Stock-Fraud Case Alleges Ties to Organized Crime
By RANDALL SMITH and MICHAEL SCHROEDER
Staff Reporters of THE WALL STREET JOURNAL
The long bull market has made stock manipulation the white-collar crime of
choice -- even among organized-crime figures, prosecutors say.
In the largest one-day securities-fraud indictment ever, the Justice
Department alleged that members of the country's five largest
organized-crime families conspired to manipulate publicly traded securities
in 19 companies, bilking investors out of $50 million over five years.
Among their alleged scams: luring investors amid tech-stock mania into
buying stocks falsely dubbed dot-coms. Brokers who didn't play along,
prosecutors say, were threatened with beatings.
The charges, unsealed in a New York
federal court, involve 120 defendants --
including 10 alleged mob members and
associates, an official of a New York City
detectives' union and the chief investment
strategist of a well-known San Francisco
money manager. Separately, the
Securities and Exchange Commission
suspended trading in the securities of two
stocks -- Wamex Holdings and
EPawn.com -- involved in the alleged
scheme.
Federal agents fanned out to pick up
nearly 100 defendants by midday
Wednesday in a dozen states, also
executing search warrants in a half dozen
locations from lower Manhattan to Dallas
and Salt Lake City.
The action marks the largest number of defendants ever arrested at one
time on securities-fraud-related charges, said Mary Jo White, the U.S.
Attorney in Manhattan. Yet many of the cases were only loosely related.
The high-profile charges suggest that federal authorities are heightening
their focus on organized crime's potential influence in the securities industry.
Yet the allegations indicate that any such influence is concentrated on small
brokerage-firm players and tiny "micro-cap" stocks at the fringe of the
stock-market arena.
In some cases, the defendants allegedly aimed to exploit the Internet
boom, by touting the companies as dot-com plays. The federal officials
played an online presentation promoting Wamex as an alternative
online-trading system that would soon be available. But the SEC, in
suspending trading in Wamex, said it wasn't lawfully authorized to operate
such a system.
The alleged activity bore more resemblance to classic "pump-and-dump"
schemes -- where small stocks are hyped, sold to unsuspecting investors,
then deflated -- rather than traditional organized-crime activity.
Prosecutors did assert, however, that brokers who didn't play ball were
subjected to "beatings, intimidation and threats." The charges also allegedly
involved union influence. And one defendant allegedly tried to arrange for
the murder of a cooperating witness. (The job never was completed.)
"The size and the scope of this indictment which combines both organized
crime and securities fraud violations is unprecedented," says Jerry D.
Bernstein, head of the white-collar criminal-practice group in New York at
the law firm of Holland & Knight LLP. He added, "The notion that
markets would be influenced by the threat of violence rather than the threat
of a margin call, if true, is disturbing."
As financial frauds go, it is hardly the largest.
In the past few years, for instance, criminal
prosecutors have alleged that Sterling Foster
& Co. and A.R. Baron & Co., two small securities firms, each bilked
investors out of $75 million in six months, in Sterling Foster's case. (Both
firms now are out of business.)
At the same time, however, the alleged scheme also underscores how the
nearly 10-year-old bull market has made it easier to tap into investors'
greed to quickly strike it rich.
The indictments charged 21 defendants with participating in a racketeering
conspiracy in which members and associates of the Bonanno and
Colombo organized crime families over five years forged corrupt alliances
with three other crime families, infiltrating and controlling several small
brokerage firms.
Many of the charges stemmed from a successful one-year undercover
operation, code-named "Uptick" by the Federal Bureau of Investigation's
New York office, with assistance from the SEC and the regulatory arm of
the National Association of Securities Dealers. The operation involved
surveillance devices at the office of DMN Capital Investments Inc., a small
securities firm that prosecutors say was at the heart of the alleged
manipulation.
Ms. White said DMN Capital offered "its services to anyone and any deal,
as long as it was illicit," attracting "allegedly mobbed-up broker-dealers,
top-shelf investment advisers, unscrupulous issuers, unethical lawyers and
accountants, and micro-cap manipulators -- a virtual Who's Who of
securities violators."
The defendants, however, aren't in the upper echelon of the
organized-crime world, according to prosecutors. They include Robert A.
Lino, known as "Little Robert," who prosecutors alleged is a capo in the
Bonanno crime family; Frank A. Persico, an alleged associate of the
Colombo crime family (and cousin of Alphonse, alleged acting head of the
Colombo crime family); and Anthony P. Stropoli, an alleged Colombo
crime family "soldier."
Mr. Persico allegedly controlled crews at brokerage firms including First
Liberty Investment Group Inc., William Scott & Co. and Bryn Mawr
Investment Group Inc. Other firms allegedly controlled or infiltrated by the
mob group included Monitor Investment Group Inc.; Meyers Pollack &
Robbins, which had previously been tied by prosecutors to organized
crime; First Liberty Investment Group Inc.; and Atlantic General Financial
Group.
The mob's alleged racketeering enterprise also sought to defraud union
pension funds by structuring investments that allowed for secret kickbacks
to corrupt union officials, the charges said. One of them, officials said, was
a preferred stock offering of American Realty Trust, a real-estate
investment trust listed on the New York Stock Exchange, allegedly
arranged through Gene Phillips, who controlled Basic Capital
Management, the Dallas investment adviser to the REIT.
In a statement, Basic Capital, which manages $2.5 billion and advises four
publicly traded real-estate companies, said Mr. Phillips and another key
executive were "out of the country," one on vacation and the other on
business. "We are shocked and surprised" by the news, the company said.
In the 1980s, Mr. Phillips helped build Southmark Corp. into a real-estate
conglomerate with a wide range of other interests; shortly after he left in
1989, the company tumbled into bankruptcy proceedings with about $2
billion in debt.
William P. Stephens, chief investment strategist for Husic Capital
Management, a San Francisco investment adviser, also allegedly agreed to
manage as much as $300 million in union pension funds knowing that a
portion would be invested in "corrupt deals for the purpose of funding
kickbacks" to union officials and others, Ms. White said. Husic, which
manages $4.5 billion, suspended Mr. Stephens Wednesday, saying the
news came as a "complete shock," and said he wasn't available to
comment.
Write to Randall Smith at randall.smith@wsj.com and Michael Schroeder
at mike.schroeder@wsj.com |
