Businessman’s Trial on Fraud Charges to Open Today

A Newport Beach businessman accused of causing investors to lose at least $550,000 by manipulating the stock of a company he controlled is scheduled to go on trial today in U.S. District Court in Los Angeles.

Lee Roy Shrout, president of Abex Ltd. of Newport Beach, was indicted last June on securities and mail fraud charges in connection with Abex Ltd., a Newport Beach company he controlled. Abex was a holding company with investments in other smaller companies.

The 25-count indictment also named two of Shrout’s business associates, Ralph Ernstsen and E. Michael Furlong. Ernstsen owned and controlled three companies allegedly involved in the stock transactions. Furlong was employed as a stockbroker for a Los Angeles firm.

According to court records, the trio bought and sold Abex Ltd. stock, causing the price to jump from “less than 10 cents a share in August, 1983, to $5 a share in January, 1984.” The stock’s price later crashed and was considered worthless, according to the indictment.

To boost trading and increase the per share price of Abex shares, the men allegedly opened various accounts in the names of friends and relatives. They also generated stock activity by simultaneously buying and selling stock, according to court records.

Shrout and Furlong are also accused of placing articles about the company in trade journals and putting out false corporate reports to encourage investment in the stock.

The Securities and Exchange Commission conducted a joint investigation with the U.S. attorney’s office. Government prosecutors and defense attorneys declined to discuss the case, citing problems with pretrial publicity. The three defendants also declined to comment.

Other companies involved in the operation were Western Investments Inc. of El Toro and Pacific Mortgage Inc. of Las Vegas.