|Alumni of notorious brokerage firms find work in `boiler rooms'|
BY CHRISTOPHER CAREY
Posted on Tue, Jun. 22, 2004
St. Louis Post-Dispatch
ST. LOUIS - (KRT) - The securities industry thought it had seen the last of Frank L. Palumbo.
His Florida-based stock brokerage, J.W. Gant & Associates, shut down under regulatory pressure in 1992.
The National Association of Securities Dealers ruled that the firm had fraudulently marked up the prices of three obscure stocks for which it controlled trading.
The NASD also barred Palumbo for life from associating with any of its member firms and ordered him to pay $762,500 in fines and restitution.
But a St. Louis Post-Dispatch investigation into unlicensed offshore brokerages revealed that Palumbo and several colleagues from J.W. Gant are back in business on the other side of the Atlantic, pushing shares of obscure U.S. companies.
So are alumni of other notorious U.S. brokerage firms.
The Post-Dispatch identified nearly 30 Americans who have been disciplined by the Securities and Exchange Commission, the NASD, the Commodity Futures Trading Commission or other regulatory bodies and now work at unlicensed, offshore brokerages, known as "boiler rooms."
Because most of the people who work for the boiler rooms use aliases, the number could be far higher. The stock sale rings extend from Europe to Asia and have targeted investors in 20 countries.
Here's how some of them operate.
European investors in 2000 started getting unsolicited calls from brokers offering shares in Spantel Communications, an upstart long-distance company targeting the Spanish telephone market.
The brokers said they worked for Goodman Hart Associates on Spain's Costa del Sol. They offered "pre-initial public offerings" of stock at prices ranging from $4 to $6.50 a share.
Spantel became listed in the United States on the Nasdaq Over-the-Counter Bulletin Board the following year but not through a public offering. Instead, it merged with a publicly traded shell company and moved its home base to Miami.
SEC filings show that Spantel was controlled by Mohamed A. Khashoggi, the son of arms dealer Adnan Khashoggi.
The filings show that Palumbo and two other former J.W. Gant brokers also were large Spantel shareholders and held key positions in the company.
What's more, SEC filings and other documents show that Spantel insiders had direct links to the boiler rooms pushing the company's shares. For example:
Spantel's early SEC filings listed Conor D. O'Connor as its technical director.
The Internet sites for two boiler rooms that peddled Spantel's shares were registered under his name.
The Internet domain registration for a third brokerage, Goodman Hart, listed O'Connor as the e-mail contact.
O'Connor acknowledged that he worked as a consultant for Spantel and that his other business set up the sites.
"I own an Internet company," he said. "We register domain names for hundreds of firms. Some of the ones that you mentioned look vaguely familiar, but I wouldn't know much more than that."
Investors who bought Spantel shares said the transactions were processed through Clearing Services on the Costa del Sol.
The address that Clearing Services used in a December 2001 SEC filing disclosing its ownership of 6.3 million Spantel shares was the same as the address that Palumbo used in his disclosure statement the same day. Palumbo identified himself as Spantel's corporate secretary and the holder of 1 million shares.
One investor contact at Clearing Services was another American, Robert J. Carlin.
However, Spantel's SEC filings listed him as manager of one of its subsidiaries.
Carlin also had been compliance director for J.W. Gant, the person responsible for ensuring that the brokerage did not violate state or federal securities regulations. And he was majority owner of a San Francisco-based brokerage that shut down in 1997 after a raid by the SEC and FBI.
Besides Spantel, the boiler rooms pushed shares of a privately held company, Adrentacar. Its vision: to turn its cars into rolling billboards, giving advertisers a new method of exposure and offering drivers a break on rental rates.
Adrentacar's Internet site featured images of vehicles wrapped in the logos of McDonald's Corp., Coca-Cola Co. and other major consumer product companies - none of which had signed contracts for the service.
