Testimony of Bradley W. Skolnik
Indiana Securities Commissioner and NASAA President
Before the House Commerce Committee Subcommittee on Finance and Hazardous Materials, U.S. House of Representatives
September 13, 2000
SUMMARY OF NASAA’S TESTIMONY
State securities regulators have been fighting a bull market in fraud at microcap firms that are organized criminal enterprises, some of them with ties to the Mob.
NASAA does not know the exact amount of Mob crime activity in the securities markets, but we do know the only way to deter these criminals is to bring more criminal prosecutions.
White-collar criminals who commit securities fraud deserve prison time just like thieves, muggers and murderers.
Traditional weapons to sanction firms and brokers who violate market regulations – such as administrative fines and suspensions – have a limited effect on these criminals.
Regulators must provide deterrents to corrupt brokers by bringing criminal cases and putting the perpetrators in prison.
State securities agencies are working with federal regulators, and state and federal prosecutors to build cases against corrupt microcap stock firms with ties to organized crime.
Chairman Oxley and Members of the Subcommittee:
I am Brad Skolnik, Indiana Securities Commissioner and President of the North American Securities Administrators Association, Inc. (NASAA)1. I commend you for holding this hearing and thank you for the opportunity to appear today to present our views.
Why is the Mob making inroads on Wall Street? Because, as bank robber Willie Sutton once said, that’s where the money is. Wall Street is booming because in the past generation we’ve become a nation of investors. Half of American households are invested in the stock market. While that’s bullish for the legitimate securities industry, it’s also bullish for the crooks. Unfortunately, many of today’s investors are relatively unsophisticated and susceptible to high-pressure sales tactics and bogus promises of guaranteed returns – the stock and trade of microcap stock firms and promoters.
State securities regulators have been fighting a bull market in securities fraud. From microcap fraud to promissory notes, from foreign currency trading schemes to Internet scams. Is there organized crime in the securities markets? Yes, we believe there is.
How much securities fraud is Mob related? No one can say precisely. From my experience in Indiana alone, I can tell you that organized crime on Wall Street is targeting investors on Main Street. For example, in recent years, the Securities Division of the Indiana Secretary of State’s office has brought enforcement actions against Meyers Pollock Robbins, Stratton Oakmont, Inc., Toluca Pacific Securities Corp., and PCM Securities Limited—all these microcap firms are suspected of having ties, in one form or another to organized crime figures. The experience is similar in many other states. Microcap fraud, some of it linked to organized crime, has cost Americans hundreds of millions of dollars, perhaps billions. Unlike The Godfather or The Sopranos, there is nothing entertaining or endearing about the Mob on Wall Street.
While we can’t tell you exactly how big the problem of the Mob on Wall Street is, we can tell you how to best fight it. By bringing more criminal prosecutions. The prospect of serious jail and prison time is the only way to deter these calculating, cold-blooded, recidivist criminals. Anything less could be viewed as just a cost of doing business.
The problem is, securities cases are complex, costly and time-consuming. The truth is some prosecutors shy away from them because the subject is complicated and difficult to understand. But from my perspective as a state securities regulator, white-collar criminals who commit securities fraud deserve prison time just like thieves, muggers and murderers.
Think about it: Someone steals your car…they go to prison. A con artist steals the money your parents saved for retirement and they get fined. That’s not right.
We need to change our collective mind-set about white-collar crime. Make no mistake: Securities fraud is not a victimless crime. It destroys lives just as surely as street crime does.
State securities regulators bring more criminal cases for securities fraud than other regulators, obtaining an average of nearly 300 criminal convictions a year. But we need to get more convictions, many more. I would like to acknowledge the cooperative efforts of the U.S. Attorney’s Office and the Manhattan District Attorney’s Office in working with the states securities agencies, the Securities and Exchange Commission (SEC) and the NASD Regulation (NASDR) and committing the resources to build cases against corrupt microcap stock firms. I believe the willingness to pursue these cases, which resulted in criminals going to jail, has sent a message and had an impact in reducing certain types of securities fraud.
