May 10, 1997
Curious Tale of a
Company Where
Criminal Background
Was the Norm
By DAVID BARBOZA
n the annals of public
disclosure, few news releases can
match the chutzpah of one issued
less than a month ago by Genesis
Insurance and Financial Services
Inc., a Chattanooga, Tenn., company
that is in the process of being
shut down and whose stock has
recently taken an extraordinary
beating.
Buried in an announcement on April
18 about the sale of a Genesis unit
was an unusual defense of the chief
executive, Mohamed Khairy Mohamed
Zayed II.
"Friends, associates and business
partners of the CEO," the release
stated, "have long been aware of a
youthful indiscretion over a decade
ago that resulted in Mr. Zayed
having fully paid a debt to society
through a period of incarceration,
completed over seven years ago."
That "youthful indiscretion," the
statement failed to explain, was a
1986 federal conviction for
counterfeiting and weapons
possession for which Zayed was
sentenced to 78 months in prison,
but was released on parole in
November 1990. The Genesis release
also failed to note that Zayed,
according to federal records, had a
1981 federal drug conviction.
It is not every day that investors
learn that a company is run by a
convicted felon. But at Genesis,
which operated as a holding company
and has changed its name several
times in recent years, it turns out
that Zayed was not the exception
but the rule.
Indeed, depending on how you look
at it, Genesis was either a haven
for criminals or a perfect case
study in the benefits of
rehabilitation. Several people who
worked for the company or were
associated with it also have
criminal records, ranging from loan
fraud to cocaine smuggling.
And that is not counting Michael
Rehtorik, the director of investor
relations, who does not have a
criminal record but was barred for
life from the securities industry
in 1989 by the Securities and
Exchange Commission for falsely
promising 22 investors that he was
using their money to buy government
bonds. Almost $2 million was
misappropriated, according to the
securities rap-sheet maintained by
state and federal regulators.
Rehtorik did not return phone calls
seeking comment.
There is no lack of companies these
days in which disbarred brokers,
low-rent lawyers and assorted
white-collar fixers engage in stock
fraud. But the tangled tale of
Genesis suggests that the money to
be made in the soaring stock market
has begun to attract a more
dangerous kind of criminal to
businesses that end up fleecing
investors.
Beyond Genesis, several grand
juries are probing the activities
of small brokerage firms that have
been linked to crime figures. And
just last month, two men were
indicted in Brooklyn, N.Y., on
charges that they tried to hire a
hit man to protect their profits in
a securities fraud they helped run.
"People who used to engage in
questionable activity are now
following the money to the market,"
said William R. McLucas,
enforcement director at the SEC.
Zayed, who is 33 now and was 23
when he most recently went to jail,
defends his actions by saying that
he was a "juvenile" when his
criminal offenses occurred. And of
his colleagues, he said, it was
merely a "coincidence" that several
had criminal records.
In a telephone interview, Zayed --
who said he was in Uruguay
conducting business -- said that
Tennessee state regulators and
jealous critics were spreading
malicious lies about him and
dredging up ancient history to
undermine his company.
"None of my problems had to do with
the operation of a business," he
said. "Moral turpitude, maybe. But
some people think what I have done
since then has been honorable and
successful."
Genesis is one of hundreds of penny
stocks that attract a lot of
attention from investors even
though they fly below regulators'
radar. The company, for example,
did not file financial documents
with the SEC and was not traded on
an exchange, but rather on Nasdaq's
O-T-C bulletin board, which has no
listing standards.
Nevertheless, investors enticed by
aggressive stock promotions on the
Internet have lost thousands of
dollars in the collapse of Genesis.
Last fall, when the stock was
trading -- rarely -- for just 75
cents, it suddenly zoomed to $3.50,
as hundreds of thousands of shares
changed hands. Trading volume
continued to be heavy even as the
stock headed south, falling
recently to 51 cents.
"I took a five-figure bath in this
thing," said Jeff Silverman, a
California investor who bought
shares of Genesis after reading
about it on the Net. "They take
these shell companies and then hype
the assets."
Such talk has caught the attention
of state regulators and federal
law-enforcement officials. Last
week, Tennessee officials seized
Genesis, charging that a subsidiary
had operated without an insurance
license. Right after that, the SEC
halted trading.
A federal grand jury is also
looking into Genesis, and on
Thursday the Tennessee attorney
general moved to liquidate the
company, citing possible state and
federal securities violations, tax
evasion, mounting debt and a host
of other problems.
Today, disgruntled investors cannot
quite believe how easily they were
duped. In retrospect, Genesis's
rise and fall seems almost
farcical, replete with a stolen
attache case filled with jewels, a
dummy corporation in Costa Rica and
claims of $140 million in assets
that have largely vanished into
thin air.
Even Paul Jennings, the lawyer
Zayed has said represents Genesis,
acknowledged Thursday that he was
"kind of a lost ball in tall
weeds."
