SEC target Lancer trades irrational, Kelly trial hears
2003-09-29 13:41 ET - Street Wire
by Erik Schelzig in Miami
James T. Kelly, on trial for securities fraud in the U.S. District Court for the Southern District of Florida in Miami, listened as two more prosecution witnesses took the stand to testify against him on Sept. 25.
Mr. Kelly is accused of conspiring with two former co-defendants in a kickback and stock manipulation scheme involving shares of Lighthouse Fast Ferry Inc. As previously reported by Stockwatch, the Lighthouse Fast Ferry shares that were to be used in the scheme allegedly belonged to the purported $1-billion (U.S.) Lancer Group. (All future amounts are in U.S. dollars.)
In an unrelated civil action, the U.S. Securities and Exchange Commission (SEC) shut down the Lancer operation on July 10, 2003, levelling allegations of massive fraud against Lancer and its principal architect Michael Lauer.
The charges against Mr. Kelly stem from a two-year joint FBI-RCMP undercover sting code-named Operation Bermuda Short that resulted in 23 indictments and charges against 58 individuals from the U.S. and Canada.
Mr. Kelly, the former president of Shamrock Partners Ltd., a brokerage firm based in Media, Pa., was arrested in August of 2002 along with his Shamrock partner Joseph Huard and business associate Bruce Cowen. Mr. Huard and Mr. Cowen copped pleas and are expected to testify against Mr. Kelly.
Mr. Kelly's trial opened on Sept. 23, but because of a longer than anticipated jury selection process the court did not hear opening statements until Sept. 24.
Thomas McCann of the Fraud Section of the U.S. Department of Justice in Washington took over for his co-counsel Thomas Hanusik to conduct the direct examination of two prosecution witnesses on Thursday.
THE LANCER TRADES
Former Shamrock trader John Doyle testified that he made transactions for account number 4736-5997, otherwise known as the Lancer Group.
Under questioning from Mr. McCann, Mr. Doyle said that he made several end-of-month transactions, some even in the last hour of the last trading day of the month.
Lancer was Mr. Kelly's client, Mr. Doyle said, adding that Lancer was also Shamrock's largest client. The end of the month brought the highest activity for the Lancer account, Mr. Doyle said, especially for penny stocks and Lighthouse Fast Ferry in particular.
Mr. Kelly "said that Lancer wanted the stock to be out at a certain price," Mr. Doyle said.
According to Mr. Doyle, the last minute trades at the end of the month made him nervous.
"There was an audit done and in the audit there was concern about Lancer's order forms," Mr. Doyle said. "I talked to Mr. Huard about it."
Mr. Huard told him that he would speak to Mr. Kelly about the audit, Mr. Doyle testified.
Mr. Kelly's lawyer, Norman Moscowitz, challenged Mr. Doyle's account of getting cold feet about the last minute trades, asking whether, in addition to Mr. Huard, he had told any regulatory body, from the SEC through local state authorities about his concerns.
Mr. Doyle said he did not.
Mr. Moscowitz also wanted to know whether there was anything inherently wrong with making trades at the end of the month.
"Is there any SEC rule which prevents traders from buying stock at the end of the month, in hopes that the price would go up?" Mr. Moscowitz asked.
"Not that I know of," Mr. Doyle replied.
Mr. Doyle also agreed with Mr. Moscowitz that trading levels were usually higher at the end of the month.
"It's not just the case for Lighthouse Fast Ferry, correct?" Mr. Moscowitz asked.
"Correct," Mr. Doyle stated.
"It's not just case for Shamrock, correct?" the defence lawyer queried.
"Correct," Mr. Doyle replied.
Mr. Moscowitz probed whether Mr. Doyle expected to gain anything from his testimony, asking whether Mr. Doyle was worried about getting charged by the FBI for his role in the Lighthouse Fast Ferry transactions.
Mr. Doyle said he was still concerned that charges might be brought against him.
Mr. Doyle also acknowledged that he racked up $200,000 in losses in his trader account at Shamrock, and still hadn't paid back Mr. Kelly for his losses.
Returning to a theme from his opening statement, Mr. Kelly asked whether Mr. Doyle found Lighthouse Fast Ferry to be a legitimate operation. Mr. Doyle said he did, and explained that he had traveled to New Jersey to inspect Lighthouse's operation. He even took a ride on one of the ferries, he said.
"You thought this was a good, solid investment in Lighthouse Fast Ferry?" Mr. Moscowitz asked.
