TSX member Deutsche Bank in major penny stock scandal
by Brent Mudry
November 14, 2002
In one of the biggest fraud scandals to rock Bay Street in recent years, Deutsche Bank's Toronto branch and a recently terminated senior broker are the lead defendants in an unsealed $250-million suit claiming the Deutsche broker and two old friends, one of whom is a convicted felon, conspired with controversial international financier Adnan Khashoggi, a lawyer running a strip bar in Las Vegas, and unnamed others to rig Rafi Khan promotion GenesisIntermedia and several other stocks last year, causing the collapse of a small New Jersey brokerage and its Minnesota clearing brokerage. (All figures are in U.S. dollars.)
This case seeks to recover for the estate of MJK Clearing Inc. a unit of Miller Johnson Steichen Kinnard, a Minnesota brokerage,(the biggest U.S. brokerage collapse in decades) more than $250,000,000 in damages caused by a wide-ranging and sophisticated securities loan and market manipulation scheme that was financed by Deutsche Bank, one of the world's largest financial institutions. The scheme directly caused the insolvency of MJK and resulted in the loss of the jobs of more than 200 Minnesota residents, states the suit.
Although not noted in the suit, the GenesisIntermedia case has been under intensive investigation by a number of U.S. authorities, including the United States Securities and Exchange Commission, and the National Association of Securities Dealers, for more than a year. Criminal probes are also likely at an advanced stage.
The lawsuit allegations, if proven true, will be discomfiting for Mr. Khashoggi, the Paris-based Saudi arms merchant who was involved in the Iran-Contra affair. Mr. Khashoggi is wanted by Thai police as a defendant in the $2-billion fraudulent collapse of the Bangkok Bank of Commerce in 1996, the first significant banking scandal in the Asian meltdown. For years, Mr. Khashoggi has been a key associate of fugitive Thai financier and offshore pro Rakesh Saxena of Vancouver, who is fighting extradition for his alleged key roles in the Thai bank's collapse. (Mr. Saxena is not known to be involved in the GenesisIntermedia case.)
The serious allegations have not yet been proven in court.
The Toronto scandal is especially embarrassing for German financial services giant Deutsche Bank AG, the Toronto unit's parent, as systemic supervision problems led to a major London scandal in 1996 at Morgan Grenfell Asset Management, a British unit. That case featured Peter Young, the young British fund manager who took up cross-dressing with a passion after his arrest. MGAM got a record $3.3-million fine, while parent Deutsche Bank, which suffered a $730-million loss, sacked five managers, including the former MGAM chief executive officer.
In a 125-page suit filed Sept. 19 in United States Bankruptcy Court for the District of Minnesota, unsealed Wednesday, the receiver for MJK Clearing claims Wayne Breedon, the former head of securities lending for Deutsche Bank in Toronto was the key player in a sophisticated fraudulent stock-lending scheme unprecedented in scope. "The scheme, which was all made possible by Deutsche Bank, which advanced hundreds of millions of dollars to fund it," states the suit. Mr. Breedon was placed on administrative leave this spring.
The trustee claims that during most of 2001, Mr. Breedon had no immediate supervisors in Toronto and was thus the de facto, if not titular, head of Deutsche Bank's and Deutsche Bank SL's securities lending in the Toronto office.
The detailed suit was filed by Minneapolis lawyer James P. Stephenson of Faegre & Benson, the court-appointed liquidating trustee for MJK Clearing Inc., and seeks $200-million in lost stock-loan funds and $50-million in damages caused by the destruction of MJK's business. The suit value is actually in excess of $750-million, as the trustee seeks treble damages under the RICO, or Racketeering Influenced and Corrupt Organization Act, plus punitive damages and attorneys' fees.
