SEC Attempts to Dethrone ‘King’ of Penny Stocks : Securities: Regulators hope a new law will help them prosecute the Orange County man. But David D. Sterns notes he hasn’t been indicted despite a three-year probe.
This time, the Securities and Exchange Commission is out for blood.
Five years ago, the SEC charged David D. Sterns of Laguna Hills with defrauding investors out of more than $600,000. The “penny stock king” of Orange County, the SEC said, duped investors by inflating the value of his company’s assets and whitewashing his resume to remove details such as a personal bankruptcy.
The SEC in 1987 won a consent order--a written promise--from Sterns: He wouldn’t do it again.
“Before the ink on that consent decree was dry,” the commission recently charged, “Sterns . . . embarked on a new fraudulent scheme in the penny stock market.”
The commission contends that Sterns built on his earlier successes and masterminded a $10-million penny stock fraud through a Laguna Hills-based network of companies--known collectively as the Ultimate Business Network--that bilked thousands of investors nationwide, including Olympic swimming champion Mark Spitz.
“I just don’t know how he’s gotten away with it for so long,” said Mike Durham, one of Sterns’ alleged victims. “How does he steal millions of dollars year after year after year?”
Some of the SEC’s critics suggest that Sterns’ business record traces the evolution of the agency’s attitude toward penny stock fraud, a problem so widespread it costs investors $2 billion annually.
Penny stocks, which generally cost less than $3 per share, are used by many legitimate companies to raise the money they need to succeed. But scam companies have issued such low-priced shares with the sole intention of netting their owners a cash hoard.
SEC critics say regulators silently watched penny stock fraud spread like wildfire in the 1980s and are just now rushing to contain it.
One Florida newspaper columnist compared the SEC’s civil sanctions and its effect on penny stock fraud to a “pack of thieves robbing $20,000 from every man, woman and child in Ft. Lauderdale while police stand by, watch and occasionally yell, ‘Stop it.’ ”
The SEC responds that it was never given the tools to fight the fraud until the Securities Enforcement Remedies and Penny Stock Reform Act of 1990 became law last October. The agency does not have the power to file criminal charges against wrongdoers, so the most it could usually do until now was win a consent order in which a defendant vowed not to violate securities laws in the future.
Just last month, the SEC sued Sterns in Los Angeles federal court under the new penny stock act. Sterns is the first Californian, and the second person nationally, to be sued under the act.
Meanwhile, a federal grand jury is considering criminal charges against Sterns, including wire, mail and securities fraud.
Sterns has repeatedly declared his innocence. He points out that after a three-year investigation, he has not been indicted. Federal regulators are so desperate to imprison him, Sterns said, that they once tried to persuade a fundamentalist minister to coax a confession out of him while wearing a concealed tape recorder.
Sterns, it is alleged, hypes himself along with his products. The SEC says he has told investors that he has taken 116 companies public with no regulatory problems, that he was the most quoted person in the Wall Street Journal in the 1970s, that he had been featured on the cover of Fortune magazine, that he owned 1% of the land mass of Panama and that he had helped liberate the Marshall Islands.
“I never said that,” Sterns said. “If you were going to scam people and you did it for a living and on a broad scale, how long could you get away with it making those kinds of statements?”
Though he seems less than charismatic in his nondescript business suits, Sterns sends out family members to do his bidding, including two nephews who were back-to-back student body presidents of Oral Roberts University. They recently pleaded guilty to criminal charges related to Ultimate Business Network dealings and are cooperating with the U.S. Attorney’s Office. Sterns’ brother, Verl--a former minister at the Church of the Open Bible in Klamath Falls, Ore.--is reportedly under investigation too.
Once a certified public accountant for Arthur Andersen & Co. and the president of a manufacturer of recreational vehicles that was listed on the New York Stock Exchange, Sterns has spent the last decade investing other people’s money in some highly irregular products--such as a bandage worn on the biceps or chest that was supposed to suppress the wearer’s appetite.
“I think the only thing that will stop (Sterns) is to put him in prison,” said a federal investigator working on his case. “He didn’t admit guilt in the prior case, and isn’t everyone not supposed to break the law again? What was the worth of that? I guess most people would have been intimidated or stopped after that, but not David Sterns. He just keeps on going.”
A number of small, family owned Southern California firms are sorry today that they ever got involved with UBN. They agreed to be acquired by UBN in exchange for shares of its stock and promises of capitalization. Many contend that both were worthless.
