Boca Raton: 'A great
place to be a rich crook'
By Scott Hiaasen, Palm Beach Post Staff Writer
Sunday, March 12, 2000
Five years ago, Daniel Porush sat atop an
empire built on deceit.
Porush was president of Stratton Oakmont Inc.,
one of the most profitable -- and notorious --
boiler-room operations in the nation. Working for
him were nearly 200 stockbrokers and salesmen
who specialized in luring unwary investors into
risky ventures with promises of quick riches.
When it all came crashing down -- after Stratton
Oakmont was kicked out of the securities
industry and a federal grand jury in New York
began to look at the company's activities --
Porush, 42, migrated to one of the few places
where a boiler-room millionaire can feel right at
home: Boca Raton.
Behind the gates of the country-club
communities around Boca, you can find many
people like Porush, cold-calling impresarios who
now live in sunny affluence despite being mired
in scores of lawsuits and legal claims.
For example, there's Brian Scanlon, an
ex-Stratton broker whose own company,
Harriman Group Inc., was ordered last year to
pay $90 million to the Securities and Exchange Commission; there's James
Villa, former head of H.J. Meyers & Co., a Rochester, N.Y., brokerage that
collapsed under the weight of investigations and customer complaints before
being expelled from the business last year; and there's Elliot Loewenstern,
another Stratton alum, who with his partner agreed to repay $6 million to
customers at his Fort Lauderdale-based brokerage.
The federal regulators who pursue boiler-room brokerages and try to recover
their illegal profits say the money trail often leads them to South Florida. Its
appeal, they say, goes beyond the warm climate; they believe the state's
famously generous property laws also make Florida a popular destination. The
state constitution protects a home of just about any value from being taken
through the courts, and certain investments are typically shielded from
creditors in bankruptcy proceedings.
"It's a great place to be a rich crook," said Alistaire Bambach, a lawyer with
the SEC, which fined Stratton Oakmont $2.5 million in 1994. "It is not a
coincidence that these people set themselves up in a state where the
(property) exemptions are very, very liberal."
And where's a better place to settle down than Boca Raton, a town known
nationally as a bastion of telemarketing scams and white-collar crime, a place
so choked with boiler rooms that regulators once dubbed a stretch of Federal
Highway the "Maggot Mile"?
How boiler rooms work
Places like Stratton make their money by manipulating stock prices at the
expense of their customers, exploiting their greed. Stratton's approach was
not particularly new or inventive. But Stratton did it better, for longer, than
most.
"Stratton came at a time when the regulators were just starting to tighten up,"
said Barry Goldsmith, vice president of enforcement for the National
Association of Securities Dealers, which regulates stockbrokers. "They were
around a long time."
The salesmen -- boiler rooms are dominated by young men -- usually work
from scripts, encouraging unsuspecting customers to invest in obscure
stocks with promises that they will double in value within weeks. They
exaggerate the stock's worth and sometimes lie about the company's
products. (In the worst cases, the company exists only on paper.) They also
apply pressure, suggesting they have inside information that must be acted
on swiftly.
At the boiler rooms, the employees can be under just as much pressure to
make sales. For example, managers at H.J. Meyers & Co. hazed their
low-performing brokers, forcing them to trudge in a circle around the office
while co-workers pelted them with office supplies, according to a lawsuit
against the brokerage. The ritual was called the "walk of shame."
Customers are left unaware of such antics; they deal with their brokers almost
exclusively over the phone.
What the customers also don't know is that the brokerage usually issues the
stocks it sells, or owns most of them. By promoting sales of "house stocks,"
the brokers boost the stock price; then the brokerage sells its shares at the
inflated value, making a handsome profit while its customers are left with
worthless portfolios.
These "pump and dump" schemes proliferated with the long bull market;
securities regulators estimate that they cost consumers around $2 billion a
year.
