US unearths 50 mn mega security scam

The charges, unsealed in a New York federal court, involve 120 defendants 8212; including 10 alleged mob members and associates, an official of a New York City detectives8217; union and the chief investment strategist of a well-known San Francisco money manager. Separately, the Securities and Exchange Commission suspended trading in the securities of two stocks 8212; Wamex Holdings and EPawn.com 8212; involved in the alleged scheme.

Federal agents fanned out to pick up nearly 100 defendants by midday Wednesday in a dozen states, also executing search warrants in a half dozen locations from lower Manhattan to Dallas and Salt Lake City.

The action marks the largest number of defendants ever arrested at one time on securities-fraud-related charges, said Mary Jo White, the US Attorney in Manhattan. Yet many of the cases were only loosely related. The high-profile charges suggest that federal authorities are heightening their focus on organized crime8217;s potential influence in the securities industry. Yet the allegations indicate that any such influence is concentrated on small brokerage-firm players and tiny quot;micro-capquot; stocks at the fringe of the stock-market arena.

In some cases, the defendants allegedly aimed to exploit the Internet boom, by touting the companies as dot-com plays. The federal officials played an online presentation promoting Wamex as an alternative online-trading system that would soon be available. But the SEC, in suspending trading in Wamex, said it wasn8217;t lawfully authorized to operate such a system.

The alleged activity bore more resemblance to classic quot;pump-and-dumpquot; schemes 8212; where small stocks are hyped, sold to unsuspecting investors, then deflated 8212; rather than traditional organized-crime activity. Prosecutors did assert, however, that brokers who didn8217;t play ball were subjected to quot;beatings, intimidation and threats.quot; The charges also allegedly involved union influence. And one defendant allegedly tried to arrange for the murder of a cooperating witness. The job never was completed

quot;The size and the scope of this indictment which combines both organized crime and securities fraud violations is unprecedented,quot; says Jerry D Bernstein, head of the white-collar criminal-practice group in New York at the law firm of Holland amp; Knight LLP. He added, quot;The notion that markets would be influenced by the threat of violence rather than the threat of a margin call, if true, is disturbing.quot;

As financial frauds go, it is hardly the largest. In the past few years, for instance, criminal prosecutors have alleged that Sterling Foster amp; Co and A R Baron amp; Co, two small securities firms, each bilked investors out of 75 million in six months, in Sterling Foster8217;s case. Both firms now are out of business

At the same time, however, the alleged scheme also underscores how the nearly 10-year-old bull market has made it easier to tap into investors8217; greed to quickly strike it rich. The indictments charged 21 defendants with participating in a racketeering conspiracy in which members and associates of the Bonanno and Colombo organized crime families over five years forged corrupt alliances with three other crime families, infiltrating and controlling several small brokerge firms.

Many of the charges stemmed from succesful one-year undercover operation, code-named quot;Uptickquot; by the Federal Bureau of Investigation8217;s New York office, with assistance from the SEC and the regulatory arm of the National Association of Securities Dealers. The operation involved surveillance devices at the office of DMN Capital Investments Inc, a small securities firm that prosecutors say was at the heart of the alleged manipulation.

White said DMN Capital offered quot;its services to anyone and any deal, as long as it was illicit,quot; attracting quot;allegedly mobbed-up broker-dealers, top-shelf investment advisers, unscrupulous issuers, unethical lawyers and accountants, and micro-cap manipulators 8212; a virtual Who8217;s Who of securities violators.quot;

The defendants, however, aren8217;t in the upper echelon of the organized-crime world, according to prosecutors. They include Robert A Lino, known as quot;Little Robert,quot; who prosecutors alleged is a capo in the Bonanno crime family; Frank A. Persico, an alleged associate of the Colombo crime family and cousin of Alphonse, alleged acting head of the Colombo crime family; and Anthony P. Stropoli, an alleged Colombo crime family quot;soldier.quot;

Persico allegedly controlled crews at brokerage firms including First Liberty Investment Group Inc, William Scott amp; Co and Bryn Mawr Investment Group Inc. Other firms allegedly controlled or infiltrated by the mob group included Monitor Investment Group Inc; Meyers Pollack amp; Robbins, which had previously been tied by prosecutors to organized crime; First Liberty Investment Group Inc and Atlantic General Financial Group.

The mob8217;s alleged racketeering enterprise also sought to defraud union pension funds by structuring investments that allowed for secret kickbacks to corrupt union officials, the charges said. One of them, officials said, was a preferred stock offering of American Realty Trust, a real-estate investment trust listed on the New York Stock Exchange, allegedly arranged through Gene Phillips, who controlled Basic Capital Management, the Dallas investment adviser to the REIT.

In a statement, Basic Capital, which manages 2.5 billion and advises four publicly traded real-estate companies, said Phillips and another key executive were quot;out of the country,quot; one on vacation and the other on business. quot;We are shocked and surprisedquot; by the news, the company said. In the 1980s, Phillips helped build Southmark Corp. into a real-estate conglomerate with a wide range of other interests; shortly after he left in 1989, the company tumbled into bankruptcy proceedings with about 2 billion in debt.