Although Genesis said it was
expanding through mergers and
acquisitions, state regulators and
law-enforcement officials now
contend that the firm was acquiring
questionable assets then using the
Internet and news releases to
exaggerate the company's size,
which may have helped inflate its
stock price. That kind of stock
manipulation may have allowed
insiders to sell shares at a profit
in what has come to be known as the
"pump and dump" strategy.
"Press releases issued by Genesis
representing certain subsidiaries
as viable entities, or earnings
representations as to Genesis
and/or these subsidiaries, appear
to be false," stated the report
released on Thursday by the
Tennessee attorney general's
office.
The company, according to state
regulators, had few operations and
very little cash flow. Regulators
suspect that salaries and other
expenses were paid for by illegally
issuing stock, often funneling the
purchases through Canada under the
name of a dummy corporation in
Costa Rica.
Zayed got control of Academy
Insurance and Financial Services, a
Florida-based insurer, in late
1995. He quickly put the company
through a series of name changes
before settling on Genesis, and
began acquiring real estate and
other holdings, usually in exchange
for restricted stock.
Before long, Genesis claimed assets
of $140 million, even as several of
the companies it acquired had
quickly ceased operations.
Zayed had promised to act as a
"turnaround artist" for the
concerns, but several former
associates said he had just let the
businesses languish.
"We were a drowning company, so we
didn't look the gift horse in the
mouth," said Andrew Cappocia, the
former president of Imagex Inc., a
medical imaging company in Albany,
N.Y., that Genesis acquired last
July with a promise of $12 million
in stock.
Cappocia said his business was
deeply in debt when it was
acquired, but the money Genesis
promised to infuse the company with
did not materialize. "They never
came to New York," he said. "They
were totally unreachable. I
realized in October that the
situation was hopeless."
Zayed, in response, blamed Cappocia
for mismanaging Imagex.
What made these stock-financed
acquisitions possible was Genesis'
rising share price, which was
bolstered immeasurably by the buzz
about the company on the Internet.
Genesis first showed up on the Net
in January 1996, when an online
investment tip sheet, the "Waaco
Kid's Hot Stocks Forum," rewarded
it with a listing. Within two
weeks, shares rose from about $2 to
more than $6. Volume tripled, from
about 9,000 shares a day in early
January to about 32,000 shares two
weeks later.
In May, Business Week magazine
wrote about Genesis' stock surge,
and six months later, The New York
Post also highlighted the company.
Among those praising Genesis were
Gary Cella, president of the
Investors Research Institute -- a
division of the same firm that
operates the Waaco Kid's forum --
and his colleague, Gayle Essary.
Cella and Essary said they bought
shares of Genesis independently.
Investors Research Institute hired
James Pratt, formerly an lawyer for
Genesis, who also held shares in
the company.
But all three say that Investors
Research was not involved in hyping
the stock. They said they simply
passed on any information they
could find about the company and
maintained an independent posture,
even disseminating unfavorable
information.
But online investors say most of
what Investors Research distributed
on the Internet was highly
favorable. Essary acknowledges that
he became a believer in Genesis. So
did many others on the Net.
"People! Wake up!" said one notice
posted on Silicon Investor, an
online bulletin board. "Don't be a
sleeping beauty! Grab that prince
by the beard while he is kissing
you."
Some people expressed doubts about
the company, but for the most part
the notices were overwhelmingly
positive. One excited message
posted on an Internet news group in
July came from Zayed's e-mail
address. The message called Genesis
"a hot new stock," adding: "This is
a stock to watch, call your broker
for a Buy Recommendation!"
For a time, Genesis thrived. But
several odd events raised
suspicions among investors about
Zayed and the company. Among them
was a Chattanooga police report
early this year, which was
circulated on the Net, in which
Zayed reported that his luxury car
was broken into and that $200,000
worth of common stock, $26,000 in
jewelry and precious metals and
$10,000 in cash was taken from two
briefcases.
In January, a wire service article
disclosed that Jerry Dorminey, who
was in charge of a Genesis
subsidiary that was supposed to
build theme parks, had been
convicted of federal securities
fraud in 1978. Dorminey, who could
not be reached for comment, was
dismissed by Genesis in February.
Not long after, there were news
reports that Dario Jaramillo, who
went to jail in 1994 for loan
fraud, had sold Genesis a gemstone
called corundum for $100,000 in
cash. The company valued it at $2
million, according to company
documents.
Doubts about the worth of such
assets, which also included a gold
mine and a purported $100 million
Mexican certificate of deposit led
Tennessee regulators to move to
liquidate Genesis this week.
And that has investors scratching
their heads, wondering how they got
involved in a company with such a
questionable past
"I would never have dreamed in a
million yeas that they would have
had that kind of background," said
one investor who lost thousands.
"It's kind of creepy."
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