interactive.wsj.com
April 5, 2001
Securities Fraud Penalties Stiffen;
Texas Leads States in Sentencing
By MICHAEL SCHROEDER
Staff Reporter of THE WALL STREET JOURNAL
As financial frauds go, John Brink's could be seen as pretty pedestrian:
Texas prosecutors alleged that Mr. Brink pocketed about $3.6 million from
nearly 250 investors after promising big returns in securities of his Houston
oil-service company.
Mr. Brink's punishment? Well, that may have been anything but ordinary.
After pleading guilty to one count each of securities fraud and misapplication
of property, Mr. Brink, 52 years old, was sentenced in August to 60 years in
a Texas state prison.
Harris County prosecutors say the prison term was justified because Mr.
Brink continued to fleece investors, mostly retirees, after he knew he was
under criminal investigation. He moved his office, renamed his company and
did business as usual, said Tracy Tirey, an assistant district attorney. Brian
Wice, Mr. Brink's attorney, called the sentence "Draconian" and has
appealed it. Under Texas guidelines, defendants must serve one-third of their
sentence to be considered for parole.
So much for the notion that white-collar criminals always get off easy.
Investor groups long have groused that courts merely slap white-collar
violators who steal millions of dollars from investors, while armed robbers
who stick up a convenience store for a few hundred dollars are sentenced to
several years of hard time.
Once, investment schemes largely were treated as civil matters punishable
by fines and penalties. When securities-law violators have been prosecuted
criminally, judges tended to impose probation or a light sentence. "Securities
fraud traditionally has been viewed as a victimless crime involving as much
gullibility by investors as culpability by perpetrators," said Bradley Skolnik,
Indiana's securities commissioner.
But the number and audacity of financial frauds are changing that thinking.
With the near disappearance of employer pensions, many Americans
manage their own retirement funds. State and federal law-enforcement
agencies now recognize the lifetime financial damage that investment
schemes cause to unsophisticated investors.
The result: a coordinated effort among state securities regulators and
law-enforcement officials to join forces in putting securities-law violators
behind bars.
So far, the states have lagged well
behind the U.S. Securities and
Exchange Commission, which has
been actively pressing for criminal
prosecutions. In the past couple of
years, for instance, the SEC has
worked with 46 U.S. attorneys
offices nationwide on criminal cases.
The SEC has teamed with
prosecutors in Brooklyn and
Manhattan on several high-profile
cases resulting in the conviction of
hundreds of brokers operating illegal
boiler rooms, including frauds with
connections to organized crime, said
Richard Walker, director of the
SEC's enforcement division.
"In many instances, civil remedies don't achieve sufficient deterrence. The
prospect of jail time is effective in stopping fraudulent conduct," Mr. Walker
said.
On the state front, California has been active. The California Department of
Corporations coordinated one of the first Internet stock offering frauds with
the district attorney in Santa Cruz County, Calif.
In late 1998, Matthew Bowin was convicted in county superior court of
fraudulently obtaining $190,000 from 150 investors in connection with the
sale of stock over the Internet in his company. He was sentenced to 10
years in state prison, with the possibility of parole after five years.
Mr. Bowin, who represented himself in court, is in prison and couldn't be
reached. The district attorney's office said Mr. Bowin has appealed the
decision.
Texas leads the nation in convictions and imposes among the harshest
penalties. In the past three years, Texas has notched about 200 convictions
-- about a third of the total successful criminal cases from states that report
statistics.
The U.S. attorneys offices usually take on the most complicated and
high-profile cases. For instance, Texas state investigators worked with
federal prosecutors in Austin to bring a securities-fraud indictment against
Russell Erxleben, an All-American University of Texas and New Orleans
Saints placekicker.
In September, Mr. Erxleben, 44, was sentenced to seven years in federal
prison for his role in running a scheme in which about 500 investors lost $34
million by investing in the defendant's defunct foreign-currency trading firm.
He pleaded guilty to two counts of securities fraud for lying to investors by
sending them statements that showed huge profits when they really were
losing money.
"Compared with what other judges are handing out in white-collar cases,
[Mr. Erxleben] did pretty well," said Steve Orr, Mr. Erxleben's attorney.
Texas has among the most severe penalties -- even for relatively small
securities frauds. In December, Steven Lovato pleaded guilty to securities
fraud and was sentenced to six years in Texas state prison for
misappropriating about $180,000 in retirement funds from a working-class
couple from Killeen, Texas. The state securities division investigated the
case and referred it to Harris County prosecutors, who alleged that Mr.
Lovato, 29, used several thousand dollars for such personal expenses as
pizza, groceries and restaurants, and lost the rest day trading.
Mr. Lovato's attorney, Kent Schaffer, said: "The sentence does seem
severe."
Long-term sentencing is still more the exception rather than the rule. Similar
to many states, Utah's experience shows how local sentencing guidelines for
white-collar cases haven't kept pace with efforts to use criminal prosecution
as a deterrent.
When regulators began taking a hardball approach to securities fraud, the
"local bar association members complained Utah's securities division was
trying to criminalize securities fraud," said Tony Taggart, director of Utah's
securities division. Traditionally, the crimes had been treated as civil property
disputes.
Utah officials have won convictions or guilty pleas in each of the state's 67
criminal securities fraud cases in the past three years. The Utah Legislature
last month hiked the possible penalty for investment fraud of more than
$5,000 involving retirement funds to three to 15 years in prison from one to
15 years.
But Utah regulators express frustration that the state is saddled with
sentencing guidelines that dictate probation or a short prison term. Probation
is recommended for defendants who have no criminal history and haven't
been found guilty of a violent crime, which describes most white-collar
defendants, said David Wayment, a senior attorney in the state securities
division.
Lee Walker, whose Nevada lawyer's license was suspended, was found
guilty in Utah's Washington County court of one count each of securities
fraud and money laundering in connection with an investment scheme that
brought in $250,000. While he faced as many as 10 years in prison for the
securities-fraud count, and as many as 15 years in prison for the
money-laundering conviction, the judge put Mr. Walker on probation.
That is despite the fact that Mr. Walker also had been named in a separate
SEC case in the past, including a six-month jail term for not complying with
the SEC order, Utah officials say.
Jim Scarth, Mr. Walker's attorney, said his client has appealed the jury
verdict, adding: "Mr. Walker was not involved in selling a security and
received no benefit from the transaction involved in the prosecution."
Write to Michael Schroeder at michael.schroeder@wsj.com
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