THE MOB ON WALL STREET--PART 1
businessweek.com
(c) Business Week. Written by Gary Weiss.
A three-month investigation reveals that organized crime
has made shocking inroads into the small-cap stock market
In the world of multimedia components, Phoenix-based SC&T
International Inc. has carved out a small but significant niche. SC&T's
products have won raves in the trade press, but working capital has not
always been easy to come by. So in December, 1995, the company
brought in Sovereign Equity Management Corp., a Boca Raton (Fla.)
brokerage, to manage an initial public offering. ''We thought they were
a solid second- or third-tier investment bank,'' says SC&T Chief
Executive James L. Copeland.
But there was much about Sovereign that was known to only a very few.
There were, for example, the early investors, introduced by Sovereign,
who had provided inventory financing for SC&T. Most shared the same
post office box in the Bahamas. ''I had absolutely no idea of who those
people were,'' says Copeland. He asked Sovereign. ''I was told, 'Who
gives a s---. It's clean money.''' The early investors cashed out, at the
offering price of $5, some 1.575 million shares that they acquired at
about $1.33 a share--a gain of some $5.8 million.
By mid-June, SC&T was trading at $8 or better. But for SC&T
shareholders who did not sell by then, the stock was an unmitigated
disaster. Sovereign, which had handled over 60% of SC&T's trades
early in the year, sharply reduced its support of the stock. Without the
backing of Sovereign and its 75-odd brokers, SC&T's shares
plummeted--to $2 in July, $1 in September, and lately, pennies. The
company's capital-raising ability is in tatters. Laments Copeland:
''We're in the crapper.''
A routine case of a hot stock that went frigid. Or was it? Copeland
didn't know it, but there was a man who kept a very close eye on SC&T
and is alleged by Wall Street sources to have profited handsomely in
the IPO--allegedly by being one of the lucky few who sold shares
through a Bahamian shell company. His name is Philip Abramo, and he
has been identified in court documents as a ranking member, or capo,
in the New Jersey-based DeCavalcante organized crime family.
James Copeland didn't know it. Nobody at SC&T could have dreamed
it. But the almost unimaginable had come true: Copeland had put his
company in the hands of the Mob.
Today, the stock market is confronting a vexing problem that, so far, the
industry and regulators have seemed reluctant to face--or even
acknowledge. Call it what you will: organized crime, the Mafia,
wiseguys. They are the stuff of tabloids and gangster movies. To most
investors, they would seem to have as much to do with Wall Street as
the other side of the moon.
But in the canyons of lower Manhattan, one can find members of
organized crime, their friends and associates. How large a presence?
No one--least of all regulators and law enforcement--seems to know.
The Street's ranking reputed underworld chieftain, Abramo, is
described by sources familiar with his activities as controlling at least
four brokerages through front men and exerting influence upon still
more firms. Until recently, Abramo had an office in the heart of the
financial district, around the corner from the regional office of an
organization that might just as well be on Venus as far as the Mob is
concerned--the National Association of Securities
Dealers, the self-regulatory organization that oversees the small-stock
business.
A three-month investigation by BUSINESS WEEK reveals that
substantial elements of the small-cap market have been turned into a
veritable Mob franchise, under the very noses of regulators and law
enforcement. And that is a daunting prospect for every investor who
buys small-cap stocks and every small company whose stock trades on
the NASDAQ market and over the counter. For the Mob makes money
in various ways, ranging from exploiting IPOs to extortion to getting a
''piece of the action'' from traders and brokerage firms. But its chief
means of livelihood is ripping off investors by the time-tested method of
driving share prices upward--and dumping them on the public through
aggressive cold-calling.
In its inquiry, BUSINESS WEEK reviewed a mountain of documentation
and interviewed traders, brokerage executives, investors, regulators,
law-enforcement officials, and prosecutors. It also interviewed present
and former associates of the Wall Street Mob contingent. Virtually all
spoke on condition of anonymity, with several Street sources fearing
severe physical harm--even death--if their identities became known.
One, a former broker at a Mob-run brokerage, says he discussed
entering the federal Witness Protection Program after hearing that his
life might be in danger. A short-seller in the Southwest, alarmed by
threats, carries a gun.
Among BUSINESS WEEK's findings:
-- The Mob has established a network of stock promoters, securities
dealers, and the all-important ''boiler rooms''--a crucial part of Mob
manipulation schemes--that sell stocks nationwide through hard-sell
cold-calling. The brokerages are located mainly in the New York area
and in Florida, with the heart of their operations in the vicinity of lower
Broad Street in downtown Manhattan.
