Embroiled with Wall Street
By Paul Giannamore
April 27, 2007
Sometimes the guy with the better idea ends up as Bill Gates.
And sometimes, he ends up like Rod Young.
Young, a Richmond native and 1969 graduate of Jefferson Union High School, is at the center of legal actions bringing focus to the involvement of organized crime in Wall Street and shedding light on the process of naked short selling, which can result in counterfeit stocks floating and being sold and resold until a company is valueless.
Young, the son of Betty and Ralph Young of Richmond, is the principal behind Eagletech Communications, a Florida-based telecommunications firm he had hoped would revolutionize small-business communications.
Young was in the construction business in the 1990s when he realized the need for an automated corporate phone system that could direct calls to himself or others working offsite from the main office. He developed and patented the technology to create a hybrid communications platform more efficient than competitive unified communications platforms; he assigned the patents to Eagletech in hopes of selling a true improvement in business efficiency.
Youngs company had begun doing business with major telecommunications firms in the late 1990s, selling a service allowing small firms to use one telephone number for customers to reach businesspeople, no matter where they were out of the office. The single number could be used for fax notification, to store and forward faxes to any fax machine and to notify the business person when a fax is received. Further, Eagletechs service included an automated phone attendant, call screening, voice mail and messaging, as well as the ability to use a Web browser from anywhere on the road to make changes or set up transfer numbers, message delivery parameters and other items, from a cell phone. Messages could be delivered to an e-mail address and heard on a multimedia computer.
Eagletech targeted phone companies instead of end users and began to contract with large phone companies to provide services to business customers. Phone companies could upgrade their hardware with Eagletech technology, enhancing their service offerings for business customers without an extensive capital outlay.
Eagletechs business plan was to provide a significant value proposition to the major phone carrier as well as their business customers, according to the firms latest lawsuit.
To revolutionize communications would take more than a great idea and an innovative product.
It would take money.
Young was no financier. In fact, he says hed never even owned a piece of stock in his life at that point.
I invented something that had huge potential and everybody recognized it. What I needed was money to make it come to fruition. Little did I know that Wall Street was pretty well along in their development of schemes to make profit from the destruction of these types of companies, Young said.
The lawsuits are filed
Eagletechs lawsuit filed April 10 in the 17th Judicial Circuit Court in Broward County, Fla., offers allegations of how a firm with good intentions can end up caught in a web of Wall Street and Mafia intrigue, stretching from New York to the Bahamas and back again.
The Eagletech suit, the second one filed since the company found itself with more stock than it had issued and no money to pay for even routine reporting to the Securities and Exchange Commission, alleges violations of the federal Racketeer Influenced and Corrupt Organizations act against 26 banks and securities firms, as well as 100 unnamed companies and individuals for manipulation of Eagletechs stock prices, laundering of organized crime money, counterfeiting of stocks and charging illegal fees and commissions for Eagletech stock sales.
Several defendants are alleged to have conducted multiple acts of securities fraud and violated federal securities statutes. Wall Street giants including Citigroup, Bank of New York, JPMorgan Chase, Chase Manhattan and the firm of Schroeder PLC are alleged to have violated federal securities statutes as the controlling firms for other companies involved.
A variety of state laws are also alleged to have been violated.
Rod Youngs mother, Betty Young of Richmond, says among the investors who lost all their investments in her sons company are people from the Jefferson County area. Over the years since her sons troubles with Wall Street began around the year 2000, Betty Young has been diligently researching and learning and trying to educate herself and others about the common practice of naked short selling of stock on Wall Street and what that has done to firms. Overstock.coms founder has long alleged his company was destroyed by being sold into a death spiral through the practice, which led to there being more stock in existence than the company actually had issued.
Rod Young says its the same thing with Eagletech.
A lawsuit filed in 2001 against 40 financiers alleges Eagletech was targeted for creation of a stock death spiral, destruction of the company for others profit.
