The murky side of finance: Colts Neck killings raise questions about penny stocks
Published in the Asbury Park Press
By PAUL D'AMBROSIO,
WILLIAM CONROY,
JASON METHOD
and JAMES W. PRADO ROBERTS
STAFF WRITERS
Murdered stock promoters Maier S. Lehmann and his partner, Albert Alain Chalem, had a knack in recent years for getting into big trouble.
Last year, Lehmann's dealings cost him $630,000 to settle a federal Securities and Exchange Commission probe into charges he inflated the price of a stock in a get-rich-quick scheme. Five years ago, he also avoided a prison term for insurance fraud in New York when he turned state's evidence in a case that eventually netted 120 people in a $120 million fraud scandal.
Chalem, previously of Clifton, ran a series of failed businesses, including a New York motel where a bouncer was murdered, and a Clifton printing business that later burned down.
He was also associated with the now-defunct A.S. Goldmen & Co., a Woodbridge and Naples, Fla., securities firm, which was indicted this year on charges of bilking $100 million from thousands of clients and acting as an organized crime enterprise. Chalem, though, was not indicted in that case.
When they were killed, the two ran an international Internet Web site touting high-risk, penny stocks, where shares of fledgling companies are sold for less than $5 each and the prices can sway widely on the smallest rumor.
Both men were found shot to death early Tuesday in the $1.1 million Colts Neck home Chalem shared with his girlfriend, Kimberly Scarola. The home is owned by Scarola's father, Russell Candela, of New York.
If 41-year-old Chalem and 37-year-old Lehmann, of Woodmere, Long Island, died because of their dealings with penny stocks, which has been infiltrated by the mob and con artists over the years, it could be one of the first, if not the first, murders directly linked to that type of stock trading. A review of news articles for the last decade found no similar cases.
"Whoever has decided to take this course of action has ratcheted up the consequences of financial fraud," said Lehmann's former securities lawyer, G. Alexander Novak. He said Lehmann never mentioned receiving any type of threat.
"I've been doing securities work for 18 years, and I've had situations where clients of mine have cooperated (with authorities) to a great extent," Novak said. "And I never thought of the possibility that there would be gunplay, or violence, or murder."
Execution-style killing
Nearly a week after the murders, local authorities have made no arrests and are not saying if they have any solid motives.
Monmouth County Prosecutor John Kaye gave rise to a theory of an organized crime hit when he termed Lehmann's bullet wounds to the back of his head an "execution-style" killing. The men were shot a total of 10 times -- Chalem six times in the head and chest and Lehmann once in the leg and three times in the head.
But why the men died is a mystery that has shocked and mesmerized a community best known for its opulent homes and horse farms. The FBI is assisting with the local probe, but it would likely take over the investigation if evidence shows organized crime was involved. So far, a mob-hit theory remains one of several possibilities, including revenge from a past deal involving one or both men.
The recent dealings of the two men, though, have led investigators to the high-risk world of penny stocks, which is not as tightly regulated as traditional stocks like IBM and Microsoft.
While much of the penny stock market involves legitimate transactions, penny stocks have become a growing playground for con artists and organized crime, leading to an estimated loss of $6 billion a year for duped investors, authorities say.
Organized crime is not a new arrival on Wall Street, said Ira Lee Sorkin, a New York lawyer who is a former regional administrator for the SEC in New York.
"The mob has been on Wall Street for many year," said Sorkin, who also prosecuted securities fraud as a lawyer with the U.S. Attorney's office in New York. With members who are sophisticated and smart, "it's not necessarily the mob from 'The Godfather.' "
Electro Optical fraud
Charles B. Weaver of Massachusetts had always hoped his miniature technology company would do well, but even he was surprised when the price on the firm's over-the-counter stock suddenly shot heavenward.
"We were aware the price was going up. We couldn't figure out why," Weaver said in an interview last week. "We kept talking about it. Everybody kept looking for the price to drop. We couldn't understand how it was being held up."
Weaver's company, then called Electro Optical Systems Corp., became part of an SEC fraud case that involved Lehmann.
The case involved a far-flung web of business partners in Spain, Switzerland, California, Grand Cayman and Tinton Falls, New Jersey, federal records show.
The SEC complaint against 40 people and companies details a complex swapping and disbursement of millions of shares in the tiny Massachusetts corporation that had virtually no assets and no marketable product.
In the end, gullible investors attracted to the site by e-mail promotions and a dubious Internet Web site were conned, the SEC said. Insiders reaped some $12 million, according to the SEC.
The SEC case was later cited before a Senate subcommittee investigating Internet stock fraud as an example of the under-belly of penny stocks, a world where insiders can net millions overnight and gambling investors can lose life savings.
