SEC’s Khan Suit a Manual for Stock Manipulators

Lawsuits are serious business, but they also often make for interesting, and sometimes even entertaining, reading.

So it is with a case filed last week by the Los Angeles office of the Securities and Exchange Commission against one Rafi M. Khan, a 47-year-old Southland stock broker and promoter whose name has been well-known to securities regulators here and abroad since the mid-1980s.

The suit, 27 pages in length, charges Khan with orchestrating fraudulent trading schemes that helped fuel spectacular gains in two stocks: Future Communications in 1993 and L.L. Knickerbocker in 1995.

The allegations, which read like a how-to guide for budding stock manipulators, are exactly what the beaten-up market for smaller stocks doesn’t need right now: another reminder of how easy it can be for a determined individual, or brokerage, to rig trading in smaller shares, to the ultimate detriment of uninformed investors.

Khan, of course, is innocent until proven guilty. He has been spending much of his time recently in the country of Dubai, on the Persian Gulf, but is expected to return soon to Los Angeles, where he worked as a broker and stock promoter from 1988 through at least 1995.

His attorney, Saied Kashani, said Friday that although he had not yet seen the SEC’s suit, “If the article [in The Times on Friday detailing the suit] is accurate, then Rafi Khan has done nothing wrong. And we will prove that.”

While the SEC alleges that Khan, in the case of the now-defunct Future Communications, illegally earned $432,500 on trades by using fraudulent tactics to help push the stock from $6.50 to $27.25 a share from June through August of 1993, his attorney has a much different view of Khan’s experience with Future Communications.

“Rafi personally bought a lot of shares of Future Communications, and his stock went down with everyone else’s” when the stock collapsed later in 1993 as the company filed for Bankruptcy Court protection, Kashani said.

“He owned it to the very end. How can there be wrongdoing when he held the stock?” Kashani asked.

Khan’s purported losses, too, remain to be proved. In the meantime, the SEC’s suit goes into great detail in mapping out the alleged manipulation schemes involving cable TV firm Future Communications and L.L. Knickerbocker, which remains a going concern, marketing dolls and other collectibles.

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Some of the charges make Ivan Boesky--one of the infamous criminal figures in the SEC’s bust of takeover-stock manipulators in the late 1980s--look like a piker.

On April 29, 1993, Khan and an associate began buying Future Communications stock and continued to do so until, by Aug. 30, “they had accumulated and placed [with investors] over 90%” of the stock’s float, meaning the shares available for public trading, the SEC claims.

How was this possible? In April 1993, about half of Future Communications’ 2.4-million-share float was held by retail clients of a Dallas brokerage, the SEC says. In June of that year most of the operations of that firm were transferred to a Dallas branch office of Reynolds Kendrick Stratton, the then-Beverly Hills-based brokerage where Khan worked.

Khan, the SEC alleges, instructed the Dallas branch manager in July and August--as Future Communications’ shares soared--that there was to be “no net selling” of the stock.

What does that mean? As a Nasdaq market maker in Future Communications, Reynolds Kendrick was supposed to stand ready to buy stock from retail investors who wanted to sell it.

But Khan’s instruction to the Dallas branch manager, the SEC says, was that no shares were to be sold back to Reynolds Kendrick. The only way a client could get out of the stock was if the branch manager could find another retail buyer to take the shares.

A “no net selling” policy is improper to say the least. Unfortunately, more than a few individual investors have been victimized by it over the years, generally by unscrupulous penny-stock brokerages.

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What’s the tip-off? If a broker tells you that you simply can’t sell a stock--or tries every which way to talk you out of selling, no matter how much you insist--there’s a very good chance that the broker is under a no-net-selling order and thus can take your stock only if he can find some other investor (usually, some other sucker) to buy it.

Khan imposed the no-net-selling rule, the SEC alleges, to keep Future Communications’ stock price on the rise.

At the same time, the SEC says, the flamboyant Khan was engaged in a campaign to lure new buyers to Future Communications by aggressively touting the stock in written research reports and oral communications to clients, prospective clients and brokers.

Some specifics, according to the SEC:

* Khan’s buy recommendations “touted Future Communications as an ‘undiscovered gem,’ yet during the same period he privately stated to an assistant that Future Communications was a ‘worthless’ company.”

* Khan told clients that “Billy Bob’s Country Countdown,” a one-hour country and western music TV show, “would generate substantial earnings for Future Communications, yet he knew but failed to disclose that the creator of Billy Bob’s disputed Future Communications’ ownership” of the show.

* Khan made a series of “rapidly increasing earnings-per-share projections” for Future Communications in the summer of 1993. In June, he forecast that the company would earn $2 or more; by July 30 the estimate was $5 or more; by mid-August, the number was $6 or more, the SEC says.

But Khan’s earnings estimates “bore no logical relationship to Future Communications’ earnings or business history,” the SEC states.

(Of course, some investors might argue that the earnings estimates some analysts are doling out today for Internet-related stocks likewise have no basis in fact.)

The SEC also contends that Reynolds Kendrick directly rigged the bidding for Future Communications shares--in other words, the prices that investors saw in the marketplace.

By “consistently” raising its bid price for Future Communications within the electronic Nasdaq trading system (so that other brokers saw that price on their computer screens), Reynolds Kendrick was able to maintain the appearance that demand for the stock was robust, the SEC suggests.

Approximately 82% of the time, from June 30 to Aug. 30, 1993, Reynolds Kendrick had the exclusive high bid, or shared high bid, for Future Communications, the SEC says. That was true “even when Reynolds Kendrick had no legitimate reason for such high bidding,” the agency alleges.

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There is much more in the SEC suit regarding both Future Communications and L.L. Knickerbocker (whose stock now trades for $2.88, about one-fifth of the peak price it reached during Khan’s alleged manipulation in 1995), but you get the idea.

What the SEC does not attempt to explain is how, at least in the case of Future Communications, Khan could possibly expect to extricate himself from a sham company in which he controlled or directed most of the stock float.

Nor is there any hint of what Khan has been up to lately, although in brokerage circles his name has been linked to other small stocks since 1996.

Some investors may also wonder why it takes the SEC so long to bring a case like this. Joel Kornfeld, one of the SEC’s attorneys on the case, says simply, “In general, manipulation cases are terribly complicated to investigate.

“There were a lot of suspicious things going on [with the two stocks], but it’s a long way from ‘suspicious trading’ to filing a lawsuit,” he said.

And given the statements by Khan’s attorney, this case also may be a long way from being resolved.

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Tom Petruno can be reached by e-mail at tom.petruno@latimes.com.