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MTC Electronic Technologies Co
Ltd -
SEC charges Leungs in orchestrated
fraud
MTC Electronic
Technologies Co Ltd
MT
Shares issued 16714076
1899-12-30 close
$0
Wednesday Feb 4 1998
BANKER DRIOL AN INDISPENSABLE
CONFEDERATE
by Brent Mudry
The US Securities and Exchange Commission
has launched a prosecution against alleged
fraudsters Miko Leung, the founder of MTC
Electronic Technologies, and his brother Sit
Wa Leung seeking disgorgement of US$16
million in profits from their "pump and dump"
manipulation of MTC shares in a phony stock
option scheme in 1992. The US regulator also
reveals that Ron Driol, Mr Leung's banker and
"confederate," played a much broader role in
the alleged fraud than earlier believed. The
SEC claims that "Driol played a central role" in
transfering the Leung brothers' ill-gotten stock
option gains from accounts at Hongkong Bank
of Canada to nominee accounts in Hong Kong.
Mr Driol was terminated from his position as a
senior official at the bank's main Vancouver
branch in 1994 when his involvement in
facilitating Mr Leung's fraudulent stock options
was exposed. The SEC also refers to secret
real estate dealings between Mr Driol and Mr
Leung dating back four years before the 1992
option scheme.
In combined actions, the SEC filed a civil suit
against the Leungs on Thursday January 29 in
United States District Court for the District of
Columbia, and filed an administrative
proceeding against Mr Driol, banning the
former banker from further securities
violations, in a consent agreement. The joint
moves came exactly a year after the
Vancouver commercial crime section of the
RCMP disclosed it had filed fraud charges
against the Leungs for the massive options
scheme. The RCMP charges capped an
international investigation that spanned more
than three years.
In the consent agreement, Mr Driol declined to
admit or deny the SEC's allegations, but vowed
never to break securities fraud laws in the
future. The SEC claims Mr Driol, who handled
MTC's accounts at Hongkong Bank of Canada,
assisted the Leung's scheme by placing the
bank's signature guarantee on stolen stock
certificates, and later approving transactions in
which the proceeds were transferred out of his
bank. The SEC notes that Mr Driol first
became acquainted with Mr Leung in 1983,
nine years before the options scheme. "In 1988
Driol and Miko entered into a real estate
partnership which Driol improperly concealed
from his employer," states SEC secretary
Jonathan Katz. In this secret deal, "at Driol's
suggestion," Miko bought some Canadian real
estate through a holding company, 8898
Investments. Miko gave his very friendly
banker a 33 per-cent interest free of charge,
and Mr Driol promised to "look after" the real
estate in Miko's absence.
Miko later boosted the banker's stake to 50
per-cent, again free of charge. Mr Driol
apparently neglected to tell Hongkong Bank
about these curious special dealings with Mr
Leung, one of the bank's corporate clients. In
June 1994, when the MTC option fraud hit the
press, the embarrassed bank allowed Mr Driol
to resign under pressure, instead of firing him,
according to the SEC. Mr Leung hired the
banker to work full-time for 8898 Investments,
the pair's joint real estate venture.
The groundwork for Miko's options scheme
was laid in 1990, two years after the secret
real estate partnership with Mr Driol,
according to the SEC. In a series of MTC press
releases from March 1990 through September
1992, Mr Leung promoted fictitious fax
machine sales to China. The promoter
repeated these false claims in SEC filings up to
July 1993. Mr Leung allegedly issued false
press releases claiming MTC was the exclusive
supplier of fax machines to mainland China,
using Yin Jiang Telecommunications Group of
China as its distributor. On the surface,
everything looked rosy. MTC booked and
reported fax machine sales of $15.9 million in
fiscal 1991, $23.3 million in fiscal 1992 and
$17.3 million in fiscal 1993. These fax machine
sales comprised 31 to 46 per-cent of MTC's
total revenues.
Unfortunately, these combined sales of $56.5
million were all just a figment of Miko's
inventive imagination, according to the SEC.
"MTC did not sell fax machines to Yin Jiang,
and all of the revenue and earnings. . . for such
purported sales were fictitious," claims Thomas
Newkirk, one of five SEC attorneys who filed
the civil suit. "Miko deceived MTC's
independent accountants by providing them
with false documentation to support the
fictitious fax machine sales, including a
contract, invoices, credit notes and audit
confirmations," Mr Newkirk adds.
MTC's claims of big cellular and paging deals
in China were equally illusory. In press
releases and SEC filings from December 1990
to January 1993, Miko claimed MTC had a
number of exclusive joint venture contracts.
The promoter claimed that MTC would be the
sole cellular provider in Hainan province, the
exclusive provider in Shanghai for 50 years,
the exclusive cellular provider in China for 15
years and the exclusive paging provider for a
large portion of the population of the People's
Republic of China. In reality, the SEC notes
that "MTC's claims that it had exclusive rights
to provide cellular telephone and paging
services to PRC cities and provinces were
false."
