SEC files first suit in GenesisIntermedia debacle
by Brent Mudry
June 4, 2003
North America's top securities regulator has launched its first prosecution relating to GenesisIntermedia, a Rafi Khan promotion which featured Deutsche Bank's Toronto branch, Vancouver Stock Exchange and Iran Contra figure Adnan Khashoggi and the biggest U.S. brokerage collapse in decades. The United States Securities and Exchange Commission filed a civil suit Wednesday against Thomas G. Brooks, the former manager of the stock loan department at MJK Clearing Inc., a unit of now defunct Minnesota brokerage Miller Johnson Steichen Kinnard, renamed Stockwalk Group Inc.
In its suit, filed in United States District Court for the District of Minnesota, the SEC claims Mr. Brooks defrauded MJK between July and September of 2001 by failing to collect millions of dollars of "marks" for stock loans involving securities borrowed from Native Nations Securities Inc., in a daisy chain which led to the collapse of MJK. The SEC seeks disgorgement of ill-gotten gains, prejudgment interest and civil fines against Mr. Brooks. The GenesisIntermedia case has been under intensive investigation by a number of U.S. authorities, including the SEC and the National Association of Securities Dealers, since the fall of 2001.
The SEC's current action comes six months after Deutsche Bank's Toronto branch and recently terminated senior broker Wayne Breedon were named as lead defendants in an unsealed $250-million civil suit in Minnesota. (All figures are in U.S. dollars.) The suit, launched by MJK's receiver, claims Mr. Breedon and two old friends, one of whom is a convicted felon, conspired with controversial international financier Mr. Khashoggi, a lawyer running a strip bar in Las Vegas, and unnamed others to rig GenesisIntermedia and several other stocks in 2001.
The receiver's suit alleges a wide-ranging and sophisticated securities loan and market manipulation scheme was financed by the Toronto branch of Deutsche Bank, one of the world's largest financial institutions. Deutsche Bank and Mr. Breedon filed motions to dismiss the suit, and these applications are set for hearing on June 26 and 27.
The lawsuit allegations, if proven true, will be discomfiting for Mr. Khashoggi, the Paris-based Saudi arms merchant who was involved in several VSE affairs and the Iran-Contra affair. Mr. Khashoggi, whose name was once golden in Vancouver, 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 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, 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 Sept. 21, 2001, 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," according to 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.
In the current suit, the SEC claims Mr. Brooks's fraudulent conduct in mid-2001 helped contribute to the collapse of MJK. "During this time period, Brooks never disclosed MJK's true financial condition which resulted from his department's failure to collect the marks owed to MJK to any of the broker-dealers his department conducted business with, while knowing the broker-dealers relied on MJK's financial condition to decide how much business to transact with MJK."
The SEC also alleges that Mr. Brooks aided and abetted MJK's violations of the customer reserve requirements and record-keeping provisions during this same time period. According to the SEC action, Mr. Brooks falsified two stock loan reports which were used by MJK's accounting department to incorrectly compute MJK's customer reserve deposit. The false information was subsequently incorporated into MJK's FOCUS reports which Mr. Brooks subsequently provided to broker-dealers doing business with its stock loan department.
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.
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