Getting closer, Isaac, I know you're sweating bullets: "Unholy Gains When stock promoters cross paths
with religious charities,investors had best be on guard.
By Bill Alpert for Barrons
Australia is famous for its audacious entrepreneurs. And one of the boldest
these days is Joseph I. Gutnick. As a promoter of some of the largest gold
mines in the outback, Gutnick, 48, has amassed a fortune once estimated to
be as high as $450 million. With the help of Chase Manhattan, Gutnick is now
trying to get investors to put $500 million into a hedge fund he plans to run.
And only weeks ago, he told the Sydney Morning Herald that he intends to
move as much as half his business interests to the United States.
Gutnick's fame is not limited to the financial pages. As president of the
Melbourne Demons, the oldest team in the Australian Football League, he has
contributed millions to keep the team solvent. He's also a heavy political
donor, not just in his home country but also in the political tinderbox of Israel.
It was there that Gutnick earned worldwide notice in 1996, when he helped
secure the election of hawkish Prime Minister Benjamin Netanyahu.
Gutnick may be most revered for
his charitable work. An ordained
rabbi, he has supported religious
projects worldwide-particularly
those of the ultraorthodox
Lubavitch Hasidic movement,
whose Yiddish-speaking
members gratefully call him the
goldener rebbe, or the golden
rabbi. Once asked his formula for
getting rich, Gutnick replied:
"According to Jewish law, if you give to charity, that is a formula for receiving
God's blessing." But some of Gutnick's business dealings with religious
charities raise uncomfortable questions. A Barron's investigation found that
several charities traded heavily in stocks promoted by Gutnick. Although the
charities profited, other investors were left with heavy losses.
In addition, Gutnick has had dealings with Nachum Goldberg, who is
currently serving five years in an Australian prison for tax evasion that involved
charities. Another individual with ties to Gutnick is Judah Wernick, who is
now awaiting trial for stock manipulation in New York. Barron's has found
that Wernick used religious charities to finance his ventures and manipulate
stocks.
In some of the cases Barron's reviewed for this story, stocks were bid up to
dizzying heights before the charitable organizations got out, leaving other
investors with millions of dollars in losses when the stocks dropped sharply.
Several charities contacted by Barron's said they have done quite well
investing in penny-stock deals, but they profess no knowledge of manipulation
or of how much their so-called benefactors may have made on the deals.
Although Australian securities regulators have
investigated Joe Gutnick for half his career, Gutnick
has never been charged with any crime. Last year,
however, an Australian federal judge did slap
Edensor, Gutnick's family holding company, with a
$19 million penalty for what the judge deemed
"deceptive and misleading" treatment of public
shareholders of a company Gutnick controlled. The
case is on appeal. Over the course of two and a half
months, Barron's repeatedly asked Gutnick for help
in understanding his involvement with the deals
uncovered in our reporting. But despite his proven
appetite for publicity in other areas, Gutnick did not
answer us.
Mining the stock market
The son of one of Australia's leading rabbis, Gutnick began his career
studying at the Brooklyn rabbinical seminary of the Lubavitchers before
returning to Melbourne in 1976 to work in a textile business owned by his
wealthy father-in-law, Max New. By 1979, with gold prices perking up and
Australia's stock market rising, Gutnick began trading with $22,000 in
borrowed money. Gutnick proved an adept investor and promoter, turning his
small grubstake into $45 million, according to Diamonds and Demons, a
recently published authorized biography of Gutnick by Australian journalist
David Bernstein. (All dollar figures in this story are U.S.) By his own account,
Gutnick made more money mining the stock market in the 1980s than by
mining the earth. He dealt mainly in thinly traded mining stocks, and at one
point he managed three mutual funds that traded in the very stocks he was
promoting to other investors.
The stock market crash of 1987 brought Gutnick's self-described paper
shuffling to a halt and nearly broke him. He was rescued by $54 million in
loans from a bank owned by the Australian state of Victoria. Some years
later, the bank wrote off a substantial portion of those loans as losses.
