Re: 6/11-12/04 - St. Louis Post-Dispatch: Stock fraud on a global scale - Day 1 (Part 2 of 2)
Illinois town got taken by firm with a false front
By Chris Carey
06/11/2004
Investing in volatile, low-priced "penny stocks" is always risky.
Doing business with a penny stock company can be equally perilous, as Canton, Ill., learned after Canton Industrial Corp. set up a tire recycling business there in 1992.
Although city officials did not know it at the time, a federal judge later concluded that Canton Industrial was controlled by Allen Z. Wolfson, who had three felony convictions for financial crimes and was barred from serving as an executive or director of any company.
Wolfson's nephew, Richard D. Surber, and other managers were Canton Industrial's public face.
The city of about 15,000, nearly 200 miles northeast of St. Louis, was counting on the company to replace some of the 2,700 jobs lost when International Harvester Co. closed its plant in 1983.
Canton was so desperate for jobs that it didn't delve too deeply into the backgrounds of people wanting to set up businesses, said Public Works Director Clif O'Brien.
"We made a lot of bad deals," he said.
Canton Industrial took in hundreds of thousands of tires, but money and equipment problems plagued the shredding side of the business. It abandoned the operation in 1993, leaving behind 600,000 to 700,000 scrap tires and, ultimately, more than $500,000 in unpaid taxes and assessments.
The state of Illinois got a court order in 1995 requiring Canton Industrial to remove the tires from the property. But it wound up doing the work itself and billing the company.
The state got a court order in 1995 requiring Canton Industrial to remove tires from the property. But it wound up doing the work itself and billing the company.
Canton Industrial changed its name to CyberAmerica Corp. in 1996, when it went into a new business - developing and marketing online shopping malls.
When that venture faltered, it took the name Axia Group Inc.
In the summer of 1997, a fire broke out in a six-story building near the heart of the complex. The inferno spread to surrounding buildings and burned for three days, fueled by chemicals, paint and other materials left over from previous operators.
Axia still owes the Illinois Environmental Protection Agency nearly $237,000.
Axia's most recent SEC filings describe it as a "shell company" seeking businesses to acquire. Axia's stock was being offered to foreign investors last year by a boiler room that the agency later sued, charging fraud. The defendants in the SEC's civil case include David Wolfson, who is Surber's cousin and Allen Wolfson's son. But the SEC has not alleged wrongdoing by Surber.
The elder Wolfson's involvement with other penny stock companies led to his indictment in 2000 on charges of stock fraud, wire fraud and conspiracy. It was part of the FBI's Operation Uptick, which produced more than 120 arrests for securities-related offenses. He was convicted last year and is in a federal prison in New York.
O'Brien, Canton's public works director, was unaware that Axia has been trying to raise fresh capital from foreign investors. But he said the city had all but given up on collecting the back taxes and other debts the company owes.
The Illinois EPA and the federal EPA still are pursuing the company, he noted, and their claims rank ahead of Canton's in legal priority.
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Scottish man did sleuthing - and still got taken
By Chris Carey Of the Post-Dispatch
06/11/2004
LIVINGSTON, Scotland - Adrian Charters was thinking of his 8-year-old daughter's future when he bought shares in a U.S. biotechnology company from a broker who said he represented a large Japanese investment firm.
Charters had set aside a modest amount of money for his daughter's education. He checked out the company, Stem Genetics Inc., and the investment firm, Sukumo Group Ltd., on their Internet sites.
The self-employed geologist also talked it over with his accountant. "He said, 'If you can afford to lose the money and it looks legitimate, then it's worth a waggle,'" Charters, 43, recalled in an interview at his home outside Edinburgh.
So, Charters decided to get in on the ground floor, wiring $11,700 in late 2002 for shares in Stem Genetics, a Salt Lake City research company, which had filed with the Securities and Exchange Commission for an initial public stock offering.
