Re: 6/14/04 - St. Louis Post-Dispatch: Stock fraud on a global scale - Day 3
Rogue brokers resurface overseas
By CHRISTOPHER CAREY
Of the Post-Dispatch
06/14/2004
The securities industry thought it had seen the last of Frank L. Palumbo.
His Florida-based stock brokerage, J.W. Gant & Associates, shut down under regulatory pressure in 1992.
The National Association of Securities Dealers ruled that the firm had fraudulently marked up the prices of three obscure stocks for which it controlled trading.
The NASD also barred Palumbo for life from associating with any of its member firms and ordered him to pay $762,500 in fines and restitution.
But a Post-Dispatch investigation into unlicensed offshore brokerages revealed that Palumbo and several colleagues from J.W. Gant are back in business on the other side of the Atlantic, pushing shares of obscure U.S. companies.
So are alumni of other notorious U.S. brokerage firms.
The Post-Dispatch identified nearly 30 Americans who have been disciplined by the Securities and Exchange Commission, the NASD, the Commodity Futures Trading Commission or other regulatory bodies and now work at unlicensed, offshore brokerages, known as "boiler rooms."
Because most of the people who work for the boiler rooms use aliases, the number could be far higher. The stock sale rings extend from Europe to Asia and have targeted investors in 20 countries.
Here's how some of them operate.
European investors in 2000 started getting unsolicited calls from brokers offering shares in Spantel Communications, an upstart long-distance company targeting the Spanish telephone market.
The brokers said they worked for Goodman Hart Associates on Spain's Costa del Sol. They offered "pre-initial public offerings" of stock at prices ranging from $4 to $6.50 a share.
Spantel became listed in the United States on the Nasdaq Over-the-Counter Bulletin Board the following year but not through a public offering. Instead, it merged with a publicly traded shell company and moved its home base to Miami.
SEC filings show that Spantel was controlled by Mohamed A. Khashoggi, the son of arms dealer Adnan Khashoggi.
The filings show that Palumbo and two other former J.W. Gant brokers also were large Spantel shareholders and held key positions in the company.
What's more, SEC filings and other documents show that Spantel insiders had direct links to the boiler rooms pushing the company's shares. For example:
Spantel's early SEC filings listed Conor D. O'Connor as its technical director.
The Internet sites for two boiler rooms that peddled Spantel's shares were registered under his name.
The Internet domain registration for a third brokerage, Goodman Hart, listed O'Connor as the e-mail contact.
O'Connor acknowledged that he worked as a consultant for Spantel and that his other business set up the sites.
"I own an Internet company,'' he said. "We register domain names for hundreds of firms. Some of the ones that you mentioned look vaguely familiar, but I wouldn't know much more than that.''
Investors who bought Spantel shares said the transactions were processed through Clearing Services on the Costa del Sol.
The address that Clearing Services used in a December 2001 SEC filing disclosing its ownership of 6.3 million Spantel shares was the same as the address that Palumbo used in his disclosure statement the same day. Palumbo identified himself as Spantel's corporate secretary and the holder of 1 million shares.
One investor contact at Clearing Services was another American, Robert J. Carlin.
However, Spantel's SEC filings listed him as manager of one of its subsidiaries.
Carlin also had been compliance director for J.W. Gant, the person responsible for ensuring that the brokerage did not violate state or federal securities regulations. And he was majority owner of a San Francisco-based brokerage that shut down in 1997 after a raid by the SEC and FBI.
Besides Spantel, the boiler rooms pushed shares of a privately held company, Adrentacar. Its vision: to turn its cars into rolling billboards, giving advertisers a new method of exposure and offering drivers a break on rental rates.
Adrentacar's Internet site featured images of vehicles wrapped in the logos of McDonald's Corp., Coca-Cola Co. and other major consumer product companies - none of which had signed contracts for the service.
The boiler rooms offered Adrentacar at prices ranging from $4 to $6.50 a share. They told investors the money would finance an expansion, which in turn would lead to a lucrative public stock offering.
Meanwhile, Spanish authorities issued warnings that the boiler rooms, Goodman Hart and Morgan Paris and Co., were offering investments despite being unlicensed.
Like Spantel, Adrentacar never filed for an initial public offering. Instead, it merged into European Day Spa Holding Co., the other stock the boiler rooms were promoting. Adrentacar investors got one share of European Day Spa stock for every Adrentacar share they held.
The combined company, European Diversified Holdings Inc., has headquarters in Evergreen, Colo. Its shares currently trade for 25 cents.
Spantel's stock closed Monday at 29 cents.
