La Jolla Capital is under the gun
Stock market maker for once-high-flying Akron firm has touted other crash-and-burners
BY GLENN GAMBOA AND ROGER J. MEZGER
Beacon Journal business writers
March 23, 1997
Allegations From Ex-IMP Consultant
Interactive MultiMedia Publishers Inc., the Akron developer of multimedia
computer applications, went public in April 1995.
In February and March 1996, IMP's stock virtually exploded -- going from 56A
cents a share to as high as $8 -- but it has declined steadily since and is now
worth about one-tenth of a penny. IMP has not sold any products in more
than a year.
Douglas Furth, a former IMP consultant, has testified in a Summit County civil
lawsuit that P. Joseph Vertucci -- IMP's founder, president, chairman and chief
executive officer -- was involved with agents of La Jolla Capital Corp. and
others in a scheme to artificially drive up IMP's stock price for their own gain.
"It is clear from what Vertucci has come clean about that these guys pushed
the price of the stock up to unjustifiable levels, received large share
distributions from Joe and sold out at prices that were ridiculous in
comparison to where the stock should be trading relative to its value," Furth
wrote in a memo that is now part of the court record in the civil lawsuit.
La Jolla officials deny the charges of stock manipulation. IMP's Vertucci says
Furth's allegations are "off the wall."
Vertucci blames many of the company's misfortunes on unscrupulous brokers
and former employees and business associates, including Douglas Furth and
his brother, Thomas, who served briefly as the company's lawyer last fall.
Under subpoena by the Securities and Exchange Commission, Douglas Furth
was in Washington, D.C., last week answering investigators' questions about
IMP and La Jolla Capital.
Federal investigators looking into suspicious trading activity in the
stock of a Highland Square multimedia company didn't have to look
far before stumbling onto the handiwork of La Jolla Capital Corp.
The brash, young San Diego-based brokerage house was at the
heart of frenzied trading early last year in shares of Akron's
Interactive MultiMedia Publishers Inc. -- trading that produced a
1,300 percent spike and subsequent collapse in IMP's stock price
that ultimately inspired the investigation under way by the Securities
and Exchange Commission.
But IMP's isn't the only stock irregularity associated with La Jolla
Capital.
Although it is not yet 8 years old, La Jolla Capital has increasingly
attracted the attention of securities regulators because of its
aggressive tactics in buying and selling "penny stocks" -- the most
volatile segment of the stock market.
Since 1994, regulators in at least four states have sanctioned and, in
some cases, fined the California company as much as $10,000 for
such practices as selling unregistered securities, moving stocks
through unregistered agents and making "material misrepresentations"
that "had no basis in fact" in order to sell securities.
The National Association of Securities Dealers fined La Jolla Capital
$750 in 1994 for updating stock prices after the allowable time. The
NASD alleged the following year that the company "failed to
establish, maintain or enforce a supervisory system" to ensure
compliance with federal securities laws.
Last year, the NASD accused the company of falsely portraying
stocks it was promoting as exempt from "penny stock rules" and of
inducing investors to tell regulators that their transactions were not
solicited by La Jolla Capital, when in fact they were.
Just last week, investigators probing alleged organized crime activity
in the nation's stock markets revealed that the regulatory arm of
NASD has disciplinary action pending against La Jolla Capital, its
president and 27 of its registered brokers for their dealings in the
stocks of 15 small, publicly traded companies.
It was unclear at week's end whether Akron's IMP was among the
15 companies in question. There was no indication that La Jolla
Capital is part of the organized crime investigation.
But the brokerage has moved major blocks of stock of Celebrity
Entertainment Inc., a Palm Beach, Fla.-based resort operator, over
the past few months. And Celebrity Entertainment is under
investigation by the NASD for a possible link to organized crime,
according to documents made public last week.
Those inquiries are all in addition to at least two -- and possibly more
-- investigations by the Securities and Exchange Commission into
curious stock trading patterns involving small, "penny stock"
companies with ties to La Jolla Capital.
Largest IMP trader
Doing business under the name La Jolla Capital Financial, the San
Diego company was the largest trader in IMP shares on the Nasdaq
exchange in February and March 1996 when the stock of the Akron
developer of multimedia computer applications went from 56A cents
to as high as $8.
