WSJ (C1): Penny-Stock Fraud Cases Don't Live Up to Billing
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June 27, 2000
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Penny-Stock Fraud Cases
Don't Live Up to Billing
By JOHN R. EMSHWILLER and MICHAEL SCHROEDER
Staff Reporters of THE WALL STREET JOURNAL
Four years ago, federal prosecutors made a splash with a penny-stock "sting" operation that led to criminal charges against 45 brokers and promoters. Two of the men charged were Cary Cimino and Allen Wolfson.
This month, prosecutors announced their biggest stock-manipulation crackdown yet: 120 brokers, promoters and alleged mobsters. Two of the men charged were Cary Cimino and Allen Wolfson.
If this is starting to sound like a rerun, there is a reason. While prosecutors' succession of efforts to bust up stock fraud on Wall Street have been as flashy as a television miniseries in recent years, it has been more complicated and difficult in the real world to make the cases stick.
Thus, there are defendants from the 1996 case who have spent the past four years allegedly taking part in new illegal activities. In fact, Mr. Cimino in the latest case was charged with witness-tampering for allegedly soliciting the murder of a person who he believed to be a cooperating witness. (No assault occurred.)
Lawyers for both Messrs. Cimino and Wolfson say their clients will be vindicated. The allegations "are more of the same baseless allegations made in 1996," says Michael Bachner, Mr. Cimino's attorney, who attributes the witness-tampering charge to a moment of "locker-room bravado" on Mr. Cimino's part. Avraham Moskowitz, Mr. Wolfson's attorney, says his client plans to "contest the charges vigorously."
Prosecutors' ever-larger sweeps against alleged stock manipulators have received world-wide media attention when they have been announced, and that is part of the strategy: Publicity about mass arrests, say prosecutors, helps deter crime.
Still, of the 45 individuals in the 1996 probe, prosecutors dropped original charges against one-third, including Messrs. Cimino and Wolfson. (While new charges were refiled in many of the dropped cases, investigators still are trying to build cases against several others.) Of the 38 defendants who eventually pleaded guilty or were convicted at trial, 16 have yet to be sentenced. In at least some of the cases, the delay is probably the result of continuing cooperation with criminal investigations.
The top federal prosecutor in Manhattan, U.S. Attorney Mary Jo White, says she considers the 1996 sting operation, known as Operation Thorcom, to have been "extremely successful."
Federal prosecution records from 1992 through 1998, gathered by the Transactional Records Access Clearinghouse at Syracuse University in Syracuse, N.Y., indicated that about 60% of the securities-fraud cases prosecuted resulted in convictions, compared with more than 75% of narcotics cases. Justice Department officials said they couldn't comment specifically on the TRAC data but said it might not fully reflect prosecutions pending from those years.
Even when white-collar defendants are convicted, they typically have received relatively little jail time compared with drug dealers and other federal lawbreakers. Of the 22 sentenced so far in the 1996 cases, half received no prison time and half were given prison sentences ranging from three months to 71 months.
Besides the original 45 defendants, the 1996 investigation led to at least 28 additional stock-fraud convictions, Ms. White says. It also produced leads to other stock-fraud investigations, says Richard Walker, enforcement director at the Securities and Exchange Commission. "We struck a mother lode," says Mr. Walker, whose agency worked on the 1996 probe and subsequent criminal investigations.
This month, Ms. White announced the biggest roundup yet: the 120 brokers, promoters and alleged mobsters in a dozen states allegedly involved in various stock-fraud schemes. The big bust surpassed the previous unofficial record, established a year ago, when the U.S. attorney's office in Brooklyn -- a longtime rival of Ms. White's Manhattan office -- trumpeted the arrest of 85 brokers and promoters. There also have been big, splashy stock-fraud cases announced by New York state prosecutors in Manhattan.
Operation Thorcom involved undercover federal agents posing as brokers at a new Manhattan brokerage firm serving wealthy clients. A parade of individuals were secretly recorded offering the agents payments to buy stock of certain small and obscure public companies for the agents' supposed clients. Operation Thorcom was taken from the name of the sham brokerage firm that authorities set up.
For example, the original 1996 court filings charged Mr. Cimino, a 39-year-old former Prudential-Bache broker, with agreeing to pay the undercover agents as much as 40% of the value of stock they purchased. Separately, Mr. Wolfson, who came into the investigation with a criminal record that goes back to a 1977 fraud conviction, was charged with involvement in paying $4,375 to an undercover agent's offshore account as part of his effort to pump up a stock.
Messrs. Cimino and Wolfson were accused in 1996 of offering bribes to undercover agents involving penny-stock companies. In the latest case, they allegedly bribed real brokers to push penny stocks.
Manhattan U.S. attorney's office officials declined to say why they dropped the initial charges against Messrs. Cimino and Wolfson and 13 others.
However, prosecutors outside the U.S. attorney's office speculate that officials might have run into problems proving that certain individuals' dealings with the undercover agents actually constituted a crime. It isn't illegal for one person to give a broker money to promote a stock to his clients -- unless the broker doesn't tell his clients about the payment when getting them to buy the stock.
The lack of real clients and real-world transactions in the undercover operation might have produced prosecution problems, even if the defendants were taking part in an activity that they believed to be illegal.
Federal officials certainly didn't just forget about the cases they dropped. They continued to pursue all 15 defendants. "You've got to hand it to the prosecutors. They have resources and they're dogged," said Sean F. O'Shea, former chief of the business and securities-fraud unit of the Brooklyn U.S. attorney's office.
In the most recent sweep, prosecutors alleged that members and associates of the country's five largest organized-crime families conspired to manipulate publicly traded securities in 19 companies, bilking investors out of $50 million over five years. Brokers who didn't play along, prosecutors say, were threatened with beatings.
Prosecutors have charged Mr. Cimino with arranging for secret bribes to be paid in 1995 and 1996 to corrupt brokers to push stock. Mr. Bachner, Mr. Cimino's attorney, predicts that his client will be "completely vindicated." As for the witness-tampering allegation, he adds: "There's no evidence Mr. Cimino ever took affirmative steps to influence any witness."
In the latest case, prosecutors charged the 54-year-old Mr. Wolfson, of Salt Lake City, with obtaining control of large blocks of shares in five stocks and paying bribes to brokers to push up the prices of the stocks, which he then sold.
Like others, Mr. Moskowitz, the attorney for Mr. Wolfson, questions the prosecutors' motives in going after 120 people at once. He notes that the big bust actually involves 23 separate indictments and criminal complaints. By putting all these cases together and sprinkling in a few allegedly mob-related names among dozens of defendants, the government is trying to "make it seem like the cases are more substantial than they really are," Mr. Moskowitz says.
Officials at the Manhattan U.S. attorney's office insist that all 23 cases are related. Ms. White doesn't deny wanting publicity, but says it is for the best of motives. Having large numbers of defendants is "important from a deterrence point of view," she says. "When people are charged criminally, it sends the message that [committing stock fraud] is not safe."
Write to John R. Emshwiller at john.emshwiller@wsj.com and Michael Schroeder at mike.schroeder@wsj.com
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There's a chart called "Aftermath of a Sting," of the result stemming from the 1996 investigation.
It shows (counter-clockwise): "Investigation of charges pending 7*," "Awaiting sentencing 16," "Given prison time 11," and "Guilty but no prison time 11."
"Brokers and promoters originally charged: 45"
"* Includes certain dropped cases in which defendants have been charged again."
"Source: U.S. Attorney in Manhattan"
Please see wsj.com or C1 for chart.
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