Tuesday, January 25, 2005

Elgindy and Former FBI Agent Royer Convicted

Anthony Elgindy and former FBI Agent Jeffrey Royer were convicted (Jan. 24) in the U.S. District Court for the Eastern District of New York (Brooklyn) of racketeering and securities fraud after a trial that started in early November.  Elgindy specialized in analyzing companies that he would recommend be sold "short" by investors, and the government accused Royer of leaking information to Elgindy about pending investigations of companies that could be used to short the shares or, in two instances, to extort the company to keep the information from being disclosed.  According to an article in the Wall Street Journal (Jan. 24):

Mr. Elgindy was downcast as he entered the courtroom, appearing nervous, with his eyes closed or focused on his lap. The jury found Mr. Elgindy guilty of 11 counts against him, including five counts of securities fraud, a count of racketeering conspiracy, a count of securities fraud conspiracy, a count of extortion, a count of extortion conspiracy, and two counts of wire fraud.

As the jury read the verdict, there were gasps and cries from the crowd and defense table, leading Judge Raymond Dearie to halt the proceedings so Mr. Elgindy could be taken from the courtroom.

Mr. Royer was found guilty of nine of 14 counts against him, including four counts of securities fraud, a count of securities fraud conspiracy, a count of racketeering conspiracy, a count of obstruction of justice conspiracy, a count of obstruction of justice and a count of witness tampering.

Royer testified (earlier post here) that he leaked the information to Elgindy to cultivate a source of information about corporate wrongdoing, a defense rejected by the jury.  The jury also rejected the defendants' venue defense (ealier post here).  (ph)

January 25, 2005 in Fraud, Prosecutions, Securities | Permalink | TrackBack (0)

Travelzoo Executive's Trading Probed by SEC

Travelzoo Inc., an internet company that promotes travel bargains for other company's on its website, filed a Form 8-K (here) with the SEC disclosing that the Commission has requested information from the company regarding trades by CEO Ralph Bartel, who owns 80% of the company's outstanding shares.  The stock has been the subject of significant short selling, and the shares dropped over 20% on Travelzoo's disclosure of the informal inquiry by the SEC.  The Form 8-K states:

Travelzoo Inc. has provided information to the Securities and Exchange Commission in connection with an inquiry into trading in its shares. The inquiry follows a period of extreme volatility in the company's stock price on the NASDAQ Stock Market during 2004, which has also been a cause of concern to the company.

In response to this inquiry, Travelzoo Inc. has provided information concerning any transactions in the company's shares by its officers, directors and employees, including Ralph Bartel, the company's CEO. The results of the company's review showed that, during the period in question, when the price of the company's shares increased dramatically, neither Mr. Bartel nor any other directors or senior officers of the company purchased any shares, except for one exercise of a stock option. The inquiry also asked for additional information from Mr. Bartel. Mr. Bartel has confirmed that, since his last sale of 50,000 shares in May 2004, at $19.96 per share, he has neither purchased nor sold any of his shares, except for a previously reported sale of 30,000 shares in November 2004, which Mr. Bartel was required to sell under a stock warrant issued in 2003, which allowed the holder to purchase those shares from Mr. Bartel at $3.90 per share.

The company has provided all information which has been requested to date in this inquiry. The company has no reason to believe that the inquiry relates in any way to the financial reporting or operations of the company.

The impetus for the SEC's inquiry may well be the short sellers who are betting on a decline in Travelzoo's stock price.  The last sentence is small comfort to the public shareholders when the SEC probes market manipulation.(ph)

January 25, 2005 in Investigations, Securities | Permalink | TrackBack (0)

Monday, January 24, 2005

Penthouse Execs Accused of Accounting & Sarbanes-Oxley Violations

The SEC filed a civil injunctive action on Jan. 24 accusing Penthouse International, Inc. (now PHSL Worldwide, Inc.), Charles Samel, a former officer of the company, and Jason Galanis, shareholder in the company, of accounting and Sarbanes-Oxley certification violations.  In addition, the Commission filed and settled a separate cease-and-desist proceeding against Penthouse founder and former CEO Bob Guccione related to the Sarbanes-Oxley violations.  The SEC Litigation Release states that "Penthouse improperly included as revenue on the financial statements for that quarter $1 million received as an up-front payment in connection with a five-year website management agreement" and that "Samel and Galanis prepared and filed the false Form 10-Q, and they did so knowing or recklessly disregarding that Guccione had not seen or approved it, that Penthouse's auditor had not performed its required review of the Form 10-Q, and that it would be improper to include the $1 million payment as revenue for the quarter ended March 31, 2003." The Commission is seeking inter alia director-and-officer bars against Samel and Galanis.  The SEC complaint (here) does not have any pictures or forum items.(ph)

