Madison trader illustrates SEC's limited power
By Mark Clothier, The Atlanta Journal-Constitution
Peter C. Lybrand, the Madison resident
connected to five firms whose stock was
suspended from trading in January, has
owed more than $1 million to the Securities and Exchange Commission
since 1997, according to the agency.
But Lybrand, also known as Peter Tosto, is not alone.
Since 1989, the SEC has ordered people charged with stock fraud to pay
$5.1 billion in penalties or disgorgements. Of that, more than half has gone
uncollected, the SEC said.
Spokesman John Heine said it is difficult to collect the money because the
SEC does not have the power to enforce its penalties.
"We can only proceed civilly," Heine said. "That's as tough as we can be
... If you wanted to put an end to it, you'd have to use the electric chair.
These guys would operate out of a jail cell if they had to. It's sort of
congenital.
"We're certainly aware of the problem," he said. "It's not like this is a
surprise. We're open for suggestions. I just don't know where we can go
with it."
Last year the SEC's enforcement division wrote a memorandum to
Chairman Arthur Levitt explaining why it is hard to collect the fines and
penalties it levies.
"Given the population that is targeted by the commission's enforcement
program--primarily securities fraud artists who are skilled at evading their
legal responsibilities--we believe that our collection record is a good one."
Lybrand's history with market regulators provides a good example of how
fragile the SEC's handcuffs are, especially on tiny, thinly traded
companies. It also serves as a case study for potential stock market
investors: The market is a Darwinian world where fitness is determined by
the accuracy of your information.
The SEC has started to shut the doors through which such companies
slip. In January it adopted a National Association of Securities Dealers rule
that will make the roughly 6,500 companies traded over the counter file
financial statements with the SEC or a regulator. The new rule requires
that stocks whose share prices are quoted on the OTC bulletin board file
public reports starting in June 2000.
Most of Lybrand's penalties stem from a 1997 SEC finding ordering him to
give back $1.1 million in illegal profits and interest in connection with his
role in a kickback scheme to sell San Diego Bancorp stock to the public.
The same year, the SEC banned Lybrand, then known as Tosto, from
association with any broker, dealer, investment company or investment
adviser.
But by then, Lybrand had moved to Madison--some 60 miles east of
Atlanta. He was working out of a former five-and-dime on Main Street and
playing in a Tuesday night recreational basketball league.
He also was involved with five companies--Citron, Electronic Transfer
Associates, Invest Holdings Group, Polus and Smartek.
By the summer of 1998, according to the SEC complaint, Lybrand bought
about 95 percent of Citron's outstanding stock, or 3.02 million shares, for
$295,000. The bulk of those shares were distributed to business entities in
Ireland, Jersey and the Isle of Man.
The shares were gradually put up for sale in January, which is when
several press releases about the companies were issued. The press
releases alone fueled a flurry of interest in the stock. Shares of Citron, for
example, shot from $1.25 on Dec. 30 to as high as $21 on Jan. 25.
In late January, the SEC suspended trading in those five companies' stock
for 11 days after raising questions about the press releases.
The press releases, sent out on the Internet via Business Wire and
PRNewswire, touted pending stock splits, potential mergers and product
offerings. They also made references to high-flying Internet companies
such as Yahoo!. By doing so, they played into the hands of inexperienced
investors hoping to catch the next Amazon.com early.
The SEC suspension was lifted, but not before the stocks lost most of
their value and some investors lost most of their money.
Citron, for example, now trades at about 50 cents a share, up from a
52-week low of 13 cents May 4. A recent trade of a share of Electronic
Transfer Associates was for $1, down from a high of $31 on Jan. 26.
In February, after the trading suspension ended, the SEC asked a federal
judge in New York to freeze at least $2.5 million in proceeds--money from
individual investors--from the sale of Citron and Electronic Transfer
Associates.
In the request, which was granted, the SEC said Lybrand, in Madison, was
representing the businesses in Ireland, Jersey and the Isle of Man.
The SEC said $350,000 illegally made from the sale of stocks was wired
overseas. Christian Mixter, an SEC attorney working on the case, said the
commission has been waiting since March for Glittergrove, one of the
overseas businesses, to respond to its request for an accounting of its
assets.
Citron is described in press releases as an Internet marketing company.
Last month the Texas-based company launched a Web site designed to
be an "online community for all equestrians." The site offers classified ads
and chat rooms.
In press releases, Smartek is described as a construction company and
Polus as Smartek's largest shareholder. Invest Holdings Group was linked
to a Web site that sells baldness cures and impotence creams.
Last summer, one of the authors of the bill that gave the SEC the power to
levy civil penalties asked the commission why its fines go unpaid.
Jeff Duncan, an assistant to U.S. Rep. Edward J. Markey (D-Mass.), said
the congressman was interested in how the 1990 act was working out and
whether any legislative remedies were needed.
"The response indicated the SEC's track record was better than some of
the other agencies," Duncan said. "Getting people to pay is difficult. You're
dealing with some fly-by-night operations, some fraudulent individuals.
They've usually hidden or dissipated their assets by the time the
government gets there."
A few years ago, Congress passed the International Enforcement
Remedies Act, designed to make it easier for the SEC and its foreign
counterparts to cooperate. The United States has cooperative agreements
with some governments but not with the Isle of Man, Ireland and Jersey.
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