Part 2
Ploshnick denies that the three men pushed stocks at Meyers Pollock.
Minsky and Ballou could not be reached for comment, and the NASD
declined to release the name of the attorney representing Minsky in
recent NASD disciplinary proceedings. Ruge's attorney, Michael
Bachner, says that ''Mr. Ruge denies any involvement in the promotion
of any stocks at Meyers Pollock.''
According to one account of the stock-pushing process at the Fort
Lauderdale branch, which was furnished to federal and state
investigators, a typical manipulation of a hot IPO would begin well
before the stock began trading. Minsky and Ballou and the brokers
reporting to them, would work with other Meyers Pollock brokers to line
up as many other chop houses as possible to support the stock and
increase the share price as much as they could. But IPO or not, the
stocks pushed by the brokers in that office of Meyers Pollock all
seemed to have one inevitable outcome. With one exception--a
''vegetation management'' firm called Aquagenix Inc.--the stocks
pushed by the brokers all plummeted in the months to come.
LUCKY INSIDERS. One IPO allegedly handled by the
Minsky-Ruge-Ballou crews at Meyers Pollock was Multi-Media Tutorial
Services Inc. That offering consisted of ''units,'' each made up of one
share of stock and one warrant to buy one share for $5.60, with an
initial offering price of $4 a unit. As a result of the enthusiastic selling by
Minsky's brokers and others at other firms, the units ended the first day
of trading on Apr. 13 at $5.75 a unit--a one-day profit of well over
$500,000 for the handful of brokers and insiders lucky enough to trade
the units on the opening day. The units are now worth 7 cents.
The stocks allegedly promoted by the three men at Meyers Pollock
were considerably more substantial than the shell companies that were
foisted on investors in the penny-stock era. Aside from Multi-Media
Tutorial and Aquagenix, there were NuMed Home Health Care Inc., an
Ohio-based home-care company, and American Resources
International of Delaware, an energy exploration company. Others
included Protosource Corp. and Grace Development, which is headed
by Ruge. (In November, 1996, Ruge was arrested in an FBI sting,
accused of attempting to bribe an undercover agent who was posing
as a stockbroker. Bachner says Ruge is vigorously contesting the
charges.) Officials of Aquagenix, NuMed, and Protosource denied
knowledge of the promotion of their stock at Meyers Pollock, while
officials of the other companies could not be reached.
When Meyers Pollock's South Florida operations shifted from Fort
Lauderdale to Boca Raton in May, 1995, sources say the Minsky crew
did what stock promoters always do when offices close--they simply
changed firms. The next stop was at the Miami offices of J.P. Milligan,
and then the Boca Raton office of Euro-Atlantic Securities Inc. A branch
office of a firm called Brauer & Associates opened up at the same
location, with some of the same brokers, and, sources maintain,
Minsky. At Brauer and Euro, his brokers allegedly continued to push
stocks, just as they had at Meyers Pollock and other firms. An attorney
for Brauer, John Kiefner, confirms that Minsky worked briefly for Brauer
in South Florida, but in a legitimate ''investment-banking capacity.'' He
denied that Minsky had any role in retailing stocks. Efforts to reach
officers of J.P. Milligan and Euro-Atlantic, which ceased operations in
mid-1997, were unsuccessful. Minsky's odyssey through a succession
of firms is an example of a phenomenon that has vexed regulators
since the demise of the huge cold-calling powerhouses. One
ex-regulator notes that the NASD and SEC can lose track of the
dozens of stock promoters who work behind the scenes. And even
when regulators act promptly, it isn't always promptly enough. Take
Euro-Atlantic, which was expelled from the securities industry last
month. In this case, the NASD acted fairly quickly--filing a complaint in
March, 1997, only a few months after the trades that were the subject of
their investigation. But by the time the firm was expelled a few weeks
ago, Euro had been out of business for four months.
SEE NO EVIL. Regulators do not always act so swiftly, or at all. For
example, in 1992 and 1993 the NASD became aware of possible
payoffs to a 150-broker California firm called LaJolla Capital.
According to an internal NASD memorandum obtained by BUSINESS
WEEK, NASD examinations found that the brokerage had accepted
''due diligence fees'' and ''investment banking fees'' from companies for
which it was a market maker. But the NASD never acted on those
findings--which officials suspected were illegal payoffs. A LaJolla
spokesperson, Janet Frazier, denied LaJolla had ever accepted
payments for making a market in companies, but said the company
continued to accept due diligence fees--in return for carrying out due
diligence on companies.