Recently, some investors who bought Spantel shares from Goodman Hart and Morgan Paris heard from a new Spanish boiler room with a new offer: They could exchange their holdings for stock in another publicly traded U.S. company, Franchise Holdings International Inc.
However, that company stopped submitting financial reports to the SEC more than a year ago. The last report listed Carlin as president and Khashoggi as a director.
From Bangkok to Budapest
Daniel Sterk, of Fort Lauderdale, Fla., has been on the SEC's radar screen for more than a decade.
The agency filed a fraud suit in 1994, alleging that he sold unregistered shares in a wireless cable TV venture. He settled the suit without admitting or denying guilt, and agreed to surrender more than $1 million in proceeds.
Then he made his way to Bangkok, Thailand, and its teeming boiler room trade.
After working for other operators, he set up his own shop in 2000. Thai authorities raided the boiler room in August 2001, putting it out of business. They filed charges against Sterk and a partner, Stephen R. Casciola, saying they ran an unauthorized securities firm that defrauded foreign investors.
Sterk and Casciola fled Thailand, evading arrest.
Private investigators working for investors say Sterk and Casciola relocated to Eastern Europe and ran a new string of boiler rooms from Hungary and Romania.
Their first boiler room, Livingstone Asset Management, claimed to have headquarters in Geneva but operated from Budapest, Hungary.
Livingstone peddled shares in several American companies, including Slender Life International Inc. of Boca Raton, Fla.
Sterk did business with Slender Life under the alias Daniel C. Worthington and Casciola as Steve Corso.
Slender Life's deal with Livingstone and its successor, Cambridge Global Ltd., gave those brokerages the right to buy 10 million shares of the privately held company's stock at 20 cents a share. The boiler rooms resold the shares at prices as high as $3.90.
Another boiler room, Amherst International, peddled Slender Life bonds, which brokers said could be converted to stock. Investors were told that the proceeds would finance the privately held weight loss company's expansion in the United States and Europe and that the company would go public this spring at $15 a share.
But in November, investor complaints led Hungarian authorities to raid the Budapest boiler room. Three people were taken into custody, but Sterk and Casciola again avoided arrest.
Slender Life's president, Larry Pettit, resigned in January and was succeeded by Thom Scott, a vice president and director of marketing. In a letter to shareholders in March, Scott acknowledged that the company's partners were in the boiler room business.
"Frankly, they were all very intelligent, well-spoken, and financially sophisticated," he wrote in the letter to stockholders. "And, the venture capital operations that they developed looked and ran like completely legitimate brokerage or venture capital firms."
Scott also acknowledged that Worthington was actually Sterk.
He disclosed that Slender Life's foreign partners had ownership interests in the company's flagship weight loss center in Boca Raton and an unfinished one in Vienna, Austria.
And he noted that an audit of Slender Life's finances revealed that the company had never been paid for 2 million shares of stock that had been issued to the boiler rooms.
Scott outlined a recovery plan for shareholders that relied on two former managers of the European boiler rooms to help raise additional capital.
One of them is Randolph E. Beimel. He is a former vice president of Hibbard Brown & Co., a U.S. boiler room shut down by authorities eight years ago. For his role in that company's activities, the National Association of Securities Dealers barred him from associating with any member firm and fined him $100,000.
Hibbard Brown was expelled from the NASD in 1996, fined $10 million and ordered to pay $8.7 million to defrauded customers.
One NASD document said Beimel dictated sales scripts for Hibbard Brown brokers, containing "highly aggressive purchase recommendations, baseless price predictions and material misrepresentations and omissions."
Beimel is now on Slender Life's board of directors and has returned to Eastern Europe to handle investor relations. The company plans to offer additional stock to those shareholders, Scott said, and will use the proceeds to pay off debt, buy the Boca Raton and Vienna weight loss centers and provide seed capital for expansion.
"Frankly, without additional capital, it would be nearly impossible to continue operations, let alone grow Slender Life," he wrote in the letter to shareholders.
World traveler
Paul Richard Bell, another American with a checkered past, once worked for Sterk in Bangkok.
More recently, he has operated Premium Placements, a boiler room selling "pre-initial public offering" shares in a number of companies, including International Biometrics Inc. of Newport Beach, Calif.
Bell, who once hosted a radio show on investments in Washington, is no stranger to U.S. and international regulators.
In 1992, he settled fraud charges with the U.S. Commodity Futures Trading Commission. He was fined $100,000 and barred from the industry for life.
Three years ago, Australian authorities boarded a jetliner at Brisbane Airport and arrested Bell, who had been selling shares on behalf of boiler rooms in Thailand and the Philippines. He was charged with making false and misleading statements to investors and offering securities to Australians without proper disclosure.