But Gutnick had even grander backers than the government. In the motif of a
Hasidic miracle tale, the leader of the Lubavitchers, the late Rebbe
Menachem Mendel Schneerson, predicted several times that Gutnick would
discover gold and diamonds in Australia's desert. Indeed, those predictions
were mentioned in a video shown at New York brokerage houses such as
Datek Securities and Bishop Rosen as part of the 1993 U.S. road show
promoting the shares of Gutnick's Great Central Mines. On the video,
Gutnick said the rebbe foresaw a discovery "worth billions of dollars." With
this blessing from the rebbe, the shares, trading in the U.S. as American
depository receipts, surged from 5 to 14.
One beneficiary of this rise was Colel Chabad, a charity promoting religious
education, which owned 1.5 million shares in Great Central before the offering
of ADRs to U.S. investors. A month after the U.S. offering, by which time the
shares had fallen back below 10, Colel Chabad had vanished from the
shareholder rolls. This indicates that the charity sold some or all of its shares
at or near the peak. "They were one of the lucky ones," Gutnick told his
biographer with a smile. Gutnick's mine never did produce diamonds, but it
did prove one of Australia's richest gold producers. After the initial run-up,
shares of Great Central Mines bounced between 4 and 10 until the price of
gold began to slip in 1997. Last year, Gutnick teamed up with another mining
company to buy out Great Central's public shareholders at 95 cents a share.
Gutnick's family holding company, Edensor, was promptly sued by the
Australian Companies and Securities Investments Commission for misleading
public investors. An Australian federal judge socked Edensor with a $19
million penalty. Gutnick is appealing the ruling.
Among the other Gutnick stocks whose prices rose on heavy trading in their
U.S. ADRs were Astro Mining, Centaur Mining & Exploration and Johnson's
Well Mining. But Gutnick's two biggest successes were Quantum Resources
and Mount Kersey Mining, which between 1991 and 1997 rose 64,900%
and 28,640%, respectively. These and other companies -- a few of which
actually showed operating profits -- made Gutnick one of Australia's
wealthiest men. Gutnick has enjoyed his wealth, too, owning a yacht, flying in
a private jet and chauffeuring his wife and 11 children in a fleet of Rolls
Royces and Bentleys.
Not surprisingly, Gutnick wields political influence in his home country. A
generous supporter of Australia's two leading political parties, he is on a list of
business leaders who are briefed on government economic policy. Australia's
former prime minister, Bob Hawke, sits on the board of Gutnick's Quantum
Resources and has helped promote Gutnick's hedge fund.
Politics and religion
Like many Jews worldwide, Gutnick has taken a keen interest in Israeli
politics as well. In 1990, he became the emissary to Israel on behalf of Rebbe
Schneerson, reminding politicians of the rebbe's admonition against
surrendering land for peace with Arab neighbors. Gutnick has subsidized
Jewish residents in West Bank towns, such as Hebron. In 1996, Gutnick
sponsored ads that praised Benjamin Netanyahu as "Good for the Jews," and
by all accounts, helped Netanyahu clinch the election. But Diamond Joe, as
he's known at home, is most admired for his donations that promote religious
aims. For years, Gutnick has sponsored tiny ads on the front page of the New
York Times on Fridays, urging Jewish women to light Sabbath candles. Near
Rebbe Schneerson's grave in Queens, pilgrims can study and pray in
Gutnick-financed hostels. Tithing more than 10% of his earnings, Gutnick is
probably the largest underwriter of the Lubavitcher mission, which encourages
assimilated Jews to return to Orthodoxy through some 1,200 outreach centers
that gird the globe from Marina del Rey to Moscow.
Lubavitcher organizations such as Colel Chabad and Chabad of the Marina,
meanwhile, have turned up as significant traders in Gutnick stocks, say
Australian securities regulators. Indeed, according to trading records obtained
by these regulators, Colel Chabad one year traded upwards of $8 million in
shares of Gutnick-promoted stocks, while Chabad of the Marina traded
about $4 million in Gutnick shares. The Australian authorities wonder if that
trading was intended to push up the price of Gutnick shares in a classic stock
scam, where outsiders are lured into a stock at rising prices, allowing those in
the know to cash out before the price collapses.