“I got caught in his web, and he bankrupted me,” said Paul Jaswell, whose family’s Huntington Beach rubber seal company fell apart after becoming part of UBN.
“I don’t know how he (Sterns) keeps operating,” Jaswell said.
Scott Stapf, spokesman for the North American Securities Administrators Assn., a coalition of state securities regulators, commended the SEC’s stepped-up efforts in the penny stock area but said the investigations are late in coming.
“The bull has already been through the china shop,” Stapf said. The SEC “did not do a particularly good job of what is referred to internally at the SEC as the garden-variety, low-ball investment fraud. . . . They thought it was beneath them.”
“We don’t authorize people to commit fraud,” said Joseph Goldstein, the SEC’s associate director of enforcement, bristling at the notion that agency somehow encouraged penny stock fraud by laissez faire regulations. “We try to stop it.”
The penny stock act should help.
The SEC can now prohibit anyone proven to have engaged in penny stock fraud from ever running another publicly traded company. Penalties of up to $500,000 per violation are now allowed in penny stock fraud cases. Previously, the SEC could only win penalties in insider trading cases.
The SEC is seeking to ban Sterns from the business world as well as levying a yet-to-be-determined amount of penalties.
Sarah Ackerson, chief of the SEC’s penny stock fraud task force, believes that the penny stock act should make a dent in the sale of low-priced-stock scams, but concedes that it may not stop a repeat offender.
“When you are committed to making money at any price, at any cost, civil sanctions are not going to deter anyone,” Ackerson said.
SEC officials lament that while they believe that someone running a penny fraud stock scam should be in jail, only the U.S. Attorney has the power to decide whether to bring a case before a grand jury. Many times, the SEC isn’t even the investigating agency on penny stock fraud cases.
Sterns has spent nearly six years working in penny stock markets, running companies that federal investigators contend were all shams. Sitting at the head of the table inside the Torrance boardroom of his latest endeavor, the chain-smoking Sterns talked almost nonstop for three hours on everything from federal investigators--”vigilantes with badges”--to what he sees as lack of initiative on the part of American business.
“I see spontaneity missing in our churches, our synagogues, in our relationship with our children. I see it missing in our lovemaking. And it’s definitely not acceptable in business anymore,” Sterns said. “You go into an area like Irvine and, my God, every house is the same, every family looks the same, every family acts the same, every family does the same and it’s almost like we are the living dead.”
One of Sterns’ spontaneous ideas was Le Patch. The adhesive strip--about the size of a postage stamp--was supposed to suppress the wearer’s appetite after it was affixed to skin. The patch supposedly contained a proprietary chemical called Cephatrex that UBN contended would “permeate the skin, enter the bloodstream and occupy part of the brain so it will not receive hunger signals.” Federal investigators maintain that Le Patch was just a bandage.
Sterns agreed to pay $60,000 to settle claims by the California Attorney General’s Office that his companies--two of them publicly traded--misrepresented the patch’s potential, including that it had the approval of the U.S. Food and Drug Administration.
“We were wrong,” Sterns admitted. Sterns’ OmniSource and New Source marketed Le Patch. There were 22,000 distributors in a marketing network that federal investigators said was a pyramid scheme--salespeople were paid just to bring new distributors into the organization.
Protectin, another Sterns product, was supposed to kill the AIDS virus on contact and was first marketed in March, 1988. The SEC says UBN told investors that Protectin “had been developed by Jonas Salk and had been approved by the FDA for use as a chemical agent capable of destroying the AIDS virus.” The FDA, saying UBN’s claims were bunk, seized UBN’s supply of Protectin in 1989.
Federal investigators said Sterns hyped Le Patch and Protectin to attract investors, which in turn drove up stock prices in his companies. Once the products were roundly criticized and the National Assn. of Securities Dealers suspended trading in a few of the companies, the stocks lost their marketability.
The SEC further contends that Sterns concocted a complicated shell game with dummy corporations to sell 36 million shares of worthless stock to the public in several UBN companies. He allegedly helped falsify records, including backdating corporate minutes, in carrying out the alleged scheme.
Sterns denies the charges, although he admits to backdating some corporate documents.
“I let the minutes of some of those corporations slip,” Sterns said. “It’s rather a moot point in that they were largely dormant.” Federal investigators respond that what Sterns was doing was anything but the industry standard.
