BCSC target Pacific International served dastardly Davis

Canada StockWatch
by Brent Mudry
2002-10-17 10:33 PT

One notorious American client of Pacific International Securities, a controversial Vancouver brokerage currently fighting a landmark prosecution by the British Columbia Securities Commission for attracting and servicing more than its Howe Street share of crooks, securities violators and other riff-raff, was recently sentenced to 30 months in prison for masterminding a penny stock fraud and money laundering, and ordered to forfeit $308,500 in ill-gotten gains. (All figures are in U.S. dollars.) This is on top of $3-million in disgorgement orders won by the United States Securities and Exchange Commission against the P.I. client and his wife four years ago.

Barclay Davis, 55, of Las Vegas, described as a "serial stock manipulator" by the SEC five years ago, was sentenced Sept. 26 by Judge Lloyd George of United States District Court for the District of Nevada for his 1993-1997 rig job of Combined Companies International Corp. The fraudulent promotion included bribed brokers, false audit reports, income tax returns and bank loan documents, Form S-8 share issuances to bogus consultants and illegal use of nominee accounts. The prosecution followed an extensive investigation by the Las Vegas Field Office of the Internal Revenue Service.

"In order to arrive at the 30-month sentence of imprisonment, the court also made findings under the United States Sentencing Guidelines that the criminal activity involved more than minimal planning, that Davis was a leader in the criminal activity, and that Davis had obstructed justice by planning to have a witness injured to prevent the witness from testifying against him," states the U.S. Department of Justice in a press release.

On Oct. 7, the BCSC began an eight-week hearing into Pacific International's alleged "cultural of non-compliance," claiming the Vancouver brokerage's business was dominated by non-resident clients, mainly Americans seeking to bypass U.S. laws, rules and regulations, and allowed itself to become little more than a massive stock and money laundering conduit for criminals and other dubious clients. The hearing, set to run through the end of January, is scheduled to resume Oct. 21 after lawyers work out the procedure for entering 1,107 documents, comprising more than 22,000 pages, into evidence.

After Pacific International broker Jean Claude Hauchecorne was banned for life in 1998 for servicing New York Mafia clients Phil Abramo and Phil Gurian, a series of events in the summer of 1999 prompted the BCSC to mount an extensive two-year investigation of Pacific International, believed to be the most comprehensive probe conducted into any brokerage in Canada in recent history, if not ever.

Pacific International's summer of 1999 was quite a time, with a pair of its brokers, Dirk Rachfall and Michael Patterson arrested for dealing with other mob-related clients and the brokerage itself named as a conduit in three U.S. indictments in three days, all duly revealed and chronicled by Stockwatch.

After its two-year probe, the BCSC launched its prosecution against Pacific International on July 10, 2001, with a notice of hearing noting by name 15 more dubious clients, led by Shalom Weiss, recently extradited from Austria to Florida after fleeing an 845-year sentence imposed three years ago. Although Pacific International has not yet fully unveiled its defence, it blames the BCSC for failing to stem or reverse the constant stream of dirty clients to the brokerage. Defence counsel claim the BCSC should have protected Pacific International and the public from its own dubious clients.

One of these intriguing Pacific International clients is Mr. Davis, the well-known serial stock manipulator. According to a BCSC hearing exhibit, the SEC sent an investigatory assistance letter to the BCSC on May 9, 1997, in connection with a probe into the trading of shares of Twenty First Century Health Inc.

In this letter, the SEC told the BCSC that Twenty First Century was owned by Mr. Davis, a Las Vegas stock promoter under continuing investigations by the SEC and the United States Department of Justice, and that the SEC had obtained information indicating a possible effort by Mr. Davis to manipulate the stock, which was boosted by false press releases and financial statements.

"A significant number of trades in securities of Twenty First Century were executed through four British Columbia brokerage firms, including Pacific (International). The SEC was trying to determine if those accounts had been used to facilitate the manipulation of Twenty First Century stock," states the hearing exhibit. In its investigative request, the SEC sought documentation for various accounts at the four Howe Street brokerages, including accounts at Pacific International in the names of Mr. Davis and two other notorious penny stock players, La Jolla Securities and Richard Gladstone.

Pacific International now claims the BCSC should have kicked out Mr. Davis, one of its star U.S. clients.