Stratton Oakmont's record
Stratton Oakmont joined the securities industry in 1989 and quickly earned a
reputation as one of the industry's worst. Its motto: "Never hang up the phone
until the customer buys or dies."
Twelve times the company was disciplined by the NASD. In 1992, the SEC
sued Stratton Oakmont over its sales tactics. Company chairman Jordan
Belfort agreed to a ban from the stock industry in 1994 -- placing Daniel
Porush solely in charge.
Within seven months of taking over, Porush paid himself $3 million in salary
and bonuses, according to the trustee overseeing Stratton's assets in
bankruptcy court. He also set up a $180 million golden parachute for Belfort. It
was the start of what's been described in a lawsuit filed by the trustee as the
systematic looting of Stratton Oakmont's accounts.
Property records indicate Porush and his wife, Nancy, first came to this area
in 1995, when they paid $600,000 for a Palm Beach condominium. They also
owned two homes on Long Island in New York.
The following year, the NASD accused Porush and others at Stratton of
illegally manipulating stocks. By December 1996, Stratton was kicked out of
the business, and Porush along with it.
By that time, hordes of customers were complaining that they were duped by
their brokers, or their orders to sell the sinking house stocks were ignored.
When the company filed for bankruptcy in January 1997, 455 customers had
accused Stratton of fraud, claiming losses of more than $40 million, according
to the trustee's suit. Porush, as president, was named in many of the
complaints.
Porush and his lawyers would not comment for this story.
Porush moved to Palm Beach County for good in early 1998. He and his wife
separated, but she soon followed him to Boca. He found himself in familiar
company.
One former Stratton salesman, Scott Forman, also moved to Boca in May
1998; another, Ira Boshnack, lived in Coral Springs since at least 1997. One
of Stratton's top men, Howard Gelfand, lived in Aventura in Miami-Dade
County, and, briefly in 1997, Delray Beach, before moving back to New York.
Since 1994, Stratton partner Jordan Shamah owned a house in Boca where a
relative lived; when a bank tried to foreclose on the mortgage last April,
Shamah sold it to the wife of yet another Stratton alum, Irving Stitsky.
(Shamah, Stitsky and two other Stratton graduates were indicted in New York
in August on charges stemming from an Internet stock-promotion scheme.)
The tactics spread
With the closing of Stratton in 1996, the NASD investigated more than 30 of
its brokers for possible sanctions. Many paid fines or were suspended, and a
few were banned. But many more left Stratton to join other brokerages that
used the same tactics -- the "sons and daughters of Stratton," as Goldsmith,
the NASD vice president, calls them.
One such company was Biltmore Securities, a Fort Lauderdale-based
brokerage taken over by two brokers, Elliot Loewenstern and Richard
Bronson, who left Stratton in 1992. The pair maintained a close relationship
with their former employer: they hired at least 22 people from Stratton, NASD
records show, and Biltmore took over Stratton's Maryland office.
Another was the Harriman Group Inc., or HGI, of Jericho, N.Y. In the early
1990s, two former Stratton brokers, Mark Hanna and Brian Scanlon, took a
controlling interest in the company and, according to regulators, adopted
many of Stratton's methods.
In an effort to keep track of brokers from troubled dealers like Stratton, the
NASD maintains a hit list: If several brokers from a company on the list end
up at a new office, that office's phone calls must be taped for investigators.
Stratton, Biltmore and HGI all made the list.
"If you look at the family tree, you will find a lot of people who learned the
trade at Stratton Oakmont," Goldsmith said.
The SEC first charged Biltmore with securities violations in 1993; in a
settlement two years later, the company paid $1 million and Loewenstern and
Bronson agreed to one-year suspensions. Last year, after the NASD also
complained about Biltmore's tactics, Bronson and Loewenstern agreed to
leave the industry for good, though they admitted no wrongdoing.
Loewenstern, who lives in Boca Raton, is now developing real estate; Bronson
owns a trendy Miami Beach fashion magazine.