-- Four organized crime families as well as elements of the Russian
Mob directly own or control, through front men, perhaps two dozen
brokerage firms that make markets in hundreds of stocks. Other
securities dealers and traders are believed to pay extortion money or
''tribute'' to the Mob as just another cost of doing business on the
Street.
-- Traders and brokers have been subjected in recent months to
increasing levels of violent ''persuasion'' and punishment--threats and
beatings. Among the firms that have been subject to Mob intimidation,
sources say, is the premier market maker in NASDAQ stocks--Herzog,
Heine, Geduld Inc.
-- Using offshore accounts in the Bahamas and elsewhere, the Mob has
engineered lucrative schemes involving low-priced stock under
Regulation S of the securities laws. Organized crime members profit
from the runup in such stocks and also from short-selling the stocks on
the way down. They also take advantage of the very wide spreads
between the bid and ask prices of the stock issues controlled by their
confederates.
-- The Mob's activities seem confined almost exclusively to stocks
traded in the over-the-counter ''bulletin board'' and NASDAQ small-cap
markets. By contrast, New York Stock Exchange and American Stock
Exchange issues and firms apparently have been free of Mob
exploitation.
-- Wall Street has become so lucrative for the Mob that it is allegedly a
major source of income for high-level members of organized crime--few
of whom have ever been publicly identified as having ties to the Street.
Abramo, who may well be the most active reputed mobster on the
Street, has remained completely out of the public eye--even staying
active on the Street after his recent conviction for tax evasion.
-- Mob-related activities on the Street are the subject of inquiries by the
FBI and the office of Manhattan District Attorney Robert M. Morgenthau,
which is described by one source as having received numerous
complaints concerning mobsters on the Street. (Officials at both
agencies and the New York Police Dept. did not respond to repeated
requests for comment.)
-- Overall, the response of regulators and law enforcement to Mob
penetration of Wall Street has been mixed at best. Market sources say
complaints of Mob coercion have often been ignored by law
enforcement. Although an NASD spokesman says the agency would
vigorously pursue reports of Mob infiltration, two top NASD officials told
BUSINESS WEEK that they have no knowledge of Mob penetration of
member firms. Asked to discuss such allegations, another high NASD
official declined, saying: ''I'd rather you not tell me about it.''
-- The Hanover, Sterling & Co. penny-stock firm, which left 12,000
investors in the lurch when it went out of business in early 1995, is
alleged by people close to the firm to have been under the control of
members of the Genovese organized crime family. Sources say other
Mob factions engaged in aggressive short-selling of stocks brought
public by Hanover.
-- Federal investigators are said to be probing extortion attempts by
Mob-linked short-sellers who had been associated with the now-defunct
Stratton Oakmont penny-stock firm.
Mob manipulation has affected the markets in a wide range of stocks.
Among those identified by BUSINESS WEEK are Affinity
Entertainment, Celebrity Entertainment, Beachport Entertainment,
Crystal Broadcasting, First Colonial Ventures, Global Spill
Management, Hollywood Productions, Innovative Medical Services,
International Nursing Services, Novatek International, Osicom
Technologies, ReClaim, SC&T, Solv-Ex, and TJT. Officials of the
companies deny any knowledge of Mob involvement in the trading of
their stocks, and there is no evidence that company managements
have been in league with stock manipulators. These stocks were
allegedly run up by Mob-linked brokers, who sometimes used force or
threats to curtail short-selling in the stocks. When support by allegedly
Mob-linked brokerages ended, the stocks often suffered precipitous
declines--sometimes abetted, traders say, by Mob-linked short-sellers.
The stocks have generally fared poorly (table, page 99).
Not all of the stocks were recent IPOs, and they were often taken public
by perfectly legitimate underwriters. International Nursing, for example,
went public at $23 in 1994 and was trading at $8 in early 1996 before
falling back to pennies. Short-sellers who attempted to sell the shares
earlier this year were warned off--in one instance by a Mob
member--market sources assert. International Nursing Chairman John
Yeros denies knowledge of manipulation of the stock.