"The BCSC took no steps to advise Pacific about the SEC's concerns as described in the May 9, 1997, letter. The BCSC took no regulatory action in relation to the matters described in the May 9, 1997, letter other than to use its powers of compulsion to obtain the information sought by the SEC and to provide the information it obtained in response to the SEC. The documents used to compel the information did not specify any reason for compelling it and did not describe the concerns of the SEC," states a document recently prepared by Pacific International's counsel.

"There was no determination of wrongdoing on the part of Pacific by the SEC or the BCSC in relation to the matters described."

While Pacific International now points the finger at the BCSC, there was ample unflattering documentation of Mr. Davis and his dubious promotions on the public record before this SEC request, and piles more in the following 18 months.

In fact, the red lights should have been flashing strong in the compliance department of any brokerage handling trading in shares of Twenty First Century. On Feb. 10, 1997, a full three months before the SEC sent its investigative request to the BCSC, the U.S. regulator issued and broadly publicized an abrupt 10-day temporary trading suspension of the company's stock.

While the SEC has imposed just 11 such halts this year, including another related to Mr. Davis, two last year and 11 in 2000, the regulator has a long-distance knack for sniffing out promotions linked to Howe Street, the centre of dealings for the former Vancouver Stock Exchange. The SEC has halted numerous Howe Street promotions in the past seven years, including eConnect, anthrax exploiter 2DoTrade Inc., mob plays WAMEX Holdings Inc. and U.N. Dollars Corp., Harry Moll alumni Randall Andrus's Ikar Mineral Corp., VSE graduate Solucorp Industries Ltd., Rachfall-Patterson deals Orlando Super Card Inc. and Legend Sports Inc., Amquest International Inc. and Garcis USA Inc.

In its halt notice, the SEC noted that Twenty First Century Health "holds itself out" as a new products development company in the field of health-related hygienic, home diagnostic, nutritional supplement and medical technology products.

The SEC noted it ordered this trading suspension due to questions raised regarding the "adequacy and accuracy" of publicly-disseminated information, including Twenty First Century's financial condition, the "existence, effectiveness, and marketability" of a blood-sugar testing device it claimed to have licensed, the size of the market for this device, and the "ownership, value, and business of certain companies purportedly acquired by TFCH." The U.S. regulator announced that it determined it an immediate trading suspension was both in the public interest and necessary for the protection of investors.

Such trading halts are rare, but rarer still are the occasions in which the SEC imposes a second halt just before or after the first 10-day halt expires. This has happened just three times in more than five years, and Pacific International client Mr. Davis was involved in two of these three extended halts.

On Feb. 27, 1997, 10 weeks before its letter to the BCSC, the SEC imposed its second halt on Twenty First Century. This time, the U.S. regulator gave more details and named names.

The SEC questioned "the accuracy of TFCH's public announcement that it 'welcomes' the commission's inquiry, offers 'full co-operation' and states that the company officials would be able to provide the Commission with the information it requires within nine days, when Joe Davis, who is TFCH's president, Loretta Davis, who was its founder and formerly its president, and Barclay Davis, who formerly was its secretary and director but who continues to act on behalf of TFCH, have all stated through counsel that they refuse to testify in the investigation in reliance on their Fifth Amendment privileges against self-incrimination."

This was an exciting time for Mr. Davis, according to public records easily available to anyone having any interest in him.

In August, 1996, nine months before the SEC letter Pacific International now complains about, Mr. Davis joined another, much more notorious fraudulent U.S. penny stock promotion which featured Howe Street accounts: Systems of Excellence, a bribed-broker rig job. At least five SOE defendants, including mastermind Sheldon Kraft, 52, a New York promoter, have pleaded guilty to criminal charges in the case.

The SOE defendants included notorious Florida penny stock broker Jerome (Jerry) Edward Rosen, a key player in Canadian career fraudster Michael Mitton's 1997 H & R Enterprises debacle. Mr. Rosen used an unidentified Canadian brokerage as a money laundering conduit to split bribes from SOE president Charles Huttoe with key SOE promoter Mr. Kraft. (Mr. Huttoe was later sentenced to 46 months in jail.)

(Mr. Rosen is an A-list player in dirty penny stock circles. In another case, he harassed market maker John J. Fiero, the president and sole owner of Fiero Brothers Inc., a key player in the Mafia-linked short-attack collapse of brokerage Hanover Sterling. Mr. Fiero gained national prominence in Gary Weiss's Dec. 16, 1996, Business Week cover expose, The Mob on Wall Street, which detailed the collapse of Hanover Sterling and featured Pacific International clients Mr. Abramo and Mr. Gurian.)