HGI was charged in 1997 with making $16 million in illegal profits by trading in
restricted stocks with another company, Maidstone Financial Inc. Both
companies were kicked out of the NASD as a result, and the SEC is now
seeking $90 million from HGI for illegal profits.
Who owns the home?
The brokers at these two companies learned more than just sales tactics from
Stratton: When they got into trouble, they too came to Palm Beach County.
Two months after leaving HGI, Scanlon, 33, and his wife bought a house in
Boca Raton for $928,000, and at least two other HGI brokers also came
down. Maidstone's president, Stuart Litman -- who was banned from the
business and fined $100,000 -- moved into a house right around the corner
from the Scanlons, though he and his wife later moved back to New York.
The Scanlons, however, stayed in the area. In 1998, they moved into a bigger
house in the Royal Palm Yacht and Country Club in Boca Raton. Five months
later -- on the day an NASD hearing on complaints against him was to begin
-- Scanlon filed for Chapter 7 bankruptcy, seeking to erase his debts. He has
listed only $10,237 in assets and $8 million in debts, including claims from 18
customers who say they were swindled by HGI.
If Scanlon has no money, he's certainly surrounded by it. His wife, Suzanne
Davis, is listed on the property deed as the owner of their $1.69 million house,
though both of them are responsible for the $1 million mortgage, county
records show. Scanlon's $650,000 settlement with the NASD -- money
intended for ex-customers -- was paid by his mother-in-law.
The trustee overseeing the bankruptcy claims Scanlon tried to distance
himself from his assets by transferring money to his wife, giving her more than
$3 million in the two years before he declared bankruptcy. In court papers,
Davis said she handled the couple's financial matters, and that she has
always had her own money and property.
Michael Bakst, a lawyer for the trustee, said a settlement of the bankruptcy
claims is being discussed. Through his lawyer, Scanlon declined to comment
for this story.
The holding of assets by a spouse is common among local boiler-room
veterans: Stuart Litman's wife, Nancy, held the deed and mortgage to their
house, and she held the titles to their boat and other watercrafts; former
Stratton manager Irving Stitsky is named on the mortgage of a house, but not
on the deed. And Nancy Porush, not her husband, Daniel, was on the deed to
their $1.4 million home in Boca's Woodfield Country Club, which has since
been sold.
These methods can shield property because, under Florida law, the assets of
one spouse usually can't be taken to pay the debts of the other. Even if
property has been transferred from one spouse to another, it can be hard for
creditors to challenge in court, particularly if they must show it was a
deliberate attempt to keep money away from creditors, said Bakst.
Troubles growing
For Daniel Porush, at least, Florida has not been much of a refuge. In 1998,
he was indicted in New York for fraud, money laundering and other crimes. He
now faces prison after pleading guilty to manipulating several stocks. He also
agreed to turn over about $6 million, including the Boca house that was in his
wife's name; officials say that money, along with another $9 million from
Belfort, the former company chairman, is probably the last, best chance for
Stratton customers to recover any of their losses.
But the lawsuits continue to pile up. The trustee in charge of liquidating
Stratton Oakmont's assets filed a $54 million suit against Porush, his wife,
Belfort and Belfort's family. During just the past two years, arbitrators have
found Porush liable to Stratton customers for more than $23 million in
damages.
Three of those customers dragged Porush into bankruptcy court in West
Palm Beach, where they're seeking more than $12 million. At a hearing in the
case last week, Porush refused to answer questions about his finances,
invoking his right not to incriminate himself under the Fifth Amendment.
Like most of his boiler-room brethren, Porush has kept a relatively low profile
in South Florida. He's living in Woodfield Country Club (not far from his old
house), and he's working at a collectibles business in Pompano Beach,
making $78,000 a year.
Staff researchers Sammy Alzofon and Nicole Puccinelli Ortega contributed to
this story.
scott_hiaasen@pbpost.com |
