SEC targets ex-CIBC Mellon staffer in Bogus Shares fraud
By Sean Silcoff
The Financial Post
October 25, 2003
The U.S. Securities and Exchange Commission has accused a former CIBC Mellon Trust Co. executive of taking bribes to issue bogus stock certificates and pocketing ill-gotten stock market gains in a fraud case involving seven men from British Columbia and California.
In a civil action filed last month in Washington, D.C., the SEC alleges Alnoor Jiwan, 47, the former assistant vice-president and manager of CIBC Mellon Trust's Vancouver office, received "a series of bribes" from B.C. residents Daryl G. Desjardins and Robert S. Zaba to issue 98 million illegal shares in now defunct telecom firm Pay Pop Inc. in 1999.
Profits from the stock sale of US$3-million that should have gone to the firm went straight into the pockets of Mr. Desjardins and Mr. Zaba, two senior Pay Pop officers, the SEC alleges.
"Desjardins even boasted that Pay Pop was his own 'printing press' for money, while at the same time bartering Pay Pop stock for several exotic cars and an ownership interest in a thoroughbred racehorse," SEC documents claim. Pay Pop stock, meanwhile, "ultimately ... became worthless."
The SEC hasn't determined how many investors lost money, or the amount they lost. However, one California man claimed in a lawsuit he lost almost US$900,000 on the stock.
The man who blew the whistle on the alleged scam, Pay Pop's former lawyer Warren Soloski, said this week it is "the most egregious thing I have come across."
Mr. Jiwan's alleged role was to act as Pay Pop's "transfer agent," appointed to keep track of its shareholders and empowered to issue and cancel stock certificates. Transfer agents are often called "gatekeepers," charged with ensuring firms don't gain control over and manipulate their shareholder list. They also send out annual reports, dividends and other correspondence between companies and shareholders. CIBC Mellon is Canada's second largest transfer agent.
The alleged involvement of Mr. Jiwan underscores just how important a position some of the more unheralded players in the capital markets hold in guarding the integrity of the system.
CIBC Mellon, jointly owned by Canadian Imperial Bank of Commerce and U.S.-based Mellon Financial Corp., quietly fired Mr. Jiwan four years ago, soon after learning of his alleged involvement in the scam and doing its own internal investigation.
A second senior CIBC Mellon employee in the office of 20 people was involved in the scheme, the SEC alleges. But CIBC Mellon "did not determine this employee was involved in misconduct," spokeswoman Jennifer Mehra said. The employee left in 2001.
Ms. Mehra declined to comment further, saying, "I'm very limited as to what I can [say] on this," despite the fact the firm faces no legal action. "It's just not something we want to" talk about.
The SEC is seeking a range of penalties against the defendants, including fines and orders barring Mr. Desjardins and Mr. Zaba from serving as directors and officers of any public company.
"We view this as a very serious breach of trust by officers of a public company who managed to exploit a situation so they could enrich themselves and others," said Greg Faragasso, an SEC lawyer.
In addition, police in B.C. recently concluded a 40-month investigation into Pay Pop. "It's gone to the Crown for charge approval and a legal opinion," said Sgt. Bud Cramm of B.C.'s Organized Crime Agency. "This is a complex case."
Several authorities on both sides of the border helped with the SEC's investigation, including the RCMP, U.S. Federal Bureau of Investigation, and securities commissions in Ontario and B.C.
A Los Angeles lawyer and a second California man also tied to the investigation have agreed to pay fines to the SEC without admitting or denying allegations against them, respectively, of insider trading and unlawful distribution and sale of the stock.
A third Californian, ex-stockbroker Ronald Brouillette Jr., has also been charged in the case, as well as White Rock, B.C. realtor and stock promoter Brian Koehn.
"It's very tough to fight the SEC when they have an opinion that they feel is justified by their perspective," said Mr. Koehn, choking back tears. "I can't even afford an attorney to defend myself or to present any kind of rebuttal."
Mr. Jiwan, now a product manager with a Vancouver technology company, referred a request for a comment to his lawyer, Bronson Toy. "All I can say is obviously he disputes many of the allegations in there," said Mr. Toy.
The story begins in the spring of 1998, when Mr. Zaba gained control of Pay Pop, a Nevada shell company on the loosely regulated U.S. over-the-counter market.
Mr. Zaba had promoted several Vancouver Stock Exchange-listed firms in the 1980s and 1990s, all of which lost money and attracted regulatory attention, the Vancouver Sun reported three years ago.
Pay Pop immediately got busy, announcing a series of deals, including multi-million-dollar financings, the purchase and sale of a Caribbean resort, and the takeover of a tiny B.C. phone service reseller from Mr. Desjardins, who became Pay Pop president.
None of the deals ever closed, and other press releases were "materially false and misleading," the SEC says. But the two men trumpeted the company's success in two meetings that autumn with San Diego brokerage La Jolla Capital, a penny-stock promoter that had run afoul of U.S. securities regulators. La Jolla was later shut down by the state of California and two of its principals were jailed for securities fraud.
Mr. Desjardins and Mr. Zaba told La Jolla that Pay Pop was growing at more than 100% a year and had signed a deal to install phone lines in hundreds of buildings -- false claims, the SEC alleges.
Mr. Desjardins and Mr. Zaba asked Mr. Koehn to prepare audited financial statements despite the fact he didn't have an accounting background. He complied "without making any attempt to verify the financial information Zaba and Desjardins supplied" the SEC alleges. As a result, "the financial data in the 'audited' Pay Pop financial statements [that claimed the firm had US$13-million in assets] were materially false and misleading." Mr. Koehn got $5,000 and 300,000 Pay Pop shares, which he sold for $21,000, the SEC claims.
