Thursday, April 13, 2006

Adnan Khashoggi Charged by SEC with Securities Fraud

Saudi financier Adnan Khashoggi and Ramy El-Batrawi, former CEO of telemarketing firm GenesisIntermedia, Inc. (GENI), were charged with securities fraud by the SEC in a civil complaint (here) filed in U.S. District Court in Los Angeles.  Khashoggi is best-known as the arms dealer in the Iran-Contra scandal in the 1980s, and he and El-Batrawi were controlling shareholders of GENI before its collapse in 2001.  They are accused of manipulating the stock price and misappropriating over $130 million in transactions that led to the collapse of several brokerage firms, resulting in the largest bailout in the history of SIPC.  According to the SEC's Litigation Release (here):

According to the complaint, Ramy El-Batrawi, GENI's Chief Executive Officer at the time, and Adnan Khashoggi, with the assistance of Richard J. Evangelista, Wayne Breedon, and Kenneth P. D'Angelo (a stock loan broker previously charged by the SEC and criminal authorities), developed a manipulation scheme by which they could profit from lending GENI shares (rather than selling them). The complaint alleges that El-Batrawi and Khashoggi, through an offshore entity called Ultimate Holdings, loaned approximately 15 million shares of GENI stock to Evangelista's employer at the time, Native Nations Securities, a New Jersey broker-dealer, and more than a dozen other broker-dealers in exchange for cash based upon the market value of the shares.

According to the complaint, Ultimate Holdings loaned stock through Native Nations (and other broker-dealers) to Breedon's employer at the time, Deutsche Bank Securities Limited in Canada, and received the current market value of the stock in cash. As GENI's stock price fluctuated, the loaned stock was marked-to-market by the broker-dealers. Ultimate Holdings received additional cash when GENI's price increased, and was obligated to return cash when the stock price dropped. By lending the shares in this manner, El-Batrawi and Khashoggi raised approximately $130 million without giving up control of the stock or depressing the market price for the stock.

The manipulation caused GENI's stock price to increase approximately 1,400%, from a low of $1.67 per share (split adjusted) on September 1, 1999 to a high of $25 per share on June 29, 2001. After the scheme collapsed in September 2001, GENI's stock price plunged to pennies per share. El-Batrawi and Ultimate Holdings then defaulted on their obligations to repay the approximately $130 million they had obtained from the stock loans, which caused several of the broker-dealers in the stock loan chain to go bankrupt.

(ph)

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Civil Enforcement, Fraud, Securities | Permalink

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