The NASD's Goldsmith says that he does not know why the LaJolla
case was not pursued. But he observed that a federal appellate court
ruling in 1994--on alleged payoffs to another firm--required the NASD
to issue a formal rule banning such conduct before prosecuting payoffs
to brokerages. The rule was not issued until last July. In the interim, he
noted, the NASD did not pursue such cases. Goldsmith pointed out that
the NASD fined LaJolla in September for violating penny-stock sales
rules, in a decision that LaJolla says it is vigorously contesting.
However, the recent action makes no mention of payments from
companies.
Payoffs to brokers and brokerages by corporate officials and stock
promoters are some of the most invidious practices in the chop-stock
business. How widespread are they? Regulators at the NASD
minimize their prevalence. ''When you're talking about payments or
bribes--we take that very seriously. But to characterize that as
widespread, as sort of the practice or the norm, or as endemic, even to
the small, micro-cap stocks--we just don't see that,'' says the NASD's
Goldsmith.
But former chop-house execs maintain that such payoffs are pervasive
throughout the world of micro-cap stocks. Chop-house brokers say that
corporate officials, directly or through intermediaries, frequently pay off
brokers to drive share prices upward, or to obtain offerings of their
shares for listing on the OTC Bulletin Board. At one brokerage, a
former chop-house manager maintains, every OTC Bulletin Board
stock offering involved a payoff. ''It's a very thin market, usually there's
very little on the buy side initially--that's why they have to enlist the help
of a lot of brokers to get the buyers for these things,'' says one former
chop-house broker. The brokers have the whip hand--and thus can
demand payoffs. In one case, according to the former chop-house
official interviewed by BUSINESS WEEK, even NASD examiners are
not immune from accepting payoffs. However, NASD officials contend
that they have heard no such allegations--which, they say, they would
promptly refer to law enforcement.
One problem the NASD does pursue fairly vigorously is common at
chop houses--excessive commissions and markups. But the cases
they handle appear to be the tip of the iceberg--and point up the
sensitive role served by the Wall Street firms that process trades for
chop houses. The firms often process trades that appear to show
excess markups and commissions--but insist that they are in no
position to monitor the activities of the firms that trade for them.
Regulators are studying ways of chipping away at this long-established,
legally sanctioned ''see no evil'' policy--for often, there is a lot of evil that
passes through their trading systems.
A LOT OF HEAT. In its recent prosecution of Euro-Atlantic, markups of
as much as 63% were alleged. The NASD complaint does not specify
when the trades took place, but they appear to have been in the latter
half of 1996--at a time when the trades were processed by Schroder
Wertheim. A Schroder spokeswoman declined comment on whether
the firm was aware of the overcharges or even whether Schroder
processed the trades--though the spokeswoman said the firm
''apparently'' did so.
One firm that has been subject to substantial heat for its chop-house
clearing activities--particularly at the now-defunct A.R. Baron--is Bear
Stearns. Bear has been the clearing agent for a host of chop houses,
including PCM Securities, Meyers Pollock, and another major dealer in
small-company stocks--Paragon Capital--where, regulators have been
told by a former Paragon employee, massive overcharges have taken
place. These charges are significant because Paragon is believed to
be one of the largest dealers, possibly the biggest, in OTC Bulletin
Board stocks.
Internal Paragon trading records from late 1994, which were recently
submitted to the NASD and were obtained by BUSINESS WEEK,
show apparently massive commissions. Some were as high as 25% or
more. One trade went as follows: On Aug. 19, 1994, one customer
bought 17,700 shares of Environmental Technologies USA Inc. for
$13,275. According to the trading records furnished to the NASD, as
shown above, he paid a commission of $3,982.50--30%. Similar high
commissions were charged for trades that took place on other days
that month.
According to the trading records supplied to the SEC by a former
Paragon employee, customers were similarly overcharged in a host of
other stocks--Evro, Paramark Enterprises, Apogee Robotics, La-Man,
Eco2, First Standard Ventures, and quite a few others. There was no
indication that the firms had any knowledge of the overcharges.
Repeated calls to Paragon President Danny Levine for comment on
these allegations were not returned.
