B.C. Securities Commission - Street Wire
BCSC's EBT probe features veteran Howe Street fan
B.C. Securities Commission BCSEC
Wed 24 May 2000 Street Wire
by Brent Mudry
While the British Columbia Securities Commmission's probe into Exchange
Bank & Trust Inc. is uncovering a cornucopia of aiders, abettors and stock
market crooks, the prime target of the United States Securities and
Exchange Commission to date is the apparent founder of the secretive
Nevis-based offshore bank.
Alleged securities violator Terry L. Neal liked Vancouver brokerages and
Bank of Montreal so much during the $14-million Itex Corp. fraud that he
picked Vancouver, its brokerages and a fine old Canadian bank's downtown
branch as the main onshore operations base for EBT in 1997, judging from
regulatory documents.
Mr. Neal's pivotal roles with Exchange Bank & Trust emerged soon after the
BCSC froze the offshore bank's pooling account at Bank of Montreal on April
13. The Canadian regulator's move was prompted by the SEC, which was
targeting another alleged securities violator in an apparently unrelated
case.
Los Angeles tree trimmer Stephen Sayre, the eConnect tout, wired
$1.44-million from a Las Vegas bank account into Exchange Bank's conduit
account in Vancouver in a three-week period ending April 5.
Mr. Neal, like Exchange Bank and its main front-person, operations manager
Gillian Hobson, is based in the secretive offshore enclave of Nevis, West
Indies, where he moved amid the SEC's Itex investigation. The offshore bank
was incorporated in the Republic of Nauru on May 12, 1997, and since August
of that year it has maintained an account at Bank of Montreal in Vancouver,
using the services of corporate banker Jake Fiddick and his staff.
According to Ms. Hobson, a front not yet as famous as Pamela Lee Anderson,
but coming along nicely, Bank of Montreal is Exchange Bank's main
conduit-of-choice. "EBT deposits are physically held with the Bank of
Montreal, and other institutions. EBT deposits are primarily held with the
BMO in Vancouver, Canada," she states in an affidavit.
Mr. Neal served as Exchange Bank's signing authority on the conduit account
until he was hurriedly removed on May 2. The SEC's chief Itex target
explained his role with the conduit account in a letter to the BCSC on
April 21, a week after the account was frozen.
In the letter, Mr. Neal told regulators that the funds in the bank account,
then at the $13.8-million level, did not belong to him, but to clients of
Exchange Bank. He confirmed that he did not have an account with Exchange
Bank himself.
"He is the signatory for the bank account but only one of a series of
persons that reviews wires from the bank account," stated BCSC enforcement
deputy director Lang Evans in an affidavit, paraphrasing the letter. "He is
working in the Caribbean as a result of the difficulties experienced in the
United States relating to the Itex case, which he says he intends to
defend," stated the regulator.
Although the conduit account of Bank of Montreal's fine offshore client has
been quite busy servicing its mystery clients, even after it was frozen,
Mr. Neal's fondness for Vancouver predates the account's opening in August
of 1997.
"I am also advised by the SEC that Neal and his wife transferred a
significant portion of the proceeds realized from their sales of the
securities of Itex from brokerage houses in Vancouver to bank accounts at
the subject Bank of Montreal in Vancouver some time prior to the opening of
the bank account," states Mr. Evans.
While the Vancouver brokerages used by Mr. Neal in his alleged Itex fraud
are not identified, six brokerages have subsequently turned up in the
broadening Exchange Bank & Trust investigation: Goepel McDermid, Yorkton
Securities, Union Securities, Thomson Kernaghan, IPO Capital and Pacific
International Securities.
The date range of Mr. Neal's Itex trading through Vancouver brokerages is
not disclosed, although the SEC's prosecution covers the period starting
Aug. 1, 1993.
"Beginning from at least its 1994 fiscal year and continuing through Feb.
1998, Itex Corp., a Nasdaq company until its delisting on Dec. 21, 1998,
and a prominent participant in the barter trade business, fraudulently
accounted for numerous barter transactions to transform illiquid, dubious
assets into purported valuable assets," states the SEC in its complaint.
The U.S. regulator claims that Itex posted sham transactions and grossly
overstated the value of barter transactions which had little or no
determinable value, most of which were unreported related party
transactions, then reported substantial revenues and income from the sale
of such assets in the company's periodic reports and financial statements.
"Itex then issued press releases touting its extraodinary gains in
financial condition and operating results, misleading investors and
artificially inflating the trading price of the stock. Itex's officers
deliberately misused basic accounting principles to inflate the fair value
of difficult-to-value assets such as artwork, prepaid advertising due bills
and preferred securities of thinly-traded public companies," states the
SEC.
In recent months the SEC has settled with Itex and three individual
defendants. In a consent settlement on Feb. 4, Itex was permanently barred
from future securities violations, including violations of antifraud,
securities registration, internal controls and record-keeping provisions of
federal securities laws.
In a separate consent settlement, former Itex chief financial officer
Joseph Morris was barred for five years from serving as an officer,
director or securities filing accountant. He was also ordered to disgorge
$45,400, but payment was waived based on his demonstrated inability to pay.
In settlements disclosed May 3, former Itex president Graham Norris was
fined $50,000, while former Itex controller Cynthia Pfaltzgraff was barred
for five years from acting as an accountant before the commission.
"Pfaltzgraff's and Norris's conduct was part of a larger scheme in which
defendant Terry Neal, Itex's founder and control person, implemented a
broad-ranging fraudulent scheme to make materially false and misleading
disclosures about the company's business and to conceal numerous suspect
and in many cases sham barter deals between Itex and various mysterious
offshore entities related to and/or controlled by Neal," states the SEC.
Another former president, Michael Baer, and Mr. Neal have not yet settled
with the SEC. In its complaint, the SEC claims the pair rode a wave of
financial misinformation which boosted Itex's share price from $2.25 to
$12.50 from January of 1994 through February of 1996. Mr. Neal allegedly
made more than $6-million, which he spread among family members, dumping
shares during this period, while Mr. Baer made about $1.4-million.
Mr. Neal faces a court hearing on July 7 in Portland, Ore., regarding the
SEC's freeze order on his assets. The BCSC and SEC's investigation into
Exchange Bank & Trust continues. A speedy decision is expected on the
offshore bank's challenge to the BCSC freeze order on its conduit account
at Bank of Montreal.
(This is Stockwatch's 13th story on the Exchange Bank & Trust affair.
Readers wishing more details of Bank of Montreal's fine offshore banking
client may refer to Streetwires dated May 4, May 5, May 8, May 9, May 10,
May 11, May 12, May 16, May 17, May 18, May 19 and May 23 under the symbols
BCSEC and ECNC. Links to a host of other related articles are noted in the
May 5, May 8 and May 19 Streetwires.)
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