One of the two friends who found Lehmann and Chalem's bodies last week, Allen Conkling, was involved in the Electro Optical Systems case, but he was not charged by the SEC. Conkling is also listed as an investor-relations officer for Aviation Industries Inc., a company currently touted on futuresuperstock.com, an Internet site in which authorities say Lehmann was involved. A woman answering the phone number for Aviation Industries said she never heard of Conkling.
Lehmann settled with the SEC after paying $630,000, but without admitting any wrongdoing. The progress of that civil case was halted pending the outcome of a criminal investigation, according to the court record. The record did not state if Lehmann was involved in the criminal probe.
The Electro Optical saga began when Weaver's company, WTS Transnational, trying to develop a fingerprint-security device for computers, attempted to find interested investors willing to sink millions into the firm.
Weaver said in an interview that through a series of contacts, he was introduced to a now-defunct Staten Island company call U.S. Milestone. Weaver was not charged by the SEC.
At a subsequent meeting in New York, Weaver briefly met Lehmann, who introduced him to Thomas Edward Cavanagh and Frank Nicolois, officers at U.S. Milestone.
Cavanagh and Nicolois suggested WTS merge with a paper company to get into the stock market quickly, Weaver said. In this case, the paper company was a California firm with $567 in assets, no revenues and 3.5 million shares of common stock.
Voorhees attorney William N. Levy brokered a deal with a California attorney representing the paper company. The new company was to be called Electro Optical Systems Corp. Then Cavanagh and Nicolois opened accounts in the name of two Spanish clients with trader Cosimo Tacopino at the Tinton Falls brokerage, Donald & Co. Securities.
According to federal court papers, the Internet stock tip site futuresuperstock.com began touting Electro Optical in January 1998, claiming the company's product had been found to be 100 percent accurate in tests. Lehmann had a hand in running futuresuperstock.com.
Later that month, a press release distributed by Conkling said Electro Optical had received an order for 1,000 of its fingerprint-security devices. That press release was fiction, the SEC said.
Meanwhile, shares began moving through accounts at the Tinton Falls brokerage.
Lehmann received 150,000 Electro Optical shares for free from the Spanish clients. He quickly sold 100,000 shares for a $500,000 profit, the SEC charged.
Two million shares were sold through the Tinton Falls accounts at $5 or more a share for a net total of at least $10 million, court papers say.
Tacopino's secretary said last week that the trader would not take calls on the subject. He has denied the allegations in court papers. Donald & Co. was released from the case after surrendering all profits and commissions from Electro Optical stock.
In the end, Electro Optical stock was only traded for 70 days before SEC regulators suspended activity. Weaver said he suspects federal authorities were on the case early.
"We think they were already watching them (before the merger). I mean, nothing happens that fast," Weaver said.
Weaver's company, which has reverted to its previous name, is still trying to develop its electronic fingerprint-security device. And Weaver said he has learned a lot.
"Had we known what we know now, we would have been educated enough to know something was screwy," Weaver said. "The stock being up there and staying up there, we should have gone back right at that point to figure out what was going on."
Pump-and-dump stock
Penny stock fraud has been around for decades, authorities say. The Internet has simply allowed con artists to tout stocks more efficiently, and a Web site offers a stock promoter more credibility than a huckster over the telephone.
"Buy a television set over the Internet? You're not going to do it," said Sorkin, the New York lawyer who is a former regional administrator for the SEC in New York. "But something flashes on the (computer) screen with promises of early retirement, and they'll throw $10,000 or $20,000 into something," he said.
"That's just greed. People take advantage of that."
Penny stocks have always attracted more fraud than blue chip stocks because it is easier to manipulate their prices and their market, Sorkin said.
"If I buy 1,000 shares of Microsoft, that's not a flea on the tail of the elephant," he said.
The purchase will have scarcely any effect on the market in Microsoft stock, or Microsoft's stock price, said Sorkin.
But penny stocks, besides being cheaper, also tend to have a thin "float" -- the number of shares traded in the hands of the public, Sorkin said. Thus, it is easier for a few conspirators to drive up the price of the stock, either by buying and selling shares among themselves, or by persuading people to buy shares based on false claims about the company.
"In the 1980s, we saw a proliferation of penny stock fraud," said David Levine, senior adviser to the director of enforcement for the SEC in Washington, D.C.
A typical scheme, common then and since, is known as the "pump and dump," he said. "A person gets his or her hands on a large supply of stock and puts out false buzz about the stock."
False information might be a claim such as, "it has the best chip since Pentium," Levine said. Once the price is artificially inflated, he said, the conspirators dump their shares at a hefty profit, and the unsuspecting investors are left with almost worthless stock.
