OSC target Valentine, Howe Street's Chambers top big sting Ontario Securities Commission
*OSC
Thursday August 15 2002
Street Wire
Also Securities and Exchange Commission (*SEC) Street Wire
by Brent Mudry
In a major bombshell sure to reverberate through penny stock markets in Canada and the United States, suspended Toronto brokerage head Mark Valentine, his offshore front Paul Lemmon, controversial former Vancouver lawyer Martin
Chambers, and other Howe Street players, including promoters John (Jack)Purdy, Les Price, Kevan Garner, Ronald Horvat and Ken Liebscher, are among 58 individuals indicted in the broadest U.S.-Canadian joint probe of stock-market-related money laundering in recent history. The case was unveiled by the FBI and the RCMP in Miami and Vancouver. Birthday boy Mr. Purdy turned 52 the same day.
"We were able to reach the highest level of those criminal organizations," RCMP Vancouver spokeswoman Danielle Efford told Stockwatch. The overall operation includes 23 separate grand jury indictments, with several individuals named in
more than one indictment. The main Canadian brokerages named as conduits for illicit dealings are Mr. Valentine's Thomson Kernaghan and Rampart Securities, unrelated Bay Street firms both shut down by Canadian regulators in the past year.
"We couldn't have done this case without the co-operation of the RCMP and our federal partners here," an FBI Miami official told Stockwatch. The RCMP effort was mounted by the Integrated Proceeds of Crime section of the force's
Vancouver-based "E" Division, which targeted Mr. Chambers, and the Commercial Crime Section of the force's Toronto-based "O" Division, which targeted Mr. Valentine. "The RCMP undercover units are second to none," says Vancouver-based business investigator Bill Cotter, a retired Vancouver-based RCMP proceeds-of-crime veteran. Other authorities playing strong roles in the RCMP-FBI-led operation include the United States Postal Inspection Service, the U.S. Securities and Exchange Commission, the National Association of Securities Dealers' criminal prosecution
assistance group, the State of Florida's Department of Banking and Finance and the U.S. State Department's Diplomatic Security Service.
The dirty U.S. brokers worked at such controversial brokerages as Shamrock Partners of Media, Penn., best known for SEC rogue, Howe Street fan and federal informant Rafi Khan, Centex Securities of San Diego, a key house in the
Howe Street Pay-Pop fraud, which remains under investigation by the RCMP and the SEC, and New York bucket shop Baxter Banks & Smith, another U.S. house fond of Howe Street.
Two individuals arrested in Toronto, presumably including Mr. Valentine, won a bizarre publication ban at a bail hearing Thursday morning in Toronto that the RCMP are unable to say absolutely anything. "Does this pub ban even cover their identities?" asked an incredulous reporter. "I cannot comment in any way at all," Const. Michelle Paradis, the Toronto RCMP's media official, replied.
With Canada's criminal justice system rife with such absurdities, including severe sting, search and wiretap restrictions, constitutional challenges, extradition
nightmares and the like, it is little wonder the joint operation was based in the States, which features a justice department seriously intent on cleaning up on crime. "It is unfortunate that Canadian (police) expertise has to play itself out in U.S. courts," says Mr. Cotter.
In the first phase of the overall investigation, a three-year operation featured an undercover RCMP corporal and a undercover FBI special agent posing as Colombian cocaine cartel figures, a ruse which snared Mr. Chambers, Mr. Garner
and Michael Hepburn, a chartered accountant and offshore banker in Barbados.
This phase, resulting in three indictments, targeted corporate officers, stock promoters and other financial professionals who used U.S., Canadian and offshore banks to launder a total of about $1.4-million of funds purportedly from domestic cocaine distributions. "These money laundering allegations were agreed upon as the initial part of a longer standing business relationship where the
defendants ... would receive many more millions of dollars, represented as cocaine proceeds," states the U.S. Attorney's office.
The multipart sting also targeted numerous penny stock players snared by an undercover FBI agent, posing as a dirty fund manager for a fictitious $800-million mutual fund, and two co-operating witnesses posing as corrupt stock brokers, who set up millions of dollars of bribes to stuff the mutual fund with garbage penny stocks. (All figures are in U.S. dollars.) This part of the operation targeted most of the other defendants, including Mr. Valentine, the head of recently collapsed Bay Street brokerage Thomson Kernaghan, and his offshore front Mr. Lemmon, who runs the Voyager Group in Bermuda.
