SEC target Lancer featured in Kelly Bermuda Short trial
by Erik Schelzig in Miami
September 25, 2003
James T. Kelly, former head of Pennsylvania-based securities broker Shamrock Partners Ltd., may hear two former co-defendants testify against him in his Bermuda Short trial on charges of conspiracy in a kickback and stock manipulation scheme involving shares of Lighthouse Fast Ferry Inc. Joseph Huard and Bruce Cowen both copped pleas and now appear on the U.S. Attorney's draft witness list.
Jury selection for the trial in the U.S. District Court for the Southern District of Florida in Miami began on Sept. 23 and carried over to Sept. 24. The court heard opening arguments after the jury selection wrapped up on Wednesday.
The charges against Mr. Kelly stem from a two-year joint FBI-RCMP undercover sting code named Operation Bermuda Short that resulted in 23 indictments involving the securities of 23 publicly traded companies and charges against 58 individuals from the U.S. and Canada. Mr. Kelly, Mr. Huard and Mr. Cowen, all U.S. residents, were among the Bermuda Short targets arrested in August of 2002.
According to the original seven-count indictment against the trio, Mr. Kelly, Mr. Huard and Mr. Cowen conspired to pay undisclosed kickbacks totalling $900,000 (U.S.) to a purported corrupt fund manager and two due diligence officers in exchange for a fictitious fund operated by an undercover FBI agent purchasing 3,125,000 restricted shares of Lighthouse Fast Ferry for approximately $5-million (U.S.). (All subsequent amounts are in U.S. dollars.) As part of the deal, a further $600,000 would be kicked back to Mr. Kelly, Mr. Huard and Mr. Cowen.
While not specifically identified in the original indictment, the restricted Lighthouse Fast Ferry stock that was to be used in the convoluted deal allegedly belonged to Michael Lauer's purported $1-billion Lancer Group, which was shut down by the U.S. Securities and Exchange Commission on July 10, 2003, amid allegations of massive fraud. Court filings in both the Bermuda Short case and the SEC civil complaint against Mr. Lauer and his allegedly fraudulent fund operation identify Mr. Cowen as a managing director of Lancer.
Lancer was to transfer the approximately 3.12 million restricted shares of Lighthouse Fast Ferry to Capital Research Ltd., purportedly run by Mr. Cowen. Capital Research was then supposed to deposit the shares into its account at Shamrock, which also held an account in the name of Connelly & Williams Associates Inc., the fictitious fund operated by the undercover FBI agent. Upon the fictitious fund wiring $5-million to Capital Research's Shamrock account, the restricted Lighthouse Fast Ferry shares were to be transferred to Connelly & Williams's Shamrock account.
Upon completion of the planned $5-million transaction, Capital Research was supposed to wire a $900,000 kickback to the undercover agent's Swiss company. Mr. Kelly, Mr. Huard and Mr. Cowen allegedly planned to split another $600,000 kickback.
After completing a $16,000 "test trade" for 10,000 shares of Lighthouse Fast Ferry that involved a $10,000 kickback to the undercover agent paid by means of a cheque drawn on the account of Capital Resarch, the FBI decided that it had the evidence it needed and the planned $5-million trade was cancelled. The grand jury indictment against Mr. Kelly, Mr. Huard and Mr. Cowen was filed under seal on May 28, 2002.
Mr. Huard, a former Shamrock officer, was also indicted along with Howe Street promoter Les Price in connection with a separate Bermuda Short alleged kickback scheme involving shares of Mr. Price's Medinah Minerals Inc. On Dec. 18, 2002, Mr. Huard negotiated plea bargains in both cases and began to sing about his former co-defendants.
Evidently Mr. Huard had a good deal to sing about; on May 22, 2003, the grand jury issued a superseding indictment against Mr. Kelly and Mr. Cowen. In addition to the earlier kickback charges, the superseding indictment alleges that Mr. Kelly and Mr. Cowen fraudulently manipulated trading in Lighthouse Fast Ferry on behalf of Lancer, artificially inflating the month-end share price of the thinly traded stock.
On Aug. 21, Mr. Cowen hammered out his own plea bargain, pleading guilty to one count of conspiracy to commit wire, mail and securities fraud. As part of his deal, which resolves any federal criminal liability with respect to his involvement in Lancer as well as his role in the Bermuda Short kickback and stock manipulation conspiracy, Mr. Cowen agreed to co-operate with authorities.
While it is widely believed that much of Mr. Cowen's promised co-operation will focus on Mr. Lauer and his allegedly fraudulent Lancer operation, he also tops the list of potential prosecution witnesses against Mr. Kelly.