The SEC launched its first Systems of Excellence complaint on Nov. 6, 1996, and named Mr. Davis and his wife Loretta Davis on a list of relief defendants of nominees and associates in an amended complaint, which was announced Dec. 12, 1996, and filed Jan. 29, 1997.

The Systems of Excellence scam featured a troubled cast of characters, including Thomas Clines, 71, of Huddleston, Va., who briefly became president of SOE after trading was suspended in October, 1996. Mr. Clines was convicted in 1990 of four felony tax evasion charges in federal district court in Maryland, including willfully failing to declare more than $260,000 in profits from "secret arms shipments to the Nicaraguan contras during the Iran/Contra affair," according to the SEC.

The Systems of Excellence case traces back to early 1995, when SOE president Mr. Huttoe met broker-promoter Mr. Kraft, who had been described to him as a "power stockbroker" capable of aggressively marketing penny stocks to other brokers and to investors. Mr. Kraft agreed to work his magic on the markets, greasing his network of dirty brokers, and soon brought in Mr. Rosen as the third key conspirator. (Mr. Kraft, a broker at Commonwealth Associates and then M.H. Meyerson during the Systems promotion, had worked with Mr. Rosen in the early 1990s at Emanuel & Co. in New York.)

The SEC notes that in early 1996, Theodore Melcher Jr. of SGA Goldstar Research, which published the daily tout sheet SGA Goldstar Whisper Stocks, came on the scene at Systems of Excellence. "Rosen convinced Huttoe that Diversified could help promote SOE stock, especially by reason of Radcliffe's relationship with Melcher ... Melcher had an agreement with Radcliffe to cover Radcliffe-promoted companies in Melcher's SGA Goldstar Whisper Stocks newsletter," states the SEC. Mr. Melcher later pled guilty and was sentenced to 12 months in jail and two years probation.

Against this backdrop, the SEC sent its investigative assistance request to the BCSC in May, 1997, targeting Twenty First Century and Mr. Davis.

The case against Mr. Barclay quickly blossomed into a major prosecution, featuring actions by the IRS, the Justice Department and the SEC.

The first big hammer fell on Sept. 17, 1997, when Mr. Davis was indicted for tampering with a witness. "The defendant sought to physically harm Merle Finkel, a 67-year-old accountant, and thereby prevent him from testifying in DAVIS' anticipated federal trial," states a detention motion brought by the U.S. Attorney for the District of Nevada. Mr. Davis knew Mr. Finkel was co-operating with federal officials and had provided incriminating evidence against him. (Mr. Finkel, SOE's auditor, pleaded guilty to conspiracy to commit securities fraud and bank fraud, but died before sentencing.)

"Incredibly, on September 15, 1997, just three days prior to his indictment, DAVIS solicited the commission of another physical attack. In a tape-recorded conversation, DAVIS set forth in detail the manner in which he wanted a Florida stock trader and his associate to be assaulted, in retaliation for what he perceived to be the harmful effects of their trading activity upon the price of a particular stock. Davis furnished detailed physical descriptions of his intended victims, provided their address, and discussed the financial arrangements necessary to accomplish his planned attack," state U.S. authorities in the motion.

The indictment notes that federal agents met with Mr. Davis and his attorneys in February, 1997, and formally notified him that he was the target of a current federal grand jury investigation in Las Vegas. Mr. Davis was told authorities were probing his role in numerous offences, including conspiracy, securities fraud, bank fraud and money laundering, in relation to penny stock companies over which he exercised direct or indirect control.

Mr. Davis was also told that Mr. Finkel, who had done accounting work for the companies, had flipped and finked on him, and was wired during several conversations between the pair. In addition, the federal agents informed Mr. Davis they had enough evidence to indict him unless he also flipped and copped a plea.

According to authorities, Mr. Davis turned down the offer, and began plotting, between June, 1997, and September, 1997, to harm the fink, Mr. Finkel. Unfortunately for Mr. Davis, the business associate he plotted with was also wired by the feds. As authorities listened in, Mr. Davis solicited the participation of his associate in a plan to have a third party assault Mr. Finkel, or worse.

Key excerpts of the plot are detailed in court documents.

"Well, to put -- totally put the lights out, that could be a bigger problem in the end. But an accident with a -- severe injury, that's -- could send the right message and, you know, in other words, I don't know... But what -- so -- but the point is, is that to perfect their case they'd have to have him there to testify. And if -- and if something horrible happened, then you know, I don't know where the case goes. In other words, without his testimony...," Mr. Davis told his wired associate.

