Banks in L.A. Used--Unwittingly--in Penny Stock Fraud
Three banks in Los Angeles were used as part of an international network that laundered millions of dollars in illegal proceeds from penny stock schemes, according to recently unsealed federal court documents.
Branches of Security Pacific National Bank, First Interstate Bank and Union Bank of Switzerland here were identified in the documents as playing unwitting roles in the sophisticated laundering operation.
The scheme was detailed in documents filed in connection with a guilty plea entered in U.S. District Court in Las Vegas by Arnold L. Kimmes, a former Rancho Palos Verdes and Palm Springs resident, who has had a long career as a stock swindler.
Since escaping French authorities aboard a yacht last year, Kimmes has been cooperating with the Internal Revenue Service and the Securities and Exchange Commission in an investigation of penny stock fraud.
The investigation is being conducted by a grand jury in Las Vegas, where Kimmes’ previously secret plea was unsealed earlier this month. But attorneys familiar with the inquiry say it has taken on a worldwide scope.
Penny stocks are low-priced, often risky securities that are traded outside the market system. While some cost as little as a penny a share, prices sometimes go much higher. Penny stock fraud has soared in recent years, and federal officials are trying to stop abuses.
A key element in the fraud has been the use of high-pressure telephone sales tactics by “boiler rooms” peddling the stocks to small, unsophisticated investors. Last week, in an effort to combat that problem, the SEC adopted a rule requiring penny stock brokers to obtain a new customer’s written approval before completing a sale.
But SEC and IRS investigators are also waging a battle against sophisticated swindlers who set up phony companies to issue the stocks sold to unsuspecting investors worldwide through cooperating brokerages.
In his plea agreement, Kimmes provided the government with a blueprint for how such shell companies are created and their stock sold to the public. He also described a second, critical step--how to launder the proceeds from the sales so that the IRS does not get its hands on the money.
According to the agreement, Kimmes and associates would create “shell” companies with basically no assets or operations. They registered the companies with the SEC and sold the shares to so-called nominees--people who would be identified as the owners of the stock in exchange for small amounts of money. But Kimmes actually retained control.
The stocks were held in nominee accounts at cooperating brokerages, where employees referred to them as “Charlie” accounts, using Kimmes’ nickname.
‘Stocks in a Box’
The government said the elaborate process created the appearance of a viable public company with widespread shareholders, when actually Kimmes controlled all the shares of the shell.
The companies, known as “stocks in a box” in the trade, were then sold by Kimmes to boiler room operators, who were able to sell the stocks to the public, according to the plea agreement.
The government said the arrangement provided the boiler room operators with control of all the stock and allowed them to set the price for the stocks far above what they had paid.
Two firms created in that manner were identified in the documents as Onnix Financial Group and Executive Capital. Both were sold in 1987 to Meyer Blinder, a multimillionaire who controls Blinder, Robinson & Co., the nation’s largest penny stock brokerage, according to the agreement.
Computer printouts seized last November during an IRS search of Blinder Robinson’s headquarters in a Denver suburb show that the brokerage paid $2.6 million for all 125 million shares of Onnix to two brokerages controlled by Kimmes, according to the plea agreement.
The printouts indicated that Blinder Robinson subsequently sold the stock to investors for roughly twice that amount.
Similarly, the printouts showed that Blinder Robinson paid $4 million for all 330 million shares of Executive Capital and later sold the stock to investors for about double that amount, the government said.
Alan C. Jacobson, a lawyer for Blinder Robinson, said his client was unaware of the way that Onnix and Executive Capital were created. He said it was “ludicrous” to infer that the brokerage or Blinder himself had done anything wrong in marketing the stocks.
“Kimmes never once says in these papers that Meyer Blinder knew that there were nominees and that these were bogus companies,” Jacobson said. “There is a reason for it and that is because obviously Kimmes never told him.”
Neither Meyer Blinder nor his firm has been charged with wrongdoing. But the government’s documents claim that Kimmes and Blinder struck an illegal deal in 1985 in which Kimmes would provide sham firms for Blinder to market and that Onnix and Executive Capital were related to that deal.
Shipped to Dutch National
The Los Angeles banks became involved when Kimmes wanted to conceal the money paid to him by Blinder Robinson for the stocks.
According to the plea agreement, the checks for the stocks were usually sent to two offices in Palm Springs run by Kimmes. They were then shipped by overnight courier service to Robert Doorn, a Dutch national living in Switzerland, the government said.
The documents said Doorn deposited the money into accounts that he controlled for Kimmes at Swiss banks. When Kimmes wanted money, he would have Doorn wire funds from the Swiss banks to U.S. accounts with instructions to issue cash to a European citizen to be identified by his passport.
According to the government, a Doorn employee was dispatched from Switzerland to withdraw the cash and turn it over to Kimmes. For his trouble, Doorn received a 10% fee, the documents said.
On many occasions, according to a lawyer familiar with the investigation, the money was withdrawn by a Swiss national who identified himself to some bankers as a movie producer and to others as a real estate developer.
The amounts were considerable, according to the plea. On Oct. 15, 1987, Doorn wired $240,000 to the Union Bank of Switzerland here; on Dec. 3, 1987, he sent $198,000 to First Interstate, and on Feb. 22, 1988, another $240,000 was sent electronically to Security Pacific.
While the 10% fee was expensive for Kimmes, it was much cheaper than paying taxes on the money.
Any time someone deposits or withdraws $10,000 or more in cash at a U.S. financial institution, the institution is required to report the transaction and the person involved to the IRS. The law is designed to prohibit tax evasion and to help the government trace illegal proceeds.
The Kimmes scheme was one way of evading the requirement by having the money withdrawn by a European national, who was outside IRS jurisdiction.
While the Los Angeles banks say they followed IRS rules in reporting the withdrawals, an executive at one institution acknowledged that the scheme demonstrated how laws meant to track illegal earnings can be easily circumvented.
Federal officials believe that Los Angeles has emerged as a major center for money laundering. Recent indictments charged that $1.2 billion in drug money was laundered through the city for Colombian cocaine dealers. The drug dealers shipped the cash to jewelry stores here from around the country in armored trucks.
Jewelry stores frequently deal in large amounts of cash, and banks can exempt some types of businesses from some of the IRS cash-reporting requirements.
Faces Prison Sentence
The lawyer familiar with the Kimmes case, who requested anonymity, said Kimmes laundered about $50 million in this manner through about a dozen U.S. banks. The only banks identified in the plea agreement were the three in Los Angeles.
Despite his deal with the government, Kimmes faces up to 20 years in prison. European governments have frozen several million dollars of his in bank accounts there, and arrest warrants for him have been issued in Switzerland and France.
If the gendarmes come after him another time, he won’t be able to escape on his yacht again. As part of his plea bargain, Kimmes forfeited the $1.1-million craft, called Bigfoot, and a smaller vessel.