Trial Attorneys Thomas Hanusik and Thomas McCann of the Fraud Section of the U.S. Department of Justice in Washington, are in Miami to prosecute the case against Mr. Kelly. Miami defense attorney Norman Moscowitz is representing Mr. Kelly.
Government prosecutors say James T. Kelly was a man who got involved in securities fraud because of "greed." His defense attorney says Mr. Kelly was a sick man who trusted his partners, and was not involved in fraudulent activity.
Because of health problems suffered by Mr. Kelly, an abbreviated daily trial schedule was instituted by Judge Cecilia Altonaga, running from 11:30 a.m. to 5:00 p.m. Because of this timetable, the trial is expected to last three weeks.
SHAMROCK'S BIGGEST CLIENT
"This is a case about greed," said Mr. Hanusik in his opening statement to the jury. "It's about greed that led him to work with other people -- to conspire with other people -- to commit fraud."
Mr. Hanusik outlined the charges against Mr. Kelly, attempting to simplify the details for the jurors -- most of whom do not have a financial background.
"This case involves small cap stocks -- known as penny stocks," Mr. Hanusik said. "You'll learn that penny stocks in particular don't trade very much, they are thinly traded stocks."
Mr. Kelly was involved with Mr. Cowen at a company called Capital Research, Mr. Hanusik explained. Mr. Cowen was the "liaison" to the Lancer Group, which in turn was a major client in Shamrock, he said.
Despite a lot of talk about the Lighthouse Fast Ferry company, Mr. Hanusik emphasized that the abstract dealings in stocks was at issue in the trial, not the dealings of the actual company.
"This case is not about the ferry company itself, but about people who owned the ferry company stock," he said. "How they manipulated the ferry company's stock, specifically how they manipulated the month-end stock in 2001."
According to the prosecutor, "At the end of the months in this case, the fund managers from Lancer would get on the phone with Shamrock to tell them to push the price up."
Mr. Kelly would comply by buying up blocks of stock, which would create demand, Mr. Hanusik said.
"Remember, Lancer wasn't just a client, it was Shamrock's biggest client," he told the jurors. "The evidence is going to show that he (Kelly) was helping Lancer push the price of the ferry stock up at the end of the month -- that's called window dressing."
SCHLIEN AND JONES
Mr. Hanusik described how a sting operation was devised, using an undercover FBI agent named Mike Palasek and two former securities fraudsters, David Jones and Robert Schlien.
Mr. Jones and Mr. Schlien had been charged with fraud in Nevada, and with more charges pending against them in the Southern District of Florida, they had decided to cooperate with the government, Mr. Hanusik said.
Agent Palasek set up shop at Mr. Jones and Mr. Schlien's Boca Raton, Fla., offices, and they began spreading the word that they had $8 million to invest every month.
"They told people they had connections to British fund, that they had made friends with a British fund manager, known only by his first name, Nigel," Mr. Hanusik said.
But there were two hitches to the riches. First, the two men and the undercover agent wanted a 30-per-cent kickback.
"It was made clear to everyone that the fee could not be disclosed to the fund," Mr. Hanusik said.
Second was that a test trade with $10,000 kickback for two purported due diligence officers in Atlanta needed to take place.
"You'll hear how they were going to 'paper it over' as consulting fees," Mr. Hanusik said.
Mr. Hanusik told the jurors that the three conspirators bought into the scheme, planning to invest the money in Lighthouse Fast Ferry, but also wanted to make some money for themselves.
"You'll hear that Cowen, Huard and Kelly wanted a cut for themselves," he said. "They each wanted $200,000. ... As I told you earlier -- this case is about greed."
The test trade and a larger purchase arranged "with Kelly and his people to buy $5 million in stock," the prosecutor said, and the $10,000 was wired back to pay off the due diligence officers.
"Had this not been an undercover operation, a sting, the big transaction would have taken place," Mr. Hanusik said. Instead, the three men were arrested.
HI JIM, WE WANT TO TALK TO JOE
"James Kelly committed no crime," Mr. Moscovitz said, addressing the jury for the first time on behalf of Mr. Kelly. "He doesn't deserve to be sitting here. That deal was done by two men with whom he was close."
Mr. Kelly was "going through some very tough mental and physical problems," and was relying on his friends to operate his business, Mr. Moscowitz said.
Out of the 35 to 40 recorded telephone conversations, only three were with his client, Mr. Moscowitz said. All the others were with Mr. Huard or Mr. Cowen.
