SEC known Kelly hears Huard testimony in fraud trial
2003-10-03 18:28 ET - Street Wire
by Erik Schelzig in Miami
James T. Kelly, on trial for securities fraud, listened to the testimony of his former business associate and former co-defendant Joseph Huard in the U.S. District Court for the Southern District of Florida in Miami on Thursday. Mr. Huard negotiated a plea bargain in the case and is now a key prosecution witness. Mr. Kelly faces a possible 25 years in prison if convicted.
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 penny stock players from the U.S. and Canada last year. Mr. Kelly is accused of conspiring with former co-defendants Mr. Huard and Bruce Cowen in a kickback and stock manipulation scheme involving shares of Lighthouse Fast Ferry Inc.
The Lighthouse Fast Ferry shares that were to be used in the scheme were owned by the purported $1-billion Lancer Group. (All amounts are in U.S. dollars.) In a separate civil action, the U.S. Securities and Exchange Commission (SEC) shut Lancer down on July 10, levelling allegations of massive fraud against the hedge fund operation and its disgraced leader Michael Lauer.
Mr. Kelly, the former president of Shamrock Partners Ltd., a Pennsylvania brokerage firm with a checkered history known to U.S. regulators, was arrested in August of 2002 along with his Shamrock partner Mr. Huard and business associate and key Lancer figure Mr. Cowen.
Mr. Huard pled out last December, providing enough information to the authorities for a U.S. grand jury to issue a superseding indictment against Mr. Kelly and Mr. Cowen on May 22. The superseding indictment added charges of stock manipulation to the original kickback conspiracy charges.
On Aug. 21, just one month before the trial was set to open, Mr. Cowen also turned, hammering out his own plea bargain with prosecutors. Mr. Cowen is also on the prosecution's witness list.
As previously reported by Stockwatch, the alleged kickback scheme involved a proposed $5-million transaction for approximately 3.12 million restricted shares of Lighthouse Fast Ferry owned by Mr. Lauer's Lancer. A fictitious British fund operated by a purported corrupt manager known only as Nigel was supposed to ante up the $5-million through another fictitious U.S. company called Connelly & Williams Associates Inc.
As part of the proposed deal, $900,000 was supposed to be kicked back to the undercover sting operatives and another $600,000 was to be split equally among Mr. Cowen, Mr. Huard and Mr. Kelly. The sting also involved a $10,000 payoff to two purported due diligence officers of Connelly & Williams through a $16,000 "test trade." Once the test trade and $10,000 payoff had been executed, however, the planned $5-million transaction was cancelled.
The alleged stock manipulation also involved Lighthouse Fast Ferry shares. According to the prosecution, Lancer used Mr. Kelly's Shamrock Partners to fraudulently run up the price of Lighthouse Fast Ferry by buying blocks of the thinly traded stock at the end of the month, a fraudulent practice known as "marking the close." The rigged month-end price was then used to value Lancer's holdings of Lighthouse Fast Ferry.
According to prosecutors Thomas Hanusik and Thomas McCann of the U.S. Department of Justice Fraud Section, Mr. Kelly was motivated by greed and was a knowing participant in the kickback and stock manipulation scheme.
Norman Moscowitz, representing Mr. Kelly, disputes the government's allegations, claiming among other things that Lighthouse Fast Ferry was a legitimate company and the proposed $5-million transaction was a good deal. In his opening statement, Mr. Moscowitz also claimed that Mr. Kelly was suffering from physical and mental problems at the time and relied upon his friends to operate his business.
Mr. Huard, presumably one of the friends Mr. Kelly claims to have relied on, took the stand to testify against his former Shamrock associate.
DON'T UPSET A GOOD CLIENT
Mr. Huard's testimony, which began late Wednesday afternoon and ran through all of Thursday, began with him admitting his guilt in two separate Bermuda Short cases.
In addition to the case in which he is now testifying, Mr. Huard pled guilty in another stock manipulation sting involving Howe Street promoter Les Price's Medinah Minerals Inc. Mr. Price's Bermuda Short trial is scheduled to begin on Nov. 3.
"I pled guilty, because I was guilty of these charges," Mr. Huard said.
