SEC wins injunction on Wolfson's Olsen Payne broker
2003-07-17 13:03 ET - Street Wire
Also Street Wire (C-*TSX) TSX Venture Exchange
by Brent Mudry
Canada's most respected securities regulator has entered a permanent injunction against a Salt Lake City, Utah, broker charged in two civil cases of separate rings of American penny stock players who allegedly used Vancouver brokerages in manipulative stock frauds. The United States Securities and Exchange Commission announced Tuesday that Kevin Kirkpatrick, 42, was enjoined from future securities violations by Judge Tena Campbell of United States District Court for the District of Utah. While Canadian brokerages, especially those in Vancouver, were often used as conduits, there is no suggestion these brokerages or any of their officials had any idea anything was amiss.
The judge has not yet decided on fines and disgorgement, if any, for Mr. Kirkpatrick's role in the manipulation of Freedom Surf Inc. from July through November, 2000. The alleged penny stock rig job featured Allen Z. Wolfson, 55, a notable Salt Lake City promoter currently in jail in the New York Metropolitan Correctional Center in an unrelated case.
In this separate case, which involved criminal and SEC proceedings, Mr. Wolfson was convicted March 26 after a month-long trial of conspiracy, securities fraud and wire fraud offences arising from his scheme to manipulate six penny stocks from early 1999 through July, 2000, resulting in losses to the public of at least $7-million. (All figures are in U.S. dollars.) In this case, part of Operation Uptick, a massive FBI bust of Mafia-linked penny stock promoters, Mr. Wolfson bribed numerous U.S. brokers through offshore wires to a mobbed-up middleman, Michael Grecco, an associate of the Colombo organized crime family.
While Mr. Kirkpatrick was not involved in the Operation Uptick case, he was involved in a third U.S. penny stock case featuring offshore dealings through accounts on Howe Street, Vancouver's penny stock centre. Mr. Kirkpatrick was named a defendant in the SEC prosecution of Maid Aide Inc., for which he was fined a total of $200,000 earlier this month. A number of Maid Aide players were also charged criminally, led by Las Vegas lawyer Max C. Tanner, jailed for eight years. (Mr. Wolfson was not involved in the Maid Aide case.)
WOLFSON'S FREEDOM SURF PROMOTION
The SEC filed a civil action Sept. 30, 2002, in U.S. District Court for the District of Utah, charging Mr. Kirkpatrick, Mr. Wolfson, 11 other individuals and a Dallas-based brokerage with securities fraud in a scheme to manipulate shares of Freedom Surf from July through September of 2000. "The stock manipulation scheme perpetrated by Kirkpatrick and others appeared to shut down when SEC staff began investigating in November, 2000," stated the SEC on Tuesday.
The securities fraud complaint came six months after the SEC filed an accounting fraud action against the former president and former vice-president of Freedom Surf, since renamed Freestar Technologies, alleging they cooked the books by falsifying the company's financial statements.
In the securities fraud case, the defendants include Mr. Kirkpatrick, a broker at Olsen Payne, Mr. Wolfson, his son David Wolfson, 24, also of Salt Lake City, Mervyn Phelan Sr., 63, of Laguna Beach, Calif., his son Mervyn (Bo) Phelan Jr., 33, of Dana Point, Calif., disbarred attorney and convicted felon John W. Cruickhank Jr., 64, of Downey, Calif., trader Robert H. Pozner, 58, of Ridgewood, N.J., Dallas brokerage Salomon Grey Financial Corp., and three Texans: its president Kyle Rowe, 36, of Dallas, its chief executiver officer Angelo Paul Koupas, 34, of Frisco, and its head trader Christopher Roundtree, 25, of Little Elm. Also named were John Chapman, 61, of Salt Lake City, Craig H. Brown, 46, of Laguna Beach, and three of Allen Z. Wolfson's companies: Feng Shui Consultants Inc., formerly World Alliance Consulting Inc., A-Z Professional Consultants Retirement Trust Inc. and the AZW Irrevocable Trust.
"The SEC's complaint alleges that Phelan Sr. originated the scheme to manipulate Freedom Surf stock, and enlisted Allen Wolfson to carry it out. In July and August 2000, Phelan, his son, Phelan Jr., and Brown, transferred 345,000 Freedom Surf shares at no cost to Wolfson. Wolfson then deposited the shares in accounts he controlled at Olsen Payne. Then, Allen Wolfson and his son, David Wolfson, directed Kirkpatrick, a stock trader at Olsen Payne, to bid up the price of Freedom Surf by posting artificially high quotations for the stock;" states the SEC.