Rabbi Shalom Duchman, the leader of Colel Chabad, did not respond to
Barron's questions about his organization's stock trading. Rabbi Shmulik
Napartstek, who heads Chabad of the Marina, in Marina Del Rey, California,
told Barron's that his organization has held "one or two" Gutnick stocks. "We
got them donated to us. They set up an account for us," Napartstek explains.
"We don't really trade it. We're just waiting for the right time that we're going
to be told to sell it."
And who will tell them when to sell? "Hopefully, Mr. Gutnick will tell us,"
Napartstek said. And was Gutnick the original donor? "I can't really give you
all of the information," said the rabbi, "because I don't know if he wants the
world to know."
After that interview, Barron's learned from Australian authorities about the
extent of the stock trading being done by Chabad of the Marina. We called
Rabbi Napartstek back several times for further comment. He did not return
our calls.
Why are so many religious charities making appearances in questionable
stock deals? U.S. and Australian money laundering investigators, without
citing any particular charities, say that religious organizations are among the
most opaque places to hide financial transactions, in part because they have
virtually no legal disclosure requirements. John Moscow, a prosecutor at the
Manhattan District Attorney's office and an expert on money laundering, says
that Judaism's high regard for anonymous charity sometimes means that the
business records of Jewish charities sought by investigators simply don't exist.
Other centuries-old ethnic and religious organizations that have been exploited
by money launderers include Chinese gold-trading networks and Islamic Halal
loan funds, he notes.
Nor are Jewish charities the only religious charities that turn up as investors in
tiny companies with little or no operating history. Barron's performed a
computer search for all the religious charities that appeared in the registrations
to sell shares of tiny companies to the public in the past five years. Churches
and organizations ranging from the Emmanuel Pentecostal Church of Dallas to
the Baptist Foundation of Arizona to the Marin Catholic High School in
Kentfield, California, registered small amounts of stock in tiny companies in
those years. But only about 600,000 shares, valued at $3 million at the time
they were registered, appear in the name of non-Jewish groups, while 32
million shares, worth $98 million, show up in the names of Jewish
organizations.
Among these stock-owning organizations is the Jerusalem Fund of Aish
HaTorah. While this group has no ties to Joseph Gutnick, the Jerusalem Fund
has been an active investor in the stock promotions of Broad Capital, a New
York City investment banking firm that specializes in finding investors for tiny
firms. (see sidebar "Money Machine") About three dozen other charities also
turn up as investors in Broad Capital stocks.
Another firm that has repeatedly involved
Jewish charities in its penny-stock dealings is
Patterson Travis, a New York-based outfit
run by Judah Wernick. In most cases,
Wernick's stocks ran up in price and then
collapsed. Indeed, in 1999, federal
prosecutors charged Wernick with stock
manipulation in connection with one of these
stocks, ML Direct, a marketing firm whose
shares showed just such a rise and fall. The
trial is scheduled for November. Wernick has
denied any wrongdoing. Letters to the court
from Wernick's lawyers indicate that he has
tried to strike a deal with prosecutors.
Among the dozen or so stock deals
underwritten by Wernick was a fledgling alternative energy company called
SCNV Acquisition -- a firm that was backed and controlled by Gutnick. This
1998 deal, which collapsed in price almost immediately, has been the only
U.S. offering to date of a Gutnick-controlled company. Most of his other
stocks were issued in Australia and then traded in the U.S. in the form of
ADRs.
Among the investors in other Wernick deals was a Lubavitch seminary called
Yeshiva Tomchei Tmimim, which paid $145,000 for 45% of a preferred
stock offering by Medjet, a fledgling medical-equipment company. Yeshiva
Tomchei also made $208,000 in bridge loans to another company Wernick
was promoting, a rickety chain of pancake houses called Royal Canadian
Foods. Then there is Mosdos Chinuch, a Brooklyn religious organization that
bought the second-largest portion of a preferred-stock offering from Red Hot
Concepts -- a Wernick stock at the heart of a manipulation case that New
Jersey regulators brought against another broker. Mosdos Chinuch also paid
$30,000 for 9% of the Medjet preferred offering mentioned above.