Bell, who used the alias Dr. Richard King in Australia, pleaded guilty on 21 counts. He was sentenced to two six-month prison terms, which were suspended with the posting of a "good behavior" bond. He also paid a fine equal to $6,200.
The SEC filed an unrelated fraud suit the following year against Bell and First Florida Communications Inc., a public company whose shares traded on the over-the-counter market.
The agency said Bell, as chairman of First Florida, grossly inflated the value of its assets and misrepresented its access to funding in a meeting with prospective investors.
Bell did not respond to the complaint; last summer a judge issued a default ruling and ordered him to give up $75,000 in ill-gotten gains and pay a civil penalty of $110,000.
Bell also was permanently barred from serving as an officer or director of any public company.
Documents show that one of Bell's partners in Premium Placements is Mark Hutcherson, former majority owner of Dunhill Financial Group Inc., a commodities firm based in Atlanta.
The Commodities Futures Trading Commission filed a fraud suit against Hutcherson and Dunhill Financial in 1999, saying they misrepresented the risks and potential returns of investing in commodities and options.
The agency noted that 94 percent of Dunhill Financial's customers lost money, with the total exceeding $8 million.
Hutcherson settled the charges without admitting or denying guilt. He agreed to pay a $10,000 fine and $8.31 million in restitution and to never again seek registration as a commodities broker.
The fugitive
At least one American who worked in the offshore boiler rooms did so while on the run from U.S. authorities.
Donald Craig O'Neill of Lighthouse Point, Fla., was indicted in May last year on 20 counts of fraud and 20 counts of money laundering in connection with an alleged foreign-currency investment scheme that took in $13.7 million.
Federal prosecutors charged that he misappropriated at least $10 million of the money to finance trips, gambling junkets and other personal expenses.
O'Neill fled the country and was added to the Miami FBI office's most-wanted list last fall.
The FBI's poster noted that O'Neill's travels had included Australia, Saudi Arabia and Romania.
Indeed, while a fugitive , he worked as a manager in one of Sterk's boiler rooms in Bucharest, Romania.
O'Neill, a 5-foot-8, 275-pound bulldog of a man, used the alias Don Grant and claimed that he once played football for the Tampa Bay Buccaneers.
O'Neill's days as a fugitive ended in March, when he was apprehended in Rome.
The FBI declined to comment on how it tracked him down or whether its agents knew he was working in the offshore boiler room business.
Reporter Christopher Carey
E-mail: ccarey@post-dispatch.com
Phone: 314-340-8291
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How to avoid falling prey
Post-Dispatch
06/14/2004
Here are some tips from the U.S. Securities and Exchange Commission for avoiding boiler room schemes:
Are the broker and firm licensed? If the brokerage is based outside the United States, check with regulators in its home country. The International Organization of Securities Commissions has links for many regulatory bodies at its Web site, www.iosco.org.
If the broker claims to work for a U.S. firm, call the National Association of Securities Dealers' hot line, 1-800-289-9999, or visit its Web site, www.nasd.org, which has a searchable directory of registered firms.
Is the stock registered? Visit the SEC Web site, www.sec.gov, and search its EDGAR database.
The SEC notes, however, that even if a company has registered its securities and filed all the required reports, there's no guarantee that it's a good investment. Similarly, opportunities that are not registered with the SEC are not necessarily frauds or even bad investments.
Where does the stock trade? Many fraud schemes involve "microcap" companies, whose limited assets or low share prices do not meet the minimum standards for the New York Stock Exchange, American Stock Exchange or Nasdaq. The stock is relegated to the lesser markets, where trading volumes are often low and prices can be volatile.
What is the stock price in the United States? Before buying shares from an overseas broker, check the trading price on the U.S. exchange where it's listed. Dishonest brokers may mark up the price.
The www.nasdaq.com Web site provides quotes for stocks listed on the New York Stock Exchange, American Stock Exchange, Nasdaq and Over-the-Counter markets.
Is there independent research on the company? The SEC says investors always should request and read information about the company, including a prospectus and recent financial statement. Then they should investigate the company on their own. The Internet can be a powerful tool.
The SEC has three more suggestions for investors who are approached by unfamiliar companies.
First, look past the name. Boiler room brokers sometimes appropriate the names of legitimate people and firms. Investors should compare any address a broker provides with the address on file with their securities regulator or the NASD. A discrepancy could be a sign of fraud.
Next, investors should do their own research on the Internet or through printed stock guides available through libraries. The clients or official-sounding organizations provided as references by the broker could be part of the scheme.