"Pozner, a trader at Glenn Michael Financial, bid up the stock price in concert with Kirkpatrick and on Allen Wolfson's instructions. Through these manipulative activities, Wolfson and the other defendants caused the Freedom Surf stock price to increase from $5 to $40 in approximately two months, before the stock was split 4 for 1 on October 11, 2000."
The SEC also claims Salomon Grey, Mr. Koupas and Mr. Rowe had a pre-existing arrangement with Mr. Phelan Sr. and Allen Wolfson to obtain free and deeply discounted blocks of Freedom Surf stock for retail sales to the public at manipulated prices. The complaint further alleges that the defendants shut down the manipulation after SEC staff began investigating in early November, 2000, and the stock collapsed to a low of 19 cents by the end of the year.
The SEC claims that Mr. Chapman, who works with Mr. Wolfson, had trading authority over five of six entities holding Canadian brokerage accounts that engaged in manipulative trading. Mr. Chapman and Mr. Wolfson both opted to assert their Fifth Amendment right against self incrimination and refused to testify in the SEC's investigation.
The SEC complaint notes that on July 21, 2000, Freedom Surf had its first price quotation, when market maker Mr. Kirkpatrick, on behalf of Olsen Payne, posted a $5 bid and a $10 ask price. Mr. Kirkpatrick was no slouch, according to the court filing. "Between July 21 and October 11, 2000, (the day of Freedom Surf's stock split), Kirkpatrick increased the bid price 53 times, to $40. During that time period, Olsen Payne posted or maintained the exclusive high bid on 51 of 58 trading days," states the SEC document.
"There was very little trading done during this time period. During the approximately two months when Freedom Surf stock went from $5 to $40 (July 21 through September 28, 2000), Kirkpatrick reported to NASDAQ only two transactions for a total of 200 shares, and, market-wide, there were only six transactions involving 850 shares, all of which were arranged trades."
The SEC claims that after the stock split on Oct. 11, 2000, Mr. Kirkpatrick posted a revised bid of $10 to reflect the split, and subsequently, between Oct. 17 and Oct. 23, Mr. Kirkpatrick raised the inside bid five times from $10.50 to $11.375. "During the entire period from July 21st to October 23rd, Kirkpatrick never reduced OLIE's (Olsen Payne's) bid quotation for Freedom Surf. Kirkpatrick had no client orders for his bid increases. He instead was steadily increasing the bid at the direction of Allen and David Wolfson," states the SEC complaint.
While Mr. Kirkpatrick was busy in Salt Lake City, fellow market maker Mr. Pozner was busy at Glenn Michael Financial Corp. in New Jersey, according to the SEC. "On July 21, 2000, Pozner, on behalf of Glenn Michael, matched Kirkpatrick's initial bid quotation of $5 just 2.5 minutes after Kirkpatrick's posting. Between July 21st and September 13, 2000, Pozner advanced Glenn Michael's bid sixteen times, from $5 to $35," states the SEC complaint.
"During this time, Pozner posted the exclusive inside bid nine times, and shared the inside bid with Kirkpatrick four more times. Even when he was not ahead of Kirkpatrick in bidding, Pozner was close behind, and in front of other market makers. Pozner posted the highest daily bid of any firm on seven days during this time period. Pozner had no client orders for his bid increases. He was instead increasing the bid at the direction of Wolfson."
The SEC claims that in moving the bid at Mr. Wolfson's direction, Mr. Kirkpatrick and Mr. Pozner knowingly and recklessly participated in and furthered the manipulation of Freedom Surf stock. Mr. Pozner, like Mr. Wolfson and Mr. Chapman, opted to plead the Fifth.
The SEC further claims that David Wolfson, Allen Wolfson, his office manager and executive assistant Bonniejean Tippetts, Mr. Kirkpatrick, Mr. Chapman and the senior Mr. Wolfson's three corporate defendants "effected manipulative, arranged public market trades among Wolfson-controlled accounts" between July 28, 2000, and Oct. 23, 2000, to inflate the stock price of Freedom Surf prior to a key block sale of 25,000 shares to retailer Salomon Grey.
This is the first time the Canadian accounts played a key role.
"Six accounts at Canadian broker-dealers generated all of the retail demand for Freedom Surf during the foregoing period: (1) East-West Trading Corporation at Union Securities, Ltd.; (2) East-West Trading at Canaccord Capital Corporation; (3) Karston Electronics at Canaccord; (4) Leeward Consulting Group LLC at Rampart Securities Inc.; (5) Consolidated Euro-Holdings at Credifinance; and (6) AZW Irrevocable Trust at Canaccord," states the SEC.
