BusinessWeek: November 9, 1998

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 Finance: INVESTIGATIONS

THE CASE OF THE GYM BAG THAT SQUEALED
An accidental find in New York tips the Feds to a stock scam

It was the kind of oversight that is, usually, pretty harmless. A "Marina Shap" failed to pay the rent on her cubicle at Manhattan Mini-Storage in the SoHo section of New York. When the manager opened the bin last January, however, he found an intriguing assortment of knickknacks: Two 9-millimeter pistols, a 12-gauge shotgun, and, the FBI asserts in a court filing, "various documents in a box and gym bag."

The fluke discovery of the guns was hardly earth-shattering in gun-happy New York. But the documents drew the attention of the FBI's Russian organized crime squad. According to a sealed criminal complaint filed with the U.S. District Court in Brooklyn and obtained by BUSINESS WEEK, the FBI maintains that the mini-storage document trove sets forth a tale of stock manipulation and money laundering. Allegedly involved are more than 30 foreign shell companies and bank accounts that, the complaint maintains, were used to launder the proceeds from illegal stock sales during 1994 and 1995.

MONEY LAUNDERING. The feds are charging that the stock scheme involves two individuals--Gennady "Gene" Klotsman and Felix Sater--who they say ran a now-defunct micro-cap brokerage, White Rock Partners & Co., which later changed its name to State Street Capital Markets. Both are charged with stock manipulation and money laundering. The lawyer listed in the court docket as Klotsman's attorney, Michael W. Kahn, did not respond to a request for comment. Klotsman was arrested in September and is in custody. Efforts to reach Sater were unsuccessful.

The stock targeted in the complaint was a Bala Cynwyd (Penn.) company called Holly Products Inc. The company makes electronic components for casino equipment, among other things, and was the subject of a public offering by White Rock in late 1994. Its share price was elevated through 1995 but swiftly plummeted, down 96% over the past year to a recent price of 3 cents. The feds do not charge any involvement by officials of Holly, whose most recent phone listing is inactive. According to the FBI, Sater and Klotsman manipulated Holly and other shares in a "pump and dump" scheme, and then laundered the proceeds.

According to the complaint, the scheme began when Klotsman and Sater secretly acquired large blocks of stock for offshore corporations they controlled. The FBI maintains that the two men inflated share prices by under-the-table payoffs to brokers at White Rock and other firms, pegged to sales volume. The two men's profits, $10 million according to the complaint, then went through a trans-national money laundry.

According to the feds, the money that came in from hapless investors was sent on a round-the-world tour--to the Netherlands Antilles and Switzerland, and then to Israel, Luxembourg, the Netherlands, Ireland, the Channel Islands, and the U.S. The feds say that Sater and Klotsman sometimes used phony names--and sometimes did not--which evidently made the FBI's job easier.

The prosecution of Klotsman and Sater bears strong similarities to the prosecution of New York jeweler Aleks Paul--who is not charged in this case (BW--Aug. 10). Paul was arrested in July and charged with engaging in a money-laundering scheme for White Rock. Paul pleaded not guilty, and his lawyer says he is vigorously fighting the charges.

One issue raised by the Klotsman/Sater complaint is the possibility that the FBI may be probing ties to Russian organized crime--which has long been believed to be enmeshed in the world of shady micro-cap brokers. The FBI agent handling the Klotsman/Sater case, Leo Taddeo, belongs to the FBI's Russian organized crime squad. Sources familiar with the Paul case say the FBI is also probing possible Russian and Italian mob links in the Paul investigation. Paul's lawyer, Benjamin Brafman, denies knowledge of any mob probe.

If indeed the feds are pursuing mob ties, they need more than lucky breaks like unpaid mini-storage bills. They need confidential informants familiar with the operations of these firms. And the complaints in both cases indicate that they've got several. Perhaps one of them, someday, will answer this question: Who owned those two 9-millimeter pistols and that 12-gauge shotgun? And what was he or she planning to do with them?

By Gary Weiss in New York
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