, Mr. Kelly's involvement
almost derailed the whole deal when someone apparently tipped AMEX
officials to the previously undisclosed fact that he was a principal of Mr.
Cowen's Capital Research, which was to receive 2.1 million shares for
brokering the deal with Mr. Lauer. With that bit of information in hand,
AMEX stalled on the application to list the 30 million shares that Mr.
Lauer was to acquire for $1.5-million (U.S.).
With the AMEX listing in doubt, Mr. Lauer tried to back out of the deal on
Jan. 9, 2002. Stage II responded two weeks later by filing a lawsuit in the
U.S. District Court for the Southern District of New York against Mr. Lauer
and his Lancer-affiliated Alpha Omega Group, Capital Research and the two
principals of the firm, Mr. Cowen and Mr. Kelly.
Among other things, the lawsuit sought damages for Mr. Lauer's purported
termination of the stock purchase agreement as well as damages for
securities fraud and tortious interference with the company's contract
rights. According to Stage II, Capital Research "and its principals failed
to resolve issues raised by AMEX about Mr. Kelly, whose involvement in
Capital had not been disclosed to the company."
The dispute was rather quickly and quietly resolved; the temporarily
interrupted transaction was consummated on April 16, 2002, and the
Lancer-controlled company was renamed JKC Group Inc. On June 5, 2002, the
fortuitously primed JKC signed a letter of intent to acquire Magic Lantern
from Zi.
While the regulatory histories of both Mr. Cowen and Mr. Kelly, as well as
Mr. Kelly's association with image-challenged and SEC-sanctioned Shamrock,
were available to anyone conducting even a modest amount of due diligence,
JKC evidently passed muster with Zi. On Nov. 7, 2002, Zi dealt Magic
Lantern off to the Lancer-controlled company in exchange for a $3-million
(U.S.) promissory note and 29.75 million shares, cementing another tie to
Mr. Lauer.
Magic Lantern, which is also mired in the Lancer scandal, reportedly only
had enough cash to stay afloat until last week, which suggests that the
$3-million (U.S.) promissory note and the 29.75 million shares still held
by Zi are worth just about the paper they are printed on. However, Magic
Lantern may be among the least of Zi's concerns, given that the company is
also on the hunt for financing, something that may turn out to be a rather
daunting task while enveloped in the Lancer cloud. Any further unpleasant
revelations could make that task even more difficult.
Meanwhile, Zi continues to show some resilience in the face of recent
unflattering media coverage. With a modest 35,900 shares exchanged in
Nasdaq trading on Thursday, Zi gained six U.S. cents to close at $2.39
(U.S.). Only 25,100 shares changed hands on the TSX as the stock added 11
cents to close at $3.38 on Aug. 21.
(With files from Miami correspondent Erik Schelzig.)
Comments regarding this article may be sent to lwebb@stockwatch.com.
(More information regarding Zi is available in Stockwatch articles
published on Aug. 6, 11, 12, 13 and 18, 2003.)
(c) Copyright 2003 Canjex Publishing Ltd. |