The boiler rooms offered Adrentacar at prices ranging from $4 to $6.50 a share. They told investors the money would finance an expansion, which in turn would lead to a lucrative public stock offering.
Meanwhile, Spanish authorities issued warnings that the boiler rooms, Goodman Hart and Morgan Paris and Co., were offering investments despite being unlicensed.
Like Spantel, Adrentacar never filed for an initial public offering. Instead, it merged into European Day Spa Holding Co., the other stock the boiler rooms were promoting. Adrentacar investors got one share of European Day Spa stock for every Adrentacar share they held.
The combined company, European Diversified Holdings Inc., has headquarters in Evergreen, Colo. Its shares currently trade for 25 cents.
Spantel's stock recently closed at 29 cents.
Recently, some investors who bought Spantel shares from Goodman Hart and Morgan Paris heard from a new Spanish boiler room with a new offer: They could exchange their holdings for stock in another publicly traded U.S. company, Franchise Holdings International Inc.
However, that company stopped submitting financial reports to the SEC more than a year ago. The last report listed Carlin as president and Khashoggi as a director.
Daniel Sterk, of Fort Lauderdale, Fla., has been on the SEC's radar screen for more than a decade.
The agency filed a fraud suit in 1994, alleging that he sold unregistered shares in a wireless cable TV venture. He settled the suit without admitting or denying guilt, and agreed to surrender more than $1 million in proceeds.
Then he made his way to Bangkok, Thailand, and its teeming boiler room trade.
After working for other operators, he set up his own shop in 2000. Thai authorities raided the boiler room in August 2001, putting it out of business. They filed charges against Sterk and a partner, Stephen R. Casciola, saying they ran an unauthorized securities firm that defrauded foreign investors.
Sterk and Casciola fled Thailand, evading arrest.
Private investigators working for investors say Sterk and Casciola relocated to Eastern Europe and ran a new string of boiler rooms from Hungary and Romania.
Their first boiler room, Livingstone Asset Management, claimed to have headquarters in Geneva but operated from Budapest, Hungary.
Livingstone peddled shares in several American companies, including Slender Life International Inc. of Boca Raton, Fla.
Sterk did business with Slender Life under the alias Daniel C. Worthington and Casciola as Steve Corso.
Slender Life's deal with Livingstone and its successor, Cambridge Global Ltd., gave those brokerages the right to buy 10 million shares of the privately held company's stock at 20 cents a share. The boiler rooms resold the shares at prices as high as $3.90.
Another boiler room, Amherst International, peddled Slender Life bonds, which brokers said could be converted to stock. Investors were told that the proceeds would finance the privately held weight loss company's expansion in the United States and Europe and that the company would go public this spring at $15 a share.
But in November, investor complaints led Hungarian authorities to raid the Budapest boiler room. Three people were taken into custody, but Sterk and Casciola again avoided arrest.
Slender Life's president, Larry Pettit, resigned in January and was succeeded by Thom Scott, a vice president and director of marketing. In a letter to shareholders in March, Scott acknowledged that the company's partners were in the boiler room business.
"Frankly, they were all very intelligent, well-spoken, and financially sophisticated," he wrote in the letter to stockholders. "And, the venture capital operations that they developed looked and ran like completely legitimate brokerage or venture capital firms."
Scott also acknowledged that Worthington was actually Sterk.
He disclosed that Slender Life's foreign partners had ownership interests in the company's flagship weight loss center in Boca Raton and an unfinished one in Vienna, Austria.
And he noted that an audit of Slender Life's finances revealed that the company had never been paid for 2 million shares of stock that had been issued to the boiler rooms.
Scott outlined a recovery plan for shareholders that relied on two former managers of the European boiler rooms to help raise additional capital.
One of them is Randolph E. Beimel. He is a former vice president of Hibbard Brown & Co., a U.S. boiler room shut down by authorities eight years ago. For his role in that company's activities, the National Association of Securities Dealers barred him from associating with any member firm and fined him $100,000.
