B.C. Securities Commission - Street Wire
CDNX member Union's Koenig was watched closely
B.C. Securities Commission *BCSEC
Thu 20 Sept 2001 Street Wire
See Securities and Exchange Commission (*USSEC) Street Wire
by Brent Mudry
The American federal undercover investigation of Vancouver broker Trevor
Koenig offers a rare public insight into the murky world of penny stock
manipulations. Mr. Koenig, a big producer for Union Securities, was
arrested Aug. 31, on the start of the Labour Day weekend, and remains in
custody in the Federal Transfer Centre in Oklahoma City, pending transfer
to the Southern District of New York, the United States Marshals Service
told Stockwatch on Thursday.
According to an unsealed federal complaint, Mr. Koenig was unwittingly
snared in an undercover operation when his star client, a crooked promoter
turned informant, set up a sting manipulation of shares of Internet Venture
Group Inc. last October, with federal agents watching every move.
This undercover operation took place four months after Mr. Koenig's
employer, Union Securities, received extensive unfavourable publicity in
June, 2000, when it was exposed as the key conduit for trading in shares of
WAMEX Holdings Inc., one of a number of Mafia-linked penny stock promotions
shut down by the FBI and the United States Securities and Exchange
Commission.
In a sealed complaint, recently unsealed, Assistant United States Attorney
Robert Hotz Jr. claims Mr. Koenig manipulated trading in Internet Venture
Group shares from at least September, 2000, to November, 2000, by
"employing devices, schemes and artifices to defraud," and by making false
statements of material facts. In the second count, Mr. Koenig is alleged to
have manipulated WAMEX trading from November, 1999, to June, 2000.
The allegations have not yet been proven in court and Mr. Koenig remains
presumed innocent until proven guilty beyond reasonable doubt.
The extent of the Koenig probe is likely to give other penny stock brokers,
in Vancouver and the U.S., at least some momentary pause before embarking
on or continuing to engage in rig jobs.
Court-filed documents on the Koenig operation read like a detailed course
summary for Rig Jobs 101 at Penny Stock College.
The key player in the Koenig case is CW-1, or Co-Operating Witness No. 1, a
stock promoter who has engaged in the manipulation of OTC Bulletin Board
stocks since 1995.
In extensive discussions with Robert Manchak, a criminal investigator with
the U.S. Attorney's Office in the Southern District of New York, CW-1
outlined his manipulation schemes, which all followed a similar pattern, or
modus operandi.
"CW-1 would approach the principals of OTC Bulletin Board companies seeking
to raise capital and increase the price of their stock. CW-1 would enter
into agreements with these principals whereby CW-1 would agree to
manipulate the price of the companies' stocks to certain predetermined
level," states Mr. Manchak in the complaint.
This level would usually be $4 to $5 a share, which is the minimum price
required for trading on Nasdaq's Small Cap Market. (All figures are in U.S.
dollars.) For his efforts, the rig-job promoter would receive "substantial
amounts" of free-trading shares at significant discounts to market prices.
"CW-1 would place these free-trading shares in various nominee accounts in
Canada and the United States in order to conceal his identity and to avoid
SEC reporting requirements. CW-1 and other co-conspirators would recruit
market makers to make markets in the stocks and to set their bid and ask
prices for the stocks according to CW-1's instructions," states Mr.
Manchak.
The complicit market makers would then post completely artificial stock
quotes, arbitrarily set by CW-1. In return for this vital work, CW-1 and
his rig-job associates would indemnify the market makers by guaranteeing
they would make a profit and never suffer a loss in their long or short
positions.
Enter Mr. Koenig.
"CW-1 would communicate his instructions to the market makers through
Trevor Koenig, the defendant, and others. CW-1 stated that Koenig was
CW-1's broker at Union Securities in Vancouver, Canada, and that Koenig had
executed trades in these manipulated stocks from CW-1's nominee accounts,"
states the criminal investigator.
CW-1 told the federal official that Mr. Koenig understood that the
promoter's goal was to artificially manipulate the stock price and sell his
shares into the rigged market at a substantial profit.
"CW-1 would communicate instructions about stock price movements to Koenig
via the America Online Instant Messenger service, which CW-1 explained
could not be recorded or traced, unlike more conventional methods of
communication such as telephone calls or E-mail transmissions."
Mr. Koenig would then relay CW-1's instructions to the market maker
co-conspirators either through Instant Messenger or cellular phone calls.
CW-1 told the FBI that Mr. Koenig's screen name on Instant Messenger was
"teknion11."
