SEC known Kelly hears secret tapes in Miami fraud trial
2003-10-01 10:10 ET - Street Wire
by Erik Schelzig in Miami
and Lee M. Webb
James T. Kelly, on trial for securities fraud in the U.S. District Court for the Southern District of Florida in Miami, listened as secretly recorded telephone conversations about an alleged kickback and stock manipulation scheme were introduced by an undercover FBI agent and played for the jury in Mr. Kelly's Bermuda Short trial on Sept. 29 and 30. If convicted, Mr. Kelly could face a maximum penalty of 25 years in prison.
Mr. Kelly is accused of conspiring with two former co-defendants in a kickback and stock manipulation scheme involving shares of Lighthouse Fast Ferry Inc. As previously reported by Stockwatch, the Lighthouse Fast Ferry shares that were to be used in the scheme allegedly belonged to the purported $1-billion (U.S.) Lancer Group, which was shut down by the U.S. Securities and Exchange Commission (SEC) on July 10 amid allegations of massive fraud. (All future amounts are in U.S. dollars.)
The charges against Mr. Kelly stem from a two-year joint FBI-RCMP undercover sting code-named Operation Bermuda Short that resulted in 23 indictments and charges against 58 individuals from the U.S. and Canada. Mr. Kelly, the former president of Shamrock Partners Ltd., a brokerage firm based in Media, Pa., was arrested in August of 2002 along with his Shamrock partner Joseph Huard and business associate Bruce Cowen.
Mr. Huard, who also faced separate Bermuda Short charges along with Howe Street promoter Les Price in connection with an alleged kickback scheme involving Mr. Price's Medinah Minerals Inc., flipped and pled guilty in both cases on Dec. 18, 2002.
Based largely on Mr. Huard's co-operation following his plea bargain, the grand jury issued a superseding indictment against Mr. Kelly and Mr. Cowen on May 22. In addition to the original charges involving a kickback scheme, the superseding indictment charged Mr. Kelly and Mr. Cowen with stock manipulation involving Lighthouse Fast Ferry.
Mr. Cowen, a key figure in the allegedly fraudulent Lancer Group and close associate of its disgraced leader Michael Lauer, maintained his innocence with respect to the Bermuda Short charges until one month before the trial. On Aug. 21, Mr. Cowen negotiated a plea agreement, leaving Mr. Kelly to face the jury alone. Both Mr. Huard and Mr. Cowen are now on the prosecution's witness list and are expected to testify against Mr. Kelly.
In the prosecution's opening statement on Sept. 24, Thomas Hanusik of the Fraud Section of the U.S. Department of Justice told the jury that greed motivated Mr. Kelly to conspire to engage in securities fraud. As outlined by Mr. Hanusik, in addition to stock manipulation the alleged fraudulent scheme involved a planned $5-million transaction for Lancer-owned restricted shares of Lighthouse Fast Ferry, a $900,000 kickback to a purported corrupt fund manager and a further $600,000 to be equally split among Mr. Huard, Mr. Cowen and Mr. Kelly.
Miami defence attorney Norman Moscowitz, representing Mr. Kelly, said in his opening statement that Mr. Kelly had done nothing wrong. According to Mr. Moscowitz, his client was "going through some very tough mental and physical problems" at the time and was relying on his friends to operate his business. The defence lawyer told the jury that Mr. Kelly's name did not appear on any of the documents that would be introduced by the prosecution and the ailing former Shamrock president only participated in three of the 35 to 40 recorded telephone conversations.
On Monday and Tuesday the jury got to listen to a selection of the conversations recorded by an undercover FBI agent and two co-operating witnesses as the alleged kickback and stock manipulation scheme was hatched and ironed out in the summer of 2001. Special Agent Michael Palasek, who played the undercover role of a corrupt securities trader for a fictitious British mutual fund, introduced the tapes and provided testimony regarding the context of the conversations.
TAPING THE DEAL
Mr. Palasek testified that for most of his 14 years with the Federal Bureau of Investigation he has worked with the White Collar Crime Squad in Miami. The FBI agent told the court that he began working on Operation Bermuda Short in May of 2000, but did not start participating in the active investigation until June of 2001.
Mr. Palasek told the court that two co-operating witnesses, David Jones and Robert Schlien, introduced him to Shamrock's Mr. Huard.
