msnbc.com
THE STORY HIGHLIGHTS CHARGES of fraud, threats and the participation of brokers at the Wall Street investment firm of Morgan Stanley Dean Witter. The yarn also casts doubt on the capacity of the National Association of Securities Dealers to police the Over the Counter bulletin board market. And in the end, the saga serves as a cautionary tale for anyone buying or thinking about buying the thinly traded shares of stocks on a market where swindlers and charlatans abound.
At the center of the controversy is one-time stockbroker named Peter C. Tosto, who was drummed out of the securities industry by the NASD in 1991 following a fine for swindling clients. Tosto then set up a stock promotion firm named Investor Relations and started swindling investors all over again. In 1997, Tosto was fined $1.1 million by the Securities and Exchange Commission for a swindle in the shares of a company named San Diego Bancorp.
Also at the center of events with Tosto is J. Alexander Securities Ltd., a Los Angeles-based brokerage firm with its own legal headaches. In September of 1998, National Financial Services Corp. sued the brokerage firm, charging it with arranging for the launch of trading in an OTC bulletin board stock — H&R Enterprises — that quickly became the focus of a “massive international securities market manipulation” in the summer of 1997, according to the lawsuit.
J. Alexander, a member of the NASD, surfaces in the current controversy as the so-called “sponsor” of three companies — Citron Inc., Electronic Transfer Associates Inc. and Polus Corp. These three companies began trading as “non-filing” microcap stocks on the OTC bulletin board between June and October of 1998. So-called non-filing companies are firms that “go public” through IPOs that raise less than $1 million in the offering. So-called “sponsoring” broker-dealers are member firms of the NASD that thereafter file documents with the NASD in order to begin trading publicly in the shares on the NASDAQ electronic quotation system.
J. Alexander declined to produce copies of the companies' financial statements and referred inquiries to the companies. The phone number provided reached an answering machine.
Three of the companies involved — Citron, Electronic Transfer Associates and Polus Inc. — all have seen the value of their shares explode in recent weeks, with Citron at one point this week touching $42 per share — up from a mere $1.50 on Dec. 31. With company press releases claiming that Citron currently has 10.2 million shares outstanding, the $42 quote puts a market value of $428 million on the company.
Polus sold for as little as 90 cents as recently as Dec. 31. By the start of this week, the price had climbed to $13 per share. With company press releases appearing to claim that Polus has a total of 13.3 million shares outstanding, the $13 quote puts a market value of $173 million on the company.
And Electronic Transfer Associates sold for as little as 75 cents per share as recently as Nov. 4. By last week the price had reached $31 per share. With an apparent total of 20 million shares outstanding, the price puts a market value of $620 million on the company — a company with no business telephone listing to be found anywhere, and whose only known corporate office is 500 square feet of rent-free space in an office in Denver.
PUBLIC INFORMATION LACKING
The lack of public information about these companies is both astonishing and calculated.
The press releases have mainly been distributed by two competing distributors of electronic news releases for corporations, PR NewsWire and BusinessWire. But the releases show only a “contact” name and a Madison, Ga., telephone number. Inquiries to that number produce someone who sometimes answers with the greeting “Corporate offices ...” and other times with “Marketing consultants…” and declines to say more.
As a result, would-be investors have no way of knowing that behind the hype is the disgraced, fined and disbarred former stockbroker Peter C. Tosto and his firm Investor Relations. PR NewsWire's own office files list Tosto as the contact for an entity known as Tellerstocks, which has been distributing the releases. <Picture: Microsoft Investor>Citron Inc (CTRN) pricechange$22.00-7.250 Polus Inc (POLU) pricechange$5.75-5.250 Smartek Inc (New) (SMEK) pricechange$5.06-0.938 Electronic Transfer Assoc Inc (ECTS) pricechange$19.75-4.250 Invest Holding Group Inc (IVHD) pricechange$0.23-0.010 Malibu Inc (MALB) pricechange$3.25-2.750 <Picture: LiveQuote!>Data: Microsoft Investor and S&P Comstock 20 min.delay
Tosto, a New Yorker, first enters our story in August of 1997. That's when he and two friends — Armando Frusciante and Thomas Telegades, both of the Bronx — arranged for a stock sale of a company they controlled named Smartek Inc., which had been formed two years earlier out of a reverse merger into a defunct silver mining company.