Valued at as much as $40 million at its high point a year ago, IMP's
stock has since declined steadily and is essentially worthless today.
Subpoenas issued in the SEC probe of IMP reveal that investigators
are interested in La Jolla Capital's role in the dramatic stock swing.
A former IMP business consultant has testified in a civil lawsuit that
IMP officials schemed with La Jolla Capital, the former manager of
La Jolla Capital's Chicago branch office, Bruce Straughn, and others
to artificially drive up the price of the company's stock for their own
gain.
Douglas G. Furth of Aurora has also testified that Straughn has
bragged of his ties to organized crime and told him and other
potential witnesses they could "end up at the bottom of a river" if they
tell what they know about IMP.
Repeated attempts to contact Straughn for comment in recent weeks
have been unsuccessful.
La Jolla Capital was also was one of the biggest traders early last
year in Comparator Systems Corp. of Newport Beach, Calif., which
experienced an even sharper rise and fall in stock price than IMP --
a shift that cost investors tens of millions of dollars in May and
resulted in legal action by the SEC and a class-action lawsuit by
angry shareholders.
Furth and other former IMP insiders also say that Technigen Corp.,
a casino developer and used-car contract purchaser based in
Vancouver, British Columbia, may also be a target of SEC
investigators because of its ties to La Jolla Capital. Technigen's stock
soared briefly in August 1995.
Wrongdoing denied
La Jolla Capital's president, Harold "B.J." Gallison Jr., denies any
wrongdoing and downplays the regulatory attention his company has
attracted.
"If you take $200 to file a lawsuit, you can say whatever you want,"
Gallison said of Furth's allegations of stock manipulation. "That's
absolutely absurd. There's no factual basis, and nothing could be
proved in that regard."
As for the regulators, "Well, we're always under investigation or are
being audited by the SEC or NASD for something," Gallison said in
a recent interview with the Beacon Journal.
"Well, we're always being audited, OK?" he said. "We're registered
with the SEC and the NASD, we deal primarily with low-priced
stocks and they're always taking a look at us."
'Penny' in name only
"Penny stocks" -- companies whose shares trade for less than a
dollar -- make up a segment of the stock market that produces big
winners and big losers every day. According to regulators, these
small-cap stocks are getting more regulatory attention these days
because they are seen as ripe for potential abuse by organized crime
or others looking for a quick killing on Wall Street.
"It is much easier to manipulate the stock of a small-cap company
than it is Microsoft," said Michael W. Robinson, manager of media
relations for the NASD.
It's on this highly charged, small-cap playing field that La Jolla
Capital has positioned itself as a buyer or seller of last resort -- what
is known in the securities industry as a market maker.
Unlike regular traders, market makers for a particular company
maintain firm bid and offer prices in the Nasdaq stock exchange,
regardless of whether they have an actual buyer or a seller for the
shares.
Such a position can be financially daring. If a market-making
brokerage gets stuck with a lot of stock that no one wants to buy, it
could take a major financial loss.
In La Jolla Capital's case, according to regulators and others familiar
with the company, the brokerage adopted a particularly aggressive
sales strategy that included cold calls -- unsolicited pleas to potential
investors urging them to buy securities -- and "blue plate specials" --
stocks that the company wanted to unload and for which brokers
would make significant sales bonuses.
False claims alleged
IMP and Comparator were among the stocks the company was
pushing to clients last year.
Shareholders of Comparator allege in their class-action lawsuit that
La Jolla Capital brokers also made false claims about Comparator's
future to recruit buyers for the stock.
"Just before Comparator began its climb, some of its brokers were
spreading rumors that MasterCard was interested in the company's
technology," said Kirk Hulett, one of the San Diego lawyers
representing the shareholders. "That turned out not to be the case.
We believe La Jolla Capital had no basis for these rumors."
Hulett also alleges that La Jolla Capital officials made fraudulent
claims about Comparator to manipulate the company's stock price.
"In the course of our investigation of them in this particular case, (La
Jolla) obviously had a slew of problems over the years, from
regulatory problems," Hulett said.
