Happy New Year Les->BCSC-known EBT founder Neal arrested in Portland
B.C. Securities Commission *BCSC
Tuesday December 31 2002 Street Wire
Also Securities and Exchange Commission (*SEC) Street Wire..
by Brent Mudry
Offshore financier Terry L. Neal, best known as the head of Nevis-based Exchange Bank and Trust, an offshore money-laundering account based in a downtown Vancouver bank, and the mastermind of the Itex Corp. fraud, has been arrested and jailed in his hometown of Portland, Ore., for alleged false statements in personal tax returns filed with the Internal Revenue Service.
Mr. Neal was arrested Friday, Dec. 27, on a criminal complaint and arrest warrant signed and sealed on Boxing Day by Judge John Jelderks of United States District Court for the District of Oregon. He made a brief first court appearance later that day and was remanded without bail.
Mr. Neal faces an initial detention hearing on Thursday in Portland. While U.S. officials are expected to oppose bail on the basis of flight risk, courts in Oregon generally have a catch-and-release policy, unlike Florida, New York and other jurisdictions with more experience with alleged white-collar criminals.
The arrest follows an extensive probe by the Criminal Investigation Division of the IRS in Portland.
Under federal court rules, the U.S. Attorney's Office has 30 days from Mr. Neal's first appearance to seek a grand jury indictment. After that, speedy trial rules allow for a trial within 70 days, although complex white collar and tax cases such as Mr. Neal's usually take six to nine months to go to trial, once the discovery and evidence argument phases are completed.
Mr. Neal's criminal investigation is believed to focus on his tax returns from 1994 through 1996, a period in which he had extensive dealings in Vancouver, patronizing Yorkton Securities, now defunct C.M. Oliver and other Howe Street brokerages, and the main downtown branch of Bank of Montreal.
The arrest of Mr. Neal came eight days after notorious offshore bank peddler Jerome Schneider, who sold him the Exchange Bank shell in mid-1997, was indicted in Los Angeles in an unrelated IRS case on Dec. 19. The indictment of Mr. Schneider, who also used Vancouver as a major centre of his operations, is a landmark case in the fight against dubious offshore tax havens, and represents one of the most significant international investigation co-operations between U.S. and Canadian income tax authorities in years.
The criminal prosecution of Mr. Neal is expected to shed further light on his extensive penny stock dealings through Howe Street, the centre of dealings for the former Vancouver Stock Exchange, dubbed the Scam Capital of the World by satirist Joe Queenan in Forbes magazine in 1989.
Mr. Neal was fined a total of $2.5-million and barred from ever serving as an officer or director of a public company by the U.S. Securities and Exchange Commission in September, 2000, in a consent settlement in the prosecution of Itex, a dubious barter promotion based in Portland. Mr. Neal was the alleged mastermind of the broad $14-million Itex fraud from 1994 to 1996.
The SEC claims the Itex founder and his family made more than $9.4-million in illicit profits trading shares of Itex, largely through the former C.M. Oliver, now part of Canaccord Capital, and a host of other Vancouver brokerages, after boosting the stock through false and misleading press releases and financial statements.
Itex shares rose from $2.25 to $12.50 from January of 1994 through February of 1996, boosted by dubious deals with Sky Scientific, a rig job which featured Canaccord itself as a star player, and Sky Jones, an obscure painter favoured by such Howe Streeters as controversial promoters Beverlee Kamerling and Nik Markovina and their favourite broker at CIBC Wood Gundy, Peter Miles, who abruptly ended his career as a broker in the aftermath, and is still stewing about the publicity.
Mr. Neal was a particularly resourceful trader, according to the SEC, even making an additional $70,000 shorting his company's stock through his C.M. Oliver account before telling other shareholders that the company was under formal investigation by the regulator.
According to the SEC, Mr. Neal orchestrated and implemented a broad-ranging scheme at Itex, spanning from at least December of 1993 through February of 1998, to defraud the public and enrich himself. The broad scheme -- ho-hum to some -- included materially inflating the company's assets, revenues and earnings, making other materially false and misleading disclosures, and failing to disclose numerous suspect or sham barter deals between the company and various mysterious offshore entities he controlled.
"Neal and his co-defendants at Itex accomplished their fraud on Itex investors in part by bartering worthless assets and by designating the value of many of Itex's assets and transactions in 'trade dollars'," states the SEC in its complaint. The regulator notes that while the use of a medium such as trade dollars may be appropriate for a barter exchange, depending on the fair value of goods and services exchanged, Itex "corruptly took advantage" of this process by orchestrating numerous bogus barter deals.
These suspect deals accounted for about half of Itex's total revenues: 56 per cent in fiscal 1994 and 1995, 43 per cent in 1996 and 60 per cent in 1997. "Many of the Itex barter transactions were inside deals involving entities associated with Neal," states the regulator.
The deals included an eclectic potpourri of such hard-to-value assets as artwork, prepaid advertising due bills and worthless shares in a number of public companies under SEC investigation, including Canaccord's Sky Scientific, as well as such purely bogus assets as leases on vacant property, a non-existent stamp collection and highly-questionable mineral claims. "Many of the deals involved the repeated swapping back and forth of paintings of an obscure artist named Sky Jones, who invented fictional appraisers to value his own paintings at astronomical values," states the SEC.