This two-year undercover operation, codenamed Bermuda Short, achieved indictments against officers of public companies, licenced American brokers, stock promoters and control persons. "Although the undercover investigation was
conducted in such a way that resulted in no actual loss to any investor, the combined attempted fraudulent securities sales exposed by the undercover operation totaled over $200-million," states the office of the United States
Attorney for the Southern District of Florida, the lead jurisdiction. Shares of 23 U.S.-listed public companies, based in the U.S. and Canada, were involved.
The FBI's Miami field office confirms that 53 of the 58 individuals were arrested on Tuesday and Wednesday, including one party nabbed in Germany. The RCMP confirm all Vancouver-based targets were arrested on U.S. soil. Mr. Chambers is believed to have been arrested at the St. Louis, Miss., airport. According to the RCMP, all arrested parties were arraigned Thursday morning, presumably in
Miami, the operational centre of the international sting scheme.
MARTIN CHAMBERS AND OTHER ALLEGED DRUG-MONEY
LAUNDERERS
The biggest catch in the drug sting was Mr. Chambers, a former Vancouver lawyer with an impressive knack for turning up in intriguing situations. Mr. Chambers, described as a purported management and financial consultant residing in Vancouver, Howe Street promoter Mr. Garner, a principal of Vancouver-based Garner Purdy Venture Capital and Diacam Ventures Ltd., and accountant Mr. Hepburn, an offshore banker for Keywest Swiss Investment Bank Inc. in St. Michael, Bahamas, face a total of five counts in one grand jury indictment, sealed Aug. 6 in Miami.
While Mr. Chambers is a veritable Vancouver legend, Mr. Garner is also well known on Howe Street. The penny stock promoter has been involved in numerous deals for years, especially with his close associate Don Sheldon.
In Count One, the indictment claims that beginning as early as this April and continuing through July, in Miami and elsewhere the trio (Mr. Chambers, Mr. Garner and Mr. Hepburn) conspired to launder drug money identified as cocaine proceeds. Count Two specifically claims the trio handled $500,000 in drug money on May 24 in Miami, set up by undercover officers posing as Colombian cartel members. Count Three specifically claims the trio laundered drug funds through the wire transfer of $446,000 received June 6 at SunTrust Bank in Miami.
The final two counts relate to just Mr. Chambers and Mr. Hepburn. In Count Four, the pair allegedly handled $200,000 of drug money on June 19 in Miami.
Count Five relates to the pair's handling of a $125,000 wire transfer on July 29, received as SunTrust Bank in Miami.
The indictment also includes a forfeiture order for all cash, accounts and other assets relating to the trio's purported drug money laundering operations. The only
asset specifically noted is a Royal Bank of Canada bank account in the name of Mystar Holdings Ltd., one of Mr. Chambers's offshore entities.
The case will be particularly distressing for Mr. Chambers, who has been eager for years to assert his reputation as a fine, upstanding, law-abiding financier, even threatening, in a non-violent manner, last year to sue Stockwatch over its unflattering coverage of him.
The current sting is especially sweet for police in both Vancouver and Miami. Mr. Chambers suffered the ignomy of being dragged through the criminal courts for nine years as an alleged key player in a conspiracy to import cocaine from Miami to Vancouver. The former lawyer was charged in 1981, acquitted in 1983, ordered retried by the Supreme Court of Canada, convicted in a second trial in
1987 and sentenced to nine years.
The Supreme Court of Canada threw out the second trial in 1990 and ordered a third trial, which never took place as the Crown folded and finally stayed the charges. Mr. Chambers was free on $100,000 (Canadian) bail throughout the
ordeal and spent a total of only two months in jail during the saga.
Although Mr. Chambers maintained his innocence, being a target of a cocaine smuggling prosecution did not help his career as a lawyer. The Law Society of B.C. issued a suspension in 1981, after he was charged, and he voluntarily
withdrew as a member in 1984. In 1990, criminal defence lawyer David J. Martin, who recently represented Mr. Mitton in the Clay-Tech fraud case and negotiated his guilty plea, described his client Mr. Chambers as "an industrious fellow" who was involved in many businesses. "Many businessmen would wish to accomplish as much as he has done in so little time," Mr. Martin told late Vancouver Sun
reporter Moira Farrow. (The unfortunate Mr. Martin has also been in the press lately, at the centre of the Air India criminal defence scandal, the subject of current law society and RCMP reviews.)
In a feature story that Mr. Chambers denounced as "yellow journalism" which hurt his ability to carry on his business, Ms. Farrow noted that the chief warden of Pacific Rim National Park said a sheltered coastal cove property owned by Mr. Chambers and later his associates featured unusually heavy traffic. "For 10 years, there's been a regular run of small ships back and forth between the cove and a ...ship out in U.S. waters," the warden told the reporter in 1990. More recently, Mr. Chambers appeared as a major behind-the-scenes player in Brian Slobogian's
massive Eron Mortgage fraud, which was shut down by regulators in 1997.
