The secret life of a brokerage: Dallas investment firm was actually a front for FBI extortion inquiry
(Dallas Morning News, The (KRT) Via Thomson Dialog NewsEdge) Jul.
[July 02, 2006]
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2--On the surface, Talon Holdings Inc. looked like any of the dozens of boutique investment firms in Dallas-Fort Worth.
Its address was a suite on Addison Circle in Addison, the financial center of Dallas' northern suburbs. The NASD's Web site showed the firm and its brokers as being registered to work in the securities business and having spotless regulatory records.
In fact, Talon was an FBI front operation used in the undercover extortion investigation of New Mexico's former state treasurer and in a securities case involving some Arkansas businessmen.
Experts say that, as the financial services industry has grown, the FBI has become more active in securities-related cases but that it's still rare for investigators to go to the lengths of creating a bogus brokerage firm and registering it with regulators.
Such undercover operations must be carefully constructed, experts say, because they often lead to accusations of entrapment and law-enforcement misbehavior, allegations that have been leveled in the Talon Holdings cases.
Harold Degenhardt is the former head of the Securities and Exchange Commission's Fort Worth office. In his nine years, he said, the office was never involved in a sting operation. But the high level of cooperation between regulators and law enforcement would make it relatively simple to set up such an operation, he said.
"Those lines of communication are very well-established," said Mr. Degenhardt, now a partner at Fulbright & Jaworski LLP in Dallas. "It would not be as if the wheel would have to be invented to initiate that sort of work. They [the FBI] could contact the field office or chat with the head of the enforcement division in Washington."
In what reportedly was the FBI's first foray into undercover brokerage work, 45 people were arrested in New York in 1996 after an investigation into stock promoters bribing brokers. That case involved several agents working out of a Manhattan brokerage office.
The Talon Holdings setup doesn't seem to have had a physical office. The Web site of the NASD -- the brokerage industry's regulatory body, previously known as the National Association of Securities Dealers -- showed the firm's address as 5015 Addison Circle, Suite 509. The address is actually an Eagle Postal Center, where a clerk confirmed that Talon Holdings had a mailbox.
Another address for the firm was a nearby construction site on Belt Line Road. The firm's phone number has a recording that says the number is no longer working but then goes to an answering machine.
An NASD spokeswoman referred all questions about Talon Holdings to law-enforcement authorities.
Politics and pensions
Talon Holdings' identity was revealed in testimony in May in federal court in Albuquerque, N.M., where former state Treasurer Robert Vigil was on trial on 24 charges of extortion, racketeering, money laundering and conspiracy.
Mr. Vigil was accused of demanding kickbacks from investment advisers in exchange for steering state business to them. The jury deadlocked, and a retrial has been set for September. Mr. Vigil has pleaded not guilty.
Robert Bettes, now retired from the Dallas office of the FBI, testified that he posed as a Talon Holdings broker using the name Robert Brewer, and another Dallas FBI agent posed as a broker using the name Peter Vaughn. Mr. Bettes said they gave Mr. Vigil a $2,500 political contribution, and Mr. Vigil suggested they bypass registration requirements and partner with another firm to get some investment work with the state.
The case is one of several involving officials who control public investments, said Ted Siedle, president of Benchmark Financial Services in Ocean Ridge, Fla., which investigates brokers' wrongdoing on behalf of pension funds.
"Today, more than ever, where you are most likely to bribe a politician is to get the opportunity to manage pension money," said Mr. Siedle, who has worked on investigations with the FBI.
Stock sales questioned
In the Arkansas case, Shimoda-Atlantic Inc. of Rogers, Ark., said it received an unsolicited e-mail a year ago from a Talon Holdings broker named John Firo offering to help sell stock in the company. The company said it is about to begin clinical trials into a cancer drug, trademarked Xenavex, that's derived from the oleander plant.
Jim Bolt, Shimoda-Atlantic's research coordinator and spokesman, said the company checked out Talon and Mr. Firo with the NASD and saw that they were registered in good standing. Mr. Bolt said Mr. Firo had an investor from Dubai who agreed to buy 20 million shares of the company for $3 million.
Mr. Bolt said the firm's officials were stunned when an agent served them with a subpoena in May and told them Talon Holdings was a law-enforcement operation. The subpoena, from a federal grand jury in Arkansas, demanded the company turn over its computer hard drives and any documents related to John Firo and stock offerings.
Mr. Bolt began calling reporters in May to say the company hadn't done anything wrong and had been defrauded by undercover FBI agents. He has suggested that the investigation is the result of the efforts of a well-connected competitor or is the latest salvo in a feud with a local prosecutor.
But Mr. Bolt and some of his colleagues have been involved in questionable stock deals before. In 2002, Arkansas securities regulators issued a civil cease-and-desist order demanding that Golf Entertainment Inc. and some of its insiders, including Mr. Bolt, stop selling unregistered stock. Also named was John Dodge, Shimoda-Atlantic's corporate counsel.
The men also have shown a litigious side, according to the Northwest Arkansas Business Journal and Arkansas Business, weekly publications owned by Arkansas Business Publishing Group. When the papers began investigating Golf Entertainment's business practices and securities activities, Mr. Bolt and Mr. Dodge filed incorporation papers for companies they called Northwest Arkansas Business Journal Inc., Arkansas Business Inc. and Arkansas Business Publishing Group Inc. Mr. Dodge then demanded that the papers stop using the names, according to a May 2003 report in Arkansas Business.
Around that time, U.S. Sen. Tim Hutchinson of Arkansas and local prosecutor Robert Balfe urged the SEC to look into Golf Entertainment.