Other Sukumo brokers sold him shares in three more small companies last year, pushing his total investment to just over $100,000.
Charters had no inkling of any problems until the date for Stem Genetics' stock offering came and went without a word from his broker in Japan.
Because he had misplaced the phone number, he went looking on the Internet. First, he found Sukumo's name - misspelled - on a warning list put out by the Financial Services Authority, the organization that oversees stock market activity in Britain.
His Sukumo broker explained that away, saying the company on the warning list was a different firm.
But last Aug. 28, Charters found an online message board full of postings that suggested Sukumo was a scam, a classic "boiler room" telemarketing operation.
"And then that big black hole opened up," he said. "I just took the dog for a walk for about three hours and thought about what the hell had happened and what I was going to do."
Charters' mother-in-law had just died, and he didn't want to trouble his wife with more bad news. So he waited about six months, suffering in silence with his predicament.
When the truth and the tears finally came, he said, she was remarkably understanding.
Charters began corresponding via the Internet with other British investors who bought shares from Sukumo, actually operating out of Laos. And he joined a group dedicated to exposing the scheme, identifying the perpetrators and pushing the SEC and FSA to bring charges.
When the SEC filed a fraud suit in October against Sukumo, Stem Genetics and 19 other businesses and individuals, it submitted affidavits from Charters and some of the other investors leading the charge against the boiler room ring.
Charters has agreed to testify if the case comes to trial in the United States, and he has continued compiling his own evidence. "I'm going to make it as difficult as possible for them, without making it a personal crusade."
Although Charters admits to a trusting nature, he never thought he could fall for the type of investment schemes regularly spotlighted on British television.
"I always look at those shows and say, 'How could they be so stupid?'" he said. "And here I got done myself."
His last correspondence with Sukumo was an e-mail he sent in October. He scanned a photograph of his daughter into his computer and sent it with a letter to his Sukumo brokers, appealing to their sense of decency and asking for help in recouping at least some of his investment.
Charters isn't expecting that to happen. He plans to take on more work to make up for his losses, estimating that it will take four to five years to fill the hole in his savings.
Charters counts himself luckier than many of his fellow investors. "I've still got my house, I've still got my family," he said. "And I've got a business I can be successful in and put it behind me."
(c)2004, St. Louis Post-Dispatch
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'Boiler rooms' cloak themselves in stolen legitimacy
By Chris Carey Of the Post-Dispatch
06/11/2004
Birchtree Financial Services Inc. knew it had a problem when it began hearing from prospective customers in Australia.
The brokerage arm of Kansas City's H&R Block Inc. has no operations in that part of the world or even an Internet site.
But people claiming to work for Birchtree were calling Australian investors, offering to exchange their stock in a failed American company, GeoAlert Inc., for shares of a far more successful one, Yahoo! Inc.
They also were pointing the investors to a bogus Birchtree Web site, which they registered using the address of an H&R Block administrative office in Kansas City. To complete the illusion, the telephone contact number had an 816 area code.
Birchtree is just one of many U.S. brokerage and venture capital firms whose identities and Internet sites have been pirated by rings operating unlicensed, offshore brokerages, known as boiler rooms.
Many of the companies had no idea that their names, the contents of their Web sites - even photographs and biographies of their top executives - had been misappropriated until they were told by the Post-Dispatch.
The victims include some of the biggest names in the investment business: A.G. Edwards & Sons Inc., Smith Barney, Merrill Lynch, Goldman Sachs.
For example, Cogan Davis and Associates, the boiler room that originally peddled GeoAlert shares to overseas investors, lifted big chunks of the text on its Web site from St. Louis-based A.G. Edwards.
Cogan Davis took its description almost verbatim from Edwards, even matching the claim that its personnel frequently were sought out by reporters and others for research tips and opinions on the economy and stock markets.
In fact, no Cogan Davis executive was quoted in news stories on the investment business.
Cogan Davis also lifted the section on careers and employee benefits from Edwards' Web site.