In the prosecution's opening statement, the jury heard that Mr. Jones and Mr. Schlien were co-operating with the government under pressure of pending fraud charges in the Southern District of Florida. Defence attorney Mr. Moscowitz characterized the pair as "swindlers" who ran pump-and-dump stock promotions. As reported by Stockwatch on Sept. 26, Mr. Jones and Mr. Schlien are repeat securities violators well known to regulators.
According to Mr. Palasek, the earliest conversations with Mr. Huard were not taped because he was not yet a target of the investigation.
"The initial conversation with Mr. Huard came after the FBI received a tip about a stock being manipulated," Mr. Palasek testified, drawing a hearsay objection from Mr. Moscowitz. Judge Cecilia Altonaga overruled the defence attorney's objection and Mr. Palasek went on to explain that the allegedly manipulated stock that was the subject of the FBI tip was Medinah Minerals.
In the recorded conversations played for the jury, Mr. Jones and Mr. Schlien operate in tag-team fashion as they discuss the particulars of the scheme with Mr. Kelly and his former co-defendants, Mr. Cowen and Mr. Huard. Undercover FBI agent Mr. Palasek is seldom heard speaking on the tapes. Mr. Palasek told the jury that he spent much of his time during the recorded conversations taking notes.
Mr. Palasek recounted for the jury how the co-operating witnesses and Mr. Huard negotiated the deal for a $5-million purchase of Lighthouse Fast Ferry shares. The government informants initially asked for a 20-per-cent fee on top of the purchase price.
In a June 5, 2001, conversation, Mr. Huard is heard telling Mr. Jones and Mr. Schlien that he had figured out a deal.
"Is Jim (Kelly) happy?" one of the co-operating witnesses asked.
Mr. Huard replied that Mr. Kelly was out of town.
Mr. Palasek testified that a deal was eventually hammered out whereby 18 per cent of the planned $5-million transaction would be paid to the undercover agent and his associates and a further 12 per cent would go to Mr. Kelly, Mr. Huard and Mr. Cowen. On the $5-million transaction the undercover sting operatives would receive $900,000 while Mr. Kelly, Mr. Huard and Mr. Cowen would split another $600,000.
The deal also involved a $10,000 payoff for what the undercover FBI agent referred to as the "due diligence kids" in the Atlanta office of Connelly & Williams Associates Inc., the purported U.S. representative of the fictitious British fund that was supposed to purchase the $5-million worth of Lighthouse Fast Ferry shares.
In the taped conversations the co-operating witnesses told Mr. Huard and Mr. Kelly that the 18-per-cent payment was to be deposited to the account of Southern Star Shipping Ltd., a company registered in Bern, Switzerland.
According to court filings in the case, Southern Star Shipping was purportedly used by the undercover agent to receive kickbacks without the knowledge of the fictitious fund.
(In a separate Bermuda Short money-laundering sting involving disgraced Vancouver lawyer and Howe Street promoter Martin Chambers, dubbed the "Lex Luthor of crime" in Western Canada, Southern Star Shipping was made out to be the account of a cocaine cartel front man. On Sept. 4, a Miami jury found Mr. Chambers guilty on all five counts of money laundering.)
In explaining the Southern Star Shipping deal to Mr. Huard and Mr. Kelly, the role-playing co-operating witness asked whether their conference call was being recorded, and only continued after being assured that it was not being taped.
In an earlier taped conversation with Mr. Cowen, Mr. Jones insisted that "the paperwork cannot and will not mention the 18 per cent put back to Southern Star Shipping." In the same conversation, it was agreed that the $10,000 payoff for the Connelly & Williams due diligence men would be invoiced as consulting fees by the undercover agent for Mr. Mr. Cowen.
According to Mr. Palasek, Mr. Huard and Mr. Kelly told the undercover crew that Lancer would sell the approximately 3.12 million Lighthouse Fast Ferry shares to Berwin Capital or Mr. Cowen's Capital Research for $1.12 per share.
"They would then sell them to us, Connelly & Williams, for $1.60," Mr. Palasek testified, going on to explain that the difference of 48 cents per share made up the total 30 per cent that was going to be taken as undisclosed commission on the deal.
