SEC claims Wolfson Jr. ally used Montreal brokerage
Securities and Exchange Commission *SEC
Wednesday January 7 2004 Street Wire
by Brent Mudry
In its first significant prosecution of an overseas boiler room operation, the United States Securities and Exchange Commission has won extended temporary injunctions against a series of alleged associates of David Michael Wolfson, the son of jailed Salt Lake City, Utah, promoter Allen Z. Wolfson. The SEC claims one of the group's penny stocks was manipulated last spring through a nominee account controlled by an associate of the elder Wolfson at a Canadian brokerage.
The injunctions, granted Dec. 22 and Dec. 23 in United States District Court for the District of Utah, enjoin the defendants from future securities violations and extend assorted asset freezes and evidence retention orders. The SEC launched its civil prosecution, naming the younger Mr. Wolfson and 20 other individuals and entities, in a complaint filed in federal court in Salt Lake City on Oct. 16.
The SEC claims that about 1,100 investors, mostly in the United Kingdom, Australia and New Zealand, were defrauded of $16-million from late 2002 through last September through high-pressure boiler room operations in Vientiane in Laos and in Thailand, which sold shares of five thinly traded U.S.-listed penny stock promotions. (All figures are in U.S. dollars.)
The regulator claims the scheme was organized by the younger Mr. Wolfson, Salt Lake City associate Gino Carlucci and Sukumo Ltd., an offshore boiler room operation headed by Michael Sydney Newman, alias Marcus Wiseman.
According to the SEC, the modus operandi, or procedure, was quite simple. Sukumo allegedly agreed to subscribe, in Regulation S offshore financings, for up to 10 million shares each of the stocks: Stem Genetics Inc., F10 Oil & Gas Properties Inc., Diversified Financial Resources Corp., Valesc Holdings Inc. and NCI Holdings Inc., usually for 30 per cent of the bid price in no-risk deals, then used its Asian boiler room to sell the shares in off-market transactions at close to full price. Investors wired their funds to U.S.-based escrow accounts, with Sukumo's 70-per-cent split allegedly then wired to offshore bank accounts in Laos, and Mr. Wolfson's group and the issuer allegedly splitting the remaining 30 per cent.
The complaint claims the prices of three of the thinly traded stocks -- F10, Diversified and Valesc -- were manipulated. The SEC claims Diversified's stock price was manipulated in mid-2003 by its chief executive officer, defendant John Chapman, through an account he controlled at Desjardins Securities in Montreal. Mr. Chapman, whom the SEC claims has known both the elder Mr. Wolfson and his son for 10 years, denies the allegations and none of the injunctions apply to him. There is no suggestion that Desjardins was anything other than an innocent conduit.
The SEC claims the younger Mr. Wolfson helped launch the scheme in late 2002 as his father was preparing for a potential move to prison. The elder Mr. Wolfson, convicted last March in an unrelated criminal penny stock case, currently resides at the Metropolitan Correctional Center as he awaits sentencing, which has been delayed several times.
ALLEN WOLFSON'S BACKGROUND
Although the elder Mr. Wolfson, 55, is not a defendant in the current Sukumo case, he and and his background are noted in the complaint and other court filings in the case.
The Sukumo case comes a year after Mr. Wolfson, his son David Wolfson, 24, Mr. Chapman, 61, and others were targeted by the SEC in a separate penny stock fraud case, alleging the manipulation of shares of Freedom Surf from July through September of 2000. That civil action was filed Sept. 30, 2002, in federal court in Utah.
In that case, the SEC claims that Mr. Chapman, who worked with the elder Mr. Wolfson, had trading authority over five of six entities holding Canadian brokerage accounts that engaged in manipulative trading. These six accounts were held at Vancouver-based Canaccord Capital and Union Securities, and Credifinance Securities and now-defunct Rampart Securities, both based in Toronto. All the brokerages were innocent conduits. The only Freedom Surf client named in the Sukumo complaint is Leeward Consulting Group LLC.
The elder Mr. Wolfson and Mr. Chapman both opted to assert their Fifth Amendment right against self incrimination and refused to testify in the SEC's Freedom Surf investigation, as they, along with the younger Mr. Wolfson, deny the regulator's allegations.
The elder Mr. Wolfson also faces criminal charges in the Freedom Surf case, in a New York grand jury indictment returned in December, 2002. His trial is set to start March 1, 2004.
The Freedom Surf indictment came as Mr. Wolfson geared up for a criminal trial in another separate prior penny stock case.
Mr. Wolfson was convicted March 26, 2003, 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. In that case, part of Operation Uptick, a massive FBI bust of Mafia-linked penny stock promoters and others, Mr. Wolfson bribed numerous U.S. brokers through offshore wires to a middleman, Michael Grecco, an alleged associate of the Colombo organized crime family.
THE SEC'S SUKUMO BOILER ROOM COMPLAINT
The key defendants in the current case include the younger Mr. Wolfson, Mr. Newman, a British national residing in Laos or Thailand, and his Sukumo Ltd., also known as Sukumo Group, Sukomo Ltd., International Investment Holding, First China Capital, First Chartered Capital Corp. and Fujiwara Group.