In a recent court case, Mr. Chambers complained that he has a tough time making it through the airport in Vancouver after trips abroad without having his briefcase contents inspected and copied by customs officials as he describes himself as a "person of interest" to authorities. In another case two years ago, Mr. Chambers sued a marine dealer who allegedly refused to deliver 10 of 15 Yamaha outboard motors he purchased.
In the Eron case, Mr. Chambers emerged as a hero of sorts, helping bail out Michael Graye. In December of 1996, controversial offshore Vancouver accountant Michael K. Graye, a major Eron borrower, was arrested in Toronto
as he stepped off an airplane, on charges related to fraud and income tax evasion.
After Mr. Chambers paid a visit to Eron's offices, Eron head Brian Slobogian handed over $300,000 (Canadian) of Eron investors' money for Mr. Graye's bail.
Mr. Graye, like Mr. Chambers, has a few unhappy airport experiences under his belt. Last October, Mr. Graye was arrested at Buffalo International Airport, snared by an offshore stock manipulation scheme featuring notorious career fraudster Ed Durante as the star federal informer and operative. Mr. Graye is now in jail in New York. When he gets out, Canadian authorities are eager to put him
on trial, as he was severed from co-defendant Thomas Baker, a Toronto lawyer, in the Seven-Up Canada offshore fraud and money laundering case.
THE BOGUS BRIBED FUND MANAGER STING
While scores of mutual fund managers have shown a remarkable attraction to volatile penny stocks, this phenomenon has rarely been fully explained. A number
of fund managers have fallen in penny stock scandals, including Canadians Veronika Hirsch, exposed by Stockwatch, and Frank Mersch, exposed by The Globe and Mail, and such Americans as John Kaweske, also exposed by Stockwatch.
More than a decade ago, the Carter-Ward scandal on Howe Street featured several U.S. fund managers greased by penny stock promoters. Now, the FBI used this same modus operandi to snare scores of penny stock players.
An undercover FBI agent posed as a corrupt securities trader employed by Connelly & Williams Associates Ltd., the purported Atlanta-based representative of a fictitious foreign mutual fund. The FBI agent claimed the fund had a number of investors who had invested millions of dollars, with total assets of about $800-million. The FBI agent also claimed that he worked with two U.S.-based due diligence officers whose job was to research and approve which securities the undercover agent, as the fund's purported trader, would be allowed to purchase on behalf of the fund and its investors.
In addition, the undercover officer claimed that a purported manager of the fund was corrupt and had knowledge of the undercover agent's corrupt activities. Two unidentified co-operating witnesses also assisted in the undercover operation, posing as corrupt stock promoters who presented prospective stock purchase deals to the fund. The FBI officer, along with the two purported dirty promoters,
presented themselves as being able to arrange for the fictitious fund to pay millions of dollars for large blocks of stock owned by some of the defendants and/or their
companies at prices significantly above the actual market prices of the stocks.
In return for the fund buying their stock, the defendants agreed to participate in an illegal kickback scheme in which proceeds from the stock sales to the fund would
be secretly kicked back to the FBI agent and others involved in the scheme. The amount of undisclosed kickbacks generally amounted to several million dollars and were to be paid using offshore corporate entities and bank accounts.
In addition, a number of the indictments charge that defendants, including licensed securities brokers, with participating in the illegal kickback schemes by agreeing to
help manipulate the market prices of the stocks involved. Specifically, defendants would allegedly agree to artificially increase the market price of a publicly-traded
company's stock by recommending and selling shares of the particular stock to their customers in exchange for undisclosed payoffs.
VALENTINE AND LEMMON
Several of the indictments detail dirty deals related to Toronto brokerage Thomson Kernaghan, notable for its brash promoter-head Mr. Valentine. One indictment is particularly intriguing to Thomson Kernaghan followers, naming Mr. Valentine and his offshore front Mr. Lemmon. This sting involved three Kernaghan stocks: C-Me-Run, SoftQuad Software and JagNotes.com, with illicit Valentine-Lemmon dating back to Dec. 13, 1999. "It was part of the conspiracy that the undercover agent's mutual fund would
purchase approximately $9.4-million worth of CMER stock from Thomson Kernaghan and MARK VALENTINE. It was also a part of the conspiracy that the undercover agent and the co-operating witnesses would receive a 30% undisclosed cash bribe or 'kickback' for themselves from PAUL D. LEMMON
and MARK VALENTINE on the $9.4-million purchase," states the grand jury indictment. The Valentine sting also involved planned mutual fund purchases of $10-million each of shares of SoftQuad, C-Me-Run, again for the 25-per-cent
cash bribes.