"While it is incredibly frustrating when this type of thing occurs, our hands are really tied because these Web sites do not use our name and are hosted overseas and frequently move or are shut down," said A.G. Edwards spokeswoman Margaret Welch. "However, knowing that this can and does happen, it underscores the importance of knowing who it is you are doing business with - whether via the Internet or on the phone."
In addition, Cogan Davis took its online roster of personnel largely from Goldman Sachs' partner list, changing middle initials and altering the spellings of some names.
Other boiler rooms have been more brazen, appropriating the pictures and biographies of legitimate investment professionals for their fictitious ones.
Thomas D. Watkins, a partner in the Kansas City-based law firm of Shughart Thomson and Kilroy, uttered an expletive when a reporter asked him to call up the Internet site for Preston Morgan and Associates.
The site listed Watkins, a graduate of the University of Missouri and a fourth-generation attorney, as Preston Morgan's chairman and chief executive. It included five other lawyers from his firm as subordinates.
"The first emotion is surprise," Watkins said. "The next emotion is anger. The third emotion is concern."
Preston Morgan claimed its headquarters was in Chicago. However, its Internet site was registered to an address in the Philippines and hosted by a company in British Columbia.
Shughart Thomson and Kilroy went to court and got a restraining order against Preston Morgan before the Web-hosting company would pull the plug on the site.
Top executives at St. Paul Venture Capital Inc. were stunned to learn that another boiler room, Jacob Stern, had pilfered the photographs of half a dozen members of its team and used them on Jacob Stern's Web site, with fictitious identities.
"It's not only plagiarism, it's fraud," said Dave Stassen, one of the Minnesota-based company's general partners.
Stassen and Bill Cadogan, another general partner, were transformed by the site's creators into the fake brokerage's supposed founders, whose last names were Jacob and Stern.
The brokerage, which claimed to be based in Switzerland, was pushing the stock of a single company, CardioBioMedical Corp. of Natick, Mass. That company did not respond to a request for comment.
Another boiler room adopted the name and address of Stuartt Reed Kammer, who works at the Chicago Board of Options Exchange. The identity theft allowed the operators to refer their targets to the Web site of the Securities Investors Protection Corp., or SIPC, which lists Kammer as a member.
Because SIPC protects investors from losses caused by a member firm's fraud or bankruptcy, the boiler room's use of his identity gave its victims a false sense of security.
Birchtree's name appears also to have been plucked from SIPC's membership rolls.
The ease with which the boiler rooms can appropriate material from legitimate investment firms - usually without detection - has enabled them to create a succession of Web sites in fairly short order. That makes their activities tougher to detect and harder to thwart.
Until a few enterprising Australians tracked down the real Birchtree last fall to confirm it was offering to exchange GeoAlert shares for Yahoo stock, the executives were unaware that their company's identity had been hijacked.
The callers had every reason to be wary. Cogan Davis and its successor firm, Greer Fox Yamato, had been identified by Australian regulators as unlicensed boiler rooms.
GeoAlert, of Berea, Ohio, was one of more than 100 small U.S. companies whose publicly traded shares have been marketed to foreign investors by such operations. It hoped to profit by distributing alerts about storms, emergencies and school closings to subscribers via phone, pager and the Internet.
GeoAlert ceased operations in 2002.
Authorities say the calls from the fake Birchtree were part of a standard follow-up scheme that uses the promise of financial recovery to persuade investors to part with even more money. The callers usually explain that they represent a buyer who wants to quietly assemble a majority stake in the company, or who wants the worthless shares for tax purposes.
The exchange offers came with one catch: GeoAlert investors would have to put up a percentage of the transaction price for an "insurance bond," to guarantee they would hold up their end of the deal.
The real Birchtree sent a complaint letter in October to the e-mail address listed on the domain registration for the fake Internet site.
