I find this article pretty interesting:
Heard on the Street
Penny-Stock Ties
Entangle Retailer
By CHARLES GASPARINO and TERZAH EWING
Staff Reporters of THE WALL STREET JOURNAL
It could be a scene right out of the new movie "Boiler Room."
A top penny-stock executive meets a client in the locker room of a private
Long Island golf club, where the client hands over $80,000 in a brown
paper bag. In return, the client seeks quick riches through early access to
the executive's coming initial public offerings.
But it's no movie. It's an allegation made by Bryan Herman, a former top
executive of defunct penny-stock firm Monroe Parker Securities during a
recent trial of former Monroe Parker brokers charged with stock fraud by
New York state. Mr. Herman was a witness who testified against the
brokers in the Westchester County, N.Y., state-court case. The jury
acquitted all four brokers.
The client who Mr. Herman testified made the payment: Steven Madden,
creator of one of the nation's hottest women's shoe retailers.
Mr. Herman testified that he took the money. Neither he nor his lawyer
would comment.
Mr. Madden's lawyer, Joel
Winograd, says: "All I can tell you is
that the government is relying on the
word of scoundrels and scalawags.
... They are liars and deceivers." The
proof that Mr. Madden did nothing
wrong, Mr. Winograd says, is that
the jury acquitted the brokers Mr.
Herman testified against. "Twelve
decent hard-working people who
listened to Herman testify on the
stand rejected it," Mr. Winograd
added.
What's clear, however, is that Mr. Madden is a high-profile figure in the
fashion world. His signature platform-style shoes are a big hit among
trendy teenage girls everywhere, and they're starting to catch on with
investors as well: Over the past year, shares of Long Island City,
N.Y.-based Steven Madden Ltd. have nearly doubled, to $16.50 in 4
p.m. trading Thursday on the Nasdaq Stock Market.
Federal investigators at the U.S. Attorney's Office for Southern District of
New York have been quietly examining Mr. Madden's connections with
penny-stock firms for some time, say people close to the matter. Mr.
Winograd, for his part, says he's heard "rumors" that criminal prosecutors
are interested in his client's dealings with penny-stock firms Stratton
Oakmont and Monroe Parker, but that he hasn't been approached. He
says Mr. Madden "categorically denies any wrongdoing."
Mr. Herman's testimony, previously undisclosed, marks the first public
comment purportedly linking Mr. Madden with misdeeds in the
penny-stock world. In the past, even hints of indirect involvement with
penny-stock firms seem to have hurt Steven Madden shares. In July, when
the National Association of Securities Dealers fined Monroe Parker and
four officers more than $8 million for manipulating securities, including
Steven Madden warrants, Madden shares fell 7.4% in one week.
Mr. Madden is widely regarded as the creative genius of the firm, which
more than doubled its earnings for the first nine months of last year and is
leaping into new markets faster than most if its peers.
Mr. Madden didn't return telephone calls seeking comment. During a rare
interview on CNBC in December, Mr. Madden shrugged off a question
about how his association with penny-stock executives has affected his
company's stock. "Could be," he said on CNBC. Earlier in the same
interview, answering a question about whether investigators will turn their
attention from the penny-stock firms to him or his company's involvement,
he said, "We don't think we'll be tainted by that brush."
Mr. Madden, a former shoe salesman from Cedarhurst, N.Y., is no
stranger to a world that has long been the target of federal regulators.
Stratton Oakmont brought Mr. Madden's company public in December
1993, just four years before the securities firm was effectively shut down
by federal regulators. Mr. Madden's lawyer confirms that his client once
was a close friend and golfing buddy of Jordan Belfort, Stratton's founder
and chief executive, as well as Daniel Porush, Stratton's president.
During Stratton's heyday, Mr. Madden held a coveted spot as a "selling
shareholder" in many of the companies that Stratton would bring public.
Such a position meant he received shares in companies below the offering
price, and he could sell them at a profit when the stock was free to trade.
When Stratton was shuttered in 1996, Mr. Madden began doing business
with Monroe Parker, run by Mr. Herman and another former Stratton
broker. Mr. Madden not only brought his own company's business to the
firm, but also his personal account. Mr. Winograd, for instance, says Mr.
Madden bought, for his personal account, public offerings of deals
underwritten by Monroe Parker.
Mr. Herman, in his testimony, raised questions about the relationship. Mr.
Herman, who pleaded guilty to securities fraud and is cooperating with
investigators, testified in the recent Monroe Parker case that Mr. Madden
had been one of a group of "flippers," who made big profits by helping
Monroe Parker brokers manipulate stocks of companies the firm was
bringing public.
Mr. Madden denies any wrongdoing in his relationship with Mr. Herman,
Mr. Winograd says.
Flipping occurs when shareholders of public offerings immediately sell, or
"flip" back their stock once it becomes free to trade. While the practice
isn't itself improper, it can be illegal when there is a prearranged deal to sell
back shares at specific prices, often leading both the firm and the flipper to
profit.
Mr. Herman, for his part, defines a flipper as "somebody who got the
stock and had a prearrangement to flip it back to us at the first opening tick
when the market opened." During his testimony, Mr. Herman cites the
example of Big City Bagels, a company brought public by Monroe Parker
in May 1996. According to Mr. Herman, Mr. Madden and several other
Monroe Parker clients participated in a scheme to manipulate shares of Big
City bagels after its 1996 initial public stock offering. Mr. Madden agreed
to buy shares of the company, Mr. Herman testified. As part of the deal,
Mr. Madden would sell the stock back to Monroe Parker at some higher
price before Monroe executive would ship out shares to unwitting
investors.
Over time, Mr. Madden had made payments totaling "a couple hundred
thousand" dollars to the firm for the privilege of flipping IPOs back to the
company, Mr. Herman testified. Mr. Herman testified that Mr. Madden
made the payments over "a dozen or more transactions," and that Mr.
Madden "made a lot of money" from the dealings.
One day, Mr. Herman testified, he met Mr. Madden in the locker room of
the Engineers Country Club, a private golf club in Roslyn, N.Y., not far
from Mr. Madden's childhood home. After playing golf that day, Mr.
Herman testified that Mr. Madden handed him $80,000 in a brown paper
bag, the largest sum of cash ever paid to him by one of the firm's
designated flippers at any one time.
It was, Mr. Herman testified, "just like in the movies."
-- Deborah Lohse contributed to this article.
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