January 24, 2005 in Civil Enforcement, Securities | Permalink | TrackBack (0)

ImClone Systems Settles Shareholder Lawsuits

ImClone Systems Inc. announced on Jan. 24 (company release here) that it has reached a settlement in the consolidated securities class action and shareholder derivative suit regarding the company's disclosure of information about negative FDA action on a drug application.  The timing and completeness of the disclosure was at the heart of the insider trading case against former CEO Sam Waksal, who entered a guilty plea related to his stock transactions the resulted in a seven-year prison term and a recent settlement of the SEC civil action in which he agreed to pay a $3 million civil penalty in addition to disgorgement and prejudgment interest (post here). 

According to the ImClone release, the company will make a cash payment of $75 million to a settlement fund, of which $8.75 million will come from insurers.  ImClone's release states, "The claims against all defendants would be dismissed with prejudice but the Company would retain the right to continue to pursue certain claims against its former chief executive officer, Samuel D. Waksal."  The latter point is important because Waksal still has substantial assets, and the company will pursue its claims against him for breaching his fiduciary to the the company as an officer and director.  Waksal's woes are not yet over. (ph).

January 24, 2005 in Martha Stewart, Securities | Permalink | TrackBack (0)

Profile of Scrushy Trial Lawyer Jim Parkman

An article in the Birmingham News (Jan. 23) gives a profile of Jim Parkman, who will be among the trial counsel representing Richard Scrushy in his securities fraud trial that has opening arguments scheduled to begin today (Jan. 24).  Parker has taken the local "country lawyer" approach, as described in the article:

For Parkman, this is his promotion to the big-time, after more than 20 years of workaday litigating in his hometown of Dothan, a biography he is fond of repeating in court. "I'm just a country lawyer from Dothan, and I don't have all sorts of fancy notebooks," he told panelists at jury selection two weeks ago, waving a lonely piece of yellow paper, seconds after government attorney Richard Smith had yielded the floor, carting off bulky binders that he consulted every few minutes while questioning jurors. Later in the week, Smith attempted to poach on Parkman's territory, telling a new group of potential jurors, "I'm just a country lawyer from Talladega, Alabama." Parkman didn't let it stand, even though Smith is from Talladega. Next time he had the floor, Parkman told the jury that Smith and other government lawyers regularly work on major cases in Washington, Chicago and other business and legal capitals. "I'm only from Dothan," he told the potential jurors. "You aren't going to hold that against me, are you?"

Parkman is an unknown quantity, and certainly is not a high-profile white collar defense lawyer, unlike his predecessor, Abbe Lowell.  It is an interesting strategy, consistent with Scrushy's approach that emphasizes his local roots, humble beginnings, and lack of sophistication, especially with regard to all that accounting "stuff." (ph)

January 24, 2005 in Defense Counsel | Permalink | TrackBack (0)

Fallout from Ponzi Scheme Hits Family

An article in the Denver Business Journal (Jan. 21) discusses bankruptcy court proceedings against the relatives of Will Hoover, whose eponymous company was a ponzi scheme that resulted in investor losses of over $15 million.  Hoover was sentenced to a 100-year prison term, and the trustees in bankruptcy for the company have made the following claims against Hoover's family members to recover funds transferred to them by Hoover:

  • Katie Galpin, Hoover's sister living in Wimberley, Texas, received $224,622 from Hoover or his company within four years of the personal and business bankruptcy filings, of which $40,583 was made within one year of the filings.
  • Michael Hoover, Hoover's brother living in Charlotte, N.C., received $33,050 within four years of the filings and $10,050 within one year of the filings.
  • Kim Wyatt (formerly Kim Hoover), Hoover's daughter living in Orange, Calif., received $185,658 within four years of the filings and $119,215 within one year of them.
  • Mark Hoover, Hoover's son living in Laguna Hills, Calif., received $84,218 within four years of the filings and $22,679 within one year of them.