In a July 9, 2001, conversation, Mr. Kelly broaches the subject of the trading in Lighthouse Fast Ferry shares and another fund's involvement in the company. A transcript of portions of that conversation is included in early prosecution court filings. According to the allegations, the other unidentified fund is Lancer and Mr. Kelly is talking about manipulating the month-end share price of Lighthouse Fast Ferry.
"Yeah, we have a retail interest with the clients we also have, uh, the largest holder, and institution that has made a significant investment into it," Mr. Kelly says, according to the transcript. "I'm a partner in a, in a group that filed a 13D in the company and we are active buyers of the stock, uh, and participants in the company along the way here."
"Okay," the co-operating witness responds.
"Uhh there one of the things that we need to understand is what the, the fund, is it the fund's object that it be, is there a, is there a reporting time or a time that they need the price of stock to be at a, uh, significantly higher level, uh, in other words do they mark to the market their portfolio at the end of every month, on the fifteenth of the month is there a certain date that each month or each quarter..." Mr. Kelly continues before being interrupted by another telephone ringing.
"That it's important to have a print at a say, you know or the last trade of the day or the month or the quarter, um, you know how do they normally work their reporting?" Mr. Kelly picks up the conversation.
The co-operating witness advises that the fund that he is involved with reports its investment results at the end of every month.
"Under, understand that the institutions that are, in this deal also have the same they like to, they try to buy the stock as low as they can after month's end, and at month end they like to get it at the highest possible price," Mr. Kelly says.
"Well what, what..." the co-operating witness begins.
"But they have the same objective," Mr. Kelly says.
Mr. Palasek testified that by "they," Mr. Kelly meant Lancer.
In another recorded conversation, the undercover operatives indicated to Mr. Huard, Mr. Cowen and Mr. Kelly that the British fund was concerned that there might be a sell-off of Lighthouse Fast Ferry shares after the $5-million investment was made and that was why it was important for them to know who held shares in the company.
The undercover FBI agent said that Connelly & Williams would open a $300,000 to $400,000 account at Shamrock that would be used to "shore up" Lighthouse Fast Ferry's share price, if it began to slip significantly.
"Is there any chance that Lancer would go crazy when they get the money and not put the money back into the company?" one of the co-operating witnesses asked Mr. Huard in a July 11, 2001, conversation.
"No," Mr. Huard answered.
CONSULTING FOR CAPITAL
Mr. Palasek's testimony under direct examination by Thomas McCann, Mr. Hanusik's co-counsel for the prosecution, continued on Tuesday. In addition to further taped conversations, Mr. McCann introduced a number of documents as evidence.
Using an overhead projector, Mr. McCann displayed an invoice written by Mr. Palasek on July 11, 2001, billing Mr. Cowen's Capital Research $10,000 for "research related to emerging growth companies."
Mr. Palasek testified that this money was meant for the kickback to the purported due diligence men at Connelly & Williams.
Also projected by prosecutor Mr. McCann was a draft of the consulting agreement between Southern Star Shipping and Capital Research, which was a cover for the larger payback in the planned $5-million stock deal, the FBI agent testified.
A recorded July 13 conversation had one of the co-operating witnesses, Mr. Jones, asking Mr. Kelly to "stay on Bruce" to get the documents done.
In a July 16 conversation with Mr. Cowen regarding the consulting agreement, the co-operating witnesses told Mr. Cowen that they "left things vague in there like we usually do," and that this was "boiler-plate language."
Other documents presented by the government included an E-mail between Mr. Jones and Mr. Cowen with detailed wire instructions for the $16,000 test trade in which $10,000 was allegedly kicked back for the due diligence officers at Connelly & Williams.
Mr. Kelly had some fun at one the co-operating witness's expense in a July 18 phone call to Shamrock. Mr. Jones called Shamrock to ask for Mr. Huard, and Kelly repeatedly asked Mr. Jones to spell his name until finally acquiescing and passing the phone over to Mr. Huard.
By July 19, the test trade had been made, and the co-operating witnesses called Mr. Cowen to organize the payback of $10,000. In a telephone conversation from California, Mr. Cowen said that he would take care of it.
"I'm going to write the cheque now and it'll be there tomorrow morning via FedEx," Mr. Cowen was recorded as saying.
Mr. McCann projected a copy of the $10,000 cheque on the overhead, which was made out to Agent Palasek's undercover identity. In the memo line, Mr. Cowen had written "Consulting."