Mr. Huard said he had known Mr. Kelly for 18 years, and that they had worked together at a company that later went out of business. Mr. Huard testified that the co-operating witnesses in the case, David Jones and Robert Schlien, who helped the undercover FBI agent organize the sting, were also employees in a Florida branch office of the now defunct company.
Mr. Huard told the court that he went on to other jobs after that, and eventually started up a brokerage of his own. He sold 100 percent of that brokerage to Mr. Kelly in 1988 for $15,000, Mr. Huard testified.
Mr. Kelly renamed the company Shamrock Partners, and relocated it to Media, Pa., just outside of Philadelphia. Mr. Huard, identifying himself as a Shamrock "employee" to prosecutor Mr. Hanusik, said he then went to work for Mr. Kelly.
"I wore a number of hats at the firm," Mr. Huard said. "I did what had to be done."
Mr. Huard told the court that he deferred to Mr. Kelly on important issues.
"Jim was the boss, he owned the firm," he said. "What he said went."
The most important function that Mr. Kelly had with Shamrock was his relationship with the Lancer Group, Mr. Huard said.
Mr. Hanusik walked Mr. Huard back through the buy tickets he had shown earlier government witnesses to establish that Mr. Kelly orchestrated the Lancer orders for Lighthouse Fast Ferry, especially at the end of the month.
"Primarily they put their orders in at the end of the month, and at first it wasn't so obvious," Mr. Huard said. "But as time went by, it became more obvious that they were buying stock at the end of the month so they could drive up the price."
The handwriting on the buy tickets was that of Mr. Kelly, Mr. Huard testified.
"The primary contact at Lancer was Marty Garvey, the secondary contact was Michael Lauer and after that it was Bruce Cowen," Mr. Huard testified.
Shown the purchase trends of Lighthouse Fast Ferry shares by Shamrock, Mr. Huard showed Mr. Hanusik how the stock was purchased overwhelmingly at the end of the month.
"Mr. Kelly would come out and tell me and Mr. Doyle and anyone else who was still around to go out and buy the stock, so we could reach a target price," Mr. Huard testified.
"Did you think this was wrong?" the prosecutor asked.
"Yes I did," answered Mr. Huard.
Mr. Huard said that when he left Shamrock in January 2002, he was still working with Lancer and expressed his concern about the end of month trades to Mr. Garvey.
Mr. Huard testified that he later received a call from Mr. Kelly to tell him that "Marty was upset, and you shouldn't upset a good client."
BLATANTLY ILLEGAL
Mr. Huard recounted how he heard from the co-operating witnesses Mr. Jones and Mr. Schlien for the first time when they called to ask whether they could get in on a deal with Medinah Minerals.
Mr. Huard said he called Mr. Price to find out whether he was interested in investors, but at the time Mr. Price said he was not.
"They called me back and I told them that Mr. Price at Medinah had no interest, and they said is there anything else that you're working on, anything else we can do," he said.
Mr. Huard told the court that Mr. Kelly encouraged him to pitch Lighthouse Fast Ferry to Mr. Jones and Mr. Schlien.
"Jim said show them Lighthouse and see if they're interested," Mr. Huard said.
Mr. Kelly was informed about the proposed unreported commission of 15 per cent to 30 per cent, Mr. Huard said.
"He said check it out with Bruce first," Mr. Huard said. "I called Bruce Cowen and I told him Jim said 'I had to talk to you.' And he said, 'Yeah, let's do it.'
"He said he wanted to get it done in the next 10 days. He suggested that we ask for 12 per cent, which we would split four-four-four between Cowen, Mr. Kelly and myself."
The next day, when he called to tell the co-operating witnesses that he could make the deal work, he said he was "shocked" to hear that they also wanted a $10,000 kickback on a test trade to pay off due diligence officers.
"It was obvious they wanted to get some sort of payoff," Mr. Huard said. "I was thinking out loud and said I had to find out if this was legal and appropriate ... because this was blatantly illegal," Mr. Huard testified.
Mr. Huard said that Mr. Kelly responded by telling him to check it out with Mr. Cowen, which he did, and Mr. Cowen said he checked and it was okay.
In a later teleconference with Mr. Kelly and Mr. Huard, the undercover team spoke openly about their need to get their undisclosed payment returned to a Swiss company called Southern Star Shipping Ltd. Before going on, they asked whether they were speaking on a call recorded by Shamrock. Mr. Huard was recorded as saying the call was not being taped.
