A three-month investigation reveals that organized crime has made shocking inroads into the small-cap stock market

In the world of multimedia components, Phoenix-based SC&T International Inc. has carved out a small but significant niche. SC&T's products have won raves in the trade press, but working capital has not always been easy to come by. So in December, 1995, the company brought in Sovereign Equity Management Corp., a Boca Raton (Fla.) brokerage, to manage an initial public offering. ''We thought they were a solid second- or third-tier investment bank,'' says SC&T Chief Executive James L. Copeland.

But there was much about Sovereign that was known to only a very few. There were, for example, the early investors, introduced by Sovereign, who had provided inventory financing for SC&T. Most shared the same post office box in the Bahamas. ''I had absolutely no idea of who those people were,'' says Copeland. He asked Sovereign. ''I was told, 'Who gives a s---. It's clean money.''' The early investors cashed out, at the offering price of $5, some 1.575 million shares that they acquired at about $1.33 a share--a gain of some $5.8 million.

By mid-June, SC&T was trading at $8 or better. But for SC&T shareholders who did not sell by then, the stock was an unmitigated disaster. Sovereign, which had handled over 60% of SC&T's trades early in the year, sharply reduced its support of the stock. Without the backing of Sovereign and its 75-odd brokers, SC&T's shares plummeted--to $2 in July, $1 in September, and lately, pennies. The company's capital-raising ability is in tatters. Laments Copeland: ''We're in the crapper.''

A routine case of a hot stock that went frigid. Or was it? Copeland didn't know it, but there was a man who kept a very close eye on SC&T and is alleged by Wall Street sources to have profited handsomely in the IPO--allegedly by being one of the lucky few who sold shares through a Bahamian shell company. His name is Philip Abramo, and he has been identified in court documents as a ranking member, or capo, in the New Jersey-based DeCavalcante organized crime family.

James Copeland didn't know it. Nobody at SC&T could have dreamed it. But the almost unimaginable had come true: Copeland had put his company in the hands of the Mob.

Today, the stock market is confronting a vexing problem that, so far, the industry and regulators have seemed reluctant to face--or even acknowledge. Call it what you will: organized crime, the Mafia, wiseguys. They are the stuff of tabloids and gangster movies. To most investors, they would seem to have as much to do with Wall Street as the other side of the moon.

But in the canyons of lower Manhattan, one can find members of organized crime, their friends and associates. How large a presence? No one--least of all regulators and law enforcement--seems to know. The Street's ranking reputed underworld chieftain, Abramo, is described by sources familiar with his activities as controlling at least four brokerages through front men and exerting influence upon still more firms. Until recently, Abramo had an office in the heart of the financial district, around the corner from the regional office of an organization that might just as well be on Venus as far as the Mob is concerned--the National Association of Securities

Dealers, the self-regulatory organization that oversees the small-stock business.

A three-month investigation by BUSINESS WEEK reveals that substantial elements of the small-cap market have been turned into a veritable Mob franchise, under the very noses of regulators and law enforcement. And that is a daunting prospect for every investor who buys small-cap stocks and every small company whose stock trades on the NASDAQ market and over the counter. For the Mob makes money in various ways, ranging from exploiting IPOs to extortion to getting a ''piece of the action'' from traders and brokerage firms. But its chief means of livelihood is ripping off investors by the time-tested method of driving share prices upward--and dumping them on the public through aggressive cold-calling.

In its inquiry, BUSINESS WEEK reviewed a mountain of documentation and interviewed traders, brokerage executives, investors, regulators, law-enforcement officials, and prosecutors. It also interviewed present and former associates of the Wall Street Mob contingent. Virtually all spoke on condition of anonymity, with several Street sources fearing severe physical harm--even death--if their identities became known. One, a former broker at a Mob-run brokerage, says he discussed entering the federal Witness Protection Program after hearing that his life might be in danger. A short-seller in the Southwest, alarmed by threats, carries a gun.

Among BUSINESS WEEK's findings:
-- The Mob has established a network of stock promoters, securities dealers, and the all-important ''boiler rooms''--a crucial part of Mob manipulation schemes--that sell stocks nationwide through hard-sell cold-calling. The brokerages are located mainly in the New York area and in Florida, with the heart of their operations in the vicinity of lower Broad Street in downtown Manhattan.