Birchtree also contacted the Securities and Exchange Commission, the FBI and the National Association of Securities Dealers.
When the company got no response from the people using its name, it turned to Missouri Secretary of State Matt Blunt, whose office oversees all investment firms and securities offerings in the state. He issued a cease-and-desist order in February against the fake Birchtree.
The investigation by Blunt's office revealed that the Kansas City phone number the fake Birchtree used was rented from Regus Group, a company that provides reception, mail and answering services around the globe.
Blunt's order identified the people behind the fake Birchtree as Alistar McIntyre and Simon Devitt. But those names could be false, too. Much of the text on the fake Birchtree's Web site comes from another investment firm, Alterity Partners LLC of New York. The founder is Sean Devitt.
Birchtree's experience illustrates the lengths to which boiler rooms go in their deception. It also shows the limits on the ability of identity theft victims to pursue them.
And despite the cease-and-desist order and the regulatory scrutiny, the bogus Birchtree site was still alive on the Internet Friday.
(c)2004, St. Louis Post-Dispatch
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Regulation S
06/11/2004
A little-used financing mechanism authorized by the U.S. Securities and Exchange Commission has caused big trouble for thousands of foreign investors.
The provision, Regulation S, allows American companies to sell stock and other securities to qualified foreign buyers without filing the detailed financial and operating information required for a formal stock offering.
The catch: The unregistered securities cannot be resold on the U.S. market for one year.
Because of the added risk, such shares generally are sold at a discount. And individual buyers must have an annual income of $200,000 a year or a net worth of $1 million. Investment funds and other institutional buyers must have assets of $5 million.
The main problem is offshore brokerages, known as boiler rooms, that acquire blocks of the discounted shares and peddle them at big markups to individual foreign investors. In most cases, the investments are not suitable for those buyers, and the value almost always plunges.
When the Securities and Exchange Commission adopted Regulation S in 1990, the holding period was 40 days. That short wait meant shares could be sold offshore, then quickly returned to the U.S. market, sometimes even before a company disclosed the transaction in its quarterly SEC filings. In 1997, the SEC extended the holding period to one year.
To be sure, many companies legitimately use Regulation S as a fund-raising vehicle. For example, Charter Communications Inc. of Town and Country sold $1.5 billion in notes earlier this year in an offering that includes some offshore buyers.
Also of note: Stock and bond sales under the provision account for only a small percentage of the capital raised by U.S. businesses each year.
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High-tech shell game
By Christopher Carey Of the Post-Dispatch
06/12/2004
The calls come from Bangkok and Barcelona, from Manila and Budapest.
Smooth-talking brokers, many of them American, use flattery, urgency and sometimes lies to persuade foreign investors to buy stock in the small U.S. companies they tout as the next Microsoft or eBay.
But almost as soon as money changes hands, many of these can't-miss propositions become sure losers. The value of the stock plunges, and the firms that peddled the shares stop answering the phones, shut down their Web sites and vanish.
The prestigious-sounding brokerages - Dreyfus Securities Ltd., for example - are actually unlicensed, offshore "boiler rooms," selling stock in questionable companies whose chief virtue is Securities and Exchange Commission oversight.
The rise of the overseas boiler rooms is an unforeseen consequence of globalization and deregulation.
Just as the U.S. manufacturing and technology industries have gone offshore in search of lower costs and looser operating restrictions, so has the stock-fraud industry.
The Internet has added a new twist, allowing boiler rooms to create impressive virtual storefronts. Advanced telecommunications also aid in their deception, routing calls, faxes and voice-mail from answering services in Hong Kong, Tokyo and other business capitals to their true, hidden locations in other! nations.
In essence, the operations are everywhere and nowhere , making them hard to find and even harder to stop.
An investigation by the St. Louis Post-Dispatch has identified more than 100 publicly traded U.S. companies - some with ties to Missouri and Illinois - whose stock has been peddled by the offshore rings.
