This is the second in a series of four articles from The Globe and Mail which can be found at globeandmail.ca and just use the archive search function.
More Canadian brokers linked to big stock fraud case Shares moved through several firms: court filing
PETER KENNEDY, ANN GIBBON and RICHARD BLACKWELL
The Globe and Mail
Thursday, July 8, 1999
Vancouver and Toronto -- PETER KENNEDY in Vancouver ANN GIBBON in Vancouver RICHARD BLACKWELL in Toronto
Two Vancouver brokers charged in an allegedly massive stock manipulation scheme run by U.S. mob figures were involved with clients who moved stocks through several Canadian brokerages, not just Pacific International Securities Inc., court documents allege.
A senior official at the British Columbia Securities Commission declined to say whether he and other regulators have expanded their investigation to include other Canadian brokerages.
Langley Evans, deputy director of enforcement with the BCSC, said allegations in a criminal complaint filed in the U.S. District Court in New York "raise obvious concerns."
"But where this goes and how it turns out, I can't say at this juncture," he said.
The complaint was filed before Pacific International brokers Michael Patterson and Dirk Rachfall were arrested June 29 near Seattle in connection with an alleged stock manipulation scheme that was led by the Colombo organized crime family and the Russian mob.
After spending several nights in jail, Mr. Patterson, 43, was permitted to return to his home in Vancouver after he agreed late Tuesday to post a $350,000 (U.S.) bond with the U.S. Federal Court in Washington state.
Minutes earlier, Mr. Rachfall, 38, also an investment adviser with Pacific International, secured his freedom after agreeing to post a $300,000 bond.
"I think they're very happy to have been released and to be back with their families and show that they're innocent," their lawyer Marvin Storrow said.
Mr. Rachfall and Mr. Patterson have been suspended by Pacific Securities. There are no allegations of wrongdoing against the brokerage.
Mr. Rachfall and Mr. Patterson must remain under police supervision until they appear in court in Brooklyn, N.Y.
The two men are among several indicted in an allegedly massive U.S. stock manipulation and money laundering scheme. They're charged with conspiracy to commit securities, mail and wire fraud, securities fraud, conspiracy to commit money laundering and conspiracy to engage in unlawful monetary transactions.
The complaint, based on information from an informant described as CW-1 (co-operative witness 1), alleges clients of the two men purchased stocks on margin and traded them "among several Canadian brokerage houses in a 'kiting' scheme," and that as a result of falling share prices "the brokerage firms faced substantial losses."
Kiting is a system whereby brokers try to avoid or delay paying for a specific stock by exploiting credit practices through the use of a series of accounts.
According to the allegations, Mr. Patterson and Mr. Rachfall managed several accounts at Pacific International that CW-1 used to park stocks whose prices were illegally manipulated.
These included shares in a Florida-based company called Orlando Supercard Inc., which claimed to be a marketing specialist in pre-paid, discounted telephone cards. Its shares have been delisted from the OTC Bulletin Board.
In August, 1997, the complaint alleges, Mr. Patterson and Mr. Rachfall called CW-1 for help when two of their clients -- identified only as Wright and Williams -- opted out of the kiting scheme and Pacific International was left with debts of $300,000 in its accounts.
"Because the stocks had been purchased on margin and the companies underlying the stocks had little intrinsic value, the price of the stocks fell and the brokerage firms faced substantial losses," the complaint alleges.
CW-1 suggested those shares be bought and their price artificially inflated to cover losses, the document alleges.
Pacific International said it has no debts outstanding related to this matter.
Executives of several of Canada's biggest brokerages said they have no knowledge of this situation, and they believe the trades must have been done through smaller, less reputable investment dealers.
"There are a lot of brokerage firms around," said one senior brokerage executive. The Investment Dealers Association of Canada (IDA) has more than 180 members, he noted, "and there are a bunch of so-called 'bucket shops' that aren't members of the IDA."
This executive said he had heard nothing about his firm having any connection with the situation, and "I would have heard if there was anything going on."
Executives of several other big brokerages made similar comments.
Michael Watson, director of enforcement at the Ontario Securities Commission, said the situation is "one of those things that, technically speaking, would fall into the 'neither confirm nor deny' [category] although, quite frankly, I haven't heard a word about it at all."
VERBATIM
The complaint against Michael Patterson and Dirk Rachfall discusses an informant identified only as CW-1, who has pleaded guilty and is now co-operating with the U.S. government. The complaint, none of which has yet been proven in court, says CW-1's information has been corroborated through wiretaps and other means. It says in part:
CW-1 further states that the defendants Michael Patterson and Dirk Rachfall managed several nominee accounts that CW-1 maintained at Pacific, including those in the name of Debra Lee and Associates ("Debra Lee") and Nyack Partners ("Nyack"). CW-1 used those accounts to "park" stocks whose price CW-1 and others were fraudulently manipulating. Patterson and Rachfall knowingly executed trades of these stocks through these and other accounts in order to inflate the stocks' price, to create an artificial market for the stocks and to control the sale of these stocks in order to prevent them from being sold on the open market.
In or about August of 1997, CW-1 engaged in several telephone conversations with the defendants Michael Patterson and Dirk Rachfall wherein they asked CW-1 to help them with a problem. In one such conversation, Rachfall explained that he and Patterson had two clients named Wright and Williams who had been purchasing stocks on margin and trading the stocks among several Canadian brokerage houses in a "kiting" scheme. When Wright and Williams encountered legal problems, they ceased the "kiting scheme." Because the stocks had been purchased on margin and the companies underlying the stocks had little intrinsic value, the price of the stocks fell and the brokerage firms faced substantial losses. Rachfall stated that, as a result of this scheme, Pacific currently had a debt of approximately $300,000 in their accounts. Rachfall asked CW-1 if there was anything CW-1 could do to alleviate the debt. CW-1 asked Rachfall which of the stocks involved in the scheme had the greatest volume of trading. Rachfall replied OSCD [Orlando Supercard Inc.]. CW-1 then asked if Rachfall could get all of the outstanding stock. Rachfall replied that he thought he could.
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