Hibbard Brown was expelled from the NASD in 1996, fined $10 million and ordered to pay $8.7 million to defrauded customers.
One NASD document said Beimel dictated sales scripts for Hibbard Brown brokers, containing "highly aggressive purchase recommendations, baseless price predictions and material misrepresentations and omissions."
Beimel is now on Slender Life's board of directors and has returned to Eastern Europe to handle investor relations. The company plans to offer additional stock to those shareholders, Scott said, and will use the proceeds to pay off debt, buy the Boca Raton and Vienna weight loss centers, and provide seed capital for expansion.
"Frankly, without additional capital, it would be nearly impossible to continue operations, let alone grow Slender Life," he wrote in the letter to shareholders.
Paul Richard Bell, another American with a checkered past, once worked for Sterk in Bangkok.
More recently, he has operated Premium Placements, a boiler room selling "pre-initial public offering" shares in a number of companies, including International Biometrics Inc. of Newport Beach, Calif.
Bell, who once hosted a radio show on investments in Washington, is no stranger to U.S. and international regulators.
In 1992, he settled fraud charges with the U.S. Commodity Futures Trading Commission. He was fined $100,000 and barred from the industry for life.
Three years ago, Australian authorities boarded a jetliner at Brisbane Airport and arrested Bell, who had been selling shares on behalf of boiler rooms in Thailand and the Philippines. He was charged with making false and misleading statements to investors and offering securities to Australians without proper disclosure.
Bell, who used the alias Dr. Richard King in Australia, pleaded guilty on 21 counts. He was sentenced to two six-month prison terms, which were suspended with the posting of a "good behavior" bond. He also paid a fine equal to $6,200.
The SEC filed an unrelated fraud suit the following year against Bell and First Florida Communications Inc., a public company whose shares traded on the over-the-counter market.
The agency said Bell, as chairman of First Florida, grossly inflated the value of its assets and misrepresented its access to funding in a meeting with prospective investors.
Bell did not respond to the complaint; last summer a judge issued a default ruling and ordered him to give up $75,000 in ill-gotten gains and pay a civil penalty of $110,000.
Bell also was permanently barred from serving as an officer or director of any public company.
Documents show that one of Bell's partners in Premium Placements is Mark Hutcherson, former majority owner of Dunhill Financial Group Inc., a commodities firm based in Atlanta.
The Commodities Futures Trading Commission filed a fraud suit against Hutcherson and Dunhill Financial in 1999, saying they misrepresented the risks and potential returns of investing in commodities and options.
The agency noted that 94 percent of Dunhill Financial's customers lost money, with the total exceeding $8 million.
Hutcherson settled the charges without admitting or denying guilt. He agreed to pay a $10,000 fine and $8.31 million in restitution and to never again seek registration as a commodities broker.
At least one American who worked in the offshore boiler rooms did so while on the run from U.S. authorities.
Donald Craig O'Neill of Lighthouse Point, Fla., was indicted in May last year on 20 counts of fraud and 20 counts of money laundering in connection with an alleged foreign-currency investment scheme that took in $13.7 million.
Federal prosecutors charged that he misappropriated at least $10 million of the money to finance trips, gambling junkets and other personal expenses.
O'Neill fled the country and was added to the Miami FBI office's most-wanted list last fall.
The FBI's poster noted that O'Neill's travels had included Australia, Saudi Arabia and Romania.
Indeed, while a fugitive, he worked as a manager in one of Sterk's boiler rooms in Bucharest, Romania.
O'Neill, a 5-foot-8, 275-pound bulldog of a man, used the alias Don Grant and claimed that he once played football for the Tampa Bay Buccaneers.
O'Neill's days as a fugitive ended in March, when he was apprehended in Rome.
The FBI declined to comment on how it tracked him down or whether its agents knew he was working in the offshore boiler room business.
© 2004, St. Louis Post-Dispatch.
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