BROKERS SNARED IN 50:50 SCHEME
by Brent Mudry
Golfing can be hazardous to your liberty. That is the lesson learned by
two Vancouver brokers invited for a round last week at the
Semiahmoo Golf Course and Country Club, just across the border in
Blaine. The duo, Michael Patterson and Dirk Rachfall of Pacific
International Securities, were invited to meet up with alleged penny
stock fraudster David Houge for a round on the links last week and
venture further south to Seattle last Tuesday, June 29. The timing was
impeccable. Less than two weeks earlier, on June 16, two dozen alleged
co-conspirators, several with alleged mob credentials, were indicted in
New York in a stock fraud scheme. Although Mr. Houge was a central
player, he was not indicted.
Mr. Patterson and Mr. Rachfall must have been quite surprised to meet
several other men in Seattle: members of the Federal Bureau of
Investigation. The Vancouver brokers were arrested on June 29 and
have been held in custody in Seattle since, on allegations they were key
players in Mr. Houge's stock manipulation ring. The pair, who have
retained prominent Vancouver defence lawyer Marvin Storrow, face a
bail hearing on Tuesday afternoon. "I have heard the prosecution will
ask for no bail, and our lawyers will ask for them to be released," Mr.
Storrow told Stockwatch on Monday, on his car-phone en-route to
Seattle. "They have been oustanding members of this community and
good family men and so on," says Mr. Storrow.
Still, Pacific International promptly suspended the two brokers on
June 30, the same day it heard of the arrests. "We were shocked when
we were notified of the allegations," Larry McQuid, senior
vice-president and chief operating officer of the brokerage, told
Stockwatch. Mr. McQuid claims P.I. had no clue that any of its brokers
were implicated in the Houge affair, although it has been aware for
more than a year that officials in the United States have been
investigating dealings of several of the brokerage's clients. "As soon as
we found about the investigations in June of 1998, we immediately
restricted those accounts," says Mr. McQuid. The accounts in question,
named Debra Lee and Associates and Nyack Partners Inc. were shell
companies allegedly controlled by Mr. Houge.
Mr. McQuid denies the Houge affair and two other scandals tarnishing
Pacific International in recent years, those of Andy Katz and
Jean-Claude Hauchecorne, indicate any pattern of troubles at the
Vancouver-based brokerage. Echoing the mantra of Vancouver Stock
Exchange president Michael Johnson, and all his predecessors, Mr.
McQuid asserts that all the troubles are in the past. "They go back a
number of years . . . Katz dates back to 90-91, with Hauchecorne, it
was P.I. that brought those concerns to the attention of the exchange,"
states the P.I. executive.
Mr. McQuid inadvertently hints that the Houge affair may date back a
year earlier than previously known. "This dates back into 95-96,"
states the brokerage official. The multi-count indictment filed June 16
in the United States District Court for the Southern District of New
York traces the Houge ring back to July, 1996, when John Manion, the
president of Continental Capital & Equity Corp. met with several
other co-conspirators in Garden City, N.Y., to discuss the sale of
shares of Legend Sports Inc.
The official claims his brokerage still has the support of National
Bank, which bought a 35 per-cent stake in P.I. in March, 1998, through
its brokerage subsidiary Levesque Beaubien Geoffrion. "We have kept
our shareholders fully informed and they are supportive of us," says
Mr. McQuid. The P.I. spokesman, however, is reluctant to pass on
what National Bank officials may have said about the pair of arrested
brokers. "I am not going to comment on what their comments may
have been, if any," says Mr. McQuid. In the original National Bank
deal, the bank gained an option to boost its stake in P.I. to 60 per cent
in March, 2001.
The Vancouver brokerage's deal with National Bank was clouded when
Stockwatch revealed on the same day that the VSE had quietly fined
Mr. Katz $350,000 and banned the former P.I. head trader for life for
blatant stock manipulations of Caprice-Greystoke Enterprises. This
spring, Stockwatch revealed the regulatory plight of another star P.I.
broker, Mr. Hauchecorne, whose dealings with U.S. mobsters netted
him a lifetime ban as well.
The full details of the dubious dealings of Mr. Patterson and Mr.
Rachfall are not yet known, but the pair are named in a
recently-unsealed federal complaint in the U.S. District Court for the
Eastern District of New York. The complaint alleges the P.I. pair
engaged in fraudulent trading and manipulation of the shares of
Orlando Super Card Inc., one of three main stocks in the Houge affair,
from August to October of 1997. An anonymous informant, referred to
only as "CW-1," provided evidence, which was corroborated by
wiretaps, both court-authorized and consensual. Federal officials also
relied upon documents obtained through search warrants, evidence
revealed through surveillance and other material in FBI files. The
trading related directly to the accounts of Debra Lee and Nyack.
While the identity of the informant remains unknown, Mr. Houge is
one key co-conspirator who has not yet been indicted. In a coordinated
complaint and partial settlement filed on June 16, the same day as the
main indictment, the Securities and Exchange Commission, Mr. Houge
consented to all the SEC's reliefs sought, including a bar against
serving as an officer and a director. The SEC alleges that Mr. Houge
participated in the "fraudulent manipulation" and sale of stock in three
micro-cap companies: Auxer Industries, Legend Sports and Orlando
Super Card, and for participating in the fraudulent sale of one private
placement for City Services Inc.
In the cases of Auxer, Legend and Orlando, Mr. Houge allegedly
obtained control of all or nearly all the supply of publicly-traded
stock, raised the stock to desired levels through a series of rigged
trades and payed undisclosed cash compensation to registered and
unregistered salespeople. These payments, not technically described as
kickbacks or bribes, amounted to 50 per cent of the proceeds from the
stock sales. The City Services payout was the same percentage. The
SEC claims Mr. Houge used nominees to purchase Auxer stock under
Rule 504 of Regulation D, which he then resold without filing a
registration statement. In the Orlando, Legend and City schemes, Mr.
Houge also acted as an undisclosed control person of First National
Equity, a now-defunct registered broker-dealer.
The total proceeds from the stock sales were $7-million (U.S.) for
Auxer, from sales in 1995, $6-million (U.S.) for Legend Sports, for
sales in 1996 and 1997, $4-million (U.S.) for Orlando, for sales in
1997, and $1-million (U.S.) for City Services, for sales in 1997 and
1998. "Of that amount Houge paid approximately 50 per cent of the
proceeds to retail salespeople. Houge used the remaining proceeds to
pay for the stock he resold to the public, to pay himself and other
participants in the scheme, and to pay other expenses of the scheme,"
states the SEC.
(c) Copyright 1999 Canjex Publishing Ltd.
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