.SEC ex-head Pitt's headache touted by SEC target
2002-11-07 11:31 PT - Street Wire
by Brent Mudry
The highest-profile tout of U.S. Technologies Inc., the controversial penny stock promotion which led to the downfall of Harvey Pitt, the chairman of the United States Securities and Exchange Commission, was under SEC investigation for undisclosed payments when Judge William H. Webster joined the company's board in early 2000. (Mr. Pitt, under fire for pushing the nomination of Mr. Webster to head an SEC accounting oversight committee, resigned just after the polls closed Tuesday in the U.S. mid-term elections.)
Later in 2000, John Westergaard, now 70, who allegedly charged penny stock clients up to $48,000 for "independent" analyst reports, was charged by SEC with misleading investors and forgetting to mention the payments his touting companies received. (All figures are in U.S. dollars.) The once highly successful Wall Street analyst, who claimed he was wiped out by the SEC, made an unusual and unsuccessful personal plea to Arthur Levitt, Mr. Pitt's predecessor as head of the SEC, and later settled by agreeing to a permanent injunction against future securities violations.
It is unclear how much front-end due diligence was done by Mr. Webster before he agreed to become a director of U.S. Technologies in April, 2000, or how much followup due diligence he did afterwards. Virtually all of his other public company directorships were with companies of a much higher stature, including Anheuser-Busch Cos. Inc., TLC Beatrice International Holdings Inc., NextWave Telecom Inc. and Pinkertons Inc.
Judge Webster, a Washington beltway heavyweight, has impeccable credentials and greater experience with, and access to, intelligence than most. He was named a U.S. District Court judge in 1970, elevated in 1973 to the U.S. Court of Appeals for the Eighth Circuit, served as the director of the FBI from 1978 to 1987, then as the director of the CIA from 1987 to 1991, and last year was named head of a commission to do a thorough and independent review of the FBI's internal security after revelations that FBI Special Agent Robert Hanssen moonlighted as a Russian mole for about 22 years.
Stockwatch revealed Tuesday that U.S. Technologies features strong roots on Howe Street, the centre of dealings for the former Vancouver Stock Exchange, that its controlling shareholder was a shell company in the secretive offshore enclave of the Turks and Caicos Islands, that several former directors were previously key directors in Pan Pacific Gold Corp., a controversial VSE promotion, that one former company president held U.S. Technologies shares in accounts at eight brokerages over a 2-1/2-year period, and that another former director had an account at a brokerage allegedly controlled by Phil Gurian, a Florida-based close associate of Phil Abramo, a reputed capo in New York's deCavalcante Mafia family.
The latest unflattering revelation regards Mr. Westergaard, who touted penny stocks and other small-cap issues until late 2000, when the SEC launched its prosecution against him and his two main companies: Westergaard.com Inc. and Westergaard Broadcasting Network.com Inc.
U.S. Technologies is not the sort of company which attracts a lot of attention from Wall Street analysts. The penny stock promotion, now virtually insolvent, has three main 100-per-cent owned subsdiaries: Labour to Industry, also know as LTI, a contract manufacturer, and dot-com incubators E2Enet Inc. and Yazam.com Inc.
The only apparent Wall Street endorsement on U.S. Technologies' web site is an excerpt from an upbeat report by Mark Hayes, described as a "senior analyst" with Westergaard Online. "Wouldn't it be terrific PR for an American multinational to repatriate jobs from foreign sweat shops to American prisons under the U.S. Government's PIE (Prison Industry Enhancement) Program -- a program that saves taxpayers' money, helps victims get financial restitution, helps freed inmates find jobs, doesn't take jobs away from working Americans, and reduces recividism?" asked Mr. Hayes in the highlighted excerpt.
Before Mr. Webster joined U.S. Technologies' board, the company's only significant subsidiary was Labour to Industry, which operates industrial facilities in state and federal prisons staffed mainly with inmate labour, a kinder and gentler American version of China's prison factories. In April, 2000, the same month Mr. Webster became a director, U.S. Technologies acquired E2Enet, which owns tiny stakes in an eclectic mix of embryonic dot-coms with such names as Gomembers.com, Final Arrangements LLC, Baobob Inc., Phlair Inc., My Virtual Model and Plant America. A year later, in March, 2001, U.S. Technologies acquired Yazam.
The U.S. Technologies endorsement was one of many penny stock companies touted by Mr. Westergaard's operation. Not all have been winners. Mr. Westergaard, a well-known analyst in his prime in the 1960s, took to touting penny stocks in his later years.