Mr. Doyle said he did, explaining that he found it to be a "very professional" operation. He tried to help find $3 million in funding for Lighthouse, of which he would have made a cut, if he had succeeded. Any proceeds would be split equally with Mr. Kelly, Mr. Doyle testified.
Mr. Moscowitz tried several times to ask Mr. Doyle about his perception about Mr. Kelly's health issues, but Judge Cecilia Altonaga sustained the government objections in each instance. Mr. Moscowitz argued, to no avail, that the ailments of Mr. Kelly "go to their relationship." After a sidebar conference, the line of questioning was dropped.
In his opening statement, Mr. Moscowitz indicated that Mr. Kelly's health problems led him to become detached from the every-day dealings of Shamrock and rely on his friends to run the business.
RAISING RED FLAGS
The government's next witness was Robert Lowry, formerly of the SEC's enforcement division. He testified about "red flags" he detected in the trading patterns of Shamrock's client, the Lancer Group.
"I saw that there was a pattern of trading activity that raised, in my opinion, red flags," Mr. Lowry said.
In all but one month between April and December 2001, trading volume spiked on the last day of the month, Mr. Lowry said.
Mr. Lowry tabulated the trading data to show that trading in Lighthouse Fast Ferry stock on the last day of the month during the period under review was almost as high as the rest of the months combined.
From April to December 2001, 620,800 Lighthouse shares were traded during all but the last day of the month. The total shares traded on the last day of the months under review amounted to 605,800 shares.
In April the average daily trading volume of Lighthouse was 4,211 shares. On the last day of the month, that amount jumped to 122,400 shares -- a 2559.5-per-cent increase, Mr. Lowry testified.
In August 2001, the daily average volume was 1,767 shares, which jumped to 92,000 on the last day of the month.
He found another red flag in data that showed a single customer, Lancer Group, accounted for the vast majority of the trades, he said.
Among other things, Mr. Lowry testified that Lancer accounted for 94 per cent of the Lighthouse shares purchased at the end of April. He noted that the previous day's closing price was 90 cents, but by the end of the following day the stock closed at $1.50, a 66.7-per-cent increase.
In September and November, Lancer accounted for more than 97 percent of the month-end Lighthouse trades. On the last day of trading for the other six months, Lancer was responsible for the purchase of all Lighthouse shares, Mr. Lowry testified.
"It was a deliberate effort by Shamrock to raise the price of the stock by the end of the day ... " Mr. Lowry said. "If it was not Lancer's intention to buy the stock, they wouldn't have placed the orders all in one day. By placing a large order at the end of the day for any stock -- but particularly for a stock as thinly traded as Lighthouse -- it was predictable what would happen. It would go up."
Mr. Lowry charted the end-of-day trades to show that Shamrock kept buying Lighthouse stock, even as the price went up.
"Curiously, the bid price remains the same," Mr. Lowry said.
"The market was not competitive," he said. "A competitive market is one where the economic forces of supply and demand determine the price."
Mr. Lowry also argued that it did not make sense for Shamrock to continue buying Lighthouse stock as the price increased, when the next-highest bidder was 40 cents below Shamrock's offer.
"At this time Shamrock's bid was at $1.50, and the next highest bid price was at $1.10," Mr. Lowry said.
"This activity is not economically rational," he said.
Mr. Lowry's assessment of the price increase at the end of the month was that it was an "artificial influence" from Lancer, Shamrock and another broker, Hermitage.
Mr. Moscowitz disputed Mr. Lowry's assertions about manipulating the Lighthouse share price. Writing up the month-end share prices on a poster board, he showed how the month-end prices of the shares weren't always higher than the previous month's close.
"The price goes down seven times, up only five times," Mr. Moscowitz observed. In terms of quarters, the price went up for two and down for two.
Mr. Moscowitz illustrated his example by asking Mr. Lowry to calculate how much money would be earned on an initial investment of 1,000 shares in December 2000, at the price of $2.19. Going month by month, Mr. Moscowitz got Mr. Lowry to say that the thousand share investment would lose money vis-a-vis the initial investment by the end of the period under review.
Given that set of assumptions, "that would be correct," Mr. Lowry said.
On re-direct, Mr. McCann asked Mr. Lowry whether "individuals need to make money on a stock for manipulation to occur?"
"No," Mr. Lowry answered.
The trial schedule took Friday off so a jury member could observe Rosh Hashanah. The trial continues Monday with FBI agent Mike Palasek. Agent Palasek's testimony will include the playing of undercover recordings for the jury.
(With files from Lee M. Webb.)
(More information regarding Mr. Kelly's trial is available in Stockwatch articles published on Sept. 25 and 26, 2003.) |
