|Electro Optical fraud|
Charles B. Weaver of Massachusetts had always hoped his miniature technology company would do well, but even he was surprised when the price on the firm's over-the-counter stock suddenly shot heavenward.
"We were aware the price was going up. We couldn't figure out why," Weaver said in an interview last week. "We kept talking about it. Everybody kept looking for the price to drop. We couldn't understand how it was being held up."
Weaver's company, then called Electro Optical Systems Corp., became part of an SEC fraud case that involved Lehmann.
The case involved a far-flung web of business partners in Spain, Switzerland, California, Grand Cayman and Tinton Falls, New Jersey, federal records show.
The SEC complaint against 40 people and companies details a complex swapping and disbursement of millions of shares in the tiny Massachusetts corporation that had virtually no assets and no marketable product.
In the end, gullible investors attracted to the site by e-mail promotions and a dubious Internet Web site were conned, the SEC said. Insiders reaped some $12 million, according to the SEC.
The SEC case was later cited before a Senate subcommittee investigating Internet stock fraud as an example of the under-belly of penny stocks, a world where insiders can net millions overnight and gambling investors can lose life savings.
One of the two friends who found Lehmann and Chalem's bodies last week, Allen Conkling, was involved in the Electro Optical Systems case, but he was not charged by the SEC. Conkling is also listed as an investor-relations officer for Aviation Industries Inc., a company currently touted on futuresuperstock.com, an Internet site in which authorities say Lehmann was involved. A woman answering the phone number for Aviation Industries said she never heard of Conkling.
Lehmann settled with the SEC after paying $630,000, but without admitting any wrongdoing. The progress of that civil case was halted pending the outcome of a criminal investigation, according to the court record. The record did not state if Lehmann was involved in the criminal probe.
The Electro Optical saga began when Weaver's company, WTS Transnational, trying to develop a fingerprint-security device for computers, attempted to find interested investors willing to sink millions into the firm.
Weaver said in an interview that through a series of contacts, he was introduced to a now-defunct Staten Island company call U.S. Milestone. Weaver was not charged by the SEC.
At a subsequent meeting in New York, Weaver briefly met Lehmann, who introduced him to Thomas Edward Cavanagh and Frank Nicolois, officers at U.S. Milestone.
Cavanagh and Nicolois suggested WTS merge with a paper company to get into the stock market quickly, Weaver said. In this case, the paper company was a California firm with $567 in assets, no revenues and 3.5 million shares of common stock.
Voorhees attorney William N. Levy brokered a deal with a California attorney representing the paper company. The new company was to be called Electro Optical Systems Corp. Then Cavanagh and Nicolois opened accounts in the name of two Spanish clients with trader Cosimo Tacopino at the Tinton Falls brokerage, Donald & Co. Securities.
According to federal court papers, the Internet stock tip site futuresuperstock.com began touting Electro Optical in January 1998, claiming the company's product had been found to be 100 percent accurate in tests. Lehmann had a hand in running futuresuperstock.com.
Later that month, a press release distributed by Conkling said Electro Optical had received an order for 1,000 of its fingerprint-security devices. That press release was fiction, the SEC said.
Meanwhile, shares began moving through accounts at the Tinton Falls brokerage.
Lehmann received 150,000 Electro Optical shares for free from the Spanish clients. He quickly sold 100,000 shares for a $500,000 profit, the SEC charged.
Two million shares were sold through the Tinton Falls accounts at $5 or more a share for a net total of at least $10 million, court papers say.
Tacopino's secretary said last week that the trader would not take calls on the subject. He has denied the allegations in court papers. Donald & Co. was released from the case after surrendering all profits and commissions from Electro Optical stock.
In the end, Electro Optical stock was only traded for 70 days before SEC regulators suspended activity. Weaver said he suspects federal authorities were on the case early.
"We think they were already watching them (before the merger). I mean, nothing happens that fast," Weaver said.
Weaver's company, which has reverted to its previous name, is still trying to develop its electronic fingerprint-security device. And Weaver said he has learned a lot.
"Had we known what we know now, we would have been educated enough to know something was screwy," Weaver said. "The stock being up there and staying up there, we should have gone back right at that point to figure out what was going on."