The scheme collapsed in the wake of Sept. 11 and Nasdaq's halt of GenesisIntermedia trading on Sept. 25, 2001. The first, or second, casualty was Native Nations Securities Inc., a small New Jersey brokerage run by Valerie Red-Horse, who served as a former office manager for Michael Milken, the disgraced junk bond financier. (Besides being a rising brokerage executive, Ms. Red-Horse, a Cherokee Indian, has appeared as an actress in such television series as "Murder She Wrote," "Santa Barbara," "Babylon 5," and "Perry Mason.")
In the daisy chain, Native Nations received 7.2 million loaned GenesisIntermedia shares, in turn loaned the shares to the MJK and MJK Clearing reloaned the shares to at least four brokerages. When GenesisIntermedia shares resumed after a three-day 9-11 closure, the stock fell, and the brokerages turned to MJK for money to cover them.
MJK then looked in turn to Native Nations for payment, but Native Nations claimed a 'rogue employee' had doctored its books to hide the identity of the person or entity that had loaned the 7.2 million shares, and that $60-million was now 'missing,'" states one court filing. The failure of Native Nations to remit the funds to MJK led to MJK being seized under protection by the Securities Investors Protection Corp., in what is believed to be the largest failure of a U.S. brokerage in three decades.
The named defendants in the Minnesota case are Deutsche Bank AG, Deutsche Bank Securities Inc., Deutsche Bank Securities Ltd., Mr. Breedon, RBF International Inc., Kenneth D'Angelo, Richard Evangelista, GenesisIntermedia, Ramy El-Batrawi, Mr. Khashoggi, his offshore Bermuda-based company Ultimate Holdings Ltd., Bradford Keiller and John Does 1-10.
"The scheme was hatched and orchestrated by three old friends, who between them had decades of experience in the securities industry -- Kenneth D'Angelo, a convicted stock-loan felon, Richard Evangelista, a senior manager of a small brokerage firm thene known as Freeman Securities Inc., and Wayne Breedon, the head of securities lending for Deutsche Bank in Toronto, Canada," states the suit.
The trustee claims Deutsche Bank enabled the whole scheme by advancing hundreds of millions of dollars to finance it. "It reaped millions of dollars in proceeds, for, among others, Adnan Khashoggi, a well known Saudi financier and arms merchant, and his business partner, Ramy El-Batrawi."
Prior to joining Deutsche Bank, Mr. Breedon was formerly associated with RBF, a New Jersey firm which acted as a securities lending "finder," controlled by Mr. D'Angelo, a long-time friend and business associate.
Both RBF and Mr. D'Angelo have some baggage. In 1993, both were disciplined by the SEC for violating tender offer rules by selling securities borrowed from Native Nations, then known as Freeman. RBF and Mr. D'Angelo agreed to return more than $500,000 in illicit profits, and Mr. D'Angelo was later sued by the SEC in 1997 to collect the final $225,000 which he had previously agreed to pay.
In an earlier case case, on March 4, 1985, Mr. Angelo pled guilty to conspiracy to defraud and wire fraud in connection with fraudulent stock-loan transactions and phony purchases and sales of securities. The transactions, spanning from 1978 to 1982, gave Mr. D'Angelo and others temporary use of more than $1-million belonging to other brokerages.
The third member of the trio, Mr. Evangelista, was formerly a vice-president of Native Nations. He was fired in September, 2001, purportedly for falsifying Native Nations' books and records in connection with some of the transactions detailed in the suit. In other recent proceedings relating to GenesisIntermedia, Mr. Evangelista refused to testify, invoking his 5th Amendment privilege against self-incrimination.
The other notable character is Mr. Keiller, described as a lawyer by training whose most recent business appears to be owning a strip club in Las Vegas. Employees at the peeler bar claim he has terminated his involvement and left no forwarding address.
"Mr. Keiller participated in the market manipulation of GENI stock by undertaking hundreds of purchases and sales of GENI stock for the purpose of maintaining the stock price and false making it appear that there was a genuine interest in the stock," states the suit. Between February and September of last year, Mr. Keiller allegedly bought and sold more than $22-million worth of GenesisIntermedia shares and also sent millions of dollars to Ultimate, the offshore holding company controlled by Mr. Khashoggi.