-- Four organized crime families as well as elements of the Russian Mob directly own or control, through front men, perhaps two dozen brokerage firms that make markets in hundreds of stocks. Other securities dealers and traders are believed to pay extortion money or ''tribute'' to the Mob as just another cost of doing business on the Street.

-- Traders and brokers have been subjected in recent months to increasing levels of violent ''persuasion'' and punishment--threats and beatings. Among the firms that have been subject to Mob intimidation, sources say, is the premier market maker in NASDAQ stocks--Herzog, Heine, Geduld Inc.

-- Using offshore accounts in the Bahamas and elsewhere, the Mob has engineered lucrative schemes involving low-priced stock under Regulation S of the securities laws. Organized crime members profit from the runup in such stocks and also from short-selling the stocks on the way down. They also take advantage of the very wide spreads between the bid and ask prices of the stock issues controlled by their confederates.

-- The Mob's activities seem confined almost exclusively to stocks traded in the over-the-counter ''bulletin board'' and NASDAQ small-cap markets. By contrast, New York Stock Exchange and American Stock Exchange issues and firms apparently have been free of Mob exploitation.

-- Wall Street has become so lucrative for the Mob that it is allegedly a major source of income for high-level members of organized crime--few of whom have ever been publicly identified as having ties to the Street. Abramo, who may well be the most active reputed mobster on the Street, has remained completely out of the public eye--even staying active on the Street after his recent conviction for tax evasion.

-- Mob-related activities on the Street are the subject of inquiries by the FBI and the office of Manhattan District Attorney Robert M. Morgenthau, which is described by one source as having received numerous complaints concerning mobsters on the Street. (Officials at both agencies and the New York Police Dept. did not respond to repeated requests for comment.)

-- Overall, the response of regulators and law enforcement to Mob penetration of Wall Street has been mixed at best. Market sources say complaints of Mob coercion have often been ignored by law enforcement. Although an NASD spokesman says the agency would vigorously pursue reports of Mob infiltration, two top NASD officials told BUSINESS WEEK that they have no knowledge of Mob penetration of member firms. Asked to discuss such allegations, another high NASD official declined, saying: ''I'd rather you not tell me about it.''

-- The Hanover, Sterling & Co. penny-stock firm, which left 12,000 investors in the lurch when it went out of business in early 1995, is alleged by people close to the firm to have been under the control of members of the Genovese organized crime family. Sources say other Mob factions engaged in aggressive short-selling of stocks brought public by Hanover.

-- Federal investigators are said to be probing extortion attempts by Mob-linked short-sellers who had been associated with the now-defunct Stratton Oakmont penny-stock firm.

Mob manipulation has affected the markets in a wide range of stocks. Among those identified by BUSINESS WEEK are Affinity Entertainment, Celebrity Entertainment, Beachport Entertainment, Crystal Broadcasting, First Colonial Ventures, Global Spill Management, Hollywood Productions, Innovative Medical Services, International Nursing Services, Novatek International, Osicom Technologies, ReClaim, SC&T, Solv-Ex, and TJT. Officials of the companies deny any knowledge of Mob involvement in the trading of their stocks, and there is no evidence that company managements have been in league with stock manipulators. These stocks were allegedly run up by Mob-linked brokers, who sometimes used force or threats to curtail short-selling in the stocks. When support by allegedly Mob-linked brokerages ended, the stocks often suffered precipitous declines--sometimes abetted, traders say, by Mob-linked short-sellers. The stocks have generally fared poorly (table, page 99).

Not all of the stocks were recent IPOs, and they were often taken public by perfectly legitimate underwriters. International Nursing, for example, went public at $23 in 1994 and was trading at $8 in early 1996 before falling back to pennies. Short-sellers who attempted to sell the shares earlier this year were warned off--in one instance by a Mob member--market sources assert. International Nursing Chairman John Yeros denies knowledge of manipulation of the stock.

What this all adds up to is a shocking tale of criminal infiltration abetted by widespread fear and silence--and official inaction. While firms and brokerage executives who strive to keep far afield of the Mob often complain of NASD inaction, rarely do such people feel strongly enough to share their views with regulators or law enforcement. Instead, they engage in self-defense. One major brokerage, which often executes trades for small-cap market makers, keeps mammoth intelligence files--to steer clear of Mob-run brokers. A major accounting firm keeps an organized-crime expert on the payroll. His duties include preventing his firm from doing business with brokerages linked to organized crime and the Russian Mob.

