SEC Goes After Microcap Scams Across the U.S.

Regulators accused 82 people and companies Tuesday of earning more than $12 million in illicit profits on a series of microcap stock scams, including several in Orange County.

The crackdown, in which the Securities and Exchange Commission filed 26 complaints and other enforcement actions across the country, targeted an array of people--from promoters who touted the stocks to boiler-room-style brokerages to accountants and lawyers who allegedly filed bogus documents.

Orange County companies charged were Del Mar Financial Services of Irvine and Kanakaris Communications Inc. of Costa Mesa.

Whether regulators will collect on any court judgments they win remains to be seen. The SEC has collected about half the judgments and penalties it has imposed in the last 10 years.

SEC officials said the sweep marks their second major offensive against microcap fraud.

Richard H. Walker, the SEC’s enforcement chief, said the market for microcap stocks “is too vital to our nation’s small businesses to allow it to be spoiled by a corrupt few.”

In one case filed in Los Angeles federal court, the SEC accused a Newport Beach couple of insider trading, falsifying financial documents and looting the assets of American Telephone Plus Data Inc., a publicly traded Costa Mesa telecommunications company.

The complaint says William Posnett Lynas III and Janeen Hauxhurst-Lynas misappropriated at least $900,000 for such personal expenses as a $46,000 GMC Suburban and vacations in Hawaii, New York and Europe.

Regulators said the couple also made $400,000 selling stock in the company, which they controlled, without disclosing their accounting practices.

American Telephone Plus Data, which no longer has a telephone number in Orange County, was listed as having numerous fictional assets, the SEC said. The agency cited as an example licensing rights to a fax system--valued on the corporate books at $10 million--that never existed.

The Lynases could not be reached for comment.

SEC officials also accused Irvine brokerage Del Mar Financial of fraudulent schemes involving shares in Comparator Systems Corp., a maker of fingerprint-identification systems. The Newport Beach company’s stock rose thirtyfold in record trading during three days in May 1996 before collapsing.

Comparator later settled SEC charges that it inflated the value of its assets and defrauded investors of $2.9 million.

Federal regulators charged Tuesday that Del Mar and its clearing firm, Private Brokers Corp. in Dallas, lowered the prices that customers received for Comparator stock that they sold to Del Mar. The brokerage did so to erase more than $800,000 in trading losses and restore its net capital, the SEC said.

According to the SEC charges, Del Mar changed the order tickets without clients’ permission and faxed the orders to the clearing firm, which had initially suggested the changes. The defendants hoped the victims would not notice the changes, the SEC said.

Del Mar President Kevin Conway Dills also was accused of receiving kickbacks. Jai Chaudhuri, a Utah resident who is also facing SEC charges, was accused of buying Comparator stock cheaply, then selling the shares to Del Mar at an inflated price. The regulators charge that Chaudhuri gave a portion of the profits to Dills.

Dills could not be reached for comment Tuesday. David Harris, a lawyer for Private Brokers Corp., declined comment.

Brian Ochs, an SEC assistant enforcement director, said the agency did not allege any wrongdoing by Comparator in the latest case.

The SEC also charged Kanakaris, which says it is an Internet technology firm, with stock fraud. Chief Executive Alexander Frank Kanakaris and sales President David R. Valenti were named in the complaint.

It alleges that from January 1997 through January 1998 Kanakaris and Valenti fraudulently sold Kanakaris shares to investors in several states, misrepresented the company’s financial condition and its operations and claimed that the tiny firm had a joint-venture agreement with software giant Microsoft Corp.

Also named in the complaint is Las Vegas attorney Shawn F. Hackman, who was charged with preparing a false offering circular for Kanakaris, selling shares based on the document and keeping a “substantial portion” of the proceeds.

The company, Kanakaris and Valenti agreed to settle the action, without admitting any wrongdoing, by promising to abide by federal securities laws. Kanakaris and Valenti also agreed to pay civil penalties of $25,000 each.

Kanakaris, in the 87th press release issued in the past 148 trading days, said late Tuesday that it plans to become a fully reporting public company within 10 days. Company officials also said they have severed ties with Hackman, who could not be reached for comment.

In another Orange County fraud suit, the SEC accused Lambert D. Vander Tuig of Coto de Caza of manipulating the stock of Fastlane Footwear Inc., a small Michigan shoemaker, in 1996.

The SEC said that Vander Tuig, a former licensed securities professional, had agreed to help Fastlane raise $3 million through a public stock sale.

Vander Tuig drove up the stock price by 56% to $4.88 per share through a series of sham trades, the SEC said, then “proceeded to dump the stock, selling 103,767 shares to retail investors, causing the price of the stock to plummet nearly 75% to $1.25 per share.”

The SEC seeks a court order barring him from committing fraud again, the return of unspecified illegal profits and unspecified interest and fines.

Vander Tuig did not return phone calls seeking comment.

In another Los Angeles case, regulators accused 15 people and companies of a classic “pump-and-dump” scheme, in which the defendants allegedly propped up their stock with fraudulent trades and false promotions on the Internet, then sold it at inflated prices, reaping more than $1 million.

SEC officials said Edward A. Durante and Burton G. Vishno--both of whom have been convicted previously of fraud or related felonies--worked with other promoters to corner the market on shares of Los Angeles-based PSA Inc. and manipulated the price by matching buy and sell orders.

At one point, the stock soared from about 50 cents a share to $5 in less than two weeks, the SEC said.

When the defendants prepared to then dump the stock, SEC attorney Michael Dicke said, Durante and others set up an unregistered broker-dealer (in the same building) called First New Haven to market the shares and hired a San Diego promoter to hawk them on the Internet.

Lawyers for Durante and Vishno did not return phone calls Tuesday.

PSA Inc. is not named as a defendant in the case.

Staff writer P.J. Huffstutter and Bloomberg News contributed to this report.