What this all adds up to is a shocking tale of criminal infiltration abetted
by widespread fear and silence--and official inaction. While firms and
brokerage executives who strive to keep far afield of the Mob often
complain of NASD inaction, rarely do such people feel strongly enough
to share their views with regulators or law enforcement. Instead, they
engage in self-defense. One major brokerage, which often executes
trades for small-cap market makers, keeps mammoth intelligence
files--to steer clear of Mob-run brokers. A major accounting firm keeps
an organized-crime expert on the payroll. His duties include preventing
his firm from doing business with brokerages linked to organized crime
and the Russian Mob.
In the pages that follow are the results of BUSINESS WEEK's
investigation.
THE BOX
At about 3 o'clock in the afternoon of Sept. 25, 1996, three men
appeared on the 28th floor of 120 Broadway, Manhattan. They walked
into the offices of Sharpe Capital Inc., a dealer in over-the-counter
stocks. They were burly. ''Like lumberjacks,'' said an eyewitness soon
after. A gun was in the belt of one of the men.
The confidential police report of the incident (Complaint No. 10530,
First Precinct) reads as follows:
''At that point they asked the victim what he was trading in. Then they
slapped him in the head and stated again, 'What the f-- are you trading
in.' Then he slapped the victim in the head again.''
A witness recalls one of the men saying: ''Don't f-- with our stock.'' The
stock: Crystal Broadcasting Inc. After the men left, Sharpe stopped
trading in Crystal Broadcasting.
To the New York Police Dept., the incident at Sharpe was about as
serious as a scuffle over a parking space. A police source says that the
assault, categorized as a low-grade misdemeanor at best, is
considered closed and is not being investigated because the victim
was not seriously hurt, no gun was displayed--even though one was
observed--and the perpetrators were unknown. (However, one witness
ruefully notes, police did nothing to ascertain their identity--such as
examine a security-camera surveillance tape.) Sharpe's CEO,
Lawrence Hoes, declined to discuss the matter.
But BUSINESS WEEK learned that the assault at Sharpe was not an
isolated incident. Rather, it was part of a systematic pattern of
intimidation. By eliminating competing market makers and allowing
only cooperating brokers to bid on stocks, the result is a kind of rigged
auction--with the prices where desired, and the spreads between bid
and ask prices kept as wide as possible. In Street parlance, this
process of rigging the market in a stock is known as ''boxing'' a stock. It
is part of the lexicon of the Mob's dominion on Wall Street (page 99).
The box is the heart of most stock-manipulation schemes. In the case of
Crystal, the trader at Sharpe was suspected of ''cracking the spread.''
According to market sources who were familiar with the trading in
Crystal that day, Sharpe was blamed, in effect, for doing what a market
maker is supposed to do--get the best possible price for its customers
and keeping the spreads as narrow as possible. During the day,
Crystal traded as low as 4, well below the 5 1/8 closing price of the day
before, and the spreads narrowed as well, to a relatively reasonable 4
3/8 bid and 4 7/8 ask. Sharpe was blamed for that benign--to most
people--market action.
In the weeks following the Sharpe incident, Crystal shares were trading
at the kind of spreads that can only happen when the market is tightly
controlled. If you buy it from a dealer, you pay the ask price, $3.50. But
when you sell it, you get the bid--56.2 cents. (Crystal's president,
Joseph Newman, said he had no knowledge of coercion of market
makers in his stock.)
Sometimes the maneuvering involved in creating and exploiting the box
can be as subtle as a bison in a china shop. One West Coast investor,
who requested anonymity, says that brokers at a small New York firm,
Monitor Investment Group, convinced him that two small-cap
stocks--International Nursing Services and Beachport
Entertainment--were about to be pushed upward. Says the investor:
''They said they had a handle on all this stock. They said they'd run it up
and get me out of it in a week.''
So sometime around last New Year's Day, he bought warrants and a
big block of the stock--100,000 shares of International Nursing and
85,000 of Beachport. When he tried to sell, he says, his brokers flatly
refused. The shares, which had started heading southward almost from
the moment he bought them, plummeted. They're now worth one-fifth of
what he paid. Monitor Chairman William F. Palla denies the firm was
involved in stock manipulation but concedes a broker may have
promised a runup but not really meant it.
Sometimes, of course, thinly traded stocks can be run down by
aggressive short sellers, and the Mob is alleged by Street sources to
have profited from that as well. One target of investigators, sources say,
is a coterie of brokers formerly associated with the defunct penny-stock
brokerage of Stratton Oakmont. Sources familiar with the investigation
say that authorities are exploring charges that some of these brokers,
after Stratton's demise, may have extorted money from their former
colleagues in the business--allegedly threatening to short-sell stocks
underwritten by those firms. According to sources, the Stratton brokers
allegedly shared their profits with a member of a New York crime
family.