Mr. Moscowitz had earlier challenged the undercover FBI agent as to whether there was any certainty that Mr. Kelly was even in the room when this conversation had taken place. The agent said he could not guarantee it.
In court on Thursday, Mr. Huard testified that Mr. Kelly was in the room with him during that conversation.
COWEN'S "LAWYER" TALK
Under Mr. Hanusik's direct examination, Mr. Huard's testimony with respect to his reservations regarding the legality of the deal and his subsequent call to Mr. Cowen to check it out caused something of a kerfuffle. In fact, that matter was the subject of a number of pretrial pleadings.
The court had earlier granted the prosecution's motion to exclude testimony that Mr. Cowen purportedly checked with a lawyer about the proposed transaction. Just five days before the trial opened, however, Mr. Moscowitz filed another motion to admit that evidence in support of a "good faith defence."
Put simply, a good faith defence addresses the matter of intent. Evidently Mr. Moscowitz wanted the evidence admitted in order to show that Mr. Kelly had been told by Mr. Huard that Mr. Cowen had checked the deal out with a lawyer and it was legal.
Mr. Moscowitz argued that it did not matter whether Mr. Cowen had really checked with a lawyer. In effect, Mr. Kelly did not intend to be involved in an illegal deal, but in good faith had accepted Mr. Cowen's passed-on claim that a lawyer had vetted the deal.
The prosecution countered that Mr. Kelly was simply attempting "an end-run around the requirements of the Advice of Counsel defense by claiming a Good Faith defense based upon advice of counsel." The government also argued that the matter would just confuse the jury.
In its pretrial pleading, the government also disputed the claim underpinning the defence motion.
"Defendant claims that Huard and Cowen told Kelly of comments by an attorney," the prosecution stated. "This is not true. Neither Cowen nor Huard told Kelly of an attorney's opinion of the undercover kickback scheme."
Another twist was added to the whole matter in a defence filing on Sept. 22, just one day before the trial started. In that filing Mr. Moscowitz reported that on Saturday, Sept. 20, the prosecution turned over a memo recording a prior statement made by Mr. Cowen regarding having checked with a lawyer about the deal.
The document submitted by Mr. Moscowitz was an undated memo to file by a Lancer lawyer, Frank Fico, regarding a Sept. 12, 2002, conversation with Mr. Cowen.
"Mr. Cowen stated that Lighthouse's SEC legal counsel verified the transaction in which he was arrested and gave their authorization," the memo states in part.
The matter was still unresolved when the trial opened on Sept. 23. In a hearing without the jury present on the first day of the trial, Mr. Huard testified before Judge Cecilia Altonaga that upon hearing that the undercover team wanted a $10,000 payment, he called Mr. Cowen to find out whether that would be legal.
Mr. Huard testified that Mr. Cowen had told him that he checked with a lawyer who said it was okay to make the deal.
After the Sept. 23 hearing, Judge Altonaga ruled that statements about Mr. Cowen's legal counsel would not be admissible into trial.
On Oct. 2, the jury was again ushered out while Mr. Moscowitz argued that since Mr. Hanusik's direct examination of Mr. Huard had raised the subject of the telephone call to Mr. Cowen to check out the deal, the door was now open to asking the witness about why Mr. Cowen said the deal could take place.
Mr. Hanusik became animated at Mr. Moscowitz's request. "I saw this coming a mile away," the prosecutor said.
Mr. Hanusik argued that if suddenly Mr. Moscowitz were allowed to ask Mr. Huard about the lawyer that Mr. Cowen allegedly spoke to, it would make it seem as if the government had tried to hide something from the jury, "even though we were following the judge's ruling."
"It's not fair for the jury to think we left this out on purpose," he said.
Judge Altonaga was not convinced.
"So you want to tell them about one part of the conversation, but not about another?" she asked.
"We were operating under orders of the court," Mr. Hanusik said.
The judge said that the versions of the stories had changed with Mr. Huard's testimony.
"What I heard outside the jury's presence was very different from what I heard in the presence of the jury," she said.
Mr. Moscowitz argued that the government had gone into the telephone call with Mr. Cowen knowing that the defence attorney would not be allowed to explore it further.
"It think it's only fair that the jury hear the full extent of the conversation," he said.