The trading records were routinely churned out by Bear Stearns, which
could have noted the size of the commissions at Paragon by making a
simple calculation. Two former Paragon officials, who were
unacquainted with the former Paragon employee who submitted the
records to the NASD, said that the trading records show the magnitude
of the commissions clearly and that they would be obvious at a glance.
However, an official of a rival clearing firm--no friend of Bear--notes that
there is ''no obligation of a clearing firm to look at anything like that.''
Bear Stearns's position is that it simply processed the Paragon trading
records and did not review them. Asserts Bear Stearns's general
counsel, Mark E. Lehman: ''It is our view that the responsibility for
determining markups and commissions is that of the introducing firm
and not the clearing firm.'' According to Lehman, Bear Stearns is still
clearing trades for Paragon.
''GRAVY.'' One former Paragon manager observed a nefarious
practice that, he maintains, has been common at the New York
headquarters of Paragon in recent years. According to this
ex-manager, who personally witnessed the practice, Paragon would
postdate and predate time stamps of trading tickets, to make markups
as large as possible. According to this ex-manager, the scheme
worked like this: A customer would buy 10,000 shares of a Bulletin
Board stock when the market was $5 bid and $6 asked. If portions of
the order were filled at a lower price, the order was supposed to be
time-stamped to reflect that, and at the end of the day the orders are
submitted to NASDAQ. The former manager maintains that Paragon
would accumulate the stock during the day--paying, say, $5 for the first
thousand, $5.50 for the next, and so on--and show the entire order at
the highest price. ''Everything else is gravy for the broker,'' says the
ex-Paragon manager.
No one seems to have sopped up the gravy that flows from chop stocks
more than Jordan Belfort, who founded the Stratton Oakmont
penny-stock brokerage in the 1980s. Just 35, he is believed to be a
millionaire many times over. ''Investment banker'' was how Yachting
Magazine characterized him in its May issue, in detailing the sinking of
his 150-foot yacht, the Nadine. A publicity release from United Film
Distributors, one of Belfort's many enterprises, calls him a ''private
investor.'' The Queens (N.Y.) native is the executive producer of several
of United's movies, which have titles such as Santa With Muscles.
But there is another side to Belfort. According to numerous chop-house
execs and traders interviewed by BUSINESS WEEK, Belfort has
remained a hidden power whose influence in the chop-stock world has
hardly waned since he sold his stake in Stratton and was barred for life
from the securities industry by the SEC, nearly four years ago. (Belfort
agreed to the ban without admitting or denying the SEC's allegations of
securities fraud.) He has managed to retain his power and wealth while
apparently remaining within the letter of his agreement with the SEC.
Indeed, his name does not appear on a single scrap of paper
associated with any brokerage--except Stratton.
After he left Stratton, Belfort continued to draw vast sums from the
firm--something that is currently being investigated by Stratton's
bankruptcy trustee, Harvey Miller. Under a ''noncompete'' agreement
that he signed with Stratton in March, 1994, Stratton agreed to pay
Belfort a staggering $180 million, payable in monthly installments of $1
million. In return, Belfort could not open a competing brokerage. The
timing of the deal was fortuitous, to say the least--it was signed one
week before Belfort was banned from the securities business. The
SEC ban, one state regulator observes, was no doubt pending at the
time the noncompete was signed. Belfort and the former attorney for
Stratton who negotiated the deal, Ira L. Sorkin, declined comment, with
Sorkin citing attorney-client privilege.
Belfort kept up his side of the bargain by keeping out of the securities
business--at least on paper. Sources on Wall Street assert that Belfort
continues to exert control, through intermediaries, of some of the
leading brokerages in the micro-cap stock business. Among them are
D.L. Cromwell Investments, Monroe Parker Securities, and Biltmore
Securities. Allegations of Belfort control are not new for Monroe
Parker--they were raised in 1992 by the NASD when the firm applied
for membership, notes Monroe Parker attorney Bill Singer. But Singer
says that the NASD was satisfied that Belfort had no hidden role at the
firm. Attorneys for Biltmore and D.L. Cromwell deny that Belfort has any
tie to the firms.
FRONT MAN. But Amr ''Tony'' Elgindy, head of a Fort Worth-based
firm called Key West Securities Inc., has alleged in court papers that
Belfort bought a silent partnership in his firm early in 1997. He
maintains that the relationship fell apart after he resisted pressure by
Belfort to open up an office in New York City to sell stock to the public in
the time-proven way, by high-pressure cold-calling. According to
Elgindy, Belfort bought into his firm using a trusted associate named
Robert LoRusso as a ''front man.'' LoRusso and Belfort vigorously deny
Elgindy's allegations.