Finally, investors should be wary of unusual banking instructions. Reputable U.S. brokers generally have their accounts at U.S. banks. They would not ask an investor to transfer money to a foreign bank or send it to the United States for further credit to a non-U.S. bank.
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SEC assserts it can tackle high-tech fraud
By Christopher Carey
Of the Post-Dispatch
06/14/2004
William H. Donaldson, chairman of the Securities and Exchange Commission, says the regulatory agency is focusing on the future as its looks for better ways to fight all types of fraud.
There are lessons to be learned in the ruins of Enron Corp. and WorldCom Inc., but Donaldson is more concerned with spotting new risks and devising ways to counter them. Those risks include fraud schemes that rely on the Internet and that can be conducted from almost anywhere in the world.
Donaldson, a retired brokerage executive who became SEC chairman in February last year, said the agency is well-equipped to meet the challenges posed by modern technology.
"I think we're on top of it," he said last month during a question-and-answer session after a speech in Fort Worth, Texas. "We've got a lot of resources working on it right now."
The SEC's Office of Internet Enforcement routinely patrols cyberspace to look for fraudulent investment offers. It also helps manage the agency's complaint center, which gets 1,200 to 1,300 tips a day.
Although the SEC brought a record number of enforcement cases last year, critics say it still is not doing enough to stop some types of fraud, such as the sale of dubious U.S. securities by unlicensed, offshore brokerages, known as "boiler rooms."
The shares are routed overseas through a securities rule known as Regulation S. It allows companies to raise money directly from foreign investors without having to go through the time and expense of a formal stock offering.
James Martin, a U.S. businessman who says he lost control of his company after agreeing to merge with another being used by a boiler room ring, thinks the only way to stop the overseas stock fraud is to scrap Regulation S or seriously restrict its use.
Martin now lives in New Zealand and runs the Securities Investigation Research Society, a nonprofit group formed by boiler room victims to help other investors determine the legitimacy of international stock offers.
The SEC contends that closer cooperation with foreign securities regulators is the key to making the global markets safer.
"We've developed, over the years, a very close and productive relationship with foreign regulators," said Paul Berger, associate director of enforcement at SEC headquarters in Washington.
The United States has cooperative agreements with regulators and law enforcement agencies in more than 30 countries, Berger said. It also cultivates information-sharing through the International Organization of Securities Commissions, he said.
That helps the SEC obtain bank records, brokerage records and other documents crucial to building cases, he said.
Despite criticism from some investors and activists, regulators in the United States are bringing more cases than ever. Boiler room cases have taken a back seat to other types of crackdowns, on everything from insider trading and accounting fraud to market manipulation and sales of unregistered securities.
The SEC filed 679 enforcement actions last year against individuals and companies suspected of violating federal securities laws, compared with 598 in 2002. Of last year's cases, nearly 30 percent involved allegations of fraud.
However, only one involved an offshore boiler room. That's because false addresses and false identities make those cases harder to develop, and because most of the schemes are conducted beyond America's borders and the agency's jurisdiction.
The National Association of Securities Dealers, the brokerage industry's self-regulatory arm, brought a record 1,352 enforcement actions last year, up from 1,271 in 2002. The group suspended or barred 830 people from the securities business, including some who were found to be working in domestic boiler rooms.
The SEC, with added funding from Congress, has boosted its staff by nearly 25 percent, Donaldson said during his speech in Texas. Morale is up, too, he said.
"I think there's a new excitement at the SEC in terms of what we're trying to do," he told the Society of American Business Editors and Writers conference.
The SEC last week took the unusual step of suspending trading in 26 inactive "shell companies'' that were delinquent in their filings. The regulatory agency was concerned that such companies could be used as vehicles for stock manipulation.
The SEC now has more than 1,000 enforcement personnel. Much of their activity, however, remains behind the scenes.
Foreign investors who have filed complaints with the SEC usually receive a standard reply that urges them to contact regulators in their own countries and directs them to additional information on the SEC's Internet site.
Those who fear that the agency is not following up on their complaints might be seeing only part of the picture, Berger said. "The nature of what we do is confidential," he said.
Whatever its shortcomings, the SEC remains the world's most effective securities regulator and represents the best hope of slowing the offshore boiler rooms, said William K. Black, a lawyer, criminologist and professor who teaches at the University of Texas in Austin.
Regulators in Britain, New Zealand and other nations - mindful of the difficulty in locating the boiler room operators and successfully prosecuting them - have focused instead on warning investors.
Many boiler rooms have operated from the Philippines and Thailand, but regulators in those countries have been less active on that front than in the past.