"You don't think that Oscar thing will come back and bite us in the behind, you said "Oscar, I'll go with Oscar to LA," replied the associate. "No, Guatemalan, Oscar has seen him, so he knows," responded Mr. Davis.

"It's a question of when he leaves this office he walks out of the door, then he starts heading down the stairs," said Mr. Davis. "Right," replied his associate.

"So if Oscar is in this back corridor -- comes up behind him, foot in the back, he goes tumbling down the stairs, 'Que Sara Sara (sic,)'" Mr. Davis told his associate.

Mr. Davis then got to the specifics. "So a message to Finkel of serious injury, concussion, a head injury where he can't remember, you know, like a phone call to him in the hospital, saying, 'I heard you lost your memory, I'm sorry that you're,'" stated Mr. Davis. "Send him a greeting card, whatever," his associated replied.

Mr. Davis discussed luring Oscar (Mr. Finkel) to fly into Los Angeles, picking him up, taking him to some offices at "Sepulvida," then rigging the slip and fall at the end of the business day.

"And you know, Finkel just needs to fall down the stairs. He slipped and fell, have a witness there to say that they saw him take a slip and that's the end of that. It's the perfect setting the stairs are far enough down, he takes that flight of stairs, he's going to end up with broken bones, scratched head, whatever it is, and that will put...," Mr. Davis told his wired associate.

U.S. prosecutors argued that Mr. Davis presented a "serious threat" to the safety of the government's witnesses and others in the community. They described his plot against Mr. Finkel as "a callous plan."

"To date, the defendant has solicited the commission of violent assaults against two individuals. The first, designed to prevent a witness from testifying against him, represents the most serious threat imaginable in our system of justice. The second, calculated to further his economic position by violence, represents a pathological willingness to inflict suffering. Both are indicative of the defendant's complete disregard for the legal process, and are reflective of his callous willingness to cause grave harm to others in furtherance of his own interests," the prosecutors told the judge.

        While it is unclear what kind of know-your-client due diligence Pacific International did on its fine client Mr. Davis, he is well known to various authorities. In March, 1990, he was charged in California Superior Court with the felony offence of grand theft by false pretences. After posting bail, he failed to appear in court, and was arrested on a bench warrant in 1994. That July, he pled guilty to reduced charges and was fined $5,000 and given a three-year probation order. (He was still on probation when the SEC sent its letter to the BCSC seeking a search of Pacific International's client records.)

"From all information available to the government, it does not appear that the defendant has any regular employment or legitimate income, his only source of funds coming from various questionable stock promotions with which he has been involved. In fact, DAVIS has had no regular work history since 1984. It was then that DAVIS left the United States to live in Mexico, returning six years later," states a 1997 court filing.

In a March 3, 1997, deposition, Mr. Davis testified that he had no employment during his six-year stint in Mexico, and he claimed his purpose for being there was "fishing." Mr. Davis also testified that he had no employment from 1990 through 1992 after he returned to the U.S., and he admitted not having filed federal tax returns from 1990 through 1994.

The prosecutors also argued that Mr. Davis posed a serious flight risk, as he routinely "utilized offshore and foreign accounts to avoid seizure of his assets by the government, and to provide a ready source of funds with which to support his family if he opted to flee the country once again."

In one taped conversation, Mr. Davis told an associate all he had to do to get his profits from one deal, involving Laser Tech stock, was to call in wiring instructions to the Bahamas. The U.S. government could not trace any asset in Mr. Davis's own name. His primary residence in Las Vegas and his Rolls Royce and Bentley were all in his wife's name. The couple's Hawaiian home was purchased through an offshore entity in the Turks and Caicos Islands, which featured Ms. Davis as president and a Hong Kong bank as a reference bank.

"Additionally, the defendant recently has maintained and utilized Canadian brokerage accounts, amassing substantial funds in them," the prosecutors told the court. The judge was shown Canadian brokerage account opening forms and monthly statements.

After this unflattering bail hearing in September, 1997, the worst was yet to come. In co-ordinated actions three months later, on Dec. 22, 1997, Mr. Davis was charged with conspiracy to commit securities fraud and bank fraud, and money laundering, he pled guilty and agreed to co-operate with federal officials, and the SEC launched a broad complaint against him.