One company which caught Mr. Westergaard's eye, in mid-1995, was The Instant Publisher, listed on the tiny Canadian Dealing Network over-the-counter market. Instant Publisher, which later changed names to Diversinet, was one of the dubious promoters in the stable of Toronto penny stock promoter Jack Banks, who also calls himself Jacques Benqueses.
Mr. Westergaard was quite enamoured with Instant Publisher, touting it as the next best thing to Xerox in the 1960s. The tout predicted the company could earn $2 (Canadian) a share by fiscal 1997. In late 1995, he touted a target price of at least $70 (U.S.) a share. Alas, all did not go well. The company's stock price collapsed and its promoters fared worse.
In March, 2000, Mr. Banks and close associate Larry Weltman, also of Toronto, were indicted by Manhattan District Attorney Robert Morgenthau for allegedly stealing more than $32-million from National Westminster Bank PLC's Coutts & Co. subsidiary in a scheme involving one of their Canadian public companies, Laser Friendly. That September, the pair pled guilty, agreed to pay fines of $100,000 and restitution of $400,000 each, consented to a worldwide bar from serving in a controlling management position in any public company, and agreed to five-year ban on entering the U.S.
According to SEC documents, in late 1994, Mr. Banks and Mr. Weltman's Laser Friendly was one of the penny stock promotions featured in a dubious $200-million share certificate leasing scheme masterminded by Swiss-German fraudster-financier Guido Bensberg, a former part-time Vancouver resident well known on Howe Street. The scheme involved dealings in at least six offshore secrecy havens, including Switzerland, Aruba, the Isle of Man, the Turks and Caicos Islands, Bermuda, and the British Virgin Islands.
Two other more recent Westergaard penny-stock touts also collapsed: Biker's Dream and Premier Laser Systems Inc.
Westergaard.com analyst Bob Thayer repeatedly touted Biker's Dream as it collapsed in 2000, putting a happy spin on the company's bad news. Among the company's notable directors were Humbert Powell III, who served as chairman of controversial now defunct Montreal brokerage Marleau Lemire's American operations.
In April, 2000, when the Westergaard operation suspended coverage with the stock at 62 cents, the pair played good cop/bad cop, with Mr. Thayer outlining the bleak financials and Mr. Westergaard offering some optimism. "It would not take a great deal of money to put this company solidly on its feet -- probably less than $10M which is chickenfeed to some people (too bad Malcolm Forbes who was a big time biker is not still around) -- and as to the gross margin problem, we note that prices have been raised such that the estimates Bob made in his recent scenario may yet be achieved this year!!!" stated Mr. Westergaard.
The previous September, Westergaard Broadcasting's Mr. Thayer predicted Biker's Dream would post 2000 sales of $41-million and earnings per share of 82 cents before tax. In February, 2000, he boosted his estimate to net income of $3-million on $45-million in sales. "WBN breaks out the analyst's wrenches to see how fast this manufacturer of American heavyweight cruiser motorcycles can go," he stated. A few months later, the company posted a $6-million loss for 1999, its chief executive officer resigned and it missed a key debt payment of $600,000.
Mr. Westergaard's most notably disastrous call was Premier Laser Systems. In a bullish September, 1999, report, Westergaard analyst Patrick Sheehan stated the company was "clearly at the forefront of laser technology development in three primary categories of medical therapy: vision, dental and surgical."
This bullish report came out soon after Internet-based stock critic TheTruthseeker.com issued an "immediate sell" recommendation. "After considering PLSIA's history of problems and their ongoing SEC investigation into fraudulent revenue recognition, the outstanding litigation involving a class action lawsuit, we are advising the public and our members to sell their shares immediately," stated the critic.
Two years earlier, in mid-1997, Mr. Westergaard was so bullish on Premier Laser that he publicly announced a $5,000 bounty to flush out Internet detractor "Steve Pluvia." Mr. Westergaard also told TheStreet.com that he was launching Westergaard Cyberpatrol or WBN Cyberpatrol to attack other hostile naysayers on Internet chat sites. "The Cyberpatrol will be monitoring the Internet at all hours," he boasted.
By mid-2000, however, Premier Laser and its main tout, Mr. Westergaard, were both collapsing.
In May, 2000, a month after Mr. Webster joined Westergaard tout U.S. Technologies, Mr. Westergaard received a Wells warning notice from the SEC, informing him he was about to be charged with disclosure violations.