(Mr. Koenig freely confirmed his IM use and screen name to Mr. Manchak soon
after he was detained and taken into custody at the border.)
"Once the agreements with the market makers were in place, CW-1 would begin
'sweeping the street' -- that is, buying up the stock from other third
parties in order to control the float and in order to artificially inflate
the offer price of the stock," states the complaint.
CW-1, the promoter, would then orchestrate the stock's price rise by
directing his market maker associates to gradually increase their bids to
artificially inflate the market.
With this rig job foundation in place, CW-1 would then begin disseminating
false and misleading information to the market place to boost the demand
and stock price. The promoter would enter into agreements with investor
relations firms to distribute press releases, E-mails to investors, and
market research reports.
"Typically, CW-1 would require that the principals of these firms hold
their shares in accounts at Union Securities and Trevor Koenig, the
defendant, would act as their broker. CW-1 explained that he directed these
principals to Koenig so that CW-1 could more easily monitor their trading
activity," states Mr. Manchak. (Promoters hate being back-doored by anyone,
and keeping such tight tabs ensures the rigged market will not be upset.)
In typical fashion, once the stock price was artificially inflated to a
certain level, CW-1 would then begin dumping his shares, usually realizing
profits in excess of 200 per cent to 300 per cent.
"CW-1 also related to me that two of the stocks that he had manipulated,
among numerous others, were ITVI and WAMEX. CW-1 also stated that Trevor
Koenig, the defendant, participated in these market manipulation schemes,
and others, by communicating CW-1's instructions with regard to price
movements to the co-conspirator market makers, as explained above," states
criminal investigator Mr. Manchak.
After CW-1 candidly told all, the feds set up Operation Koenig.
"The USAO and the FBI obtained approval from Main Justice and the SEC to
conduct an undercover operation whereby CW-1 would manipulate the price of
ITVI stock at the instruction of the USAO and the FBI over the course of a
five-day trading period from on or about October 25, 2000, through October
31, 2000," states the complaint.
The undercover trading actually ended on Oct. 30. To maintain control and
build a solid case, the undercover operation was limited to certain time
windows during each of the trading days.
As part of the undercover operation, CW-1 was given a computer terminal
with Instant Messenger capability at an undercover location. At all times,
he was supervised by FBI special agents and/or Mr. Manchak.
"At our instruction, CW-1 had a series of IM communications with Trevor
Koenig, the defendant, who was using the name 'technion11,' concerning the
price of ITVI," states Mr. Manchak. These messages were saved on CW-1's
hard drive and later copied.
To illustrate Mr. Koenig's key role, a number of transactions have been
publicly documented.
At 1:51 p.m. Eastern on Oct. 25, 2000, CW-1 sent an Instant Messenger
message to Mr. Koenig, asking, "Who is on the box for us ITVI?" Based on
their experience, federal officials contend this question asks which market
makers are involved in the manipulation of Internet Venture Group.
"wdco so far," Mr. Koenig responded, referring to Wilson-Davis & Co., a
market maker in Salt Lake City, Utah, a city with a long-standing
reputation as a key centre for dubious penny stock deals.
"Tell ALEX to move the bid to 1.78 and move him down on offer to 1.93,"
CW-1 instructed Mr. Koenig, referring to California market maker J.
Alexander Securities.
On cue, three minutes later, at 1:56 p.m., J. Alexander boosted its bid to
$1.78125 and lowered its offer to $1.9375, as instructed.
A few minutes after that, at 1:59 p.m., CW-1 instructed Union's Mr. Koenig
"to put NAIB at 2.03 offer," referring to NAIB Trading Corp., a market
maker based in Florida.
"NAIB is offered for us," Mr. Koenig replied on Instant Messenger, with FBI
agents watching the screen like hawks. Federal agents contend this
statement indicates Mr. Koenig had contacted a market maker at NAIB who
agreed to follow CW-1's directions.
On cue, three minutes later, at 2:02 p.m., NAIB dropped its quoted offer
from $2.09375 to $2.03125 per share, as instructed.
At the same minute NAIB was dropping its offer, CW-1 told Mr. Koenig to
"WDCO bid at 1.59 please." Federal officials contend this was an
instruction for Mr. Koenig to contact the market maker at Wilson Davis and
tell him to set a $1.59 bid price.
On cue, three minutes later, at 2:05 p.m., Wilson-Davis complied by
boosting its quoted bid from $1.0625 to $1.59375, an abrupt change that
would make eyes pop anywhere but on the OTC-BB.
