New York Post
By Christopher Byron
April 14, 2003

Visitors to this space know there have been few topics we've nagged about more incessantly in the last year than the need to crack down on abuses in the hedge fund industry.

This is the biggest and most rapidly growing pool of unregulated capital on earth. And though the biggest and most visible of these operations seem generally to be on the up and up, a scrim of secrecy hides the activities of the smaller and more obscure funds, and evidence is mounting that many are drenched in out-and-out fraud. Their antics not only hurt the fat-cat suckers who actually invest in such funds. Inevitably, everyday investors in the market get hit, too, by unwittingly investing in the companies targeted by the funds.

Since most of the action takes place offshore, via funds that stage Barbary Coast-type raids on America's capital markets from tax-haven sanctuaries like Bermuda and the Cayman Islands, regulators have until now done pretty much squat-all about it.

So it was great to read the other day that the new chairman of the Securities and Exchange Commission, William Donaldson, seems to agree that something really does need to be done before things get any worse.

To that end, Donaldson told a Senate committee last week that the SEC will hold public hearings next month regarding the hedge fund industry. The purpose: to begin drafting regulations designed to increase the visibility of what these secrecy-obsessed investment vehicles are actually doing with their clients' money. The goal is not to tell the funds what they can and cannot invest in, but simply to make their investing activities more visible to everyone.

Thus, in the helpful spirit of suggesting the sorts of activities the Commission might usefully look into, how about a cold, hard look at what everyone I know in this field refers to as the "Reg. S scam."

Put simply, Reg. S is how penny-stock promoters set themselves up for a killing by selling unregistered and otherwise illegal stock to foreigners under a misguided 1990 amendment to the Securities Act of 1933 known as "Regulation S."

Though the funds hide their tracks well, folks familiar with the offshore hedge fund game say that funds based in places like Tortola and Switzerland are becoming increasingly important customers of worthless Reg. S shares, which they dump back onto the U.S. market as soon as it is legal to sell the shares.

Yet before getting into the specifics, first some background as to what Regulation S actually is, and why it was enacted in the first place.

So-called Reg. S was adopted, in a fit of deregulation excitement at the start of the 1990s, to let U.S. companies sell stock quickly and cheaply to foreign investors, without having to go through the time-consuming and costly work of filing an SEC registration statement to sell the shares directly into the U.S. market.

Now we'll just sidestep the question of why Washington apparently thought foreign buyers were some kind of lower life form who didn't warrant the protections of full financial disclosure given to U.S. investors, and we'll simply note that because of the way the law was written, penny-stock promoters quickly came running. Reg. S became a way for them to sell worthless microcap stock to foreigners, who could then sell it right back to gullible Americans.

Since the law's enactment in 1990, the SEC has tried periodically to crack down on such practices, and in 1997 it amended the rule to require investors in Reg. S shares to hold them for a full year before being allowed to resell them to U.S. investors.

But extending the holding period hasn't really changed much of anything, as evidenced by the thriving business that continues unabated in Reg. S offerings. A search of the SEC electronic database reveals that more than two dozen obscure and troubled companies on the OTC Bulletin Board sold Reg. S shares to foreign investors last year.

And that sum doesn't include the countless more companies that are so small and obscure they aren't even registered with the SEC, yet they continue to use Reg. S - entirely legally - to flood overseas markets with stock that cannot be sold in the United States at all.

One such promoter of this type of trash turns out to be the "asset management" arm of a firm bearing the name Livingstone Global Corp., whose boss (according to the company's Web site) bears the hilariously overwrought moniker of Jonathan Paul Livingstone IV.

According to the Web site, Livingstone Global has offices in Geneva, Paris, Rome and Stockholm, and traces its financial peerage back to 1799 and one Jacob Boulder Livingstone. Some 200 years later, we learn from the Web site (the only known place the information can be found) that Livingstone Global is now "the world's leading operating and development association conglomerate," and that young Master Livingstone IV not only invented an "early version" of the "online chat room," but has received numerous (if unspecified) "accolades and . . . awards."

From a separate site, for a company calling itself Safeguard Technology International Inc., with an office at 67 Wall St. in New York, we get the grand news that Livingstone Global is an "institutional investor with offices throughout Europe," and that it has lately been providing "venture funding" to Safeguard Technology.

Alas, the Web sites for both the Bank of Ireland and the Banking and Finance Commission of Belgium don't seem quite so impressed. Both list Livingstone as an unregistered and illegal banking operation in those countries.

Safeguard Technology's director of business relations, one Gregg Davis, offered yet a third perspective, saying Livingstone is "a Reg. S sales group" and that Safeguard is no longer involved with them.

A press release of Feb. 21, 2003, which announced that Safeguard and Livingstone had concluded their relationship "effective immediately," and which followed an article in Britain's Mail On Sunday newspaper questioning their ties, suggested a touch more urgency to the termination than Davis seemed to convey in his comments.

And Davis seemed to bristle at questions regarding the bona fides of Safeguard's director of operations, Jeffrey B. Lazarus, a onetime Hollywood personal trainer who moved to New York and became a trader for a brokerage firm named Preston Langley Asset Management.

The National Association of Securities Dealers employment file shows that in 1999 Lazarus was fined $10,000 for various trading-room violations at Preston Langley from the year before, and that he left the firm in April 2001.

Lazarus's departure coincided with action by a federal grand jury in New York, which in March 2001 indicted 20 individuals, including five Preston Langley brokers, for a $50 million penny stock pump-and-dump scheme.

Davis insisted strongly that Lazarus was not involved in the pump-and-dump scheme, and there is no information available from the NASD or elsewhere to suggest otherwise.

Nonetheless, it is companies such as Safeguard Technologies, which is not even registered as a reporting penny stock with the SEC, that are floating their shares abroad via Reg. S promoters like Livingstone Asset Management.

Who is buying the trash? My sources say the customers are increasingly turning out to be offshore hedge funds, which are stocking up anonymously on these penny-stock versions of weapons of mass destruction, to drop them on the market if and when the issuing companies ever do register with the SEC for their shares to become free to trade in the United States.

So here's hoping the SEC will begin looking into this matter, as well as into the many others that now characterize the hedge fund game, when the Commission holds its public hearings on hedge fund hijinks next month.


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