And despite efforts by international regulators and aggrieved investors to disrupt their activities, the number of active boiler rooms appears to be multiplying.
The boiler rooms have netted hundreds of millions of dollars - billions, perhaps - from victims in Europe, Australia, Asia and other parts of the world.
Foreign investors are not the only ones harmed by these operations.
Some Americans get sucked in by e-mail or Web-site promotions, buy stock through legitimate brokers and are wiped out when the companies collapse or the shares sold overseas are dumped back into the U.S. market.
Americans who have sold inventions or businesses to these companies and taken payment in stock instead of cash have been left empty-handed, too.
What's more, legitimate U.S. businesses have been hindered in their search for foreign capital, because the frauds have made overseas investors wary.
Foreigners who have been burned have pleaded with the SEC to investigate. They say the companies whose shares they bought are acting in concert with the unlicensed brokerages to deceive investors, a theory borne out by the Post-Dispatch's research.
Nearly half the companies the Post-Dispatch tracked have officers, key shareholders or consultants who previously have run afoul of the SEC, the FBI or other law-enforcement or regulatory agencies.
The boiler rooms also have sold shares in nearly 100 privately held companies that were supposedly poised for initial public stock offerings. None has made it to market, leaving buyers with little opportunity to cash out of their investments.
The net! works include Americans who specialize in creating dubious public companies, Americans who act as conduits in getting their stock to the boiler rooms and Americans who oversee the boiler rooms or work there as brokers.
The SEC is well aware of the problem. Tucked away on its Internet site, under the heading "Publications," is an alert, "The Fleecing of Investors: Avoid Getting Burned by Hot U.S. Stocks."
The report, which succinctly describes the schemes and offers tips for avoiding trouble, was last modified in March 2001.
The SEC only recently brought its first cases against offshore boiler-room rings and the Americans allegedly involved in them.
Because the agency has limited resources, it must be selective in the cases it pursues, to ensure that it gets the most for its money, said Paul Berger, associate director of enforcement.
Investigating complex international cases requires more time and more resources than the basic types of fraud the agency once handled, Berger said!
The FBI also has a mandate to fight fraud and other financial crimes. Since Sept. 11, 2001, however, the agency has counted terrorism as its top concern.
The FBI's stated list of priorities puts white-collar crime at No. 7, after protecting the nation from terrorism, espionage and computer attacks; combating public corruption; protecting civil rights; and fighting global and national syndicates.
But FBI officials said the intensive campaign to root out terrorists and their sources of money actually has aided the fight against stock fraud, by focusing more attention on unusual financial transactions.
"Terrorism priorities cut across all units, including white-collar crime," said Brian Lamkin, who heads the agency's financial crimes unit in Washington. "It's very horizontally integrated."
The FBI also has agents working exclusively on the overseas stock sales and has people undercover in the boiler room world,! he said.
The number of boiler rooms operating worldwide has su rged in recent months, as improving economic conditions and rising share prices have brought investors back into the stock market.
Because the SEC has its hands full with bigger fraud cases on U.S. soil, the sale of dubious stock abroad is well down its list of concerns, said Mark Maddox, former Indiana Securities Commissioner and onetime head of the North American Securities Administrators Association's international enforcement committee.
William K. Black, a lawyer and professor at the University of Texas at Austin, who specializes in corporate fraud, said: "The SEC is clearly a farce in the modern era."
The agency's investigative and enforcement arms have been weakened by high turnover, low morale, inadequate budgets and impossible workloads, said Black, who was litigation director for the Federal Home Loan Bank Board during the 1980s savings and loan scandals.
But foreign securities regulators also have been po! werless to stop the boiler rooms.
The rings are careful to operate across international borders, selling shares issued in the United States to investors in a second country, through an office in a third. So, they neatly evade any single government's jurisdiction.
Reporter Christopher Carey
E-mail: ccarey@post-dispatch.com
Phone: 314-340-8291
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