|Wolfson Is Convicted In `Pump and Dump' Penny-Stock Scheme |
The Wall Street Journal via Dow Jones
THREE YEARS AGO, federal prosecutors capped an undercover sting operation with the arrest of 120 stockbrokers and others, in a bid to root out small-stock
This week, a federal jury in New York City convicted one of the biggestplayers in the case.
Allen Wolfson, a 57-year-old Salt Lake City penny-stock promoter, was found guilty Wednesday of one count of conspiracy to commit securities fraud, wire
fraud and commercial bribery, five counts of securities fraud and one count of wire fraud. Under federal sentencing guidelines, Mr. Wolfson could face as
long as 19 years in prison.
Mr. Wolfson was the mastermind of the vast "pump and dump" scheme from late 1998 through 2000, in which stockbrokers and others were bribed with commissions of as much as 65% of trading value to artificially pump up the price of six stocks, take a profit and then dump them onto other investors, according to David C. Esseks and Robert Hotz, the lead prosecutors in the case. Being paid
fees to promote a stock isn't illegal, but not disclosing it to investors is. Said Christopher Bruno, Mr. Wolfson's lawyer: "Obviously, we are disappointed
with the jury's verdict."
The case was part of the government's largest crackdown on alleged small-stock manipulation, which through an undercover sting dubbed "Operation Uptick" led to
the arrest in June 2000 of the 120 stockbrokers, as well as promoters and organized-crime members. Of those arrested, 95 people have been convicted. Mr.
Wolfson operated one of several Wall Street penny-stock operations cited in the cases. In his case, seven people were indicted; six pleaded guilty, and Mr. Wolfson was found guilty.
The Wolfson verdict underscores that even with all the scrutiny of Wall Street in recent years, weeding out recidivists isn't easy. In 1977, Mr. Wolfson
was convicted by a Florida state jury for defrauding a Florida bank; he received 10 months' probation. In 1982, a Florida state jury found Mr. Wolfson guilty of
funneling illegally large contributions to political candidates. That violated his probation, and Mr. Wolfson was sentenced to 10 years in state prison. In
1987, he was convicted of three felony counts related to overstating the value of a building used as collateral for a loan. In 1996, Mr. Wolfson was arrested in a penny-stock manipulation sting; those charges were dismissed.
But prosecutors say when he was on probation in 1996, Mr. Wolfson spoke with an undercover agent from the Federal Bureau of Investigation and set up his next
scheme, which ultimately led to Wednesday's conviction. Moreover, prosecutors allege that while Mr. Wolfson was out on bail following his June 2000 arrest, he
engaged in another "pump and dump" scheme involving shares of Freedom Surf Inc. In December 2002, the government indicted him on securities-fraud charges in
federal court in Manhattan; that case was put on hold until the outcome of the 2000 case.
Prior to the latest trial, prosecutors sought to have Mr. Wolfson remanded to jail, because of the 2002 charges. But his lawyers persuaded Judge John G.
Koeltl to put him under house detention. Since his conviction, Mr. Wolfson has been jailed.
In the 2000 case, Mr. Wolfson's lawyers argued that he did help the six fledgling companies by restructuring their debt and giving advice on auditing and legal services in exchange for the stock. While Mr. Bruno conceded that
Mr. Wolfson paid fees to the brokers to market the stocks, he asserted that it was the brokers' responsibility -- not Mr. Wolfson's -- to tell the customers they
were receiving these fees.
Mr. Wolfson's 2000 pump-and-dump scheme originated from his offices in Salt Lake City, where he operated several shell consulting companies, according to the indictment. Through these entities, he received stock in six nascent
companies in exchange for consulting services. In a bid to throw investigators off the trail, Mr. Wolfson added another layer between him and the brokers:He
enlisted Michael Grecco, an associate of the Colombo crime family in New York, to direct trades to market makers, who, in return for a commission, made sure
brokers bought stock from Mr. Wolfson, according to prosecutors. Mr. Grecco then had these bribes, often as much as 40%, passed to the brokers at a number of
boiler rooms in and around Manhattan.
Among those investors was Thomas V. Tofany, a 52-year-old owner of a health club in Lakeville, N.Y. Mr. Tofany testified in court that he never bought stock
before he received a call in 1999 from Thomas Cordano, a J. Banks Securities stockbroker. By March 1999, at the recommendation of the broker, Mr. Tofany said
he invested $165,000 in ATR Industries, a Palm Beach, Fla., home-cleaning company. ATR had never turned a profit, but Mr. Cordano said the company's new
plan to sell discounted beauty products over the Internet would change its fate.
"He told me that this was something that was going to be very good for me," Mr. Tofany testified.
Soon after he bought the shares, the stock plunged. At Mr. Tofany's direction, the broker began selling some of the shares, but he had difficulty selling them
all because the stock was thinly traded.
Mr. Tofany lost more than $100,000. His broker, Mr. Cordano, was paid $32,000 in commission by Mr. Wolfson, according to Mr. Tofany's testimony. Mr. Tofany
testified Mr. Cordano never told him he was being paid a 20% commission to promote the stock. In January, Mr. Grecco was sentenced to three years, 10
months in prison. Mr. Cordano couldn't be reached for comment.