Re: 1/9/01 - Business 2.0: The Shareholder from Hell
The Shareholder from Hell
The inside story of how a stock-fraud scheme with ties to organized crime destroyed an aspiring dot-com.
From the January 09, 2001 issue
Edward Robinson
When FinancialWeb CEO Kevin Leininger met Glenn Laken last winter, he had no idea the firm’s majority investor was involved with organized-crime figures. [Illustration: Dennis Balogh]
Last June 14, Kevin Leininger was sitting pretty.
The 36-year-old CEO of FinancialWeb.com, an investing news Website based in Boston, was on the verge of carrying out a treasured ritual in the microcap business world–he was about to graduate his firm's stock from minor league, over-the-counter trading to the major-league Nasdaq. The move would cap a five-month turnaround: FinancialWeb.com had installed a new management team, adopted a new strategic plan, and notched up its best quarter ever. The completed Nasdaq application sat packaged in a FedEx box, ready to be sent. Then the telephone rang. The company's vice president of sales wasn't happy–Glenn B. Laken, a hedge fund manager in Chicago and the company's majority shareholder, was involved in some legal trouble.
Leininger called the company's lawyer. "What the hell is going on?" he asked.
"Have a seat, Kev," the attorney told him. "You're not going to believe this." Laken had been indicted for manipulating FinancialWeb's stock over the last four months in a classic pump-and-dump scam.
It got worse. The five-count, 19-page indictment was only 1 of 23 criminal complaints and indictments brought by the U.S. Justice Department in a sweep called Operation Uptick. In all, the Feds charged 120 defendants, including members and associates of the five organized-crime families in New York's La Cosa Nostra, with executing a massive securities fraud racket over the last five years involving 35 different companies and $50 million in illicit gains.
This was not only the biggest securities fraud case ever, in terms of the number of defendants, but also one of the largest criminal cases in U.S. history. News of the suit ran through the financial markets like a gas fire, and newspapers and online bulletin boards buzzed with the story. In fact, the case is further distinguished by the fact that the Internet was the primary instrument used in perpetrating the fraud. Apparently, organized crime wanted its share of Net boom spoils.
No part of this landmark case better illustrates how these alleged swindlers used the Net than the FinancialWeb scam. According to the indictment, Laken conspired with a group of stock promoters to use a bevy of investor Websites, online newsletters, and spam to fraudulently hype FinancialWeb's shares to unwitting investors, a tactic known as "touting." Meanwhile, the government contends, Laken conspired to secretly dump his own shares on the market at inflated prices through a crooked broker and enlisted the aid of a mob-connected "financial adviser" to advance his scheme. Laken has pleaded not guilty to these charges.
But even as the Mafia purportedly sought out new money-making opportunities online, it was also keeping its feet firmly planted in a time-honored, core business–pension fund rackets. And according to prosecutors, Glenn Laken was dipping into both revenue streams. In a separate indictment, Laken, along with members of the Bonanno, Lucchese, and Colombo crime families, was accused of using bribery and kickbacks to loot three union pension funds, including the New York City Police detectives' endowment. (Laken also pleaded not guilty to these charges.)
Leininger was aghast. So were FinancialWeb's investors, who bailed en masse. Between June 13 and June 19 the company stock plunged from $8 to $1.50. The Nasdaq application was shelved. Leininger scrapped the company's acquisition plans. But he took solace in the fact that no officer or director of the company had been named in the indictment–only Laken and his alleged collaborators. "It's an unfortunate circumstance," Leininger told Business 2.0 in July. "But while our stock has been severely damaged, we're still executing, still operating. Come hell or high water, we're going to see this thing through."
Fat chance. By October, FinancialWeb's stock had slid to 6 cents and the company was running out of cash. Leininger laid off almost the entire staff and then resigned as CEO. On November 15 the company's principal creditor foreclosed on the firm's assets–selling the domain name, brand names, databases, software, furniture, customer lists, and everything else to 123Jump.com, a financial portal based in Miami Beach, Fla. Total sale price? $645,000. All remaining employees were pink-slipped and the company was shuttered. "This one looked like a diamond in the rough," laments John Katsock, a major shareholder who says his investment group lost $8 million. "I feel like shit."
FinancialWeb's sudden death serves as an object lesson in how vulnerable small companies can be to stock-fraud conspiracy carried out over the Net. The advent of message boards, online newsletters, spam, and the galaxy of Websites proffering insight into every flinch and tick on Wall Street has opened the door for those who would spread false information and manipulate stocks. "The whiff of scandal will kill a small cap these days," says Michael Allison, CEO of the Internet Crimes Group, a private investigation firm in Princeton, N.J.
