can't find the link, but this is the story.
May 10, 1997
Curious Tale of a Company Where Criminal Background Was
the Norm
By DAVID BARBOZA
[I] 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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