After setting up the secret deal with MTC's
banker, Mr Driol, and launching the aggressive
campaign of false press releases and fabricated
financials, Miko and his brother Sit Wa then
created a pile of paper through phony options.
The SEC notes that in 1992, the two brothers
induced MTC's board to issue options on more
than 1.5 million MTC shares to reward existing
and prospective employees. "They then stole
the options, exercised them, and sold the stock
that had been grossly inflated by their
fraudulent misrepresentations regarding MTC's
business in the PRC," states Mr Newkirk.
Miko and Si Wa allegedly conned MTC's
board on four occasions in 1992 to issue large
amounts of options at exercise prices as low as
a penny, to supposed communications
engineers, who never saw the options. "Miko
and Sit Wa stole the options and concealed the
theft by causing MTC to file false registration
statements with the SEC," the regulator notes.
The action options conversion was relatively
simple. In May, October and November of
1992, the Leung brothers instructed MTC's
transfer agent to issue the option shares and
deliver the certificates to them. Miko and Sit
Wa falsely claimed the option exercise price
had been paid. "As a result they gained control
of all the optioned shares without any outlay of
cash," states Mr Newkirk.
Certificates in hand, the Leungs prepared to
meet with their banker. The SEC alleges that
to make the shares transferable, Miko and Sit
Wa "caused" the so-called engineers'
signatures to be forged on the share
certificates. Miko then arranged with Mr Driol
to place his bank's signature guarantee stamp
on the stolen certificates, even though the
banker never knew or saw any of the so-called
engineers named on the certificates. To make
things easier, Mr Driol guaranteed most, if not
all, of the certificates in blank, before the
forged signatures were even placed on them,
according to SEC official Mr Katz.
The SEC alleges the Leung brothers began
selling the option shares through nominee
accounts on September 9 1992, while Miko
continued to pump out false information to
drive the stock price up. Some of the false
information was "disguised to appear as if it
came from disinterested third parties,"
according to Mr Newkirk. Pennsylvania
Merchant Group issued a research report in
late October praising MTC's prospects. Miko
reviewed and edited the report, but he forgot to
correct the false statements. The PMG report
concluded that "MTC's new projects are
unfolding and could cause a 500-800 %
earnings growth next year to $1.75 - $2.50 per
share and more than doubling to $4 by
mid-decade." In October and November,
MTC's investor relations firm disseminated a
similarly boosterish Corporate Update, dictated
by Miko.
Miko shared his false claims with the
regulators as well. In an October 30 1992
registration statement filed with the SEC, Miko
claimed MTC had the exclusive right to
provide cellular phone and/or paging services
to approximately 300 million people, or 25
per-cent of the population of China. This SEC
registration statement formed the basis of
presentations made by MTC's investment
bankers Daiwa Securities to brokers and
institutional investors in a road show in
November 1992 to promote a $100 million
convertible debenture offering.
Miko and Sit Wa rode this wave of market
enthusiasm in the fall of 1992, which pushed
MTC's share price up from US$5.12 on
September 1 to US$30. Mr Newkirk notes that
in November alone, when Daiwa was busy
beating the drum in its dog and pony shows,
MTC shares surged from US$9.62 to
US$26.25. While MTC shares skyrocketed in
value, the Leungs were busy dumping their
stolen option stock, selling more than 1.46
million shares through nominee accounts. The
SEC notes the pair realized profits of more
than US$16.3 million, then wire-transfered
US$4.29 million of the proceeds to a MTC
bank account to conceal the theft by
purportedly paying the exercise price. "They
laundered the remainder of the proceeds of
these sales by transferring them through
nominee bank accounts in Canada, Hong
Kong, Switzerland and elsewhere," states Mr
Newkirk.
While Mr Driol was guaranteeing the blank
share certificates, he also helped shuffle the
money around. "Driol played a central role in
the transfer of the funds to and from the
accounts at Hongkong Bank of Canada, and as
a result knew, or was reckless in not knowing,
that Miko controlled these nominee accounts,"
states Mr Katz. The SEC official notes the
banker wrote or approved the transfer
instructions for every wire transfer from the
bank accounts from September to December
1992, and approved several of the deposits to
these accounts from the nominee brokerage
accounts. "On one occasion Driol issued wire
transfer instructions to bank employees for two
separate accounts in a single memorandum,"
notes Mr Katz.
In summing up its case, the SEC states that
Driol played an "indispensable role in
facilitating the sale of the stolen options stock"
and the banker "provided substantial
assistance" in directing the movement of the
stock sale proceeds through the Leungs'
nominee accounts. "Driol was thus a cause of
Miko's and Sit Wa's violations of the antifraud
provisions," states Mr Katz. Mr Driol could not
be reached for comment by Stockwatch.
RCMP commercial crime officer Anthony
Fozard notes that BC's much-heralded
Securities Fraud Office is currently talking with
the Leungs' lawyers about a potential
arrangement to skip a trial. Prosecutor Heather
Holmes could not be reached for comment.
(c) Copyright 1997 Canjex Publishing Ltd.
canada-stockwatch.com
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