While stock lending between brokerages is a legitimate, common and usually low-risk practice, the Minnesota trustee claims the Breedon ring's activities were broadly fraudulent. "In this case, Mr. Breedon and his long-time associates, Mr. D'Angelo and Mr. Evangelista, stood the business of stock lending on its head. On a daily basis, Mr. D'Angelo, Mr. Breedon and Mr. Evangelista co-ordinated stock-loan transactions with dozens of American and Canadian brokerage firms, transactions which were presented as legitimate stock loans but were really little more than devices to obtain cash for the benefit of the promoters behind the securities being lent," states the suit.
(This is the second major stock-lending scandal in recent years to feature strong Canadian connections. In May, 2001, in one of the largest trial wins in its history, the SEC won a $27-million fine against Guido Bensberg, a Swiss-German financier who formerly kept a residence in Vancouver, for his role as mastermind of a $200-million-plus share-leasing scheme. Mr. Bensberg's scheme, which featured a number of key British Columbia players, included one of Toronto stock promoter Jack Banks's companies.)
The trustee claims that while it is often hard to blow off large share positions in penny stock rig jobs without driving down the stock price, "the scheme utilized by the defendants brilliantly overcame that fundamental problem."
"By purporting to 'lend' the securities in question, Mr. Breedon, Mr. D'Angelo and Mr. Evangelista could require unsuspecting broker/dealers to advance cash as 'collateral' for the loans of the securities, and then as the prices of those securities were driven up, the 'borrowing' brokerage firms were required to advance additional cash as 'collateral,'" states the suit.
"Thus, the scheme enabled the owners of the securities to profit from massive increases in market price without having to unload the securities into a market which had few real buyers. Effectively, the defendants sold securities to stock borrowers and the borrowers became unwitting buyers at inflated prices."
Although not noted in the bankruptcy suit, this April the SEC revealed that penny stock promoter Rafi Mohamad Khan is under investigation again. The regulator claims he may have used a Pakistani holding company and his wife, Rubina Khan, to trade shares of four companies: Ontro Inc., GenesisIntermedia Inc., eUniverse Inc. and Aura Systems Inc. in contravention of a market ban imposed two years ago.
On April 1, the SEC filed an application with the United States District Court for the Central District of California to compel Ms. Khan to co-operate with investigators. Although the SEC believes Ms. Khan fronted for her notorious husband, she has been reluctant to testify and provide other evidence about numerous transactions in a bank account and brokerage account in her name.
This spring, the SEC moved quickly to escalate an investigation, launched in November, 2001, into Mr. Khan's roles with Ontro and eUniverse, both listed on the Nasdaq Small Cap Market, GenesisIntermedia, listed on the Nasdaq National Market System, and Aura Systems, listed on the OTC Bulletin Board.
In consent settlements in May, 2000, Mr. Khan was banned from associating with any broker or dealer for at least five years, stemming from his egregious rig jobs of L.L. Knickerbocker Co. Inc. in 1995 and Future Communications Inc. in 1993. The controversial penny stock promoter, who turned over to become a star witness for the U.S. Department of Justice in the fall of 1998, was not fined a penny for either rig job, a measure of just how valuable he is to federal officials. The current case, in which Mr. Khan, a key federal informant, has allegedly lapsed back into illegal behaviour, is every regulator's or cop's worst nightmare.
Mr. Khan is no stranger to controversy. He was one of the key brokers at Reynolds Kendrick Stratton after legendary boiler-room operator Irving Kott led a group which took control of the Los Angeles penny stock brokerage in the spring of 1993. Mr. Khan also had a fondness for Howe Street, the centre of dealings for the former Vancouver Stock Exchange.As noted in SEC court filings, the period of investigation dates back to June, 2000, less than a month after Mr. Khan signed his consent settlement with the regulator.
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