In the pages that follow are the results of BUSINESS WEEK's investigation.

At about 3 o'clock in the afternoon of Sept. 25, 1996, three men appeared on the 28th floor of 120 Broadway, Manhattan. They walked into the offices of Sharpe Capital Inc., a dealer in over-the-counter stocks. They were burly. ''Like lumberjacks,'' said an eyewitness soon after. A gun was in the belt of one of the men.

The confidential police report of the incident (Complaint No. 10530, First Precinct) reads as follows:

''At that point they asked the victim what he was trading in. Then they slapped him in the head and stated again, 'What the f-- are you trading in.' Then he slapped the victim in the head again.''

A witness recalls one of the men saying: ''Don't f-- with our stock.'' The stock: Crystal Broadcasting Inc. After the men left, Sharpe stopped trading in Crystal Broadcasting.

To the New York Police Dept., the incident at Sharpe was about as serious as a scuffle over a parking space. A police source says that the assault, categorized as a low-grade misdemeanor at best, is considered closed and is not being investigated because the victim was not seriously hurt, no gun was displayed--even though one was observed--and the perpetrators were unknown. (However, one witness ruefully notes, police did nothing to ascertain their identity--such as examine a security-camera surveillance tape.) Sharpe's CEO, Lawrence Hoes, declined to discuss the matter.

But BUSINESS WEEK learned that the assault at Sharpe was not an isolated incident. Rather, it was part of a systematic pattern of intimidation. By eliminating competing market makers and allowing only cooperating brokers to bid on stocks, the result is a kind of rigged auction--with the prices where desired, and the spreads between bid and ask prices kept as wide as possible. In Street parlance, this process of rigging the market in a stock is known as ''boxing'' a stock. It is part of the lexicon of the Mob's dominion on Wall Street (page 99).

The box is the heart of most stock-manipulation schemes. In the case of Crystal, the trader at Sharpe was suspected of ''cracking the spread.'' According to market sources who were familiar with the trading in Crystal that day, Sharpe was blamed, in effect, for doing what a market maker is supposed to do--get the best possible price for its customers and keeping the spreads as narrow as possible. During the day, Crystal traded as low as 4, well below the 5 1/8 closing price of the day before, and the spreads narrowed as well, to a relatively reasonable 4 3/8 bid and 4 7/8 ask. Sharpe was blamed for that benign--to most people--market action.

In the weeks following the Sharpe incident, Crystal shares were trading at the kind of spreads that can only happen when the market is tightly controlled. If you buy it from a dealer, you pay the ask price, $3.50. But when you sell it, you get the bid--56.2 cents. (Crystal's president, Joseph Newman, said he had no knowledge of coercion of market makers in his stock.)

Sometimes the maneuvering involved in creating and exploiting the box can be as subtle as a bison in a china shop. One West Coast investor, who requested anonymity, says that brokers at a small New York firm, Monitor Investment Group, convinced him that two small-cap stocks--International Nursing Services and Beachport Entertainment--were about to be pushed upward. Says the investor: ''They said they had a handle on all this stock. They said they'd run it up and get me out of it in a week.''

So sometime around last New Year's Day, he bought warrants and a big block of the stock--100,000 shares of International Nursing and 85,000 of Beachport. When he tried to sell, he says, his brokers flatly refused. The shares, which had started heading southward almost from the moment he bought them, plummeted. They're now worth one-fifth of what he paid. Monitor Chairman William F. Palla denies the firm was involved in stock manipulation but concedes a broker may have promised a runup but not really meant it.

Sometimes, of course, thinly traded stocks can be run down by aggressive short sellers, and the Mob is alleged by Street sources to have profited from that as well. One target of investigators, sources say, is a coterie of brokers formerly associated with the defunct penny-stock brokerage of Stratton Oakmont. Sources familiar with the investigation say that authorities are exploring charges that some of these brokers, after Stratton's demise, may have extorted money from their former colleagues in the business--allegedly threatening to short-sell stocks underwritten by those firms. According to sources, the Stratton brokers allegedly shared their profits with a member of a New York crime family.