Meyers Pollock Robbins fits the pattern state regulators have observed in the war against microcap stock fraud – commercial bribery, extortion, money laundering, market manipulation and suspected mobsters or their associates as clients.
In January of this year, Gordon Hall, the chief executive of HealthTech International, was convicted on charges he hired stock promoters – some with ties to organized crime – to bribe brokers to artificially inflate the price of his company’s stock. Prosecutors said Hall entered into a bogus stock promotion consulting agreement with two individuals who allegedly had ties to the Bonnano crime family. That agreement led to Mob control of Meyers Pollock Robbins. At the trial, one of the defendants testified that he arranged for three brokers to be hired at Meyers Pollock Robbins to promote certain stocks, including HealthTech, which jumped 53% in a single day during the alleged scheme.
In April of this year, the New York District Attorney, in partnership with state regulators around the U.S., announced the indictment of 20 people on charges that they carried out a nationwide stock fraud scheme in connection with Meyers Pollock Robbins. In total, 42 individuals were under investigation but, by the time of the announcement, 22 individuals had already pled guilty to various criminal charges including enterprise corruption, money laundering, criminal possession of stolen property, criminal bribe receiving, grand larceny, falsifying business records and antitrust violations.
State regulators from Alabama, Colorado, Connecticut, Georgia, Indiana, Massachusetts, New Jersey, Pennsylvania, and Utah collected and analyzed brokerage records from Meyers Pollock Robbins to uncover and document fraudulent activities. State investigators also located and interviewed investor-victims of this criminal enterprise in states from New York to California. They heard heartbreaking testimony of stolen money, broken dreams and loss of faith—faith in our financial markets and faith in our regulatory and legal systems.
For example, a woman who lived in a nursing home lost more than $100,000 when brokers at Meyers Pollock Robbins made unauthorized trades in her account. She lost 95% of her assets and her 50-year-old son-in-law had to take a second job just so that she could stay in the nursing home.
The District Attorney brought some of these victims to New York, where they testified before a grand jury that returned indictments against those involved in the Meyers Pollock Robbins criminal enterprise. Among other things, the indictment alleged that the president of Meyers Pollock Robbins assisted stock promoters to sell overvalued and worthless stock through the firm and assisted would-be principals of securities firms to own and operate branches of Meyers Pollock Robbins, even if they were not licensed. He collected “consulting fees” from the promoters and collected a percentage of the gross from each of the branch offices. The indictment alleged that other criminals provided stock to Meyers Pollock Robbins as undisclosed promoters of the stocks. Each paid bribes or other undisclosed compensation to brokers to sell their securities.
At these firms and others, state securities investigators have seen “pump and dump” schemes similar to those reported in press accounts describing Mob involvement on Wall Street. Here’s how it works: The mobsters pay, say, 50 cents a share to buy a stake in a company that’s going public. Then they go to a brokerage firm they control and have its brokers cold-call unsuspecting clients and hype the stock so that it sells for, say, $5 a share. Once the shares are pumped and dumped on the market, the hype stops and the mobsters sell their shares for a big profit. As a result of the sudden glut of shares on the market, the stock price plummets, investors are left with often nearly worthless pieces of paper, the brokers get their fat commissions and the Mob makes a killing. Why would a company go to the Mob for help? “Because the Mob guys have the cash and the wherewithal to make it happen.”2
Time and time again state securities regulators, in their investigations of microcap stock fraud cases, have turned up people who are afraid to testify, or who if they do agree to go on the record wear hoods at hearings to conceal their faces out of fear of retaliation.
Historically, securities regulators have been successful in overseeing the activities of the legitimate brokerage firms. However, they faced serious challenges when outright criminal organizations entered the markets in recent years. Traditional weapons to sanction firms and brokers who violate market regulations – such as administrative fines and suspensions – have little effect on these criminals. They readily pay fines and consider them a cost of doing business. Regulators must provide deterrents to corrupt brokers and firms by bringing criminal cases and putting the perpetrators in prison. Period.
It’s important to note that the closure of one firm and the barring of several principals who have already made their money does not end the problem. Brokers at firms shut down by regulators have migrated to other firms, or started new firms, to continue their criminal activities.