The regulator claims that Mr. Chapman, doing business as International Consulting, had trading authority over five of the six Canadian accounts. The SEC also claims that Mr. Chapman operates out of the same business address as Wolfson, and shares profits from trading in the Canadian accounts with him. (Ms. Tippetts is listed as trustee of the sixth account, AZW Irrevocable Trust.)
The SEC claims the Canadian accounts collectively purchased 12,950 shares of Freedom Surf from U.S. market makers in 10 transactions at increasing prices between July 28 and October 20, 2000. The regulator further claims that sell orders from the Wolfson-controlled accounts at Olsen Payne, near in time to the buy orders and in identical or nearly identical amounts, provided to the marketplace the stock that was used to fill the demand from the Canadian accounts.
According to the SEC, Mr. Wolfson's World Alliance and A-Z Retirement Trust accounts accounted for 100 per cent of the retail sales volume in Freedom Surf between July 28 and October 23, 2000, with Allen and David Wolfson calling in trades for the Olsen Payne accounts to Mr. Kirkpatrick during this period. The SEC claims these manipulative trades created actual and apparent activity in Freedom Surf stock, and caused the stock price to rise.
"In the spring of 2001, the defendants sold over 1.1 million shares of Freedom Surf stock in unregistered transactions from an escrow brokerage account controlled by Brown and Bo Phelan, and from the Chapman-controlled Canadian accounts," states the SEC.
The SEC claims the group continued trading through the Canadian accounts even after investigators appeared on the scene. (SEC investigators made surprise inspections of a number of the players on Nov. 30, 2000. The stock closed at $3.30 the day before, and plunged to a low of 19 cents in the following weeks after the manipulation was shut down.)
According to the SEC complaint, between August, 2000, and April, 2001, the Canadian accounts received more than 877,000 shares of Freedom Surf from sources directly linked to Mr. Phelan and Mr. Wolfson. The SEC claims that between March and June, 2001, the Canadian accounts sold over 196,000 of these shares into the market, even through no registration statement was in place and no exemptions were available.
Mr. Wolfson also faces criminal charges in the Freedom Surf case, in a New York grand jury indictment returned last December, but no trial date has yet been set.
TANNER'S MAID AIDE PROMOTION
So far, this has not been a good month for Mr. Kirkpatrick, the Olsen Payne broker who serviced Mr. Wolfson. On July 9, Judge Campbell of Utah ordered a permanent injunction against Mr. Kirkpatrick for his role in the Freedom Surf case. A week earlier, on July 2, Mr. Kirkpatrick was fined a total of $200,000 by a New York judge in the SEC's unrelated Maid Aide case.
Mr. Kirkpatrick was fined $92,000 for disgorgement, $33,200 for prejudgment interest and $75,000 for a civil penalty, in a summary judgment entered by Judge William Pauley, U.S. District Judge for the Southern District of New York. (Judge Pauley is no stranger to Canadian penny stock shenanigans, having sentenced Vancouver broker Trevor Koenig of Union Securities this January in the WAMEX case and fined Toronto lawyer Simon Rosenfeld $2.8-million in the unrelated Synpro civil prosecution in March, 2001.)
Judge Pauley found that from March through December of 1998, Mr. Kirkpatrick and his co-defendants, notably Las Vegas securities lawyer Mr. Tanner, engaged in a scheme to manipulate shares of Maid Aide Inc. The scheme involved gaining control of a majority of Maid Aide's shares, creating artificial demand through boiler room operations and creating the appearance of legitimate trading through Mr. Kirkpatrick at Olsen Payne.
The Maid Aide case was probed by the SEC, the BCSC, the FBI, the U.S. Attorney's Office for the Southern District of New York, and NASD Regulation Inc., the regulatory arm of the National Association of Securities Dealers. U.S. authorities, through the criminal prosecution and the SEC's civil case, have imposed a total of $15.3-million in assorted fines in the Maid Aide case.
According to U.S. authorities, Maid Aide, purportedly a commercial and residential cleaning services company, was little more than a promotional shell fronted by the personal house cleaner of Mr. Tanner's co-defendant Dennis Evans, also of Las Vegas. Within weeks of Mr. Tanner and Mr. Evans incorporating Maid Aide in September, 1996, with the cleaning lady as their front, Mr. Tanner opened his Delta Financial account at Pacific International.