LoRusso and Belfort both maintain that Elgindy is no angel. Indeed, in
September, Elgindy settled NASD charges of alleged trading abuses
by consenting to a fine and a one-year ban as principal of a brokerage
firm. He neither admitted nor denied the charges. The NASD complaint
alleges that ''Elgindy was suffering from severe mental illness'' at the
time of the trading abuses. Elgindy maintains that was a reference to
severe depression. LoRusso also asserts that Elgindy misappropriated
funds and failed to disclose regulatory problems, which resulted in a
suit by LoRusso to rescind his deal to buy into the firm. LoRusso's
allegations are denied by Elgindy, who settled the suit by agreeing to
rescind the deal.
PASSIVE? Although Elgindy is anything but an unbiased observer, his
allegations support the assertion of chop-house brokers and traders
that Belfort remains a powerful presence in the chop-stock business.
According to Elgindy, Belfort is a well-capitalized short-seller of chop
stocks--an adventurous brand of trading that is Elgindy's specialty. But,
say Elgindy and other sources familiar with Belfort's activities, Belfort
also has had access to cheap stock in numerous companies and has
pushed a host of stocks through retail firms-- particularly Monroe
Parker, D.L. Cromwell, and Biltmore. In a phone conversation with
Elgindy in December, 1996, that Elgindy taped, Belfort seems to imply
that he is more than just a passive observer of activities on the Street.
Referring to one stock deal, Belfort told Elgindy: ''I have access to a lot
of small firms.''
Elgindy and others familiar with Belfort's activities maintain that Belfort
has been a hidden power behind the retailing of a host of stocks.
Among the stocks that Elgindy says were Belfort favorites were Big
City Bagels, Luma Net, Grand Havana Enterprises, and the company
that was the subject of the possible Paragon
overcharge--Environmental Technologies. Elgindy says Belfort would
sometimes supply brokers with cheap stock in the firms, which would
be sold to customers at huge markups. Belfort says he legitimately
owns shares in some of those companies but denies having access to
''cheap stock'' in any. The chief executive of Grand Havana, Harry
Shuster, says that he knows of no Belfort involvement in the company
for the past two years. Officials of the other companies did not return
phone calls.
STARTLING REVELATION. Elgindy maintains that Belfort sometimes
would wax sentimental about the good old days at Stratton. And taped
excerpts of those conversations, which Elgindy shared with BUSINESS
WEEK, are revealing. In one conversation in December, 1996, Belfort
speculated why one particular stock both men were shorting was doing
so well. ''They're paying people off,'' said Belfort. ''They're definitely
paying people off with stock. I know. I owned a very large OTC firm.... I
made a zillion dollars off my deals.''
In another taped conversation, Belfort made a startling disclosure.
According to Belfort's taped account, a company called Builders
Warehouse Association Inc.--which since has become a unit of Osicom
Technologies Inc.--once offered him a huge bribe in return for Stratton
selling the stock. Said Belfort: ''This guy came to me, this...kid from
Utah came to me....He offered me three shares in Switzerland for every
share I sold....I had like 500 brokers,'' Belfort continued. ''I could have
sold a zillion shares.'' Belfort declined to discuss the alleged bribe offer.
Osicom and Barry Witz, former chief executive of Builders Warehouse,
did not respond to requests for comment.
Whether Elgindy is a whistle-blower or a sore loser, one thing is sure:
The conduct that he describes is common in the world of chop stocks.
In their efforts to clean up the world of micro-cap stocks, the regulators
have always seemed to be a day late and a dollar short--or perhaps
more accurately, years late and billions of dollars short. Their efforts to
crush micro-cap fraud are well-intentioned, sometimes vigorous--but
they have failed to put more than a dent in the problem. Driving brokers
out of the industry does little good when they stay active behind the
scenes. Shutting firms does little good when other firms open to take
their place. The money is simply too good: The indictment on Nov. 25,
which alleges the involvement of four ranking Mob figures in pushing a
single chop stock, proves that. And it is coming from a seemingly
bottomless pit--the pockets of small investors.
BY GARY WEISS |