The first indication of an investigation was the recent grand jury subpoena of Shimoda-Atlantic.
The entrapment trap
Undercover operations are prone to allegations of entrapment and fraud.
In the New Mexico case, Mr. Vigil's attorney, Sam Bregman, said the FBI and Talon Holdings first tried to trick a Bank of America broker into participating in its effort against Mr. Vigil and were rebuffed. The agents then turned to a California firm, Sutter Securities Inc. None of the efforts were the basis for a criminal charge in the case.
"Robert Vigil was accused of zero crimes related to Talon Holdings," Mr. Bregman said.
"What the FBI is willing to do to try and ensnare someone they think is doing wrong has no bounds," he said. "I don't have a problem with the FBI going undercover, but I do have a problem with the FBI using legitimate businesspeople to go after people they're going after when it has an effect on these innocent businesses' operations. The FBI and their agents need to be very careful that they're not committing fraud."
Lori Bailey, an FBI spokeswoman in Dallas, said that she couldn't comment on the case but that agents can't and don't commit crimes while investigating crimes.
In the Arkansas case, Shimoda-Atlantic has sued the FBI agents, the NASD and the Dubai investor, accusing them of fraud and theft of trade secrets.
A hearing is scheduled for July 12 in federal court in Fort Smith, Ark., on Shimoda-Atlantic's request for a temporary restraining order to stop the NASD from giving false information about brokers and brokerage firms.
Mr. Bregman in Albuquerque said he thinks Shimoda-Atlantic has a point.
"When the NASD conspires with the FBI to allow this kind of activity, then the NASD is exposing itself to some serious liability," Mr. Bregman said.
An NASD spokeswoman, who asked not to be identified, said she could not discuss the merits of the lawsuit but maintained that no court had ever imposed liability on the organization for performing its regulatory functions.
Peter Henning, a law professor at Wayne State University in Detroit and co-editor of the White Collar Crime Prof Blog, reviewed the suit and said Shimoda-Atlantic might find liability difficult to prove against any of the defendants.
FBI agents, as long as they follow proper procedures, have qualified immunity against liability, he said. Those cooperating with the FBI probably also would have protection, he added.
"It's hard to see where [Shimoda's] damage claim would come from. If you think of a situation where an undercover agent pretended to be a doctor and went forward with a procedure, then I could see a claim."
Shimoda-Atlantic "would have to show something more than, 'If you'd told us you were undercover FBI, we wouldn't have dealt with you.' "
If anything, he said, the trade-secrets claim might have a better chance than the fraud claim.
Regulators' compliance
Experts agreed that the NASD must have known about Talon's true identity from the start.
The listings for the firm and its brokers on the NASD Web site were unusual in that they showed registration only with the NASD and the Securities and Exchange Commission and not with any state securities agency. In order to work with investors, brokers have to be registered with every state in which they or a customer resides.
Mr. Siedle, the Florida investigator, has been critical of how the NASD discloses information on its Web site to investors. But he said any concern he might have about the NASD giving false information on a bogus firm would be outweighed by the knowledge that investigators were rooting out wrongdoing.
"I'm grateful that the FBI is getting involved," he said.
The listings on Talon Holdings and its brokers were taken off the NASD Web site after inquiries from reporters.
Talon's Web site came down the day after the company's FBI connection was revealed in court filings, Mr. Bregman said.
However, an Internet archive contains remnants of the Web site, listing Robert Brewer as Talon's president, John Firo as executive vice president and Peter Vaughn as a vice president.
The site said Mr. Brewer founded the company in 1995 and had worked in the industry since 1976. Mr. Firo, it said, joined the team in 1999 and concentrated on developing its Caribbean clientele and high-return hedge fund strategies.
Background checks using electronic databases turned up extensive residential and work histories for the brokers but no criminal or civil judicial records.
Deep background
The names and histories were almost certainly fabricated as part of an elaborate setup, said Ronald Kessler, author of The Bureau: The Secret History of the FBI, published in 2002 by St. Martin's Press.
"This is a common practice with all kinds of undercover operations," Mr. Kessler said. "Everything would be backstopped. It would not be clumsy. They have direct access to Social Security, driver's license records, and they can just manufacture anything they want."
Mr. Kessler said the FBI generally works through any issues ahead of time with the companies and organizations it's working with undercover.
"It's very carefully reviewed because it's obviously very sensitive," he said.
Mr. Kessler said he wasn't familiar with the Talon Holdings situation but that any image of an out-of-control FBI trying to entrap innocent people is not correct.
"Cold-calling would not be the way they would go about it," he said. "They would need some indication that some hanky-panky was going on before they made a call, just like the police can't just come up to somebody on the street and offer them drugs."
E-mail pfoutch@dallasnews.com
UNDERCOVER CASES
Two investigations related to Talon Holdings, the FBI's undercover brokerage firm, have come to light. As sometimes occurs in such operations, the apparent targets of both cases have alleged entrapment and government wrongdoing.
1. In Albuquerque, N.M., agents posing as Talon brokers gathered evidence used in the extortion case against a former state treasurer, Robert Vigil.
Retired FBI agent Robert Bettes testified in that case: "We had a company that was utilized in this investigation and its name was Talon Holdings."
2. In Rogers, Ark., Shimoda-Atlantic Inc. was subpoenaed after a Talon broker using the name John Firo helped the company sell stock to a Dubai investor.
Shimoda-Atlantic's lawsuit against the NASD and others says: "While fully knowing that TALON, FIRO and BETTES were fraudulent, NASD deliberately withheld vital information that would have given Plaintiff fair notice that Defendants FIRO and BETTES were registered under false names." |