Eagletech is not unique in that regard, Rod Young said in a Friday afternoon interview. Back in 1999, there were 12,500 companies listed on the OTC Bulletin Board. Now, there are 2,700. The question has been, how long can you eat your children and expect to have a family?
Young said the financial industry swam like sharks around developing companies.
What the industry has done to development-stage companies and the future of our economy, and our country, employment and all the negative things that go along with destroying companies and their employees its just incomprehensible that these people can do this.
With that in mind, Young says he didnt merely roll his company over and die when Eagletech was facing accusations from the SEC. He admits the firm wasnt filing required documentation but he said it could no longer afford to do so and eventually had to defend itself against the SEC.
Eagletech is now a private company with 2,400 shareholders, but we were forced against the wall financially. We just couldnt afford the $100,000 or so a year to file our audited financials, he said.
Young said the SEC went after hundreds of companies during the past three years, but Eagletech is the only one he knows of that defended itself.
Virtually every one of those companies came from a higher exchange or were once successful or were on the way to being successful and ended up victims of this crime. Either the SEC doesnt get it or doesnt want to get it and they are on the defensive, he said. The SEC hoped to put companies out of their misery to sweep the evidence under the rug forever. But the SEC was culpable here.
Uncovering the evidence
As a result of the defense Eagletech undertook as the SEC moved to de-register the companys stock, the SEC was pushed to hand over every record that had been amassed and every investigative material ever gathered with regard to Eagletech.
Young ended up with more than 50,000 pieces of paper and electronic trading records for a 17-month period, including what he says is when the worst manipulation of Eagletech stock was taking place.
He said the law firm that has undertaken his firms defense has spent more than $3 million to date on Eagletechs case.
Its take no prisoners, Young said. Theyre prepared to spend up to $100 million before they recoup a single cent.
Amid those documents, which have taken six analysts, forensic accountants and economists five months to analyze, Eagletech has put together evidence, from e-mails and financial and stock trade records, it says proves that the firm was taken for a ride at the hands of organized-crime controlled firms doing business with major Wall Street firms that simply looked the other way or never uncovered shady dealings.
The RICO violations alleged in the suit wont have to be proven by Young and Eagletech and its investors. Young said the government already has proven the violations, with 11 organized crime people to be sentenced during the summer in New Jersey.
No one saw fit in those 50,000 pages of documents from the SEC to do anything with plenty of evidence showing who among the 26 firms were doing what. We have 81 bank wires showing how they laundered money and moved it back and forth, Young said.
The suit alleges 81 accounts were addressed to a single Bahamian post office box, failing to raise a red flag for either the securities company that was facilitating most of the clearing and trading of Eagletech stock, Lewco Securities and its affiliate Schroeder & Co., or for major firms overseeing the money, including Chase Manhattan, Citigroup/Salomon Smith Barney, the Bank of New York and JP Morgan Chase. Also failing to raise red flags along the chain of stock sales and money transfers were the use of accounts through the Bryn Mawr financing firm, alleged in the suit to have been overrun with organized crime figures.
The suits allege a man named Harry Leopold, who owned a firm called LBC Capital, acted as a finder for two financing packages, one from Bryn Mawr Investment Group and the second with several Salomon Smith Barney managing directors and companies. Under the financing, Eagletech stock was exchanged for cash. The suit alleges several organized crime family members or associates controlled Bryn Mawr and that a Smith Barney vice president coordinated plans to manipulate Eagletechs stock into a death spiral.
The operations of organized crime families in Wall Street was documented through a fraud investigation called Operation Uptick, that resulted in indictments of 21 people in a RICO prosecution against members and associates of the Bonnano and Colombo organized crime families. Testimony from those trials is included in the Eagletech suit to back up the claims about Bryn Mawr and Solomon Smith Barneys John Dorocki.