In its complaint, the SEC claims that since October, 2002, the junior Mr. Wolfson and the Sukumo boiler room have conducted an illegal scheme to mislead and defraud more than 1,000 investors, mainly British victims, through the sale of shares of Stem Genetics, F10, Diversified, Valesc and NCIH. The operation allegedly raised more than $16.3-million through these overseas offerings from Jan. 1, 2003, through Sept. 30, 2003.
The regulator claims that after locating companies wishing to raise funds offshore, such as F10, Diversified and Valesc, or forming their own companies, Stem Genetics and NCIH, Mr. Wolfson, Mr. Carlucci and their entities arranged offshore financings with Sukumo, which ostensibly agreed to buy up to 10 million shares, generally at 30 per cent of the market bid price.
Sukumo, however, was never on the hook in the financings, as it merely acted as a sales agent for the issuers. Its boiler room team, or phone chimps in industry jargon, cold called overseas investors to pitch the stocks and gave wiring instructions for escrow accounts in the U.S., pocketing a 70-per-cent commission for its efforts. The SEC claims the escrow accounts, in Salt Lake City, Mesa, Ariz., and Phoenix, were opened by Mr. Carlucci and Mr. Wolfson's employees. Sukumo encouraged its victims, or marks, to check the quoted prices for the stocks, which had allegedly been manipulated by Mr. Wolfson and his associates.
Regulators claim the scheme unfolded after the elder Mr. Wolfson passed over the reigns to his son. "Starting in at least December, 2002, David Wolfson worked side by side with his father Allen Wolfson, who was about to face trial on criminal securities fraud charges in New York and who was transferring a number of his business deals to David Wolfson to run while Allen Wolfson served possible prison time," states the SEC complaint.
The SEC claims that after his father left Salt Lake City, the younger Mr. Wolfson renamed his father's private company, Feng Shui Consulting Inc. as NuWay Holding and relocated the offices. (Feng Shui was a lead co-defendant in the SEC's Freedom Surf case, while NuWay is a lead co-defendant in the current Sukumo case.)
Among the stocks allegedly manipulated was Diversified, which was headed by Mr. Chapman.
Diversified was an extremely thin trader. The SEC claims that from March 20, 2003, when Diversified signed its offshore financing agreement with Sukumo, a total of 30,200 shares were traded at prices ranging from $1.01 to $2.65 a share.
According to the SEC, the total volume of Diversified's stock sales from February, 2003, through July 31, 2003, was a paltry 14,000 shares. "All the retail trading in the stock involved purchases by Chapman through an account he controlled at Desjardins Securities in Montreal," states the SEC complaint.
All of these purchases were made from Newbridge Securities, a Florida brokerage in Boca Raton. The SEC claims that Newbridge had an arrangement with Chapman whereby it would purchase any Diversified stock that came on the market and it would then sell the stock to Desjardins. The regulator claims that Mr. Chapman used an account he controlled at Desjardins to buy any stock that came on the market.
"Chapman, the president of Diversified, manipulated the price of Diversified at a time when Sukumo was aggressively marketing Diversified shares to overseas investors at prices tied to the quoted prices on the OTC-BB. Diversified never disclosed Chapman was manipulating the price of the company's stock," states the SEC in its complaint.
While the SEC alleges the Wolfson group also manipulated shares of Valesc, F10 and NCIH, the regulator only provides brokerage account details regarding Diversified.
The SEC fleshed in more details on Diversified and Mr. Chapman in its initial injunction application, filed Oct. 16, the same day as its complaint.
The regulator claims that Mr. Chapman has known both Allen Wolfson and his son David Wolfson for about 10 years, and it notes all three are co-defendants in the prior alleged scheme to manipulate shares of Freedom Surf.
The SEC claims that Diversified's initial relationship with Sukumo is reflected in two series of documents more than a month before Mr. Chapman became an officer of the company. The documents, dated March 20 and March 27, 2003, called for Sukumo to subscribe for up to 10 million shares at 30 per cent of the bid price, with Mr. Carlucci serving as escrow agent. (Mr. Chapman was named president of Diversified, succeeding his daughter, Sandra Jorgensen, on March 21, 2003, the day after Sukumo signed its offshore financing agreement.)
After the first victim-investor wired funds into Diversified's escrow account on April 29, 2003, Mr. Carlucci allegedly made a series of wires out of this account in Mesa to Mr. Newman's account at Thai Military Bank in Laos, Diversified's corporate account, Mr. Wolfson's NuWay account and Mr. Wolfson's personal accounts.
The SEC claims Mr. Wolfson and Mr. Carlucci visited Thailand and Laos twice in mid-2003 to meet with Mr. Newman. After the initial meeting in late May, Mr. Carlucci allegedly executed an offshore financing agreement for NCIH with Sukumo. After the second meeting in August, the escrow agents for the issuers were allegedly directed to wire Sukumo's proceeds to a new bank account in the name of International Investment Holding at the Vientiane branch of the Laos-Viet bank.
