45 Arrested in FBI Sting Aimed at Stock Bribery

At least 45 stock promoters and brokers learned the hard way Thursday that what appeared to be a new Manhattan brokerage firm with wealthy clients was actually a front for undercover FBI agents intent on catching stock manipulators who bribe brokers to sell Nasdaq and penny stocks.

Federal agents fanned out around the country Thursday, arresting brokers, executives of small publicly traded companies and public relations people who promote stocks, charging that they made illegal payments to the undercover agents to sell stocks to customers.

The sting, the first of its kind by the FBI, appeared to give dramatic confirmation to something many investors and securities regulators had long suspected: that bribing brokers to sell stock in many small, thinly capitalized companies is widespread. The purpose, federal prosecutors said, is to sell stock of dubious value--often in shell companies with little or no real assets--thus running up its price and enabling insiders who hold the stock to sell at big profits.

“We didn’t have to wait around very long for a lot of people to do these deals,” said James K. Kallstrom, the assistant director in charge of the FBI’s New York office. “We had people beating our door down.”

Mary Jo White, the U.S. attorney in Manhattan, said the bribes paid to undercover agents amounted to as much as 40% of the value of the stock to be sold to customers. No investors actually got the stock, however, as the FBI’s fake brokerage firm didn’t really have any customers.

Instead, the brokerage firm wound up with the stock, for which it had to invest more than $500,000. The shares are being held as evidence and are unlikely ever to be sold, according to officials of the Securities and Exchange Commission and NASD Regulation who participated in the investigation.

Prosecutors confirmed that the market value of most of the stock had gone down, but they declined to give a specific figure on how badly the government’s evidence portfolio was doing.

The bribes collected by the fake brokers, some in cash and some in stock, were estimated to be worth more than $100,000 when received.

White called the wrongdoing “pervasive” and said the sting had uncovered “just the tip of the iceberg.” She said the undercover operation was continuing and that more arrests were expected. “The evidence revealed . . . a sordid picture of greed and indifference to the investing public,” she said.

The decision to resort to criminal prosecution by the FBI also underscores the difficulty the SEC and other regulatory agencies, such as the National Assn. of Securities Dealers, have had in trying to ban illegal penny stock operators permanently from the securities business.

The SEC and NASD can only file civil charges and penalties and, despite court injunctions--orders issued by the NASD banning these individuals from the business--the criminals keep reappearing. The charges stemming from the sting operation include contempt of court against several of the individuals for violating such injunctions.

Prosecutors made public 19 criminal complaints naming 45 individuals and said more will be issued this week. All the stocks were either listed on Nasdaq or traded over the counter via an electronic bulletin board.

The SEC also filed civil charges against 28 of the 45 individuals.

None of the brokers who were charged currently works for any of the biggest Wall Street brokerage houses.

In a typical transaction described in the complaint, one suspect, Cary Cimino, formerly a broker for Prudential Bache Securities, allegedly solicited the undercover brokerage firm to help sell 45,000 shares of Continental Orinoco Co., whose shares are traded via the electronic bulletin board. In a taped conversation, Cimino allegedly offered the FBI agents a choice of how they would receive an illicit payment.

“The first choice is, I would pay you 40 in stock . . . “ Cimino allegedly said, “or I’ll pay you three-five in Benjamin, you know what I’m saying?”

The complaint said agents interpreted that to mean they would receive a payment of 40% of the transaction price in stock or 35% in cash; a likeness of Benjamin Franklin is on the $100 bill. Ultimately, stock worth 40% of the value of the stock to be sold to customers was transferred to an account controlled by the agents. Cimino could not immediately be reached for comment.

Several individuals were also charged with making or receiving illicit payments to sell the stock of San Diego Bancorp, a small Los Angeles-based bank holding company that has since changed its name.

The executives who were charged with trying to promote their company’s stock illegally included the chairmen of Golf Ventures Inc. of Utah, Phoenix-based Princeton American Corp. and Command Credit Corp. of Garden City, N.Y.

Because the operation is continuing, Kallstrom declined to disclose many details about the fictitious brokerage firm, including its name and exact location.

The individuals arrested were expected to be arraigned before federal magistrates. If convicted, they face maximum sentences ranging from five to 50 years and fines of up to $250,000 for each criminal count.