While the SEC has made substantial progress in curtailing many online stock scams, companies are increasingly taking it upon themselves to police the Net for signs of an assault on their stock. Many CEOs are seeking out firms such as Internet Crimes Group and PricewaterhouseCoopers to increase their vigilance. Others are rooting out fraud on their own (see "Stock Fraud Self-Defense ," p78).
For his part, Laken rejects the idea that the indictments torpedoed FinancialWeb. "That's an utter load of crap," he told Business 2.0 . "That company sunk because the people who ran it didn't do their jobs." He would not elaborate further, and his lawyer declined to speak on the record.
Leininger, named FinancialWeb's CEO last January, says he didn't have a clue that the stock was being manipulated or that Laken was anything but a legitimate investor. The two had met during an investor's powwow in New York last winter, but Leininger says they never talked much after that.
But of all companies, FinancialWeb was apparently well equipped to detect that its stock was being violated. The firm's writers specialized in covering the small-cap universe and its premier product was an online newsletter called Stock Detective. Boasting that it "scour[ed] the bowels of Wall Street in search of truth for all investors!" the watchdog newsletter was hailed by Forbes and other publications. Its centerpiece was a list naming Websites and online newsletters that touted stocks for compensation. What a cruel irony that FinancialWeb failed to root out Laken's alleged manipulation of its own stock.
FinancialWeb.com made its official debut in December 1998, when Kevin Lichtman, a stock promoter and the company's founder and CEO, decided to re-christen his existing firm, Axxess, with a dot-com moniker (see "Riding the Dot.Comet ," Aug. '99, at Business2.com). Though incorporated in Nevada, the company was based in Altamonte Springs, Fla., outside Orlando. It set out to be a financial news portal on the Web, focusing on small and microcap stocks. The company's portal featured real-time stock quotes, portfolio tracking tools, various charting features, daily earnings announcements, plus 17 Websites, including its own SmallCap Investor and Stock Detective.
But within a year, the company was financially comatose. In 1999 FinancialWeb (which generated revenue almost entirely from sales of banner ads) racked up a measly $445,882 in sales and a staggering $58 million in losses; it had only $94,842 in cash on hand. Under pressure from key investors and the board, Lichtman had resigned in October 1999.
When he took the helm, Leininger's sole mission was to turn this thing around. A software engineer by training and a former vice president at ESPS, a document publishing company near Philadelphia, Leininger wasn't the only new addition: The board replaced nearly its entire management team, hiring new people in key positions. The company hired a new CFO, a new marketing chief, and a new business development head, among others. The board also named a new chairman and relocated corporate headquarters to a suburb of Boston.
But more than new hires and relocations, FinancialWeb needed capital. At the end of the first quarter, the company raised almost $8 million in a private placement, which, after repaying debt, commissions, and other expenses, netted Leininger's team $5 million to work with.
Leininger's first goal was to develop a more lucrative syndication-based revenue model that sold content in co-branded deals. BestHalf.com, for example, a Website for seniors, used FinancialWeb commentary and stock tips in the investing section of its site. The plan started to bear fruit: In the second quarter, FinancialWeb posted $97,643 in revenues from such co-branded ventures, 27 percent of total sales.
By early June things were looking up. The stock was hovering around $6.50, its market capitalization had reached a respectable $75 million, and, best of all, Leininger appeared to have reversed the company's financial woes. In the second quarter, the company recorded sales of $360,177–a fivefold increase from the second quarter of 1999–and slashed its losses in the same period from $18 million to $3 million. It was time for FinancialWeb to graduate to the Nasdaq. Leininger had planned a 10-day vacation to Italy with his wife to celebrate after the filing. "We were ready to go," he recalls. "Then this little thermonuclear bomb hit."
Racehorses and speedboats
A STOCK DIES: Following Laken’s indictment, FinancialWeb’s employees watched helplessly as the company’s shares disintegrated. [Illustration: Dennis Balogh]
According to those who know him, Glenn Laken, 46, is the kind of super-confident investor who revels in the lifestyle of a high roller. He was fond of sending stretch limos to pick up his clients at Chicago's O'Hare International Airport. And in the early 1990s Laken owned a racehorse named Perceive Arrogance that won $355,000 in purses.
Laken honed his financial chops at the Chicago Mercantile Exchange, where he battled in the S&P Futures and commodities pits, sometimes literally. In 1996 he was involved in a fistfight on the trading floor, although an investigation by the exchange found another trader instigated the melee.