Such a scheme would be illegal on at least two counts, he said: The information was false, and the conspirators failed to disclose they had a financial interest in the company they were promoting.
In reaction to penny stock fraud, Congress tightened the laws regulating those type of stocks in 1990. The legislation required stockbrokers to determine whether a potential customer could safely afford the risk of a penny stock, Levine said. It is also required that the customer be told that penny stocks are volatile, and not for the conservative investor.
"A lot of the fraud migrated to what's called the micro-cap," Levine said. Micro-cap refers to the size of the company's market capitalization -- the total value of its shares.
Micro-cap stocks have share prices from slightly above $5 up to $20, said Mark S. Herr, director of the state Division of Consumer Affairs, which includes the state Bureau of Securities.
"A stock that trades in the range of $5 or $6 is still thinly traded and can still be easily manipulated," Levine said. But the manipulators escape the disclosure requirements for penny stocks, he said.
The latest migration of fraud has been to the Internet, which Levine said is ideal for securities con games.
"You can spread your pack of lies to literally hundreds of thousands of people at the click of a mouse," Levine said.
Registration in a foreign country does not necessarily insulate a Web site from SEC rules, Levine said.
Chalem, Lehmann and an unnamed man from Clifton were partners in a Web site, www.stockinvestor.com, that was registered in Panama and managed in Budapest, Hungary.
In general, if a company operates in the United States and sells stock to U.S. investors, it is subject to U.S. SEC regulations, Levine said.
The SEC and the state Division of Consumer Affairs have each stepped up efforts to police the Internet.
The state has 10 investigators assigned to Internet fraud of all types, including stock fraud.
The SEC created a 10-person Office of Internet Enforcement in July 1998. The agency also has 240 members of its staff around the country who spend two or three hours a week surfing the Internet looking for possible instances of fraud, Levine said.
Some of the examples they find are bizarre, he said. The agency brought an action last summer against a man who was touting investments in New Utopia, an island that was supposedly going to be built on concrete pillars in the Caribbean. The island would serve as a tax haven. The cost of investing: $20,000 a share, Levine said.
U.S. Sen. Susan Collins, R-Maine, who recently held hearings on Internet stock fraud, has proposed federal legislation that would close some loopholes in the trading of micro-cap stocks.
Collins' bill, if passed into law, would keep stock traders who have been disciplined in state securities and people kicked out of other financial sectors, such as banking, from moving into federal securities, or sitting on the boards of micro-cap companies.
K. Lee Balack, chief counsel for the U.S. Senate's permanent subcommittee on investigations, said the SEC now doesn't have the authority to do that.
"It gives the SEC a little bit more authority to reach out and snag people who have done something wrong and may do it again," Balack said.
Even mobsters get taken
In the old days, crooks would rob banks because, as famous bank robber "Slick" Willie Sutton noted, "that's where they keep the money."
Today, the big money is kept in stocks.
"As good as the Internet and securities are for investment, the money attracts the crooks, and I would think that organized crime wants a piece of the action," said Joseph Borg, director of the Alabama Securities Commission. Borg has taken part in interstate efforts to uncover and prosecute organized-crime securities fraud.
In recent years, law enforcement authorities have produced an upswing of fraudulent penny stock cases involving organized crime.
In April, two defendants with ties to the Colombo crime family and one Russian mobster were indicted along with 82 others by a a federal grand jury in Brooklyn that said more than $100 million was looted from investors in boiler-room schemes to sell cheap stocks at inflated prices.
And in May, the chairman of an Arizona company was convicted of racketeering after prosecutors claimed he paid organized crime-linked stock promoters to pay off Wall Street brokers to promote his stock. In July, one of the promoters, Eugene Lombardo, who authorities say is an associate of the Bonanno crime family, was sentenced to eight years in prison for his part in the scheme.
Often in these cases, organized crime syndicates will make an investment in a small brokerage house and, while allowing the house to operate, make it clear who is in charge, Borg said.
"It's a way to get involved, and it's also another way to wash money," he said.
And while Borg said he believes organized crime's share of the penny stock market is small, "it's sort of like saying, 'Gee, of all the stockbrokers in the country, only 1 (percent) to 2 percent are bad apples. But that is 1 to 2 percent too many."
Sometimes, though, even mobsters can be victimized.
In June, some two years after organized crime figure Thomas Gambino started serving a five-year sentence for racketeering linked to a gambling conspiracy in Connecticut, Gambino sued his stockbroker, claiming his family's money had been put into high-risk penny stocks against his wishes.
"From the outset, my father made it clear (to his stockbroker) that he was only interested in conservative investments," Gambino's son, Frances, said in a sworn affidavit. "In recent years, my parents had avoided stocks entirely in favor of quality bonds."
Published on October 31, 1999
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