"Based on my review of these trading records, I learned that on or about
October 27, 2000, Trevor Koenig, the defendant, bought approximately 13,900
shares of ITVI from Wilson-Davis & Co. after the close of trading, which
was the second largest purchase of ITVI stock that day," states Mr.
Manchak.
Based on his experience and detailed conversations with CW-1, the criminal
investigator says its appears this transaction was executed in order to
indemnify Wilson-Davis by eliminating its long position while allowing the
market maker to make a guaranteed profit.
In the complaint, federal officials also note CW-1 fingered Union's Mr.
Koenig as a key player in the WAMEX stock manipulation, the Mafia-linked
rig job.
"On or about November of 1999, CW-1 had entered into an arrangement with
the principals of WAMEX whereby CW-1 would acquire the control of WAMEX's
free-trading shares through various nominee accounts at Union Securities
... Trevor Koenig, the defendant, was the broker responsible for CW-1's
nominee accounts," states Mr. Manchak.
CW-1 told the FBI that his agreement with the principals of WAMEX was to
manipulate the stock price, using his usual modus operandi.
"CW-1 stated that he instructed Trevor Koenig, the defendant, to direct the
quotations that market-maker co-conspirators were posting on the OTC
Bulletin Board concerning WAMEX," states the federal complaint.
WAMEX was a big winner for CW-1, netting him with $24-million in illicit
profits, at least before cutting the take with his secret associates.
The rig-job promoter bought 4.1 million shares of WAMEX and sold 5.9
million shares. After an extensive review by the SEC, the FBI claims that
all of these trades were executed by Mr. Koenig, who was the broker for
CW-1's nominee accounts, offshore and otherwise, at Union Securities.
Much of the WAMEX proceeds were funnelled into the primary correspondent
account of Exchange Bank & Trust at Bank of Montreal's main Vancouver
branch.
EBT, a Nevis-based brass plate bank set up by Itex Corp. fraud mastermind
Terry Neal, was courted by Bank of Montreal, which spoke highly of its
client even after the British Columbia Securities Commission, acting on the
request of the SEC, abruptly froze the $19-million account in April, 2000.
The account remains frozen.
The SEC had been pursuing funds transfers of e-Connect rigger Stephen
Sayre, the Los Angeles tree-trimmer-turned-Internet-tout, and tracked
several big wires he made from bank accounts in Las Vegas. An extensive
investigation after the account was frozen shows it is an apparent money
laundering account for a variety of stock crocks and assorted rogues,
although EBT also probably has some legitimate clients as well.
Proceeds from sales of WAMEX shares in a Union account under the name
Dottenhoff Financial Ltd., an offshore account first linked by Stockwatch
to EBT, were transferred to EBT's money laundering account at Bank of
Montreal.
The FBI claims a portion of these funds were sent by Dottenhoff to promoter
Roger Detrano who, in turn, paid a portion of the money to WAMEX. (It is
not known whether Mr. Detrano is CW-1.)
In a predawn raid on June 14, 2000, co-ordinated with the SEC, more than
600 agents fanned out from New York to California, arresting dozens of
dirty stock promoters, company officials, Mafia associates and others.
The overall case, which U.S. authorities called the largest stock fraud
case in American history, involved more than 100 defendants, including at
least 11 members and associates of five different organized crime families.
Unbeknownst to the targets, federal officials had infiltrated DMN Capital
Investments Inc., a financial advisory firm central to the New York mob's
rig jobs of WAMEX and other penny stocks, and had been listening in on two
electronic bugs for more than six months. In 104 days of monitoring, dating
back to Dec. 1, 1999, the FBI obtained more than 1,000 hours of audiotapes.
Among those arrested the morning of the massive and well publicized raid
were WAMEX chief executive officer Mitchell Cushing and the company's
vice-president, Russell Chimenti, nabbed at their respective homes in
Manhattan and Brooklyn.
With the pair in custody before markets opened, the SEC imposed a 10-day
trading halt on WAMEX. Before the halt, the stock had last traded at $1.62,
down from a peak of $22.50 that February.
The SEC claimed WAMEX's much touted Alternative Trading System for
securities was bogus, as it was not authorized, as claimed. WAMEX claimed
its purported "revolutionary trading platform" would provide investors with
24-hour access to the market, seven days a week, at low cost and with
anonymity across all continents. The ATS would ostensibly handle any major
currency, nine different languages, and be linked to all major exchanges.
The regulator also questioned the legitimacy of numerous WAMEX press
releases, including one asserting the company had closed a $6.9-million
financing with an unidentified investment group.