"When the informants call Shamrock, they ask for Joe Huard, they talk to Bruce Cowen," Mr. Moscowitz said. "If Jim answers the phone they say, 'Hi Jim, we want to talk to Joe.' And he hands them off."
The same went for the documents that were going to be introduced into evidence, Mr. Moscowitz insisted. "(The prosecutors) mention documents, but there's nothing that ties Jim Kelly to those documents," he said. "Those were prepared by Joe Huard or Bruce Cowen. Jim Kelly's name never appears."
Specifically on the test trade and the kickback to the purported due diligence officers, there was no proof that Mr. Kelly was involved, Mr. Moscowitz said.
"That transaction was done by Joe Huard. ... He makes the arrangements. The $10,000 cheque, which they say 'they sent.' That check was written by Bruce Cowen. It was sent by FedEx by Bruce Cowen."
Mr. Kelly was becoming increasingly ill as the sting operation was getting underway, Mr. Moscowitz said.
"Jim Kelly at this time had series health problems," Mr. Moscovitz told the court. "He had diabetes, a heard problem -- he had a heart attack -- and had Parkinson's-like palsy." Mr. Moscowitz said, adding that Mr. Kelly had also been in a car accident.
Mr. Moscowitz said Mr. Kelly would sometimes find himself sitting in his car and have forgotten where he was going. He would go out on his boat -- "one of his favorite pastimes" -- only to find that he "wouldn't know which way the wind was blowing."
Mr. Kelly and Mr. Huard were partners in Shamrock for 14 years "until Jim Kelly retired, largely due to the health problems I mentioned," Mr. Moscowitz said.
"Joe Huard knew Jim Kelly was sick ... this deal involved Lancer and Bruce Cowen, and he wanted to cement his relationship with them," the attorney added.
Mr. Moscowitz said that given the thin evidence against Mr. Kelly, the government was going to use his former associates to say he knew what was going on. He tried to diffuse Mr. Cowen and Mr. Huard's testimony by saying they had much to gain by trying to please the prosecution.
"The way the government is going to try to prove that Jim Kelly was a full participant is to have Joe Huard and Bruce Cowen say he was," he said.
Mr. Moscowitz told the jury that Mr. Cowen didn't plead guilty until a month before the trial, after over a year of claiming his innocence. "On the same day that Bruce Cowen signed his deal, his wife Catherine Cowen signed her deal -- a non-prosecution deal," he said. "She can lose that deal if she doesn't cooperate, but she can also lose it if Bruce Cowen doesn't cooperate."
Mr. Moscowitz emphasized that Lighthouse Fast Ferry was a real company, with real investors and potential investment by the state governments of Connecticut and New Jersey.
"The point is Lancer had a veto on this deal. What Cowen and Huard did -- which was creative -- was to have Lancer be involved," the defence attorney said. "The stocks that the fund was going to buy would come from Lancer. Lancer would get $3.5 million, which Lancer would take to Lighthouse Fast Ferry, who would replenish that stock to Lancer."
"This was a good transaction, nobody on the tapes ever says 'this is a bad transaction,'" Mr. Moscovitz said.
Mr. Moscowitz blasted the government informants Mr. Schlien and Mr. Jones, whom he called "swindlers." (Mr. Jones is expected to testify for the government).
"The kind of deal they do specifically are called 'pump-and-dumps,'" Mr. Moscowitz said, where the men would purchase worthless stock, artificially create demand for it, and then dump it at higher price and leave unwitting investors "holding the bag" once the stocks returned to their worthless state.
"They started cooperating in the Fall of 1998. ... They are still uncharged, have not pled guilty, and have not been sentenced. They are still living in big homes, and with government knowledge, are still involved in the stock market."
Mr. Schlien and Mr. Jones, as part of their agreement with the government, had agreed to turn on their "network of swindlers," but Shamrock was not part of this network, Mr. Moscowitz said.
"They told the government they could get 100 people and in the aim to please the government they went out looking for more people," he said.
But in the case of Lighthouse Fast Ferry, Mr. Moscowitz intoned, the investment was in a legitimate business.
"In this case nobody mentions a pump-and-dump," he said.
WILD WILD WEST
After the respective opening statements, the government called its first witness, Professor Stephen Halpert of the University of Miami. Mr. Hanusik used Prof. Halpert's testimony to explain some of the terminology of securities trading that would be discussed in the case.
Prof. Halpert explained the basic definitions of stocks, shares and brokers. He said that in the United States there was hierarchy of exchanges, with the New York Stock Exchange on the top, and the least prestigious exchange, called the pink sheets, at the bottom.
"The pink sheets are the Wild Wild West," Prof. Halpert said.
The trial continues Thursday.
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