Among the trading being investigated, sources say, are stocks underwritten by a penny-stock firm called State Street Capital Markets. Stocks brought public by the New York-based firm--Fun Tyme Concepts, U.S. Bridge of N.Y., and Cable & Co. Worldwide--were pummeled in the market last August, and trading in the stocks is allegedly being probed. At the time, State Street maintained that its shares were victimized by concerted short-selling. State Street officials did not return phone calls, and Stratton officials could not be reached for comment.

First Colonial Ventures Ltd. is a minor venture-capital firm whose stock trades on the OTC bulletin board--so small that it is not required to file more than token disclosures with the Securities & Exchange Commission. But for market makers in small-cap stocks, First Colonial looms huge. It is an object lesson: When the Mob speaks, market makers obey.

The incidents took place early in October, one week after the assault at Sharpe. First came a beating. A trader at Naib Trading Corp. in Fort Lauderdale was summoned to the office of a man by the name of Roy Ageloff. The trader has told associates that Ageloff had beaten him once before with a nail-pierced baseball bat. This time, he said, Ageloff left the room. Then a 400-pound hoodlum knocked him down and kicked him while he was on the floor. The message: Stay away from First Colonial.

The trader at Naib was not the only one to suffer ''persuasion'' over First Colonial. Sources say that four other firms were approached with warnings to cease trading in the stock. To be sure, it was not a total success. There was one rebuff: A market maker in the little town of Hurst, Tex., Anthony Elgindy of Key West Securities Inc., says he ignored warnings that traders who did not comply would soon be ''facing the ceiling''--and has received numerous threatening phone calls since then. But at two other market makers, the intimidation worked. They ceased making a market in First Colonial.

The market makers dropping the stock were William V. Frankel & Co. in Jersey City, N.J., and the biggest name in NASDAQ stocks: Herzog, Heine, Geduld. Sources say traders at both firms quit trading the stock after receiving menacing visits at their offices. ''We decided we shouldn't get involved in a stock like that,'' says Herzog's head trader, Irwin Geduld. Was anyone at his firm threatened? ''We weren't,'' said Geduld. ''Someone else was.'' (A Frankel trader, who declined to give his name, says: ''We have no comment whatsoever about First Colonial Ventures.'') Even a brokerage that was not a market maker, D.L. Cromwell Investments Inc. in Boca Raton, received a visit from a thug, a source says. The visitor left after demanding, and being shown, proof that the firm was not a short-seller in the stock. Cromwell officials declined comment.

Sources say that traders who caved in to coercion later received expensive bottles of liquor with a note that read: ''You've made a friend.'' But the market makers who dropped First Colonial were making no new pals among investors. Since the incident, the ask price paid by the public for buying First Colonial stock has climbed--from a low of $1.13 on Oct. 2 to as high as $4.13 in recent trading. But the bid price that the public gets when selling the stock back to the Street has been far less buoyant. The bid promptly rose from a low of 87 cents on Oct. 2 to $1.50 and has stayed at about that level, even as the ask price has skyrocketed to almost three times that figure. (On Oct. 4, according to a letter sent to market makers obtained by BUSINESS WEEK, the NASD launched an inquiry into the dropping of First Colonial stock by market makers. The NASD declined comment on the investigation.)

Who was behind the wave of intimidation over First Colonial? NASDAQ trading figures point toward a New York-based firm called PCM Securities Ltd. PCM was the largest market maker in First Colonial in September, with 48% of the trades. By October, however, this rose to 75%. PCM completely dominated the market in First Colonial.

Although he is not listed in NASD records as a control person or even as an employee of PCM--or of any other brokerage--Street sources say that the power behind PCM is the 37-year-old Ageloff. He did not respond to numerous messages left at PCM's office in Boca Raton. An employee there said Ageloff nowadays spends most of his time there, punctuated by frequent visits to New York. Asked about Ageloff, Steven Edelson, PCM's principal, denied that Ageloff has any role in the firm and says he has met him only once. Edelson had no comment on its trading in First Colonial, and First Colonial President Murray Goldenberg said he was ''shocked'' to hear reports of intimidation of market makers.

(Continued on next screen)
By Gary Weiss


Updated June 14, 1997 by bwwebmaster
Copyright 1996, Bloomberg L.P.
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