Mr. Tanner, the key player, was a former Internal Revenue Service attorney convicted for his offshore penny stock fraud, money laundering and income tax evasion who has now been sent to jail for eight years and fined $3.25-million in restitution in the criminal case. The SEC earlier gave Mr. Tanner a lifetime ban on serving as an officer or director of a public company, and later temporarily banned him from serving as a securities lawyer. The lawyer was convicted in November, 2001, of 37 counts related to securities fraud, including mail, wire and tax fraud, and money laundering, at the end of a five-week trial.
His money laundering conviction related to his dealings at Vancouver brokerage Pacific International Securities through his company Delta Financial Resources, based in the secretive offshore enclave of the Cayman Islands. The Tanner sentencing attracted national attention, and kicked off a lead business story in the New York Times on U.S. income tax prosecutions. "He funnelled the money through Canada to the Cayman Islands to evade all taxes," noted NYT income tax reporter David Cay Johnston. (Pacific International was not mentioned.)
WOLFSON SNARED IN OPERATION UPTICK
In the early stages of the Freedom Surf rig job, Mr. Wolfson had the misfortune of being snared in the FBI's Operation Uptick, the largest stock fraud case in U.S. history, an overall case involving 120 defendants, including at least 11 members and associates of five different organized crime families. Besides Mr. Wolfson, the most notable penny stock player in the June 14, 2000, arrest operation was Mafia-linked New York promoter Ed Durante, a star client of Mr. Koenig, who later helped put the broker, a top producer at Vancouver's Union Securities, behind bars. (Mr. Koenig was recently released.)
The FBI bust apparently did little to deter Mr. Wolfson. Five weeks after his arrest, his Olsen Payne broker Mr. Kirkpatrick posted the opening quotation for Freedom Surf, on July 21, 2000.
The FBI's Operation Uptick was co-ordinated with the SEC, which launched five civil enforcement actions against 63 individuals, including Mr. Wolfson. Operation Uptick led to the arrest of 120 defendants on June 14, 2000. Less than three years later, by late March, more than 95 of the 120 defendants had been convicted on charges arising from the Uptick case.
In the criminal case, Mr. Wolfson and six co-defendants were arrested. Although Mr. Wolfson unsuccessfully fought a trial, resulting in his conviction this March, his six associates all previously pled guilty. Mr. Grecco, the Colombo Mafia associate, was sentenced on Jan. 16, 2002 to 46 months in prison. Robert Balsamo was sentenced on November 16, 2001,to 30 months in prison. Konstantinos Dino Sonitis was sentenced on Jan. 25, 2002 to fives months in prison and five months of home confinement. Three others -- Vladimir Carvallo, Spiro Lazaretos and John M. Black Jr. -- either are in the midst of or await sentencing.
Mr. Wolfson, the ringleader, faces a maximum of 65 years in prison, with a recommended sentence of at least 10 years. His sentencing was set for July 11, but rescheduled to Sept. 12.
According to the evidence at trial, Mr. Wolfson was a stock promoter and consultant who operated through a series of front companies he controlled in Salt Lake City, including Cyberamerica Inc., Hudson Consulting Inc. and A-Z Professional Consulting. The jury reviewed evidence that Mr. Wolfson used these fronts to obtain large blocks of free-trading stock in each of six small-cap companies at little or no cost. Mr. Wolfson then paid secret bribes of as much as 65 per cent of the purchase price of the stocks to stock brokers in New York to motivate them to sell those stocks to their customers, according to the U.S. Attorney for the Southern District of New York.
The six companies whose stocks were manipulated in 1999 and 2000 by Mr. Wolfson included ATR Industries, a home-cleaning service operating in Palm Beach, Fla., Learner's World Inc., which operated three day-care facilities in New York, Rollerball International, a Los Angeles manufacturer of in-line roller skates, Healthwatch Inc., a medical equipment company based in Atlanta, Ga., Hytk Industries Inc., a Kansas-based oil and gas company, and Power Exploration Inc., a Texas-based oil exploration company.
"Each of these companies were, at the time of Wolfson's stock manipulation scheme, consistently losing money. Several of them, including ATR Industries, Learner's World, and Hytk Industries, had little or no market for their stock prior to Wolfson's scheme to manipulate those securities, according to the government," states the U.S. Attorney's Office.
The jury heard evidence that Mr. Wolfson used a network of corrupt brokers in the New York metropolitan area to sell his stock in these companies to the public. To insulate himself, Mr. Wolfson used Mr. Grecco, the Mafia associate, as a middleman for the bribes. Mr. Wolfson paid Mr. Grecco bribes of up to 65 per cent, and Mr. Grecco passed on bribes of up to 40 per cent.