The Philippine Securities and Exchange Commission has not issued any cease-and-desist orders against boiler rooms for nearly three years. Thailand's securities agency, which has brought only one case since 2001, declined to comment on the boiler room problem in that country.
U.S. officials never expected Regulation S to be used so extensively for stock sales by small public companies, said J. William Hicks, a law professor at Indiana University and an expert on restricted securities and international regulation.
Hicks said he thought the SEC envisioned larger companies using Regulation S primarily to sell bonds.
Prohibiting U.S. companies from selling their stock directly to offshore buyers through Regulation S would be an extreme solution to the boiler room problem, Hicks said.
"We've titillated a lot of equity ownership throughout the world," including regions without a strong tradition of individual investment, he said. "I'd hate to throw the whole thing out just because of these abuses."
More scrutiny probably would reveal which companies and transactions are part of larger fraud schemes, Hicks said.
The SEC also should take a closer look at the middlemen in the deals, including the lawyers who issue opinions that the sales comply with Regulation S and the transfer agents who oversee the distribution of shares, Hicks said.
"The lawyers and transfer agents are critical in this whole process," he said.
The highly publicized problems at Enron, WorldCom, Tyco International Ltd. and other high-profile examples of corporate malfeasance overshadow the fact that the vast majority of American companies and executives are honest, Donaldson said.
"There are 15,000-plus (publicly traded) companies out there," he said, "most of which are very well-run by good people."
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Man who cleaned up on fraud now helps uncover it
By CHRISTOPHER CAREY
Of the Post-Dispatch
06/14/2004
MIRA MESA, Calif. - Barry Minkow defines fraud as the skin of the truth stuffed with a lie.
He should know. He spent years living one of those lies as the boy wonder behind ZZZZ Best Inc., a carpet cleaning business he started in his parents' garage and manipulated into a publicly held company with a market value topping $250 million.
Along the way, he fabricated contracts, falsified sales and earnings, and took financing from organized crime.
After it all came crashing down in 1987, he was sentenced to 25 years in prison for racketeering and fraud and ordered to pay $26 million in restitution.
Minkow was paroled after 7 1/2 years. That's more time behind bars, he notes, than disgraced junk bond wizard Michael Milken, insider trading kingpin Ivan Boesky and tax cheat Leona Helmsley combined.
While in prison, Minkow earned bachelor's and master's degrees in church ministries. These days, he's senior pastor of Community Bible Church, a 1,100-member congregation in the San Diego suburbs.
He also co-founded the Fraud Discovery Institute, which lends its expertise to companies, regulators and law enforcement agencies.
Just last month, the Securities and Exchange Commission won a court order freezing the assets of Chicago D&P Inc., after examining information compiled by Minkow and his organization.
The SEC alleges that Chicago D&P, which purports to be in the real estate business, was using money from new investors to pay the returns promised to earlier investors. The agency said the "Ponzi scheme" took in $10 million.
The Fraud Discovery Institute also offers online training programs to help auditors, company directors and others in oversight positions.
Minkow and his fellow investigators use three main tests to spot trouble:
The first focuses on the sources and uses of a company's cash. How management raises and spends money can speak volumes about its intentions, Minkow said.
The second test revolves around what Minkow calls the "if, then" scenario. If the company is doing what it says it is doing, then evidence should be available through public records.
The third test is independent proof of profitability, such as seeing a piece of equipment or a facility that can generate the types of earnings a company is claiming.
"The presence of audited financial statements doesn't necessarily mean no fraud," he said. Auditors for a major accounting firm signed off on ZZZZ Best's books, Minkow noted.
Even legitimate companies can be led astray by executives or lower-level managers obsessed with achievement or wealth, he said.
"Nobody cares who you are - it's all about what you do," he said.
Minkow said the mind-set and methods of stock fraud artists have not changed much since the ZZZZ Best scandal, which resulted in the conviction of 11 other people.
"White-collar crime is still the ultimate selfish behavior," he said. "It's a heart problem."
In ZZZZ Best's heyday, he drove a red Ferrari and owned a mansion in the San Fernando Valley.
Now, Minkow drives a used Honda and lives with his wife and two children in a modest house in San Diego County.
He is off probation, and a judge recently waived the remainder of his restitution order. But he continues making monthly payments to a bank that was hurt by the ZZZZ Best fraud. And he said he has an obligation to help victims of other schemes.
"Somehow, I feel I owe them because of who I was," he said.
Reporter Christopher Carey
E-mail: ccarey@post-dispatch.com
Phone: 314-340-8291
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