The indictment was sealed May 14, several months before Canadian regulators stepped in to first suspend Mr. Valentine and then shut down Thomson Kernaghan, based on scores of other alleged irregularities. "It was also part of the conspiracy that PAUL D. LEMMON AND MARK
VALENTINE would cause brokers to receive undisclosed kickbacks for manipulating and artificially increasing the prices of CMER, JNOT and SXML stock, and for maintaining the artificially high prices ... for a period of months by
arranging for the sale of CMER, JNOT and SXML stock to customers of brokers whom PAUL D. LEMMON and MARK VALENTINE caused to be enlisted in the scheme by bribing them."
Another indictment names Mr. Lemmon, Voyager director Andrew K. Proctor, promoter Michael T. Reiter and broker Justyn S. Feldman, a principal of Dalton Kent Securities Group in New York. This stock, CT Cosmetics, was apparently
even grubbier, as whopping 50-per-cent kickbacks or bribes were involved.
A third case also involves dealings through Thomson Kernaghan. This indictment targets Doug Rasberry and Michael Vlahovic, who controlled many shares of Uncommon Media Group, a Florida company based in New York, through
offshore nominees. Although not noted in court filings, Stockwatch research shows that Mr. Rasberry dealt through Thomson Kernaghan, filing to sell 315,000 shares in his own name through the Toronto brokerage on June 12.
Another big Uncommon holder, Blueharbour International Inc., filed to sell 721,000 shares through Thomson Kernaghan in February. In a separate filing, Blueharbour filed to sell 320,000 shares through Global Securities, a small Howe Street brokerage best known lately for servicing controversial California short Amr Ibrahim (Anthony) Elgindy, recently arrested in an FBI corruption case.
The wire fraud charges in this indictment all relate to a series of six communications between Canada and either Miami or Florida's other notable penny stock centre, Boca Raton, between Jan. 16 and Jan. 23, 2001. These include wire instructions for bribes to the undercover FBI agent, a $20,000 wire of a test bribe, sent from Canada, and faxes of weekly house positions for Uncommon shares, again sent from Canada.
The indictments of Mr. Valentine and Mr. Lemmon are the latest setbacks to the once respected house of Thomson Kernaghan. Just three weeks before the grand jury indictment was sealed on May 14,Thomson Kernaghan's staff were in full celebration mode on April 23, with serious
trouble was brewing just below the surface. That evening, the brokerage hosted a fundraiser at the National Club on Bay Street, in honour of its compliance director Derek Hatfield, who was gearing up to sail off into the sunset and cast off for a solo around-the-world yachting race at the end of the summer.
Mr. Valentine, the brokerage's top brass and staff were toasting Mr. Hatfield's fine career keeping the foxes out of the henhouse. Mr. Hatfield was toasted on his upcoming epic adventure, sailing the Spirit of Canada in the Around Alone Race, formerly the BOC Challenge, a gruelling nine-month, 27,000-mile race which starts Sept. 15 at Newport on Rhode Island, heads to England, South Africa, New Zealand and Brazil before finishing back in Newport next April.
Mr. Hatfield joined the RCMP in 1971, made corporal in six years, and handled complex fraud investigations with the force. In 1986, he joined the compliance department of the Toronto Stock Exchange and later become the manager of
compliance for Canada's top market, before leaving in April, 1996, to work as a senior compliance officer at National Bank Financial, a national brokerage firm.
Given Mr. Hatfield's 30-year career uncovering fraudsters, stock crooks, bad brokers and other securities violators, it is odd that his spirit of inquiry went so soundly asleep when he joined Thomson Kernaghan in July, 2001, to head its
compliance department. Starting the day of Mr. Valentine's abrupt Ontario Securities Commission suspension on June 18, Stockwatch chronicled his amazing affinity for smelly OTC-BB deals in a seven-part series.
Mr. Valentine's close relationship with controversial Calgary penny stock promoter Cameron Chell should have raised at least a few alarm bells. As Thomson Kernaghan's compliance head, Mr. Hatfield was the executive expected
to give teeth to the firm's reputation. "Honesty and integrity are at the heart of our business. Success depends upon complying fully with the letter and spirit of the laws, rules and ethical principles that govern us," stated the brokerage on its Web site before it was taken down.
Mr. Hatfield was not the only Thomson Kernaghan executive with credentials from Bay Street's compliance club. Chartered accountant Kelly Baird, now described as a Thomson Kernaghan "consultant," previously served as
examination director with the Canadian Investor Protection Fund, which probes the financial strength and solvency of brokerage firms and steps in when they collapse.
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