In January 1999, Laken landed a juicy consulting agreement with the newly minted FinancialWeb. In return for help attracting investors, the company granted Laken warrants to acquire 1 million shares of its common stock at an exercise price of $4. Laken later added 574,663 more shares, giving him a majority 15.7 percent stake in the company by April 25, 2000. By all accounts, Laken enjoyed a warm relationship with Kevin Lichtman and his management team.
At some point in the late 1990s, Laken became acquainted with John M. Black Jr., a principal of Grady and Hatch & Company, a stock brokerage in New York. Black, however, wore another hat, too: According to court papers, he was an associate of the Lucchese crime family and was involved in the alleged larger mob-connected stock fraud conspiracy busted by Operation Uptick.
PARTY TIME: Hugh Hefner and Laken, the new chairman of the Cigarette Racing Team, unveiled a customized Playboy cigarette speedboat at the Playboy Mansion in Los Angeles last spring. [Photo: Tracy Frankel]
It appears Laken and Black got along well. In January 2000, the pair incorporated their own firm in Miami, LBG Acquisitions. A month later LBG bought the Cigarette Racing Team, the speedboat manufacturer that won fame in the 1980s after hit TV show Miami Vice popularized its superfast cigarette boats. The acquisition fit Laken's lifestyle–last spring he partied with Black, Hugh Hefner, and various Bunnies at the Playboy Mansion in Los Angeles to celebrate the unveiling of a custom Playboy Cigarette boat.
But Laken's relationship with Black wasn't all fun and games. According to prosecutors, Black recruited Laken in late 1999 to participate in a scheme to defraud three New York—based pension funds on behalf of his mob-connected associates at DMN Capital, a New York investment advisory firm controlled by Robert Lino, a reputed soldier and capo in the Bonanno crime family. Apparently, DMN served as an incubator, nurturing and directing most of the frauds that comprised this massive racket, including the pension fund scheme. According to the indictment, corrupt pension fund managers diverted millions of dollars earmarked for legitimate investment into TradeVenture Fund, a Chicago hedge fund managed by Laken. Part of the diverted cash was then kicked back to Lino and his friends at DMN Capital, who used part of the money to pay off the pension managers.
In February, Laken turned his attention back to FinancialWeb, now under new management. Looking to sell off his stake, he aimed to raise the current share price, even though it was trading in the $6 to $7 range, well above the $4 strike price on his warrants. The government contends that Laken contacted a top financial adviser at DMN Capital who worked closely with Lino and other mob-connected associates. Laken sought the adviser's assistance in "causing the market for 'F-Web' to be fraudulently...inflated so that he could sell his stock at higher prices," according to the indictment. Unfortunately for Laken, that adviser was secretly cooperating with the FBI in Operation Uptick.
In mid-March the cooperating witness (his identity has not been disclosed) introduced Laken to David W. Bruno, a Long Island, N.Y., stock promoter who, along with a partner, Adam Kriftcher, controlled a host of Websites purporting to offer investors stock picks and insight on Wall Street. According to the indictment, Bruno told Laken how he could use coordinated promotional campaigns on sites he controlled, such as bullstrategies.com, atthebell.com, and stockplayground.com, to boost the price of FinancialWeb's stock.
The conspiracy widened on April 5 when Bruno and Kriftcher allegedly brought in two other promoters: Michael Porricelli, president of Colorado-based Core Financial, and Lionel Reifler of Boca Raton, president of Fortune Investments. Reifler allegedly described to Laken how he had used a fraudulent newsletter program to jack up the volume in over-the-counter stocks at inflated prices and agreed to do the same for FinancialWeb. Laken, say the Feds, offered to secretly pay his new friends in blocks of his FinancialWeb stock in return for hyping it.
They apparently didn't waste any time. By mid-April, Bruno and Kriftcher had profiled FinancialWeb on their Websites and, according to the indictment, they made "materially false statements." In addition, Bruno, Kriftcher, and Porricelli didn't fully disclose their compensation from Laken. While it is legal to talk up a stock, by law the promoters must disclose whether they receive compensation from the company or by any major shareholder in that company. Bruno and Kriftcher did disclose on stockregister.com that they had received an option to purchase 12,500 shares of FinancialWeb stock at $1.35. But prosecutors say they had actually received an interest in 32,500 shares without an option price. Partial disclosure is actually worse from a legal standpoint than nondisclosure because it exposes promoters to charges of deliberate deception.
Finally, toward the end of May, Laken and his co-defendants allegedly agreed to make FinancialWeb more liquid so they could offload their shares. They turned to Peter J. Worrell, a principal and stockbroker at Royal Hutton Securities in New York. Laken allegedly bribed Worrell with secret payments of FinancialWeb stock to get brokers at his firm to create trading volume by selling the stock to their clients. This would accomplish two tasks: It would drive up the share price and it would enable Laken and his fellow conspirators to sell off their FinancialWeb holdings at inflated prices.
