Re: 3/21/05 - Business Week: Wall Street's Dirty Rotten Little Scoundrels; The SEC has a new plan to turn up the heat on small-time Wall Street fraudsters
Wall Street's Dirty Rotten Little Scoundrels
The SEC has a new plan to turn up the heat on small-time Wall Street fraudsters
To Securities & Exchange Commission gumshoes, it was a classic case of pump and dump. Last June, financier Donald E. Oehmke and Bryan Kos, a stock promoter, merged a small private labor-recruitment company into a shell corporation that Oehmke controlled. With the new company, Concorde America Inc., trading on the Pink Sheets quotation-and-trading service for unlisted stocks, the duo allegedly cranked up a stock-promotion scheme replete with phony analyst reports, press releases, and spam e-mails. Concorde's stock price soared from $3 to $8.90. But on Aug. 11, Concorde's management issued a press release disavowing any involvement in two earlier rosy releases -- and its share price plunged to $2.51 the next day. By then, according to the SEC, Oehmke and Kos had dumped shares, pocketing $11.3 million and $1.7 million respectively.
They may not get to keep their winnings. In February, the SEC persuaded a federal judge in Florida to freeze their assets and filed civil fraud charges against them and six other defendants. Oehmke denied the charges in court on Mar. 4. Kos's lawyer also denied the charges. Concorde and its lawyer declined to comment on the SEC complaint.
Enron it's not. But SEC enforcers know that despite their three-year drive to bag miscreants among Wall Street's big fish, small-time swindlers continue to flourish. So SEC Enforcement Director Stephen M. Cutler is zeroing in on micro-cap fraud with a novel strategy and new tactics. In the past, SEC lawyers chased swindlers one company at a time. Now the agency is targeting gatekeepers such as broker-dealers, promoters, and lawyers, who show up in scam after scam. And rather than waiting months until it can prove intent to defraud, the SEC is halting trading in companies that it suspects are about to be monkeyed with as soon as it finds what it considers clear-cut evidence of violations.
The campaign to squelch micro-cap fraud is part of SEC Chairman William H. Donaldson's push to get ahead of abuses before they cause investors widespread harm. Last year, Cutler spotted telltale signs of a possible resurgence in scams, including a jump in new issues on the Pink Sheets and soaring volume on the OTC Bulletin Board. "The message of the Enron and WorldCom prosecutions seems to be resonating with big companies, their boards, and management," says Cutler, who has made the crackdown one of his top five priorities this year. "What I worry about is whether that message is equally resonant among folks in the micro-cap world."
Making sure it is will be a tough challenge. Stock-fraud cases require legwork and resources to unravel convoluted transactions. Unlike big-company executives, micro-cap fraud suspects tend to say "see you in court" rather than "how fast can we settle?" when they get a subpoena. And while criminal prosecutors have been eager to pursue megafrauds, most shy away from time-consuming micro-cap cases.
To meet the threat, Cutler quickly pulled together a team of 10 investigators, Internet sleuths, and market-surveillance experts. After scouring SEC databases for patterns of manipulation, they devised a plan of attack focused on:
REPEAT PLAYERS By going after gatekeepers, the SEC can shutter operations that could rip off many more investors. The SEC's complaint against Oehmke and Kos, for example, alleges that they were also inflating the stock price of shell company Absolute Health & Fitness Inc., reaping total net profits of $14.4 million. Oehmke denied the charge in federal court on Mar. 4. Kos's lawyer also denied the charges.
The securities cops are training their sights in particular on recidivists. On Feb. 25, the SEC filed charges against California attorney Kevin J. Quinn for drafting securities filings on behalf of three penny-stock offerings despite being disbarred in California in 1997, suspended from practicing before the agency in 1999, and barred by the SEC in 2000 from participating in any penny-stock sale. Quinn's lawyer did not return calls.
THE AL CAPONE TACK Just as G-men ultimately nailed the notorious mobster on tax-evasion charges, the SEC is policing easily provable violations such as failing to register stock issues properly. Once it spots ongoing or potential fraud, the agency often halts trading. In the past, suspensions averaged 10 a year; last year the SEC stepped in 63 times.
On Mar. 3, the SEC moved against CMKM Diamonds Inc., a Canadian diamond exploration company incorporated in Nevada. The SEC cited the company for failing to file financial statements for two years. Another red flag was massive trading, averaging 1.1 billion shares a day in February on the Pink Sheets for a stock whose price remained a fraction of a penny. Knowledgeable sources say regulators suspect the company or affiliated shareholders were flooding the market with stock. Neither CMKM Diamonds nor its lawyer returned calls. In a Mar. 4 press release, CMKM Co-Chairman Robert A. Maheu said: "We have been aggressively gathering the essential information needed to comply with our public disclosure obligations and anticipate working with the SEC to ensure our compliance with all federal regulations."
TIGHTER RULES The commission is expected to vote soon on a proposal to bar public shell companies from using a streamlined stock-registration process designed to cut costs for small businesses. The measure also would require prompt disclosure of business and financial data on any company acquired by a shell. "This would effectively close the window during which promoters can take advantage of investors' lack of access to information about the business," says Keith Moskowitz, of New York law firm Eilenberg & Krause LLP. But, he adds, the rule change would jack up legal and accounting costs for companies that legitimately use shells to go public.
HELP FROM OTHER REGULATORS Since many con artists work both sides of the border, the SEC and Canadian authorities are working harder to share information. The SEC's move against CMKM was aided by Saskatchewan securities officials who issued a cease-and-desist order against its CEO last fall for allegedly trading unregistered shares. Calls to the company and its lawyer were not returned. Also, the SEC and NASD are discussing ways that NASD could build speed bumps for the micro-cap sector. Under discussion: rules requiring broker-dealers to put up more capital and to tell investors more about the risks when selling them penny stocks.
Many market experts laud the SEC's cleanup campaign. The only thing lacking, they say, is more criminal prosecutions. "The prospect of jail time is the only real deterrent," says former SEC enforcement attorney Jacob S. Frenkel, now a partner with Shulman Rogers Gandal Pordy & Ecker. The SEC says it's doing its best to get federal and state prosecutors involved. But until then, count on the nation's securities cops to use all the weapons in their arsenal to keep the pressure on.
By Amy Borrus in Washington
Copyright 2005, by The McGraw-Hill Companies Inc. All rights reserved.
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