Asked whether he had provided any consulting to Capital Research, Mr. Palasek replied that he had not.
With the test trade completed and the purported due diligence officers paid off, the undercover agent and the co-operating witnesses began to focus on the larger transaction.
A "BLUNDER" IN NEW YORK
A meeting was set up in New York for July 24, 2001, where the undercover operatives would meet with Mr. Huard and Mr. Cowen, along with two executives from Lighthouse Fast Ferry, and Mr. Lauer, the head of the Lancer Group.
According to Mr. Palasek, the men were told not to mention to the unreported commission to the Lighthouse Fast Ferry officials. Secretly, though, the co-operating witnesses and the agent agreed to bring up Southern Star Shipping to see if the Lighthouse Fast Ferry men knew about the arrangement.
When the co-operating witness Mr. Jones mentioned Southern Star Shipping during the meeting he was quickly cut off by Mr. Cowen and Mr. Lauer.
"Lauer said we'll talk about this later," Mr. Palasek testified.
After the meeting Mr. Schlien acted as if he was upset with Mr. Jones for bringing up Southern Star Shipping.
"It's not their concern about the commissions," Mr. Huard chimed in.
"He was a little disgusted that he brought up the payment in front of (the Lighthouse Fast Ferry principals)," Mr. Palasek testified.
Discussions later that day centred on how the 18 per cent of the deal would be wired back to the Southern Star Shipping account. Eventually they settled on moving the money through Capital Research.
"I can get Jim (Kelly) to do it," Mr. Huard said, referring to the wire transfer. "I'm not authorized, Jim is."
After the New York meeting, the FBI agent and the co-operating witnesses began to devise a way to withdraw from the $5-million deal without letting on that it had been a sting.
In subsequent conversations, Mr. Schlien said that the fictitious partner in the kickback scheme, the British fund manager known only as Nigel, was suffering from a slew of health and personal problems.
Mr. Schlien said that Nigel had been caught cheating on his wife, and after divorce proceedings were begun, he was hospitalized with chest pains, he told Mr. Huard and Mr. Cowen in separate conversations.
Additionally, Mr. Schlien played up the purported "slip-of-tongue" from his partner Mr. Jones in the New York meeting, and that Nigel had become wary that the Lighthouse Fast Ferry representatives might disclose the unreported commission if they were ever investigated by the SEC.
Asked by Nigel what the Lighthouse Fast Ferry managers knew, Mr. Schlien told Mr. Cowen on July 26, "I said they know more than they should know, since our blond fat friend here made a blunder and talked a little too much."
After the meeting in New York Mr. Schlien and Mr. Jones were involved in heated discussion, Mr. Schlien told Mr. Cowen.
"David went a little too far with the Lighthouse people, and in fact we had a little blowup about it later at the Waldorf," he said.
Mr. Cowen tried to assure Mr. Schlien that the Lighthouse Fast Ferry men had not understood what had been said about the Southern Star Shipping account, and that Mr. Lauer "understands the situation."
In ensuing conversations with Mr. Huard and then with Mr. Cowen, Mr. Schlien said he would be travelling to England to meet with Nigel and to try to convince him to make the deal happen.
Even after the trip, though, Mr. Schlien said he was unable to convince Nigel, since he was a "different man."
In calls throughout August and ending on Sept. 5, Mr. Schlien continued to blame Nigel's weariness, health and divorce for being unable to make the deal happen. A worsening economic situation and stock market also didn't encourage investment, he said.
Mr. Palasek testified that the $5-million deal never went off, and Operation Bermuda Short continued on through August 2002.
For the last 30 minutes of the trial day on Sept. 30, Mr. Moscowitz began his cross-examination of Mr. Palasek, which is expected to last through much of Wednesday.
In a sample of things to come, Mr. Moscowitz questioned the FBI agent as to why so little of the recorded conversations included the sole remaining defendant and why Mr. Kelly had not been invited to the New York meeting, the only face-to-face meeting between the agent and the targets in this case.
Stockwatch will continue its coverage of the trial, picking up Mr. Moscowitz's cross-examination of Mr. Palasek tomorrow.
(More information regarding Mr. Kelly's trial is available in Stockwatch articles published on Sept. 25, 26 and 29, 2003.) |
