Geoffrey Eiten IR for Stem Genetics:
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Overseas boiler room feels the heat: SEC case marks breakthrough
By Chris Carey
]Of the Post-Dispatch(c)2004, St. Louis Post-Dispatch
06/11/2004
MESA, Ariz. - The corporate headquarters of NCI Holdings Inc. was a rented mailbox in one of the many strip shopping centers in this desert boomtown.
The chief executive, Gino Carlucci, was a dance club disc jockey, party promoter and convicted felon. Although he never graduated from college, he claimed in the company's Securities and Exchange Commission filings to have a law degree.
The SEC says Carlucci and his partners used mailboxes in Mesa and Phoenix to process at least $16 million in fraudulent stock sales to 1,100 foreign investors, who were solicited by a group of unlicensed Asian brokerages.
NCI Holdings was little more than an empty shell. Other companies whose stock was peddled abroad by the same brokerages had similar shortcomings: meager sales, nonexistent profits, minimal assets and limited potential.
The brokers presented a more compelling tale of pending buyouts, big government research grants and other breakthroughs.
After foreign investors realized they were duped and assembled reams of evidence for the SEC, authorities moved to shut down the ring.
The agency filed a civil suit in October against Carlucci and 20 other individuals and companies, including Sukumo Ltd., a boiler room in Laos that sold shares under several names.
The suit, in federal court in Salt Lake City, marks the first major case the SEC has brought against a foreign boiler room selling shares in publicly traded U.S. companies.
The agency made the case a priority because of the number of publicly traded companies involved and the amount of money changing hands, said Kenneth D. Israel Jr., director of its Salt Lake City office.
"If we view it as a serious problem, we make the time to do it," he said. "This case we viewed as a significant fraud."
The SEC has charged Carlucci, Sukumo and their allies with conspiring to defraud investors in NCI Holdings, Diversified Financial Resources Corp., Stem Genetics Inc., Valesc Holdings Inc. and F10 Oil and Gas Properties Inc.
Most of the stock buyers lived in Britain, Australia and New Zealand.
The suit charges that the defendants lied to investors about the companies' prospects and that only a small percentage of the money raised through stock sales actually went to the businesses.
For instance, Sukumo brokers told some investors that Stem Genetics was getting a $300 million federal research grant. The startup had no lab or scientists on staff.
Sukumo got 70 cents to 85 cents of every dollar raised from investors. But the transaction statements sent to investors showed a commission of 2 percent. Other middlemen took a cut of what little remained as escrow or finder's fees, the SEC said.
Besides being president of NCI Holdings, Carlucci, 35, functioned as the escrow agent for Diversified Financial Resources and Stem Genetics. The SEC says Carlucci collected more than $700,000 for his efforts.
Although the brokers were overseas, the stock scheme had its roots in the United States. The SEC said in its lawsuit that the middleman is David M. Wolfson, 24, of Salt Lake City. He is the son of Allen Z. Wolfson, who was imprisoned last year in connection with another stock fraud case. The elder Wolfson had previous convictions for bank fraud, illegal campaign contributions and securities fraud; he spent time in prison in the 1980s and 1990s.
The SEC contends that Allen Wolfson, mindful that he might be headed back behind bars, turned over some of his business operations to his son in late 2002 and early 2003. His behind-the-scenes presence looms large in the case.
SEC filings, incorporation documents and other records show:
Allen Wolfson created Stem Genetics, installing a longtime friend, Dr. Richard Youngblood, as president. The plastic surgeon had no experience in stem cell research, the company's purported field.
NCI Holdings' majority shareholder was an investment partnership headed by Allen Wolfson's nephew Richard D. Surber, 31.
Diversified Financial was headed by another Wolfson associate, John R. Chapman. The two men are defendants in still another SEC case, filed in September 2002. That case is pending.
Since the SEC filed the Sukumo case, NCI Holdings has been converted into an apparel company, Dark Dynamite Inc. F10 now is GFY Foods Inc., which operates three sandwich-and-smoothie shops in fitness centers in Illinois and Indiana.
Claiming jurisdiction
Even before the SEC moved against the ring, Laotian police had detained Sukumo's head, British citizen Michael Sydney Newman.
He and two Thai nationals were stopped at the airport in Vientiane. Authorities seized the equivalent of $308,000 and charged Newman with attempting to take currency out of the country without permission.
The ring might have escaped the SEC's action had it not made three mistakes:
The U.S. companies used Sukumo as a sales agent rather than selling their shares directly to the brokerage as the SEC's rules for offshore stock placements stipulate.
The companies and Sukumo had investors route the money for their stock purchases to banks in the United States, instead of financial institutions in another country.
They also had American escrow agents divide up the cash and send out the share certificates.
Those arrangements put enough of the activity on U.S. soil for the SEC to claim jurisdiction.
The defendants say in court filings that they broke no laws. And they argue that the SEC lacks jurisdiction because all the investors live outside the United States.
Just as the brokers at Sukumo operated behind false names, so did Carlucci. His real name is Gene D. Odice. He adopted an alias in the mid-1990s after a divorce resulted in multiple restraining orders against him and, ultimately, a no-contest plea to felony stalking.
Court and police records show that Odice and Carlucci share a birth date and Social Security number.
Newman, 42, the head of Sukumo, has been convicted in Laos. He was sentenced in February to 7 1/2 years in prison and fined nearly $6 million. The offenses included conducting an illegal business operation, making illegal international telephone calls, violating tax rules and possessing drugs. |