Sterns has come under fire from so many agencies it is hard to keep track of them all: the SEC, Internal Revenue Service, Department of Corporations, Department of Health Services, U.S. Food and Drug Administration, U.S. Postal Inspection Service, California Attorney General, Orange County District Attorney and the State Board of Equalization are some.
“You wouldn’t believe how they come after you,” said Sterns, complaining that even members of his church and a minister were contacted by federal investigators. “If you associate with me, you get subjected to going to jail. Everybody hears it. My daughters are terrified; my ex-wife is terrified.”
Although he has been scrutinized since the mid-1980s by numerous federal investigators, no criminal charges have ever been lodged. Regulators decline comment on the investigative techniques their agencies have used, though one investigator said “certainly we would employ whatever means possible to get the evidence--whatever legal means, I should say.”
Everyone--including Sterns--believes that an indictment is on its way. “An indictment’s coming,” Sterns said. “I don’t think a conviction is coming.”
The question remains why it has taken so long for regulators to do something about Sterns, if everything they say about him is true. The SEC supposedly caught him in violation of securities laws in 1986, won a court order against him and then watched an alleged $10-million fraud run its course.
U.S. investigators defend the pace of the Sterns case, saying it is very complex and that they must painstakingly detail all money lost by investors if they are to see that he gets a lengthy prison sentence.
“It discourages me it takes so long because I see the additional public injury he has inflicted, but what can I do?” one investigator asked.
Sterns, for his part, said his reputation is ruined even though he has never been convicted of anything more serious than a traffic ticket.
“Fraud is a premeditated act of stealing, isn’t it?” Sterns asked. “When you have all of the records and you’ve looked at them for two years, that shouldn’t be hard to prove. . . . Let me turn it around. Wouldn’t it be a tragedy . . . if I were innocent, 100% innocent? I know it’s hard for you to imagine, but if I were, wouldn’t it be a tragedy?”
THE TRAIL OF ORANGE COUNTY’S PENNY STOCK KING
The Securities and Exchange Commission claims David Sterns masterminded a $10-million penny stock fraud through a Laguna Hills-based network of companies--known collectively as the Ultimate Business Network--that bilked thousands of investors nationwide, including Olympic swimming champion Mark Spitz. Sterns disputes the accusations, adding that he has not been charged with any crime. The following is a chronology of his career:
March, 1991: The SEC files a lawsuit charging Sterns with securities violations at UBN. A federal judge places a freeze on Sterns’ assets and orders his remaining empire into receivership.
September, 1990: Sterns and two UBN firms agree to pay $60,000 to settle claims by the California attorney general’s office that they made misrepresentations about Le Patch, including that it had FDA approval.
Late 1989: Sterns becomes president of Huntor Group in Torrance, parent of a feminine hygiene products manufacturer.
March, 1989: Officials of six regulatory agencies raid UBN offices and haul away two truckloads of records and computers.
Early 1989: The FDA seizes UBN’s remaining supply of Protectin, a liquid disinfectant said to kill the AIDS virus on contact.
December, 1988: New Source Ltd., the UBN company selling Le Patch, files for Chapter 11 bankruptcy protection from creditors.
Late 1988: The attorneys general of California and Texas order UBN to stop advertising Le Patch. The U.S. Food and Drug Administration orders UBN to withdraw the patch from the market.
March, 1988: Le Patch and Protectin are introduced by member firms of the Ultimate Business Network.
1987: Without admitting guilt, Sterns signs an SEC consent order promising not to violate securities laws.
1986:
* The commissioner of securities in Wisconsin issues a warning against Sterns, claiming he is selling unregistered stock there.
* Sterns creates the Ultimate Business Network in Laguna Hills.
* The SEC files suit charging Sterns with securities violations at CoElco, a Fountain Valley mergers and aquisitions firm.
1985:
*CoElco files for Chapter 11 bankruptcy protection from creditors.
* Securities Exchange Commission suspends trading of CoElco stock for 10 days to investigate reports that the company is misleading investors.
1983: Sterns becomes president of CoElco Ltd.
1979-83: Sterns heads American Business Corp., Fountain Valley, a consulting firm.
1979: Sterns files for personal bankruptcy.
1971-78: Sterns joins Elixir Industries of Gardena, a manufacturer of recreational vehicle parts, as executive vice president of finance and administration, and in 1974 is named president and CEO.
1961-71: Sterns works as an accountant for Arthur Andersen & Co, Chicago.