3,000 percent stock surge
Comparator Systems, developer of a fingerprint identification system
that had few buyers, set Nasdaq stock market records in May when
its stock surged 3,000 percent and 610 million shares changed hands
over three trading days.
According to Nasdaq records, La Jolla Capital was responsible for
the most trades of Comparator shares over the first four months of
1996 -- sometimes handling as many as 38 percent of the shares
changing hands -- before being outpaced at the height of the stock's
fury in May.
After the third day of frenzied buying and selling, the SEC stepped in
and halted trading in the stock. The federal agency filed a lawsuit
against Comparator, claiming the company had lied about its financial
condition to mislead investors and had diluted investors' holdings by
issuing hundreds of millions of shares of worthless stock.
In September, the SEC reached a partial settlement with two of
Comparator's three top officials.
"We got a final judgment against Comparator that provided for
injunctions against further violations of securities law," said Christian
Mixter, the chief litigation counsel in the SEC's division of
enforcement.
The issue of returning funds to Comparator investors remains open.
"We sought disgorgement, which means the giving back of illegal
profits," said Mixter. "That part is still open, and litigation is
continuing."
Patrols the Internet
Mary L. Schapiro, president of NASD regulation, said in a speech
on Monday that her agency now patrols the Internet for fraudulent
information about stocks because of the fall of Comparator.
"We know from Internet surveillance conducted in the wake of the
Comparator situation that there can indeed be price manipulation
triggered by touts on Internet message boards -- and that the touts
are used for that purpose alone," Schapiro said.
IMP's run-up last year coincided with interest in the stock generated
by a stock newsletter writer called "The Phantom" on the Prodigy
online service. Sources say "The Phantom," Raleigh Baughman of
Cuyahoga Falls, has been questioned by the SEC.
Baughman declined to comment.
Schapiro said the NASD also has developed its own online "search
engine" that will help its investigators find Internet touts.
"With our engine, an investigator will be able to enter select phrases
-- such as 'the next Microsoft' or 'guaranteed money maker' or 'hot
little tech stock' -- all phrases we've already encountered, and which
generally signal trouble," said Schapiro.
In a Beacon Journal interview last year at the time of IMP's run-up,
Straughn -- the La Jolla agent in Chicago -- said the Akron company
could be "the Microsoft of multimedia."
Gallison said Straughn no longer works for La Jolla Capital, having
left at the end of October under a "voluntary termination."
Trading suspended
On Dec. 4, the SEC took the unusual step of suspending all trading
of IMP's stock for 10 business days, citing questions about the
accuracy of information the company provided to investors about its
finances and its stock.
The SEC actions against IMP and Comparator were two of only 10
trading halts the SEC imposed last year on the more than 31,000
publicly traded companies.
SEC officials have declined to comment.
But, according to Douglas Furth, the former IMP consultant, La Jolla
Capital continues to have problems with penny stocks.
In court documents, Furth said Technigen, a Vancouver company
that bought a casino off the coast of Venezuela and also buys
used-car contracts, has a story similar to those of IMP and
Comparator and is also under investigation by the SEC.
SEC officials declined to comment on Technigen.
But SEC documents indicate the agency is investigating the
company's possible links to IMP. The agency investigated Technigen
in 1993 over concerns about the accuracy of the company's financial
statements and its compliance with securities laws.
According to SEC records, La Jolla Capital has been one of
Technigen's largest market makers for more than a year, handling
anywhere from 11 percent to 33 percent of the number of shares in
the company that are traded in a month.
In August 1995, soon after Technigen announced it would buy a
casino on an island off the Venezuelan coast, the company's stock
price climbed 173 percent in a week. That's a small run-up by IMP
and Comparator standards, but nearly 3 million shares and several
hundred thousand dollars changed hands.
The stock price later fell when legal problems in Venezuela delayed
the opening of the casino.
Furth worked as a consultant for Technigen at the time, as did a
Florida promoter named Chuck Arnold. Furth says he had a falling
out with Arnold and left the account when the casino's problems
became apparent.
"There are many aspects of (the IMP) transaction that parallel the
Technigen deal," Furth wrote in a Dec. 6 memo that is now part of
court records, "especially La Jolla's constant involvement in shady
deals." |