In 1997, Wernick was sued by the Securities and Exchange Commission for
stock manipulation in a case involving a personnel company called AFGL.
Asked in a deposition in the case about trading activity in Wernick stocks by
Lubavitch of Long Island, a religious education charity, Wernick replied,
"When my clients deal with me, if I tell them it's a good stock, they don't ask
questions." The SEC suit is ongoing.
Many of the charities Wernick dealt with have operations in Israel. In 1998,
Wernick talked to Barron's about the charities that invest in his deals. "In
Israel they have had their funding cut from the government, so they have to
find a way to make money," he said. But a darker explanation for Wernick's
charitable stock trading came from Maier Lehmann, an estranged business
partner who was shot execution-style last October, in a still-unsolved murder
("Dead Men Do Talk," Barron's, November 8, 1999). Before his death,
Lehmann told Barron's that Wernick controlled brokerage accounts in
charities' names and used them to manipulate various stocks for profit.
A telephone conversation with Rabbi Yerachmiel Binyominson does not
contradict this claim. The rabbi's Tzivos HaShem, a non-profit outfit that
publishes religious materials for children, has participated in several Wernick
stock deals. Asked about the charity's investment in Consolidated Technology
Group, a stock that was originally promoted by New Jersey swindler Robert
Brennan, Binyominson says, "Those were shares that [Wernick] purchased
for us." According to SEC filings, Tzivos HaShem and three other
Lubavitcher groups sold $1.3 million worth of Consolidated shares in a
privately negotiated deal to a Bermuda company. Binyominson says he knows
nothing of the Bermuda sale, but he says Tzivos HaShem got a check for
$500,000 for what Wernick said was the group's stake of the proceeds.
Wernick moved a variety of stocks through Tzivos HaShem's account. Asked
if the charity made its own investment decisions, Binyominson suggests not:
"Wernick would just say, 'I want to make you some money. I'm going to
donate you some stock.' We regularly get calls from people who say, 'I'm
transferring X amount of stock into your account, and we'll sell it for you.' We
make a lot of money that way. We don't get involved in what stock or which
stock."
The residents of these two Brooklyn homes say they know nothing of
investments by religious charities that used their addresses in SEC
filings.
Another charity tells a similar story. Batei Sefer Limlacha is a Lubavitcher
trade school represented in New York by Mrs. Henya Laine and her
husband, David. SEC filings list the Laines' Brooklyn home as the address for
Batei and show that the charity lent $500,000 to SCNV, the stock that
Wernick underwrote for Gutnick in 1998. Seated at her dining room table,
Mrs. Laine says neither she nor her husband authorized such an investment.
"Never in a million years!" she exclaims. Any money they raise, she says, goes
straight to Israel.
Another SEC filing shows that Batei, this time listed at an address around the
corner from the Laines' home, lent $550,000 to another Wernick banking
client. We visited this weathered Brooklyn home, which is also sometimes
listed in SEC filings as the address of Mosdos Chinuch. Answering the door
was a harried mother who said brusquely that her husband merely accepted
the two organizations' mail there on behalf of a relative. She refused to say
more.
Wernick was once the toast of honorary fetes put on by Tzivos HaShem and
other Lubavitcher charities. Now, with criminal charges hanging over him, he
told Barron's tersely, "I'm under orders not to speak to you."
The money movers
Religious charities were at the core of the money-laundering and tax-evasion
prosecution in Melbourne of Nachum Goldberg, which concluded earlier this
year. Australian prosecutors charged that Goldberg operated United Charity,
a sham entity that was actually a front for what prosecutors said was his
money-laundering operation. Among the transactions under scrutiny in the
case were a series of checks from Gutnick, totaling $55,000, that Goldberg
deposited into the account of United Charity. Goldberg also deposited into
United Charity's account $325,000 in checks from Emmanuel Althaus, who is
described in Gutnick's authorized biography as his most trusted and loyal
sidekick.