Mr. Koehn said in an interview he worked for a few months for Mr. Zaba and Mr. Desjardins but was "completely" misled by them. He added "it wasn't my signature" on the financial statements.
A lawyer for Mr. Zaba could not be reached. The Financial Post was unable to determine the whereabouts or Mr. Desjardins.
(The SEC has had the same problem: trial lawyer Michael Lowman told the Post he had not yet located Mr. Desjardins in order to serve him court papers in the case.)
Meanwhile, La Jolla Capital became a "market maker" for Pay Pop stock, standing ready to match buyers and sellers in large volumes of the stock, and its brokers began selling it to clients, based on the false financials.
La Jolla broker Ronald Brouillette Jr., one of the seven men charged by the SEC, left the firm and brought Pay Pop as an investment banking client to another California brokerage, Centex Securities, which itself was later shut down by U.S. regulators.
Mr. Brouillette, who faces 11 grand theft charges stemming from a separate securities case, then turned Centex into a market maker for Pay Pop stock, the SEC alleges. He set up accounts in the names of Mr. Desjardins' friends, family and employees "to create the appearance of genuine demand for, and trading activity involving, Pay Pop stock," the SEC alleges.
He further orchestrated unauthorized trades in the stock by the account holders, even directing Mr. Desjardins' secretary to forge their signatures, the SEC alleges.
All the while, the regulator says he made false claims about Pay Pop and received hundreds of thousands of shares. Mr. Brouillette was later fired from Centex. Two years ago the U.S. National Association of Securities Dealers suspended him for "egregious unauthorized trading."
Meanwhile, Pay Pop began issuing scads of stock: 55 million shares between July, 1998, and March, 1999, and 40 million more over the next six months, after the company had consolidated its float in a 40-for-1 reverse split.
Unfortunately for Pay Pop, its first transfer agent refused to issue stock certificates without slapping on "restrictive legends" -- statements that the stock was not registered with the SEC and that ownership couldn't be transferred without the registration statement or a valid exemption.
It is that sort of fussy but important bureaucratic detail that keeps transfer agents busy and ensures the integrity of the capital markets, said Lew Johnson, a Queen's University School of Business finance professor. "These are the trustees of the shareholder book," he said. "To have confidence in the market, you want transparency and accountability when it comes to oversight and control of the shareholder list."
When the transfer agent refused to issue stock without the restrictive legend, Mr. Zaba approached Mr. Jiwan at CIBC Mellon. Mr. Jiwan "agreed that in return for a bribe in the form of Pay Pop stock, he would not require there to be a registration statement in effect for Pay Pop" or any proof of an exemption to issue legend-free stock, the SEC alleges.
The SEC claims Mr. Jiwan received 315,000 shares from July, 1998, to February, 1999, and asked for more after the reverse split. In total, the SEC says he received up to 820,000 shares.
The SEC further alleges Mr. Jiwan directed most of his share certificates be placed in the name of the sister of one of his employees, and that he ordered the sale of 166,000 of the shares from December, 1998, to December, 1999.
CIBC Mellon prohibited employees from trading on confidential information obtained from clients, including a change in the share count. The SEC maintains "Jiwan misappropriated confidential information entrusted his employer" by selling the stock "while in possession of material non-public information," netting more than $20,00.
The SEC says CIBC Mellon issued 98 million Pay Pop share certificates, most of which "were free of any restrictive legend." At least 15 of the orders bore the signature of Mr. Desjardins and a forged signature of a former Pay Pop officer and director, the SEC claims.
"Jiwan at all times knew, or was reckless in not knowing, that his conduct was illegal," the SEC claims. "While Pay Pop ... told the market [it] had approximately 20 million shares issued and outstanding, Pay Pop never disclosed the fact that substantially more stock had been issued and illegally distributed to the public."
The Pay Pop scam blew up when the company's lawyer, L.A.-based Warren Soloski, realized the company was issuing illegal stock. He made the discovery as he was trying to negotiate a financing for the company with a private capital firm in New York and realized his own documents showed Pay Pop's share count had ballooned.
He sent Mr. Jiwan a letter on June 8, 1999, instructing him to "NEVER DO THIS AGAIN." Weeks later, he discovered Mr. Jiwan had issued another 11 million legend-free stock certificates. He immediately flew to Vancouver, engaging in a screaming match with Mr. Jiwan at CIBC Mellon offices. He demanded to see a shareholder list and told Mr. Jiwan his actions violated U.S. securities laws. "It didn't matter; it went through one ear, out the other," Mr. Soloski said. "I deal with transfer agents all the time. The reason I flew up there was that it was just so outrageous. I just couldn't believe it. The letting out of these millions and millions of shares destroyed this company."
He contacted the SEC, RCMP and the FBI, promising to be a witness. He ended up being sanctioned, however, for insider trading after the investigation revealed he had sold his small position in Pay Pop while in possession of "material non-public information." He paid $2,133 to settle the case, but did not admit wrongdoing. He said he told his broker to close the account without realizing it contained Pay Pop stock. "What I did was what I did," he said. "When my attorney told me it would cost $25,000 to $30,000 in legal fees and a week of my time to fight this, I said, well, just take the consent, not admitting anything."
It is the first time Mr. Soloski, a 35-year veteran of the practice, had run afoul of the authorities. But in an interview on his 63rd birthday three days ago, it was the alleged sins of his former clients that inspired him to say: "Compared to an Enron, it pales in comparison. But I am disgusted with the conduct of all the people involved in this. If they all didn't work together it couldn't have happened. You needed the company principals, you needed the brokers, you needed the transfer agents. If any of them failed to play a part, the whole thing would have failed."
[ RGM Short Selling Home page ]