It remains unclear how much Laken and his co-defendants cleared from the scheme. There is no evidence in the indictments showing that they actually reaped any profits from their activities.
What is clear, however, is that on June 14 Laken was charged with securities fraud, conspiracy to commit securities fraud, fraudulent failure to disclose compensation for stock promotion, and wire fraud. Laken voluntarily surrendered to federal authorities in Chicago and was released on a $50,000 cash bond. In the FinancialWeb case, he could face 20 years in prison and a $1.5 million fine; in the racketeering case related to the pension fund fraud, he could be looking at another 20 years.
Laken's co-defendants have pleaded not guilty to the charges. And none responded to telephone calls to their homes for comment on the case. Only Worrell's lawyer, Stephen P. Scaring, responded to inquiries, stating that his client had not been involved in any criminal enterprise. Together with Laken, they expect to go to trial in July. "I totally intend to litigate this case and be exonerated," Laken vows.
The aftermath
THE PAYOFF: According to prosecutors, Laken bribed stock promoters and a broker to help him pump and dump FinancialWeb shares. [Illustration: Dennis Balogh]
Meanwhile, back at his home outside Philadelphia, Kevin Leininger has just returned from a scuba trip to Puerto Rico. Diving the island's coral reefs offered a temporary refuge from FinancialWeb's demise, but now that he's back he still feels stung by the saga's sad denouement. Everything had seemed to be going so well. As recently as August, Worth magazine readers had voted FinancialWeb a top 10 financial portal, along with industry leaders Yahoo! Finance, the Motley Fool, and AOL Personal Finance. And in October, just days before the company announced it was going under, none other than Money magazine named FinancialWeb one of its top 50 financial sites. "We were really cranking," he says. "It's such a damn shame." Now all that's left is to prepare his résumé.
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Stock Fraud Self-Defense
Just because the Internet has opened doors for online stock grifters doesn't mean companies are powerless to stop them. On the contrary, there are a number of steps firms can take to fend off the fraudsters:
Watch the stock like a hawk
Companies should do more than simply track the ups and downs of their stock. They should monitor the stock constantly to pick out anomalies such as upward or downward spikes in price or volume that are unconnected to earnings reports or other company news. Some firms have employed monitoring outfits such as New York—based eWatch to serve as "early warnings systems." Ewatch uses proprietary "spiders" to crawl through message boards on Silicon Investor, Motley Fool, and other Websites and online publications, searching for keywords such as ticker symbols and product names. Ewatch then compiles a report on its findings, which it emails to the client company, often daily. If the report turns up anything suspicious, the firm's general counsel is notified immediately. In this way the company not only stays abreast of what investors are saying about it on the Web, it can also zero in on sites or online newsletters spreading false information.
Don't hesitate to investigate
If a company suspects that its stock is being violated by fraudsters, it must investigate immediately to determine (a) whether a scheme actually exists, (b) how broad its scope is, and (c) who's behind it. Some companies have personnel with the expertise to handle such a probe, while others turn to private eyes. Michael Allison, CEO of Internet Crimes Group, a cybersleuthing firm in Princeton, N.J., says message boards often yield a wealth of clues, including what kind of false information on the stock is being bandied about, when the information was first disclosed, and which users appear to be behind its dissemination. Next, Allison and his gumshoes trace usernames to actual people and then use public records to build profiles of the suspects–many stock fraudsters have criminal records. (Some companies use lawsuits to obtain login data from message boards such as Yahoo! and the Motley Fool to identify users.) Then it's time to take action.
Decide and act
Online stock fraud runs the gamut from relatively harmless misinformation spread by pranksters to well-oiled conspiracies run by experienced swindlers. In the case of mere pranksters, a company will usually take no legal action, save sending a warning letter to the culprits. But if a company is the victim of fraud, it should contact the SEC. In addition, many companies file lawsuits to obtain restraining orders. This action does more than just stop the scheme in its tracks–it also enables the firm to reassure investors that management has the situation well in hand. This will help the stock restore whatever losses it sustained as a result of the fraud and send a signal to other fraudsters that they picked the wrong company to mess with.
As for how investors can avoid online stock fraud, the SEC has posted on its Website an extensive laundry list of telltale signs of scams: www.sec.gov/consumer/cyberfr.htm.
Edward Robinson (erobinson@business2.com) is a senior writer for Business 2.0.
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