Never heard of Hanover Sterling USWC's underwriter? "The Hanover, Sterling & Co. penny-stock firm, which left 12,000 investors in the lurch when it went out of business in early 1995, is alleged by people close to the firm to have been under the control of members of the Genovese organized crime family."
Read up from businessweek: "A three-month investigation by BUSINESS WEEK reveals that substantial elements of the small-cap
market have been turned into a veritable Mob franchise, under the very noses of regulators and law
enforcement. And that is a daunting prospect for every investor who buys small- cap stocks and every
small company whose stock trades on the NASDAQ market and over the counter. For the Mob makes
money in various ways, ranging from exploiting IPOs to extortion to getting a ``piece of the action' from
traders and brokerage firms. But its chief means of livelihood is ripping off investors by the time-tested
method of driving share prices upward--and dumping them on the public through aggressive cold-calling.
In its inquiry, BUSINESS WEEK reviewed a mountain of documentation and interviewed traders,
brokerage executives, investors, regulators, law-enforcement officials, and prosecutors. It also interviewed
present and former associates of the Wall Street Mob contingent. Virtually all spoke on condition of
anonymity, with several Street sources fearing severe physical harm--even death--if their identities became
known. One, a former broker at a Mob-run brokerage, says he discussed entering the federal Witness
Protection Program after hearing that his life might be in danger. A short-seller in the Southwest, alarmed
by threats, carries a gun.
Among BUSINESS WEEK's findings:
-- The Mob has established a network of stock promoters, securities dealers, and the all-important
``boiler rooms'--a crucial part of Mob manipulation schemes--that sell stocks nationwide through hard-
sell cold-calling. The brokerages are located mainly in the New York area and in Florida, with the heart of
their operations in the vicinity of lower Broad Street in downtown Manhattan.
-- Four organized crime families as well as elements of the Russian Mob directly own or control, through
front men, perhaps two dozen brokerage firms that make markets in hundreds of stocks. Other securities
dealers and traders are believed to pay extortion money or ``tribute' ' to the Mob as just another cost of
doing business on the Street.
-- Traders and brokers have been subjected in recent months to increasing levels of violent ``persuasion'
and punishment--threats and beatings. Among the firms that have been subject to Mob intimidation,
sources say, is the premier market maker in NASDAQ stocks--Herzog, Heine, Geduld Inc.
-- Using offshore accounts in the Bahamas and elsewhere, the Mob has engineered lucrative schemes
involving low-priced stock under Regulation S of the securities laws. Organized crime members profit from
the runup in such stocks and also from short-selling the stocks on the way down. They also take advantage
of the very wide spreads between the bid and ask prices of the stock issues controlled by their
confederates.
-- The Mob's activities seem confined almost exclusively to stocks traded in the over-the-counter ``bulletin
board' and NASDAQ small- cap markets. By contrast, New York Stock Exchange and American Stock
Exchange issues and firms apparently have been free of Mob exploitation.
-- Wall Street has become so lucrative for the Mob that it is allegedly a major source of income for
high-level members of organized crime- -few of whom have ever been publicly identified as having ties to
the Street. Abramo, who may well be the most active reputed mobster on the Street, has remained
completely out of the public eye--even staying active on the Street after his recent conviction for tax
evasion.
-- Mob-related activities on the Street are the subject of inquiries by the FBI and the office of Manhattan
District Attorney Robert M. Morgenthau, which is described by one source as having received numerous
complaints concerning mobsters on the Street. (Officials at both agencies and the New York Police Dept.
did not respond to repeated requests for comment.)
-- Overall, the response of regulators and law enforcement to Mob penetration of Wall Street has been
mixed at best. Market sources say complaints of Mob coercion have often been ignored by law
enforcement. Although an NASD spokesman says the agency would vigorously pursue reports of Mob
infiltration, two top NASD officials told BUSINESS WEEK that they have no knowledge of Mob
penetration of member firms. Asked to discuss such allegations, another high NASD official declined,
saying: ``I'd rather you not tell me about it.'
-- The Hanover, Sterling & Co. penny-stock firm, which left 12,000 investors in the lurch when it went
out of business in early 1995, is alleged by people close to the firm to have been under the control of
members of the Genovese organized crime family. Sources say other Mob factions engaged in aggressive
short-selling of stocks brought public by Hanover.
-- Federal investigators are said to be probing extortion attempts by Mob-linked short-sellers who had
been associated with the now-defunct Stratton Oakmont penny-stock firm.
Mob manipulation has affected the markets in a wide range of stocks. Among those identified by
BUSINESS WEEK are Affinity Entertainment, Celebrity Entertainment, Beachport Entertainment, Crystal
Broadcasting, First Colonial Ventures, Global Spill Management, Hollywood Productions, Innovative
Medical Services, International Nursing Services, Novatek International, Osicom Technologies, ReClaim,
SC&T, Solv-Ex, and TJT. Officials of the companies deny any knowledge of Mob involvement in the
trading of their stocks, and there is no evidence that company managements have been in league with stock
manipulators. These stocks were allegedly run up by Mob-linked brokers, who sometimes used force or
threats to curtail short-selling in the stocks. When support by allegedly Mob-linked brokerages ended, the
stocks often suffered precipitous declines--sometimes abetted, traders say, by Mob-linked short-sellers.
The stocks have generally fared poorly (table, page 99).