On Sept. 27, 2000, the SEC launched an unrelated prosecution of Premier Laser as part of a broad 11-action crackdown on companies "cooking the books." "These actions allege a variety of accounting abuses that were designed to fraudulently mislead the investing public about the state of the issuers' financial health," stated the SEC. "These actions underscore that the SEC has a zero tolerance policy toward public companies and their officers who attempt to undermine the integrity of our securities markets by engaging in fraudulent accounting practices to the detriment of public investors," stated SEC Pacific regional director Valerie Caproni.
The SEC complaint alleges chief financial officer Michael Hiebert caused Premier to overstate quarterly revenue by more than a third in its 1997 third quarter. "It did so by recognizing $2.4-million in revenue from a purported sale of dental lasers to an entity that in fact did not place an order but merely entered into a non-binding letter of intent to market the lasers. The purported order was the largest Premier had ever received and, if it had been real, would have resulted in the company's first-ever quarterly profit," states the SEC.
The complaint alleged Mr. Hiebert failed to review adequately documentation supporting the purported sale. "As a result, Premier's now-deceased executive vice-president was able to perpetrate the fraudulent scheme involving the creation of a fictitious customer order form and the shipment of 100 lasers to a warehouse." Mr. Hiebert agreed to a $10,000 fine.
On Dec. 27, 2000, the SEC launched its prosecution of Mr. Westergaard, Westergaard.com and Westergaard Broadcasting Network, claiming they failed to disclose that companies they touted paid them up to $48,000 each for their services. Five companies touted on his Johnny Dot.com Internet radio show were singled out for attention. While both his companies settled simultaneously with the filing of the complaint, agreeing to refrain from future securities violations, Mr. Westergaard fought back to preserve his fine name.
Facing impending charges, Mr. Westergaard fired off a strong letter, dated Dec. 15, 2000, to Mr. Levitt, Mr. Pitt's predecessor as head of the SEC. Mr. Westergaard also enlisted "our mutual friend, the senior senator from New York," Senator Daniel Patrick Moynihan, to subtly lobby Mr. Levitt on his behalf.
Mr. Westergaard complained that due to the SEC's "traffic ticket level violation" against him, his public company had to collapse a $1.5-million private placement financing and shut down its operations. "Out of money and unable to raise more with the SEC cloud hanging over us, the business was shut down August 15th. 18 highly paid professionals lost employment. My entire net worth -- as of 1999 in low eight figures -- was blown away. I am now destitute, unemployable, and reduced to living off $1,500 monthly from SSA. A widowed sister resident in Washington is taking me in."
"Arthur, you and I go back together 50 years and we know a lot of the same people in New York and Washington," Mr. Westergaard stated to Mr. Levitt.
"This matter has been reviewed professionally or informally by friends of yours and mine and by others at various firms, including, but not limited to, Shearman & Sterling; Cadwalader Wickersham & Taft; Wilmer, Cutler & Pickering; Kogan, Taubman & Neville; Verner Liipfert Bernhard McPherson & Hand; Wolf, and Block, Schorr and Solis Cohen. No lawyer with whom I have spoken, or for that matter any other mutual friends or others who have reviewed this matter, believes that the Securities and Exchange Commission would maliciously destroy a respectable business over a few words in a disclosure statement."
Mr. Westergaard also complained about a Wells warning meeting with SEC enforcement staff in June, 2000. "At that meeting your staff also learned that I am terminally ill with prostate cancer that has metastasized to my spine. Two days after the meeting and of learning of my vulnerability, the Commission stated it would not only bring an action against the Westergaard corporations as had been contemplated, but against me personally which is what the intended action next week is about."
Mr. Westergaard rounded out his plea with some personal memories. "Arthur, I have fought for civil rights all my life," he added. "Then came Martin Luther King with whom I marched."
Mr. Westergaard copied the lengthy and not-too-subtle letter to Senator Moynihan, Senator Charles Schumer, Congresswoman Charles Schumer, SEC staff lawyer Eric Schwartz and SEC commissioners Isaac Hunt, Laura Simone Unger and Paul Carey.
Despite the heavy pressure, the SEC never backed down. Close to a year later, on Oct. 16, 2001, Mr. Westergaard finally settled the SEC's case, agreeing to refrain from future securities violations. "The court did not impose a civil penalty on Westergaard based on his sworn Statement of Financial Condition," stated the regulator.
bmudry@stockwatch.com |