There is a separate lawsuit seeking repayment of $8,000 from the photographer who took the pictures at Kim Wyatt's wedding that were paid for by Hoover. (ph)

January 24, 2005 in Civil Enforcement | Permalink | TrackBack (0)

Helping Out Dad at the Tyco Trial

An article in the Wall Street Journal (Jan. 21) discussing the retrial of former Tyco International Ltd. executives Dennis Kozlowski (CEO) and Mark Schwartz (CFO) points out that Koslowski's daughter, Sandy, has joined the defense team as a voluntary associate.  She is a recent graduate of the Columbia Law School.  The article notes: "Austin V. Campriello, one of Mr. Kozlowski's lawyers, told the judge that they had previously approached prosecutors about allowing them to use some of Mr. Kozlowski's frozen assets to pay her for work on the case. Prosecutors at the time said that was an 'absolute nonstarter,' Mr. Campriello told the judge."  The first trial was quite contentious, even by criminal standards, and the relationship between the defense lawyers and prosecutors apparently remains frosty.

The article also discusses the background of the four jurors selected: "In the fourth day of jury selection, a building superintendent who hopes to one day become an English teacher, a psychiatric nurse who sings opera, a New York City employee whose brother has served jail time on robbery charges and an elementary school cafeteria worker were chosen as the first panelists in the retrial. Two have previously served on juries in criminal cases."  The first trial ended when a holdout juror who allegedly gave an "OK" sign to the defendants received a threatening letter after being publicly identified.  Given the slow pace of jury selection in the second go-round, estimates of a four-month trial may be on the low side.  (ph)

January 24, 2005 in Prosecutions | Permalink | TrackBack (0)

How Small Is a Small Insider Trading Case?

The extent to which the SEC polices the securities markets regarding insider trading is shown by a recent Commission settlement of a civil injunctive action in which the defendant agreed to disgorge $1,969 of illegal trading profits, $338 in prejudgment interest, and a $1,969 civil penalty (a total of $4,276 for those scoring at home).  The SEC Litigation Release states that Mark J. Lauzon engaged 

in insider trading in the securities of Musicland Stores Corporation ("Musicland") before Musicland's December 7, 2000 announcement that it would be acquired by another company by tender offer. The Commission's complaint alleges that Alfred S. Teo, Sr. ("Teo"), a major Musicland shareholder, learned about the proposed tender offer for Musicland, and then tipped Lauzon and others with this information. According to the Commission's complaint, approximately two hours after Teo tipped Lauzon on November 9, 2000, Lauzon purchased 500 shares of Musicland stock, which he sold on December 11, 2000, and received $1,969 in illicit profits.

A pretty modest amount for an insider trading case, although it is part of a larger complaint by the SEC alleging that Teo's tipping resulted in total profits of over $1.8 million by a number of tippees (see earlier Litigation Release here).  The message here appears to be that no one should think that they can fly beneath the SEC radar. (ph)

January 24, 2005 in Securities | Permalink | TrackBack (0)

Money Laundering Investigation of Banco de Chile

Bloomberg.com reports (here) that the New York and Miami branches of the Banco de Chile are being investigated for possible money laundering violations.  Earlier posts (here and here) discussed the federal investigation of Riggs National Bank in Washington DC for money laundering problems involving foreign leaders, including former Chilean dictator Augusto Pinochet.  The report states:

Banco de Chile's New York branch, which caters to foreign customers, is under investigation for compliance with anti-money laundering laws, according to a filing with the U.S. Securities and Exchange Commission. The Office of the Comptroller of the Currency is looking into the New York branch of Chile's second-largest bank, while the Federal Reserve Bank of Atlanta is examining certain accounts at the Miami operation, according to today's filing.


January 24, 2005 in Money Laundering | Permalink | TrackBack (0)

Sunday, January 23, 2005

What's Happening at MedQuist?

The latest in the government's scrutiny into healthcare appears to be occurring at Medquist.   According to a Washington Post story, "MedQuist Gets Subpoena in Massachusetts," "[t]he U.S. Attorney's Office for Massachusetts has subpoenaed records from medical information services company MedQuist Inc. seeking documents related to its dealings with both governmental and non-governmental customers." The article notes that "MedQuist also said it continues to cooperate with the Securities and Exchange Commission's ongoing investigation in the matter." 

Agency Investigations add a component to white collar cases that one does not find in a typical street crime investigation. What was originally an agency investigation by the SEC, now is a subpoena request by DOJ.  One has to wonder if the SEC has referred this matter to the DOJ for investigation or whether this is an independent investigation?


January 23, 2005 in Investigations, News | Permalink