The judge reserved judgment on the issue to give the attorneys time to file motions on the issue overnight.
Mr. Moscowitz moved on to other issues for the remainder of the day.
EMPLOYEE OR EQUAL?
In cross-examination, Mr. Moscowitz asked whether Mr. Huard considered himself a loyal business partner and friend of Mr. Kelly's. Mr. Huard said he did.
Mr. Moscowitz then went on to outline other business deals that Mr. Huard had involved himself in, outside of his relationship with Mr. Kelly and Shamrock. On a number of occasions Mr. Huard had to be handed documents about possible deals to refresh his memory before trying to explain them.
Mr. Moscowitz did not appear to be interested in the details, often cutting Mr. Huard off before he finished a response.
Mr. Moscowitz asked Mr. Huard about his understanding about his plea agreement with the government.
In return for pleading guilty to one count each in both of his indictments, he could expect a sentence of 46 to 57 months, Mr. Huard acknowledged.
The only way he could expect a sentence of less than 46 months was if the prosecutors thought he did a good enough job as a witness to warrant a recommendation for a lower sentence, he agreed.
Mr. Huard was far more than the "employee" of Shamrock as he had portrayed himself during direct testimony, Mr. Moscowitz suggested. He showed Mr. Huard documents where he had referred to himself as a partner, founder, vice-president and chief financial officer of Shamrock.
Mr. Huard acknowledged that he had used those terms. He also acknowledged that he was responsible for compliance and clearance issues within Shamrock.
"In fact as far as your responsibilities at the firm, you ultimately considered yourself equal to Mr. Kelly, did you not?" Mr. Moscowitz asked.
"Not equal, but close," Mr. Huard replied. "He owned the firm."
Mr. Kelly did not want his names on many of the official forms; he wanted Mr. Huard and others to deal with everyday affairs, Mr. Moscowitz said.
"Mr. Kelly's favorite thing to do was to get on the phone, get on the machines, and make trades, correct?" Mr. Moscowitz asked.
"Yes, that was his favorite pastime," Mr. Huard replied.
PHONE RECORDS
Towards the end of the afternoon's questioning, Mr. Moscowitz returned to the original deal between the co-operating witnesses and Shamrock.
Mr. Moscowitz asked Mr. Huard if he "started out here trying to commit a crime" when he suggested to Mr. Jones and Mr. Schlien that they might be interested in Lighthouse Fast Ferry.
Mr. Huard replied that he had not, and acknowledged that it was only after preliminary calls with the co-operating witnesses that the two men said they needed an undocumented payment.
"What they tell you is 'the only negative' in this deal is you will have to pay them to get the deal done," Mr. Moscowitz said. "That didn't make you comfortable did it?" Mr. Moscowitz asked.
Mr. Huard said it did not.
"But with approval you'd go through with it, correct?" the defence lawyer asked.
Mr. Huard answered that he would.
Mr. Moscowitz moved on to a series of questions regarding telephone calls and records of those calls.
Mr. Huard acknowledged that once he agreed to cooperate with the government he had reconstructed his telephone conversations during the sting operation with the help of Shamrock phone records.
Those phone records showed numerous telephone conversations with Mr. Cowen in California, but not with Mr. Kelly at his beach home. Mr. Huard explained that this had to do with a certain phone line in the office that did not keep records when he called Mr. Kelly.
Mr. Moscowitz said that after the original discussion of the 18-per-cent payment took place, phone records showed Mr. Huard called Mr. Cowen to discuss it.
"You have no record that you called Jim Kelly, do you?" Mr. Moscowitz asked.
"No, I don't," Mr. Huard replied.
Wrapping up his questioning for the day, Mr. Moscowitz asked whether Mr. Huard had expressed his negative feelings about the $10,000 kickback to Mr. Kelly.
Mr. Huard said he did.
"You expressed to Jim Kelly that you had concerns about this deal that were legal?" Mr. Moscowitz asked.
"No, I did not," Mr. Huard conceded.
The trial continued Friday with the remainder of Mr. Huard's cross-examination and the government redirect. Mr. Cowen is expected to be the next witness.
(With files from Lee M. Webb.)
(More information regarding Mr. Kelly's trial is available in Stockwatch articles published on Sept. 25, 26 and 29; and Oct. 1 and 2, 2003.) |