"The proof at trial established that Wolfson and Grecco used corrupt brokers at the following brokers dealers in the course of their scheme: Royal Hutton Securities, Bell Investment Group, Wolff Investment Group, Carribean Securities, Grady and Hatch & Co., Sharpe Capital, J. Banks Securities, and J.W. Barclay," states the U.S. Attorney's Office.
"The proof at trial showed that Wolfson's consulting company, Cyberamerica, employed a staff of cold-callers who actively sought out distressed public companies in need of financing. When such a target company was identified, Wolfson then offered consulting services to the company, taking payment in the company's stock. Wolfson then sold that stock into the demand generated by his manipulation scheme."
WOLFSON BEAT PREVIOUS CRIMINAL CASE
In 1996, four years before the Operation Uptick bust, Mr. Wolfson was snared in another major penny stock case, in which 45 promoters, brokers and associates were arrested after an extensive FBI undercover sting operation featuring two agents who helped arrange stock bribes. (Fugitive Vancouver promoter Daryl Buerge of Cam-Net Communications Network was also snared in this 1996 bust.)
Mr. Wolfson was charged with securities fraud, arising from his paying a 20-per-cent bribe to an undercover FBI agent, posing as a corrupt stock broker, to have the agent sell stock in a company named Alpha Solarco.
The jury in Mr. Wolfson's recent trial heard of his success in this previous criminal case. "Although that (1996) charge was dismissed in 1997, the evidence at trial (this year) included a recorded conversation between Wolfson and a co-operating witness working with the FBI in which Wolfson recounted his 1996 arrest for bribing the undercover agent, and explained that the 'only thing that got [him] off' that charge was his claim on tape that he 'only wanted to do what was legal,'" stated the U.S. Attorney's Office this spring.
THE VANCOUVER CONNECTION
An unrelated regulatory case also demonstrated Mr. Wolfson's fondness for Vancouver brokerages. In a Sept. 17, 1999, decision, NASD Regulation Inc., the enforcement arm of the National Association of Securities Dealers, fined broker Richard Dambakly $25,000 and banned him for one year in a case involving promissory notes related to Mr. Wolfson and his associate Mr. Chapman. The regulator alleged the broker participated in the issuance of four promissory notes by Trigon Corp. while he was associated with Paramount Investments International, a U.S. brokerage.
"One half of the (promissory note funds) transfers, totaling $240,000, originated with Canaccord Capital Corp., a Canadian broker-dealer; three originated with Union Securities, another Canadian broker-dealer; and one originated with Alan M. Berkun, who at the time was the owner of Marlowe & Company, a registered broker-dealer with the NASD," states the NASDR decision.
"Enforcement traced the source of the funds from the two Canadian broker-dealers and discovered that the funds originated from five accounts at those firms: East-West Trading Corporation ( East-West ), Karston Electronics Limited ( Karston ), Tamarisk Enterprises, Ltd. ( Tamarisk ), World Financial Corporation ( World Financial ), and Lexington Sales Corporation Limited ( Lexington ). Each of these firms is also a foreign corporation."
"Records obtained from the Vancouver Stock Exchange indicate that East-West and Karston are owned by Gordon Heywood, a resident of the United Kingdom. East-West lists its principal place of business as Nevis, West Indies, and Karston lists its principal place of business as Tortola, British Virgin Islands," states the NASDR.
"East-West had accounts at both Canaccord and Union Securities, and Mr. Chapman is designated as their representative on the account information forms. Mr. Chapman had authority to trade in Karston's account. The next two companies, Tamarisk and World Financial, have a number of common factors. Each has its principal place of business in the United Kingdom, and the Secretary of Tamarisk is the President of World Financial."
"Also, Alan Wolfson set up their accounts at Canaccord. Mr. Wolfson was a stock promoter who, in October 1996, was charged jointly with Mr. Chapman by the Securities and Exchange Commission in an administrative proceeding with violating the securities laws," states the NASDR decision.
These transactions all took place in the spring of 1996.
More than four years later, Mr. Wolfson had apparently not outworn his welcome on Howe Street. In late 2000 and early 2001, Mr. Wolfson used several of these previously red-flagged offshore companies, East-West and Karston, to allegedly perpetrate the Freedom Surf fraud, partly through accounts at the Vancouver brokerage firms.
As noted earlier, there is no suggestion that anyone at the the Vancouver or other Canadian brokerages had any idea anything was amiss.
bmudry@stockwatch.com |