The prolific painter Mr. Jones, whose real named is Michael Richard Whipple, cranked out more than 8,000 pieces of "artwork," mostly while holed up in a trailer outside Fort Worth, Tex., without electricity, running water or even a telephone. While Sky Jones was not a household name in Sotheby's circles, the painter surmounted this problem by using numerous alto egos, especially Joseph B. Banker, a fictional character who, as founder of the Bankers Art Museum, was a great fan. Besides Mr. Neal's Itex, the artwork of Mr. Jones also popped up in several other bulletin-board promotions targeted by the SEC, including one which featured the long-time Howe Street promoter, Ms. Kamerling.
Like scores of other Howe Street and American penny stock promoters, Mr. Neal did not forget to stuff Itex shares in offshore accounts at Vancouver brokerages, in his case using such names as Associated Reciprocal Traders, Newcastle, Wycliff Indemnity Fund, Wycliff Fund, Bailey Mutual Fund and Red Star Holdings. Unfortunately, it now appears he may have forgotten to declare everything to the tax man.
Through his Itex phase, especially near the end, Mr. Neal was particularly fond of a Vancouver bank branch he discovered. This same Bank of Montreal branch also has the misfortune of being the only North American bank mentioned in the Jerome Schneider indictment, although there is no suggestion of wrongdoing on the part of the respected Canadian bank. Previously, this same branch was best known as the former long-time employer of private bankers Nick Massee, who mysteriously went missing several years ago in the Turbodyne case, and Howard Thomson, a key player in another penny stock deal closely linked to controversial expatriate Vancouver promoter Harry Moll.
In mid-1997, Mr. Neal abruptly left his hometown of Portland and moved to the offshore enclave of Nevis, where he founded Exchange Bank and Trust. Mr. Neal bought the EBT shell from Mr. Schneider, who had registered the company in the nearby Republic of Nauru, a smelly offshore international finance centre built on bird droppings in the middle of the South Pacific, a bit north of Fiji and the Solomon Islands.
Securities violators and other financial rogues flocked to Exchange Bank and Trust, although the offshore bank likely also attracted a few legitimate customers. The money laundering conduit was humming along just fine until disaster struck in April, 2000, when the BCSC, at the request of the SEC, abruptly froze the $18-million Vancouver bank account. In one of the biggest cases of blind luck imaginable, the regulators stumbled onto a gold mine.
The SEC was chasing eConnect tout Stephen Sayre, a moonlighting tree trimmer, who made several big wires from Bank of America in Las Vegas to the main downtown branch of Bank of Montreal in Vancouver, to the accounts of EBT and Sterling International and Exchange Bank and Trust, another offshore brass plate bank. Within weeks, BCSC investigators linked Exchange Bank and Trust to a number of securities violators, notably Mafia-linked career felon Ed Durante, who used the Bank of Montreal account as a money laundering conduit for proceeds of dubious stock trading through a series of Vancouver brokerages.
More bad news came two months later, in June, 2000, when Mr. Durante was a star catch in a massive FBI bust on Mafia-linked penny stock players. In the biggest known Mafia incursion into the Canadian securities industry in recent years, Vancouver brokerage Union Securities emerged as a major conduit in what U.S. authorities called the largest stock fraud case in U.S. history, an overall case involving more than 100 defendants, including at least 11 members and associates of five different organized crime families.
Although Mr. Durante's Union Securities dealings in his flagship garbage stock WAMEX Corp., were well publicized, his Vancouver broker, Trevor Koenig never cut ties to his star client. That fall, after Mr. Durante cut a plea deal, he set up Mr. Koenig in a scripted sting to rig WAMEX a second time. Mr. Koenig found this out 10 months later, when he was arrested crossing the border on the Labour Day weekend in 2001.
Mr. Koenig, in custody ever since, cut his own plea deal and has been singing like a canary.
Meanwhile, U.S. authorities are now anxious to get their hands on Mr. Durante's loot, frozen in the EBT money laundering account in Vancouver, and distribute it to his victims. The SEC recently launched a landmark court bid to seize $17.53-million from Mr. Durante in the Canadian account, as part of a $38.88-million default judgment won against the Mafia-linked stock fraudster in a New York court.
All of this was quite embarrassing to Mr. Neal, who claimed his offshore bank is as clean as can possibly be. "Neither I nor Exchange Bank has any interest in shielding criminals, or anything remotely close to it," stated Mr. Neal in a letter to the BCSC after the freeze. "We are very serious about not harbouring criminals."
The Itex founder, de facto control person and SEC target also defends his business franchise in general terms. "Offshore banking is a reputable and legitimate enterprise. It is absolutely legal for an offshore bank to have a correspondent account with a Canadian bank. There are likely hundreds of offshore correspondent bank accounts in Canada," stated Mr. Neal.
An extensive investigation by U.S. authorities into Mr. Neal's offshore world, separate from the criminal income tax probe, continues.
bmudry@stockwatch.com
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