Swiss, German and French investigators, with help from the U.S. Securities and Exchange Commission, are struggling to unravel a massive Swiss-based stock fraud that duped investors in 40 countries out of as much as $250 million, according to authorities here and in other European cities.
So far, two dozen persons have been arrested in what is being described as one of the biggest stock fraud schemes of all time. "If the numbers I hear turn out to be correct," said an SEC official in Washington, "it is a fraud of enormous magnitude."
An American with a long history of stock market infractions is alleged to be the ringleader of the sophisticated operation, in which U.S. over-the-counter securities were sold from phone banks in Swiss cities to foreign investors. Thomas Quinn, 50, a former New York attorney and stockbroker who spent six months in a U.S. prison for a 1963 stock scam, was arrested in late July at his sprawling pink villa near Cannes on the French Riviera.
According to French investigating magistrates, Quinn is now jailed without bond in Paris' La Sante prison, where he awaits possible extradition to Switzerland, where the main investigation is centered under Geneva-based investigating magistrate Laurent Kasper-Ansermet.
The stock swindle first came to light this summer after Swiss embassies around the world began to receive complaints from investors who said they were unable to contact their Swiss-based brokers to recover money they had invested in U.S. over-the-counter securities. According to Kasper-Ansermet, individual losses ranged between $1,000 and over $750,000, the latter in case of one Persian Gulf investor.
"It is still difficult to determine the total loss," Kasper-Ansermet said in a recent interview here. "I have had complaints from South America, Singapore, Arabian countries and Scandinavia." Based on information uncovered in his investigation, the Swiss jurist, whose job is something akin to that of a district attorney in the United States, claims investors were defrauded of between $80 million and $150 million.
Other official sources say it could be as great as $250 million since many investors, particularly those in France with its large black economy, are reluctant to come forward because it would involve disclosing the source of money they had lost.
In almost every case documented by the investigators and by Swiss private attorneys representing investors, the story was roughly the same:
The victim responded to newspaper advertisements offering a free trial subscription to an investment newsletter. After receiving one or two issues of the slick, understated newsletter, including one titled "The Swiss Analyst," they were telephoned by a smooth-talking salesman, usually with a British or American accent.
"They all had James Bond-type names--James Church or Charles Snow or Fleming Windsor," said Geneva attorney Cecile M. Ringgenberg, who represents 200 clients claiming an aggregate $5 million worth of losses in the scheme. "They were very smooth, and they all knew how to close a deal."
The caller generally introduced himself as a representative of the newsletter and offered conservative investment advice, counseling the purchase of blue chip stocks and warning about the potential risk of highly speculative over-the-counter shares.
"He had a nice, polite, American voice," recalled an Australian woman contacted by one of the salesmen. "He started out talking about buying General Electric. He said he was buying General Electric.
"Then he said: 'However, we do have another one where we know the participation and the gains are much higher. Of course there is a gamble.' "
In this case, the caller recommended an obscure American firm he claimed was marketing a pin-ball machine "that will soon be in all the bars in the United States."
In almost all cases the stock recommended was a company that was traded or that had once been traded on the over-the-counter market, penny stock issues such as Hillside Gold & Minerals, Columbia Electronic Systems, Messidor (another gold mining stock) and Creative Telecom. Two of the recommended stocks, Vanguard Financial and Chatsworth Enterprises, were shell companies that had earlier been suspended from trading by the SEC.
In most cases, said attorney Ringgenberg, her clients received actual certificates of stock for their purchases and computer printouts listing the number of shares they owned but not the value. Almost always, the stocks were worthless.
Ringgenberg has a map on the wall of her office with dozens of tiny flags marking the different countries in which the phony brokerage houses operated by telephone from Switzerland. These stretch from Japan to Bolivia to Mauritius, but there are no flags in two conspicuous places, Switzerland and the United States.
Although several American expatriates are reported to be among the victims of the fraud, the well-trained salesmen were careful not to sell to investors living in the United States, where prospects would have easy access to materials on the companies touted.
Mobility, Timing Key
No sales were made in Switzerland because investors there would be able to easily visit the addresses listed by the brokerage houses as their base. Using names such as Falcon Trust Financial, Kettler Investment Finance and Prudentrust Financial, the brokerage houses were actually "boiler room" telephone operations shunted from one Swiss city to another after a few months of operation in each location.
According to Geneva attorney Jean-Francois Ducrest, whose law firm represents another set of investors, the timing and mobility of the operation was the key to its success.
"This criminal organization was very well structured," Ducrest said. "They had an army chain of command. They knew at the beginning that each company would have a short period of life and that another would have to replace it. It was like a Hydra (the mythical nine-headed serpent slain by Hercules). One head would be cut off and another would grow."
Apart from individual investors, the big loser in the stock fraud is Switzerland, which has seen its image as a clean, responsible business nation tarnished by the episode. Kasper-Ansermet said that he will push for a Swiss law requiring stockbrokers to be license and registered.
"We have no regulations concerning brokers," he said. "I think that was the weakness. Any company may sell shares without being registered."
The result was the biggest stock scandal since the Investors Overseas Services case in the late 1960s in which fugitive financier Robert Vesco is charged with stealing millions of dollars.
"There is this myth about numbered accounts and the vaunted Swiss security," said a former IOS employee who still lives in Geneva. "The truth is there is just as much crooked activity here as anywhere else."