Not all of the stocks were recent IPOs, and they were often taken public by perfectly legitimate
underwriters. International Nursing, for example, went public at $23 in 1994 and was trading at $8 in early
1996 before falling back to pennies. Short-sellers who attempted to sell the shares earlier this year were
warned off--in one instance by a Mob member--market sources assert. International Nursing Chairman
John Yeros denies knowledge of manipulation of the stock.
What this all adds up to is a shocking tale of criminal infiltration abetted by widespread fear and
silence--and official inaction. While firms and brokerage executives who strive to keep far afield of the
Mob often complain of NASD inaction, rarely do such people feel strongly enough to share their views
with regulators or law enforcement. Instead, they engage in self-defense. One major brokerage, which
often executes trades for small-cap market makers, keeps mammoth intelligence files- -to steer clear of
Mob-run brokers. A major accounting firm keeps an organized-crime expert on the payroll. His duties
include preventing his firm from doing business with brokerages linked to organized crime and the Russian
Mob.
In the pages that follow are the results of BUSINESS WEEK's investigation.
THE BOX
At about 3 o'clock in the afternoon of Sept. 25, 1996, three men appeared on the 28th floor of 120
Broadway, Manhattan. They walked into the offices of Sharpe Capital Inc., a dealer in over-the-counter
stocks. They were burly. ``Like lumberjacks,' said an eyewitness soon after. A gun was in the belt of one
of the men.
The confidential police report of the incident (Complaint No. 10530, First Precinct) reads as follows:
``At that point they asked the victim what he was trading in. Then they slapped him in the head and stated
again, `What the f-- are you trading in.' Then he slapped the victim in the head again.'
A witness recalls one of the men saying: ``Don't f-- with our stock.' ' The stock: Crystal Broadcasting Inc.
After the men left, Sharpe stopped trading in Crystal Broadcasting.
To the New York Police Dept., the incident at Sharpe was about as serious as a scuffle over a parking
space. A police source says that the assault, categorized as a low-grade misdemeanor at best, is
considered closed and is not being investigated because the victim was not seriously hurt, no gun was
displayed--even though one was observed--and the perpetrators were unknown. (However, one witness
ruefully notes, police did nothing to ascertain their identity--such as examine a security- camera surveillance
tape.) Sharpe's CEO, Lawrence Hoes, declined to discuss the matter.
But BUSINESS WEEK learned that the assault at Sharpe was not an isolated incident. Rather, it was part
of a systematic pattern of intimidation. By eliminating competing market makers and allowing only
cooperating brokers to bid on stocks, the result is a kind of rigged auction-- with the prices where desired,
and the spreads between bid and ask prices kept as wide as possible. In Street parlance, this process of
rigging the market in a stock is known as ``boxing' a stock. It is part of the lexicon of the Mob's dominion
on Wall Street (page 99).
The box is the heart of most stock-manipulation schemes. In the case of Crystal, the trader at Sharpe was
suspected of ``cracking the spread.' ' According to market sources who were familiar with the trading in
Crystal that day, Sharpe was blamed, in effect, for doing what a market maker is supposed to do--get the
best possible price for its customers and keeping the spreads as narrow as possible. During the day,
Crystal traded as low as 4, well below the 5 1/8 closing price of the day before, and the spreads narrowed
as well, to a relatively reasonable 4 3/8 bid and 4 7/8 ask. Sharpe was blamed for that benign--to most
people--market action.
In the weeks following the Sharpe incident, Crystal shares were trading at the kind of spreads that can only
happen when the market is tightly controlled. If you buy it from a dealer, you pay the ask price, $3.50. But
when you sell it, you get the bid--56.2 cents. (Crystal's president, Joseph Newman, said he had no
knowledge of coercion of market makers in his stock.)
Sometimes the maneuvering involved in creating and exploiting the box can be as subtle as a bison in a
china shop. One West Coast investor, who requested anonymity, says that brokers at a small New York
firm, Monitor Investment Group, convinced him that two small-cap stocks- -International Nursing Services
and Beachport Entertainment--were about to be pushed upward. Says the investor: ``They said they had a
handle on all this stock. They said they'd run it up and get me out of it in a week.'
So sometime around last New Year's Day, he bought warrants and a big block of the stock--100,000
shares of International Nursing and 85, 000 of Beachport. When he tried to sell, he says, his brokers flatly
refused. The shares, which had started heading southward almost from the moment he bought them,
plummeted. They're now worth one-fifth of what he paid. Monitor Chairman William F. Palla denies the
firm was involved in stock manipulation but concedes a broker may have promised a runup but not really
meant it.
Sometimes, of course, thinly traded stocks can be run down by aggressive short sellers, and the Mob is
alleged by Street sources to have profited from that as well. One target of investigators, sources say, is a
coterie of brokers formerly associated with the defunct penny-stock brokerage of Stratton Oakmont.
Sources familiar with the investigation say that authorities are exploring charges that some of these brokers,
after Stratton's demise, may have extorted money from their former colleagues in the business--allegedly
threatening to short-sell stocks underwritten by those firms. According to sources, the Stratton brokers
allegedly shared their profits with a member of a New York crime family.
Among the trading being investigated, sources say, are stocks underwritten by a penny-stock firm called
State Street Capital Markets. Stocks brought public by the New York-based firm--Fun Tyme Concepts,
U.S. Bridge of N.Y., and Cable & Co. Worldwide--were pummeled in the market last August, and
trading in the stocks is allegedly being probed. At the time, State Street maintained that its shares were
victimized by concerted short-selling. State Street officials did not return phone calls, and Stratton officials
could not be reached for comment." |