The suit alleges 83 percent of Eagletechs stock ended up supplied by organized crime-controlled firms and 83 percent of the stock was resold into the marketplace on trades cleared through Merrill Lynch.
Down the spiral
What started out as Rod Youngs better idea for small business phone service ended up as a public float of stock with 3.3 million of 4 million outstanding shares in the control of organized crime figures dealing through legitimate Wall Street brokers and banks, the 51-page suit claims. Eagletech stock was sold at pre-arranged prices to the public and much of the stock, the suit alleges, already had been sold at least once through private placement schemes to individual investors, thus greatly expanding the available supply of Eagletech in the public stock markets.
The suit alleges that, had the major firms done proper due diligence, they would have discovered Lewco and Schroeder were manipulating Eagletech stock.
Other opportunities to uncover organized crime manipulating Eagletechs value came, too, with a firm called Grady & Hatch clearing Eagletech trades through Man Financial and Fiserv Securities Inc. Grady & Hatch was identified in Operation Uptick as a brokerage controlled by organized crime whose chief operating officer was a member of the Luchese crime family.
A complex web of offshore transfers using banks in Nova Scotia and the Bahamas are detailed in the suit, which alleges that at one point, Fiserv sold 709,300 more Eagletech shares than it had purchased, none of the sales being marked as short sales.
Stocks, including some going through accounts at the Bahamian post office box were alleged to have been valued for less than their market price on the day of trades.
Merrill Lynch is alleged in the suit to have been in a position to note the price discrepancies on large blocs of Eagletech shares.
Eagletech also is alleged to have fallen prey to organized crime using American bank connections to launder money through offshore accounts, with compliance departments not catching the discrepancies or the fact that 81 accounts were using the one Bahamian post office box. This part of the suit alleges Citibank failed to catch suspicious transactions through the Bahamas and that at least three Bahamian banks, Scotiabank(Bahamas), Ansbacher Bank and Barclays Bank held accounts for money used in the stock operation.
The scheme also is alleged to have involved the Madison Bank in Blue Bell, Pa., and was being carried out in a fashion designed to avoid taxes or to launder money from criminal operations.
In the process of it all, the number of Eagletech shares ballooned through the sale of short shares that were listed as long shares and registered through the SEC for issuance to the public. The trades would not clear for 252 trading days and were represented as shares issued by Eagletech.
The suit alleges that as much as 4.1 million shares of Eagletech were sold in such fashion into the market, with some brokerage firms selling more than they purchased, meaning shares were being sold that Eagletech neither issued or registered, from at least 81 different firms.
The suit details that in a legitimate short trade, a seller borrows a stock to be sold or has a documentable arrangement to borrow it so it can be delivered to the buyer by the required settlement date. A naked short sale, which is alleged to have destroyed Eagletech, occurs when the seller does not have the share or has not borrowed it to deliver it by the settlement date. Such sales, the suit says, allow naked short sellers to manipulate the market for riskless profits, increasing the supply of shares in a given stock for sale without the company actually issuing or registering the stock. Prices can thus be depressed through a virtually unlimited stock supply until the price of the stock is down to zero at the end of the death spiral.
The suit alleges the financial industry deals in a pattern and practice of stock manipulation by organized crime and others in the financial services industry.
In the aftermath
Young said Eagletech doesnt sell its product anymore as a result of the financing actions.
Ive become a consultant for other companies facing this same plight. In addition, I do some consulting within the telecom industry, Young said. Im making a living, but little more than that.
He continues to pursue the cases because he said there is $1 billion at stake and he has a fiduciary duty to 2,400 shareholders to get their money back.
I take that very seriously. Yes, Im one of the largest shareholders and I will benefit, too, but the biggest thing is that, in my mind, justice must prevail, he said.
Young said similar tactics have migrated from the fringe stocks of startup companies right out onto the New York Stock Exchange.
These people are ruining our country. It has to be stopped, or its all going to blow up in our face. They honestly believe its their God-given right to do this, Young said.
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