The poster child for microcap stock fraud was Stratton Oakmont, which had its headquarters in New York. An indicted mobster, one Philip Barretti Sr., was a stockholder in a Stratton backed Initial Public Offering (IPO). Other microcap firms associated with Stratton included Biltmore Securities, Duke & Company, Monroe Parker, First Jersey Securities and Hibbard Brown. As you can see from the attached “Agent to Principal” chart, this was a sophisticated network of corrupt brokers, promoters and agents. This interlocking web of companies and the migration of brokers from firm to firm is, in my view, evidence of enterprise corruption, if not racketeering.
In response to the criminal threat to the marketplace, NASAA member states have developed a task force concept to share personnel, information and resources. In addition, NASAA has developed a close working relationship with experienced criminal prosecutors in states where corrupt brokerage firms are located. NASAA member states provide the securities market expertise to detect and document crime in the marketplace. The prosecutors then present the cases for trial. However, even this concept does not provide the manpower needed to adequately address the problem. Therefore, NASAA has been forced to adopt a strategy of concentrating primarily on those rogue brokers and principals who are capable of establishing new firms, or migrating to existing firms and continuing their criminal activities.
For example, as a result of the Duke & Company investigation, 24 owners, principals, supervisors and brokers were indicted on criminal charges. It is believed that perhaps dozens more brokers, sales assistants and cold callers could have been charged, but the manpower was not available to administer such a heavy case load.
NASAA member states have tracked an “Agent to Principal” progression in and among rogue brokerage firms. This tracking has demonstrated that some talented criminals who begin as brokers, go on to manage their own firms. By prosecuting the principal figures in the rogue firms, regulators and law enforcement agencies have made large strides toward removing criminal elements from the marketplace. We need to keep the pressure on, as some of these criminal elements migrate out of the boiler room and onto the Internet, arguably a more efficient medium to commit fraud.
Unfortunately, many white-collar criminals are creative and sophisticated. Therefore if we hope to continue to protect our nation of investors from fraud and abuse our enforcement efforts must be enhanced and improved.
Currently, the Securities and Exchange Commission cannot take action based upon state actions against issuers, brokers, dealers, investment advisers and affiliated persons. This creates duplication of enforcement effort and expenditure of limited resources. Our system of regulation works best when each regulator complements the other, leveraging resources, strengths and expertise.
We recommend that where a state has issued an administrative enforcement adjudication, obtained a conviction or where a state court has issued an order or injunction, the SEC should be empowered to rely on that state action as a basis for pursuing appropriate remedies under federal law. The SEC should not be required to expend the time and resources to replicate state investigations in order to obtain relief or sanctions authorized by federal law. This authority is similar to that regularly utilized by the states. For example, in the case of Meyers Pollock Robbins, Indiana suspended the firm’s license based on the initial action taken by the Secretary of State’s office in Massachusetts. A number of states, including Indiana, had pending investigations based on the firm’s problems within their borders, but relied on the Massachusetts case for their actions. This allowed us to move faster, thereby protecting investors within our jurisdictions.
Mr. Chairman, I applaud you for holding these hearings in an effort to shed light on the criminal abuses in the securities markets. The problems in this area are serious and systemic, but can be successfully addressed if securities regulators and policy makers work together on solutions.
Yes, the Mob is making inroads on Wall Street. To fight it and other forms of organized crime, we need to bring many more criminal actions. If we don’t, a cancer will grow on our securities markets, which could have very serious and perhaps very dire consequences. We need to put these crooks in prison.
I pledge the support of the entire NASAA membership to work with you and provide any additional information or assistance you may need. Thank you.
Endnotes:
1The oldest international organization devoted to investor protection, the North American Securities Administrators Association, Inc., was organized in 1919. Its membership consists of the securities administrators in the 50 states, the District of Columbia, Canada, Mexico and Puerto Rico. NASAA is the voice of securities agencies responsible for grass-roots investor protection and efficient capital formation.
2“Wise Guys on Wall Street” by John Connolly; George Magazine; December, 1998
September 13, 2000