In a related SEC prosecution, the SEC filed suit the District Court of
Phoenix in the summer of 2000 against two Union clients who touted WAMEX
and other dubious penny stocks, including several other Vancouver-linked
promotions.
The U.S. regulator, assisted by the BCSC, targeted Stephen B. Marek, last
seen offshore after leaving Nanaimo, B.C., and partner Dominic Roelandt of
Belgium. Mr. Marek had lived in Salome, Ariz., before moving to Nanaimo,
and subsequently popped up in the Turks & Caicos Islands, a secretive
offshore haven favoured by penny stock players.
Using Mr. Roelandt's Internet newsletter "Coldstocks" and Mr. Marek's tout
sites "BigProfitNews" and Bulls-Eye Stocks," the pair touted 35 penny
stocks in return for shares or cash. In an Aug. 29, 2000, court consent
judgment, the pair was ordered to pay a total of $286,000 in fines and
disgorgement.
SEC documents note the pair used accounts at Union Securities in Vancouver.
On Oct. 11, 2000, exactly two weeks before Operation Koenig was launched, a
number of CW-1's other co-conspirators, including the principals of WAMEX,
were indicted by a grand jury in the Southern District of New York on
charges of securities fraud.
Ironically, Mr. Koenig's arrest first came to light when Union issued a
press release last week, two days after Stockwatch revealed the Vancouver
brokerage was a prime conduit in another U.S. criminal and SEC prosecution,
involving M & A West Inc. Union said it was "shocked and surprised" about
Mr. Koenig's Labour Day weekend border fiasco.
The brokerage knew about Mr. Koenig's arrest for a week before revealing
the unfortunate situation.
"We do not tolerate the use of Union Securities as a conduit for misconduct
or illegal activity and we believe we have done everything we can to
minimize the risk of that happening. We have always sought to have
reasonable and prudent procedures with changing times to help maintain the
highest levels of supervision. We believe our clients, through their own
experience with us, will continue to trust our service and rely on our
honesty and integrity as a company," stated Union president John Thompson.
This is hardly the first time the brokerage, or its brokers, have come
under the scrutiny of the SEC.
In October, 1998, Union agreed to pay $320,000 to the SEC, including
disgorgement of $140,100 and interest of $71,700, for its key role in the
1992-93 stock manipulation of Members Services. The fine is believed to be
among the biggest, if not the biggest, ever levied on an independent
Canadian brokerage by the SEC.
In one of the serendipities of the penny stock world, along with the June
14, 2000, arrests of WAMEX's top two executives in New York, London police
arrested Leslie Greyling, a de facto key director of another alleged mob
stock, E-Pawn.com Inc., that same day.
Mr. Greyling has lived in London since being deported from the U.S. about
four or five years ago after pleading guilty in the Members Service
securities fraud case.
In an ironic coincidence, meanwhile, WAMEX has recently taken a shine to
Nevis, the offshore haven favoured by EBT head Mr. Neal. WAMEX is gearing
up for the launch of its Instox trading Web site in a joint venture with
CaribSecurities.com.
The parent of CaribSecurities.com, CSCO Ltd., not to be confused with the
symbol for Cisco Systems, is based in Nevis, while Instox Inc. was formed
by three companies as a Nevis corporation.
(Readers wishing more details of Union's Koenig case may refer to Street
Wires dated Sept. 13, Sept. 14, Sept. 17 and Sept. 18, under the Canadian
symbols *CDNX and *BCSEC. Union's M & A West case is noted in Street Wires
dated Sept. 11, Sept. 13 and Sept. 14 under the same symbols.)
(Readers wishing more details of the WAMEX case may refer to Street Wires
dated June 14, 2000, June 15, 2000, and Sept. 1, 2000, and the Koenig
pieces, under the U.S. symbol WAMX.)
(Former Itex head Mr. Neal's Exchange Bank & Trust affair is noted in a
28-part Stockwatch series in Street Wires May 4, May 5, May 8, May 9, May
10, May 11, May 12, May 16, May 17, May 18, May 19, May 23, May 24, May 26,
May 29, May 30, June 1, June 5, June 15, Sept. 19, Oct. 6, Oct. 24 and Nov.
30, 2000, Jan. 19, 2001, Jan. 24, 2001, April 3, 2001, May 11, 2001, and
June 21, 2001, under the Canadian symbol BCSEC and the U.S. symbol ITEX.)
(c) Copyright 2001 Canjex Publishing Ltd. stockwatch.com |