Because the men planned to raise less than $1 million in the offering, they did not have to file a detailed stock registration form but only a skimpy “Form D” that listed Smartek's officials and promoters.
Also listed in the filing is a company by the name of Tostel Corp., which is identified as a beneficial owner of Smartek shares. In the filing, the address given for Tostel Corp. is the same as that given for Tosto himself: 124 West 72nd St. in Manhattan. That, plus the fact that the corporate name “Tostel” appears to be an acronym for Tosto and Telegades, suggests that Tostel was in reality a holding company for shares in Smartek on behalf of both men. No other shareholders are listed. The stated reason? All are “corporations organized and/or having principal executive offices in the Isle of Man” — a popular offshore tax haven.
Meanwhile, action had been developing on other fronts.
NETWORK OF PENNY STOCKS
By the summer of 1998, a penny stock bearing the name Invest Holdings Group Inc., a marketer of baldness cures in the United Kingdom, had hooked up with Smartek and several other firms to form a loose network of penny stocks, all linked by the common involvement of Tosto, Frusciante, Telegades and now a Briton named Andrew Bryant who was listed in records as one of Invest Holdings' promoters.
The linkages began to emerge in June when yet another company, Polus, materialized and, thanks to J. Alexander Securities, gained a listing for trading on the NASDAQ OTC bulletin board. No press release or public document heralded Polus's arrival in the capital market. But it did not take long before a press release issued forth from Madison, Ga., to declare that Polus had “finalized terms of a merger” with a company bearing the name “Tostel Inc.”
According to the release, the deal contemplated each Tostel share being valued at three Polus shares and suggested this valuation was warranted by the fact that Tostel had somehow wound up with 12 million shares of a company known as Smartek.
The only hint the press release gave as to what was really taking place in the transaction was the passing mention that, as part of the deal, Polus's shareholders had elected two otherwise unidentified individuals — Armando Frusciante and Andrew Bryant — to seats on the company's board of directors. In this apparent attempt at public disclosure, the release failed to point that Frusciante, like Tosto, was in fact working as a stock promoter on behalf of Smartek, and also may have had an interest in Tostel as well.
How Andrew Bryant became involved with Tosto remains unclear, but by the summer of 1998 the involvement was substantial. Bryant himself had first appeared on the scene as a promoter of IVHD — the baldness cure outfit — back in 1996, and within a year he was distributing baldness cure testimonials in Britain under the name “Andy Bryant, author and researcher.” British court records show that in March of 1998 he and his company — identified as “NHP Marketing t/a Invest Holdings Group, Inc.” — were slapped with a cease and desist order for making deceptive claims about his product's ability to grow hair.<Picture: click for return rewards>
Following the Polus press release, yet another press release materialized. This one announced that yet another recently launched J. Alexander bulletin board stock — Citron — was acquiring a British company bearing the name Project Rainmakers Ltd. and by the start of December Bryant had surfaced as Project Rainmakers' “president.” Project Rainmakers' financial records show the company was incorporated in 1996 and at the time of the Citron “acquisition” had cash on hand of approximately $25.
Meanwhile, a near flood of press releases had begun pouring forth about Citron's great future on the Internet. There were press releases about plans to launch an international freight forwarding business, plans for an advertising service for Web-site operators, even a press release predicting that Citron would take in $10 million in revenues and 40 percent of that in earnings in 1999.
Investors of course had no way to verify these claims. Nor were they likely to see through the misleading puffery of the releases themselves — documents that tried to create the image of a company putting together a transatlantic Internet empire by announcing deals and agreements that were actually nothing more than transactions between undisclosed related parties.
ENTER MORGAN STANLEY
Many of the shares of these companies reached investors, amazingly enough, by way of the white-shoe Wall Street brokerage firm of Morgan Stanley Dean Witter & Co. A broker in the firm's Austin, Texas, office, who agreed to be quoted so long as his identity was not divulged, said he had been approached in a “cold call” roughly a year and a half ago by a man identifying himself as Peter Lybrand, an alias Tosto is known to use.