Mr. Carlucci has testified that a revised escrow agreement, dated June 19, 2003, boosted his escrow fee from 0.05 per cent of the offering proceeds to 6 per cent to enable him to pay the attorneys representing him in the SEC's investigation. This change in escrow fee was never disclosed in a series of subsequent regulatory filings.
The SEC also claims that Diversified, with Mr. Chapman at the helm, made a number of other false regulatory filings, initially neglecting to disclose Sukumo's offshore agreement and the sales of its stock. Once it disclosed the Sukumo agreement on May 22, 2003, Diversified allegedly failed to disclose that Sukumo had already been selling Diversified shares to overseas investors for almost two months, that Mr. Wolfson was receiving some of the proceeds, and that NuWay was about to receive some proceeds.
"Diversified's disclosures misrepresent the company's actual arrangement with Sukumo. Contrary to the representations in Diversified's filings, Sukumo did not purchase stock from Diversified and then resell it to investors. Rather, Sukumo solicited investments and received a 70% commission that was only paid to Sukumo after Carlucci received funds from investors and trade confirmations and/or confirmation receipts from Sukumo," states the SEC.
WOLFSON'S RESPONSES
A number of the various defendants, including Mr. Wolfson, Mr. Carlucci and Mr. Chapman, have filed various court responses to the SEC case, generally denying the allegations and claiming they have been unfairly victimized by the regulator.
In an Oct. 31 filing, Mr. Wolfson and NuWay claim they have severed all relationships with Sukumo and its affiliated entities, "to the extent that any such relationship ever existed." Mr. Wolfson and NuWay also point out that they have co-operated completely with the SEC, producing "literally hundreds of thousands of pages" of documents under subpoenas without objection.
Mr. Wolfson also contends that the asset freezes have squeezed and greatly harmed his stable of unrelated businesses, including a Salt Lake City nightclub, Club DV8, and the Saltair, a resort in Magna, Utah, both of which he took over just a few months before the SEC launched its prosecution. His other affected businesses include the Friendly Bear strip mall in Las Vegas and the Oasis truck stop in Elko, Nev., which planned to titillate truckers with strippers. Both are partially owned by non-defendants, mostly in the Wolfson family fold.
Until now, the SEC has had an abysmal track record pursuing offshore boiler room operations, either turning a blind eye, sitting on its hands or declining jurisdiction if no U.S. victims are involved.
This is not lost on Mr. Wolfson. His lawyers point out that Sukumo is alleged to be a British Virgin Islands company apparently run out of Thailand and Laos, while its alleged victims are not residents of Utah, or even the U.S., but the United Kingdom, Australia and New Zealand. (In its response, the SEC states that "the national identity of investors has no bearing on the antifraud protections of the United States securities laws.")
Defence lawyers further argue that notably absent from the SEC's complaint are any allegations that the Wolfson defendants solicited the allegedly fraudulent securities sales, contacted foreign investors or made representations to the investors.
They argue that this is a foreign matter, and the SEC should butt out. "Indeed, it appears that the United Kingdom will prosecute Mr. Newman for his role in Sukumo's allegedly fraudulent securities sales to residents of that country," states a Nov. 4 defence motion to dismiss the SEC case. "Instead of explaining how the interests of the United States or its residents are implicated or vindicated by this lawsuit, the SEC's complaint focuses on allegedly fraudulent sales of securities by Sukumo, a foreign entity, to foreign investors whose damages, if any, are not even described."
Mr. Carlucci's own motion to dismiss echoes this theme, and notes that Mr. Newman, the alleged centrepiece of the fraud, is in the process of being extradited to the United Kingdom to be prosecuted for this case, among others. Mr. Carlucci's lawyers point out that Sukumo, using the spelling Sukomo, is on an investor warning list prepared by the British counterpart of the SEC, the Financial Services Authority, or FSA.
CHAPMAN'S RESPONSE
Mr. Chapman denies virtually all the SEC allegations in his response, filed Nov. 5. Mr. Chapman denies participating in a massive scheme to defraud investors of $16-million, of lying to investors and of allowing only a minuscule amount of offering proceeds to go to the company he headed, Diversified, and numerous other SEC allegations.
"Defendant denies that he engaged in any market manipulation of the stock of Diversified Resources," states Mr. Chapman's filing. Mr. Chapman admits having trading authority over an account at Desjardins Securities in Montreal and buying some Diversified shares for the owner of the account, but he denies the other SEC allegations.
Mr. Chapman further denies having any arrangement with Newbridge Securities in Boca Raton to buy any Diversified shares that came on the market, and he denies instructing Desjardins to get Newbridge to post a bid to buy such shares. Following this, he also denies giving Desjardins any instructions to purchase all of shares coming into the market for the account over which he had trading authority.
(Previous coverage related to Allen Wolfson appears in Street Wires dated July 17 and July 22, 2003, under the U.S. symbol *SEC.)
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