The SEC complaint targeted Mr. Davis and one of his companies, World Syndicators Inc., in three fraudulent penny stock promotions: Systems of Excellence, Combined Companies International Corp. and Bio-Tech Industries Inc., formerly Twenty First Century Health, the company named in the SEC's letter to the BCSC. (Twenty First and Combined Companies were both halted twice by the SEC in mid-1997.)

The criminal case centred largely on Mr. Davis's Combined Companies International promotion, dating back to April, 1993. The criminal information claims he conspired with an accountant to cook the books, with an associate to concoct $2-million in fictitious account deposits, and with the accountant to create fraudulent purported copies of 1990, 1991 and 1992 federal income tax returns in the name of a relative. Mr. Davis also engineered the issuance of hundreds of thousands of bogus "Reg S-8" shares, which he deposited in nominee accounts, and he and other promoters greased dirty brokers with bribes to buy the worthless stock for their clients.

"The defendant Davis, certain stock promoters and others were also able to fraudulently manipulate the market price of CCIC stock by bribing stock brokers to recommend the purchase of CCIC stock to unsuspecting investors," states the criminal information. "In exchange for payments of CCIC stock, cash, vehicles and securities issued by other entities, made by the defendant Davis and others, certain stock brokers touted CCIC in order to entice their customers to purchase the stock."

"Beginning in or about March 1995 and continuing until at least in or about January 1997, the defendant Davis discreetly sold shares of CCIC stock through the nominee accounts that were under his control into the already inflated market for CCIC stock," states the criminal information.

"The defendant Davis then transferred the trading profits from these sales to nominee bank accounts that were maintained for his benefit by a co-conspirator. After receiving a portion of the proceeds as compensation, the co-conspirator then transferred a portion a portion of the remaining funds to other bank accounts under the defendant's control and used the remainder to pay certain expenses incurred by the defendant Davis."

In March, 1998, another Combined Companies associate was nailed in co-ordinated actions. Raymond F. Simmons, who helped rig the company's fictitious asset by posing as an offshore banker, was cited by the SEC the day after being criminally indicted on one count of conspiracy to commit securities fraud, two counts of wire fraud, and one count each of money laundering and making false statements.

In December, 1998, Mr. Davis and his wife settled with the SEC in its prosecution of Systems of Excellence, Combined Companies and Bio-Tech Industries, previously known as Twenty First Century Health. In the consent settlement, Mr. Davis was banned for life from participating in any offering of any penny stock, and ordered to disgorge $1.54-million. The SEC also won disgorgement orders of $878,000 against World Syndicators and $662,600 against Ms. Davis. "These amounts represent the total illegal profits derived from the conduct alleged in the complaints," stated the SEC.

However, payment of these disgorgement amounts, except for certain assets surrendered to the court-appointed receiver, /was waived "in light of their (Mr. and Ms. Davis) demonstrated inability to pay based on the sworn representations in their statements of financial condition."

Meanwhile, Mr. Davis, a star client of Pacific International and other Vancouver brokerages, faced a long wait between his guilty plea, in December, 1997, and his sentencing three weeks ago, as he co-operated with authorities, presumably helping rat out and root out other crooks and fraudsters.

In such guilty pleas, convicts like Mr. Davis are usually expected to be good boy scouts and refrain from further bad behaviour.

This January, however, Mr. Davis and his wife were named by the SEC, fresh on the scent of another unfolding penny stock fraud, in yet another complaint, relating to a company called New Energy Corp. Among the defendants is BLD Trust, a revocable family trust created on March 15, 1999, by Mr. and Ms. Davis, who are its sole trustees. "BLD Trust received New Energy shares from Colt and Geneva's nominee, and sold shares during the manipulation," states the SEC.

(Geneva Financial Ltd. is an offshore company in Nevis with offices in Panama, while its president Marcelino Colt lives in Panama and Mexico and also uses various other names, including Marcelino Colt Vasquez, Marco Antonio Patterson and Marco Antonio Patterson Garcia.)

The SEC claims that between Jan. 3 and Jan. 14, Mr. Davis and his wife caused their BLD Trust to sell at least 10,000 shares of New Energy at $7.70 to $9.30 per share, for proceeds of about $79,000. A few weeks later, the quick-moving officials at the SEC moved in with their New Energy complaint.

Meanwhile, back in Canada, regulators in B.C. are prosecuting Pacific International for its dealings with numerous dubious U.S. clients, including Mr. Davis, dating back years and years. Pacific International claims the BCSC, not the brokerage itself, should have chased Mr. Davis and his ilk off Howe Street.

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