According to the broker, Lybrand claimed to be involved in financial consulting and began passing along tips about hot microcap stocks. In the summer of 1998, Lybrand tipped the broker to Citron, and the Morgan Stanley man began loading up, both for himself and his clients. “I was talking to Lybrand five times a day,” said the broker. “The stocks were flying.” “He had five or six companies. Citron, Polus, Smartek, ECTS, Malibu. He said, ‘You can work one of them or all of them, I don't care. We just need to get volume.' He wanted us to get started immediately.”
— MICHAEL AGER
Stock promoter Meanwhile, the broker had passed along Lybrand's name to a Morgan Stanley colleague in the firm's Pikesville, Ky., office, and that broker as well began loading up. That individual, who as well was contacted and interviewed for this story, confirmed the Austin broker's account, acknowledging that he, too, had taken substantial positions in the shares, both for himself and his clients.
Both brokers say they had no idea that the man they were talking to — ostensibly Peter Lybrand — was actually Peter Tosto. But at least one individual says he quickly became suspicious.
That person was a Beverly Hills stock promoter named Michael Ager, who was introduced to Lybrand through the Morgan Stanley broker in Austin. As a result of that introduction, Ager and a colleague met with Lybrand over the Thanksgiving weekend at the Peabody Hotel in Orlando, Fla., and listened as Lybrand invited them to take on several companies and pump up their market values.
“He had five or six companies,” says Ager. “Citron, Polus, Smartek, ECTS, Malibu. He said, ‘You can work one of them or all of them, I don't care. We just need to get volume.' He wanted us to get started immediately.”
According to Ager, Lybrand thereupon opened up a briefcase and showed him a valise full of stock certificates, saying the shares represented essentially the entire public float of Citron.
“He said, 50,000 shares of buying in Citron would put the stock [then selling at $3] to $10-to-$12 immediately.”
“We promoted Citron on our Web site [www.topstocks.com],” says Ager. “And we did a dog-and-pony show with a lot of brokers, and Citron's stock started to take off.” But, says Ager, on Dec. 9, Lybrand telephoned in a rage and accused him of secretly shorting Citron shares and demanded that Ager return all the Citron stock he had been given as compensation. When Ager dropped the account, he sent a letter to his clearing firm and his own broker to alert them that he believed the entire promotion was “a scam.”
The public of course knew nothing of this, and though Ager had dropped the account by Dec. 12, Tosto and his crew down in Madison, Ga., were still slogging away.
STOCKS SOAR
In early January they finally hit the mother lode, as the third and last of the J. Alexander Securities penny stock promotions — Electronic Transfer Associates Inc., or ECTS — started to surge on Wall Street's quote screens.
On the strength of Ager's promoting efforts, ECTS's stock had already rocketed more than 800 percent, to $7 per share, by Jan. 7. And when Tosto now put out a press release announcing that Electronic Transfer was “in negotiations” with a company named Citron regarding some “internet software,” Citron quintupled and ECTS nearly quadrupled in the week and a half that followed.
Whether this rag bag of stocks is worth even 20 cents, let alone $1.2 billion, is unfortunately simply unknowable since there is no credible information available about the companies at all.
The Web site for “Internet company” Citron (www.webforce10.net) is a one-page block of static text. Most of it is devoted to preposterous claims about the company's growth prospects. Biographical summaries about the principals are hilarious — as if written by someone only passingly familiar with the English language. Here's what the site says, in part, about Bryant: “In recent past he was appointed President of a non-profitable [sic] American publicity [sic] traded company.”
Behind this billion-dollar microcap illusion of real business is, of course, the conjurer who concocted it in the first place: Peter Tosto. Requests for an interview with Tosto proved pointless, as whoever answered the phone in Madison, Ga., would say he had no idea who Peter Tosto was, then hang up the phone.
Yet for all a caller knew, the person on the other end might well have been Tosto himself, and the last time this reporter called there, that seemed to have been the case, as the man on the other end would identify himself only as “Peter Lybrand.”
From a cross-check of Social Security numbers, it appears that a man named Peter Tosto, residing at 115 S. Main St., Madison, Ga. — and listing himself as chairman of a company named Investor Relations Inc. — had an evident fondness for aliases. Among those listed was this one: Peter C. Lybrand. Enough said.
|