In June 1998, both Gutnick and Althaus testified that they could not recall
donating to United Charity. And indeed, the checks Australian prosecutors
showed passing through the United Charity account were actually made out to
other charities. Gutnick told the Melbourne court that those other charities
did, in fact, receive his contributions. Althaus, through his attorneys, denies
any wrongdoing.
Bank records and wiretaps of Goldberg suggested to prosecutors that if
Gutnick's money went to the charities, some of it went by way of the Tel Aviv
bank account of Lorenzi Diamonds, one of Israel's largest international gem
traders.
Voluminous evidence from wiretaps includes a boast by Nachum Goldberg
that Australian prosecutors took to mean that Gutnick was his biggest
money-laundering customer. In a conversation with an Israeli banker,
Goldberg exhorted the banker to speed the processing of cash for Althaus,
explaining that he was a very important customer. "I'll tell you, it's a customer
of ours here," Goldberg told the banker. "If you come here, he's very big.
He's [the biggest] after Gutnick." Although code words were used in many of
Goldberg's conversations, in one intercepted sales pitch, Goldberg told a
prospective money-laundering customer (who was actually a government
informant) that he could send the money from Australia to Israel and from
there to wherever the owner of the money wanted it to go. "If you send
Monday," said Goldberg, "it can be ... in Switzerland Wednesday."
A past president of Melbourne's Adass Israel
congregation -- one of Gutnick's most favored
domestic charities -- Goldberg, 58, was
videotaped by police carrying grocery sacks of
cash into a local branch of the ANZ Bank.
Over the course of four years, bank records
submitted as evidence in court documented that
the Goldberg family handled $36 million.
Australian prosecutors believe that millions of
dollars worth of diamonds also passed through
the Goldbergs' hands. Yet the family collected
government welfare payments the whole time.
In March, Goldberg and his 56-year-old wife,
Rita, and sons Napthali, 36, and Hershel, 34,
pleaded guilty to tax evasion. Three months
later, Nachum was sentenced to five years in prison. The rest of his family
walked free on suspended sentences. At the sentencing hearing on June 20,
Judge Michael Strong in Melbourne grumbled that the Goldbergs' wealthy
supporters, whom he did not name, seemed to have bought the family's
silence by covering their living costs and million-dollar legal expenses.
Because the Goldbergs refused to give evidence on their wealthy clients,
Judge Strong growled, "the principal beneficiaries of this fraud are not before
this court. There are a number of such persons at large in the community
today because of the prisoners' unwillingness to identify them. They are
masquerading as reputable citizens, but they are in fact thieves."
Australian prosecutors blamed their inability to expand the case to include
Goldberg's patrons on what they called the complete lack of cooperation
from the Israeli Justice Ministry. Asked by Barron's why Australia's requests
for bank records related to the Goldberg case were refused, Israeli officials
cited bank secrecy and said Israel was not obliged to aid investigations into
financial crimes.
Nor would the Goldbergs help trace the ultimate destination of the $36 million
they allegedly laundered. But Australian police, who traveled to the U.S. in
search of the money, believe some of it may have gone into dozens of tawdry
U.S. penny stocks, like Management Technology and Celebrity
Entertainment. Between 1996 and 1997, Hershel Goldberg invested $2
million in penny-stock deals, including Management Technology. These deals
exploited the SEC's Regulation S, which, until a recent revision, allowed
non-U.S. residents to buy into stock offerings and then sell their shares after
only a brief holding period. U.S. investors in such deals, by contrast, had to
hold shares for one year. Reg S deals have repeatedly been used by stock
swindlers.
Joe Gutnick's nephew, Eliyahu Raphael Gutnick, 25, invested several hundred
thousand dollars in such deals, even though, like Hershel Goldberg, he had
been on Australia's welfare rolls. Arranging many of Hershel Goldberg's U.S.
investments was Ronald G. Williams Sr., ...http://interactive.wsj.com/articles/SB972691923728472516.htm |