Among the trading being investigated, sources say, are stocks
underwritten by a penny-stock firm called State Street Capital Markets.
Stocks brought public by the New York-based firm--Fun Tyme
Concepts, U.S. Bridge of N.Y., and Cable & Co. Worldwide--were
pummeled in the market last August, and trading in the stocks is
allegedly being probed. At the time, State Street maintained that its
shares were victimized by concerted short-selling. State Street officials
did not return phone calls, and Stratton officials could not be reached
for comment.
''YOU'VE MADE A FRIEND''
First Colonial Ventures Ltd. is a minor venture-capital firm whose stock
trades on the OTC bulletin board--so small that it is not required to file
more than token disclosures with the Securities & Exchange
Commission. But for market makers in small-cap stocks, First Colonial
looms huge. It is an object lesson: When the Mob speaks, market
makers obey.
The incidents took place early in October, one week after the assault at
Sharpe. First came a beating. A trader at Naib Trading Corp. in Fort
Lauderdale was summoned to the office of a man by the name of Roy
Ageloff. The trader has told associates that Ageloff had beaten him
once before with a nail-pierced baseball bat. This time, he said, Ageloff
left the room. Then a 400-pound hoodlum knocked him down and
kicked him while he was on the floor. The message: Stay away from
First Colonial.
The trader at Naib was not the only one to suffer ''persuasion'' over First
Colonial. Sources say that four other firms were approached with
warnings to cease trading in the stock. To be sure, it was not a total
success. There was one rebuff: A market maker in the little town of
Hurst, Tex., Anthony Elgindy of Key West Securities Inc., says he
ignored warnings that traders who did not comply would soon be
''facing the ceiling''--and has received numerous threatening phone
calls since then. But at two other market makers, the intimidation
worked. They ceased making a market in First Colonial.
The market makers dropping the stock were William V. Frankel & Co.
in Jersey City, N.J., and the biggest name in NASDAQ stocks: Herzog,
Heine, Geduld. Sources say traders at both firms quit trading the stock
after receiving menacing visits at their offices. ''We decided we
shouldn't get involved in a stock like that,'' says Herzog's head trader,
Irwin Geduld. Was anyone at his firm threatened? ''We weren't,'' said
Geduld. ''Someone else was.'' (A Frankel trader, who declined to give
his name, says: ''We have no comment whatsoever about First Colonial
Ventures.'') Even a brokerage that was not a market maker, D.L.
Cromwell Investments Inc. in Boca Raton, received a visit from a thug, a
source says. The visitor left after demanding, and being shown, proof
that the firm was not a short-seller in the stock. Cromwell officials
declined comment.
Sources say that traders who caved in to coercion later received
expensive bottles of liquor with a note that read: ''You've made a
friend.'' But the market makers who dropped First Colonial were
making no new pals among investors. Since the incident, the ask price
paid by the public for buying First Colonial stock has climbed--from a
low of $1.13 on Oct. 2 to as high as $4.13 in recent trading. But the bid
price that the public gets when selling the stock back to the Street has
been far less buoyant. The bid promptly rose from a low of 87 cents on
Oct. 2 to $1.50 and has stayed at about that level, even as the ask price
has skyrocketed to almost three times that figure. (On Oct. 4, according
to a letter sent to market makers obtained by BUSINESS WEEK, the
NASD launched an inquiry into the dropping of First Colonial stock by
market makers. The NASD declined comment on the investigation.)
Who was behind the wave of intimidation over First Colonial?
NASDAQ trading figures point toward a New York-based firm called
PCM Securities Ltd. PCM was the largest market maker in First
Colonial in September, with 48% of the trades. By October, however,
this rose to 75%. PCM completely dominated the market in First
Colonial.
Although he is not listed in NASD records as a control person or even
as an employee of PCM--or of any other brokerage--Street sources say
that the power behind PCM is the 37-year-old Ageloff. He did not
respond to numerous messages left at PCM's office in Boca Raton. An
employee there said Ageloff nowadays spends most of his time there,
punctuated by frequent visits to New York. Asked about Ageloff, Steven
Edelson, PCM's principal, denied that Ageloff has any role in the firm
and says he has met him only once. Edelson had no comment on its
trading in First Colonial, and First Colonial President Murray
Goldenberg said he was ''shocked'' to hear reports of intimidation of
market makers.
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