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Here ia another story about Bryant Cragun ->Beyond the SEC's Reach, Firms Sell Obscure Issues to Foreign Investors

By JOHN R. EMSHWILLER and CHRISTOPHER COOPER
Staff Reporters of THE WALL STREET JOURNAL
please visit http://www.wsj.com

The call couldn't have been timed better. Adrian Lawlor, a Dublin computer-systems salesman, and his wife had just received a $17,000 settlement from a car accident his wife had been in when a broker from International Asset Management in Brussels rang him up. Speaking with an American accent, the broker told Mr. Lawlor he had just the ticket for entering the red-hot U.S. stock MARKet.

"They said they had a wonderful investment opportunity for me," Mr. Lawlor says.

Although "absolutely green" when it came to stocks, Mr. Lawlor decided to sink most of the settlement into the broker's recommendations. That was in 1996, and he was happy for a time and unruffled when his broker moved from Brussels to Barcelona, Spain. But then he tried to sell some shares of a small-cap issue that had begun to stumble. The broker said he would make the sale only if Mr. Lawlor agreed to plow the proceeds -- and $10,000 more -- into shares of a tiny California company called ZIASUN Technologies Inc.

A Matter for the Police

Mr. Lawlor refused and then complained to Spanish regulators. Though the brokerage was based in Barcelona, Spanish regulators said they had no jurisdiction because IAM apparently didn't sell to Spaniards. "If you consider this situation a matter of fraud," Spanish regulators wrote, "the normal procedure is to get in touch with the police."

Instead of calling the police, Mr. Lawlor managed to sell some shares "by complaining bitterly to my broker." But still, he hasn't been able to unload his biggest holding, a stake in a troubled start-up that he bought for $6,000 and that is now worth about $90. He has lost contact with his IAM broker, who went by the name Steve Young.

"An Irish citizen buying U.S. stocks through a dealer based in Spain," Mr. Lawlor says. "The whole experience made me realize how alone I was."

Alone in a growing crowd, that is. Nurtured by economic liberalization and the steady rise in U.S. MARKets over the past decade, legions of Europeans and Asians have developed a STRONG appetite for stock investments. Much of the focus is on the U.S.; in just the 12 months ended March 31, foreigners bought $2.8 trillion worth of U.S. shares, up 65% from the previous 12 months, the U.S. Treasury says. After accounting for stock sales, net foreign purchases totaled $159.6 billion during the period. About 85% of that was from Europe.

Many Affiliates, Many Names

But as the global investor base broadens, a big problem has arisen: Investors are often venturing into a gray area that national regulators are either unable or unwilling to police. And that makes them particularly vulnerable to the likes of International Asset Management. This outfit and its many affiliates operating under many names throughout Europe and East Asia buy shares in small, obscure U.S. companies, some linked to IAM through equity or other ties, and then sell the stock to foreigners who often are ill-informed about the companies they are investing in, the difficulty of trading the stock and their own lack of regulatory protection.

IAM officials turned down repeated requests for interviews and have refused to identify the precise location of their Barcelona offices.

In recent years, investors from Athens to Australia have purchased millions of dollars of stock in U.S. companies from IAM and its affiliates. Many, like Mr. Lawlor, have found themselves unable to sell their shares or even get stock certificates, and nearly all are unable to get help from regulators.

Sudden Disappearance

Guy Fletchere-Davies, a 62-year-old carpet manufacturer in Melbourne, Australia, bought ZIASUN and other small U.S. stocks over several years from the Manila office of Oxford International Management, a brokerage firm with ties to IAM. Mr. Fletchere-Davies says his account was passed around among several Oxford salespeople and then to a successor firm. Late last year, "suddenly, the phone calls stopped and paperwork dried up," he says.

The Australian has since embarked on a frantic telephone journey from Manila to Jakarta to Manhattan to the British Virgin Islands in hopes of learning the fate of the nearly $150,000 that was to be his retirement nest egg. "We don't know who to talk to,'' he says. "We don't know where to go."

Nikolas Morokutti, a 26-year-old owner of a computer business in Innsbruck, Austria, thought he knew where to go when he had trouble getting his ZIASUN share certificates from IAM. He called the U.S. Securities and Exchange Commission. The agency, he says, told him that it couldn't help because the shares were issued under Regulation S.

These Regulation S stock sales are allowed under a 10-year-old provision of U.S. securities law that is intended to allow American public companies to raise capital from experienced foreign investors without the onerous registration process required to sell stock in the U.S. Once sold abroad, Regulation S shares cannot legally be resold to U.S. investors for at least a year; they can, however, be sold to other foreigners during that period.

While hundreds of perfectly legal and legitimate S-share transactions occur each year, unscrupulous operators have found a way to exploit Regulation S to their advantage. The way it often works, a promoter that is at least nominally based outside the U.S. buys large blocks of S shares from American issuers at deep discounts and then sells them at huge MARKups to neophyte investors abroad.

The SEC doesn't comment on specific cases and won't comment on the current state of Regulation S. Non-U.S. regulators aren't much help either, though they periodically warn citizens to avoid boiler-room brokers operating outside of their home country. British stock regulators recently noted a sharp rise in the number of boiler rooms in continental Europe that target English residents. "The firms are not registered here, so it's up to our counterparts in other nations to regulate them, which is very frustrating," says Sarah Modlock of Britain's Financial Services Authority.

A Lot in Common

Over the past few years, IAM and related brokerage firms have MARKeted shares in about a dozen small U.S. companies. Overseas customers of IAM's offices in Barcelona often receive a monthly publication called "The Capital Growth Report," which mixes glowing reviews of the small companies in IAM's stable with commentary about well-known companies such as Compaq Corp. Several of the small companies have held stock in each other, used the same investor-relations firm or employed Jones, Jensen & Co., a Salt Lake City accounting firm, which is auditor of ZIASUN, a company that looms large in IAM's pitches.

In May, the SEC filed administrative charges against the accounting firm's two named partners, R. Gordon Jones and MARK F. Jensen, for "recklessly violating professional accounting and auditing standards" in an audit of a company unrelated to ZIASUN. Mr. Jensen denies wrongdoing. Mr. Jones didn't return phone calls.

The tale of IAM and its affiliates is deeply entwined with that of ZIASUN, based in Solana Beach, Calif., just north of San Diego, in a modest ground-floor office suite nestled between a freeway and the sea. An IAM affiliate has an address on the same floor of a Hong Kong office building as ZIASUN's office in that city, and ZIASUN maintains the Web sites of IAM and of some of its affiliates.

ZIASUN has operated under various names since it was founded and went public in 1996, and it has engaged in businesses ranging from motorcycles to soda dispensers. In news releases, it now bills itself as "a leading Internet technology holding company focused on international investor education and e-commerce." About 85% of ZIASUN's 1999 revenue came from a business that operates traveling seminars on Internet stock trading for $2,995 a pop. "You Can Become a Millionaire on Regular Pay," says one seminar flier.

In an April 1999 news release, ZIASUN said its 1998 audited earnings totaled $1.15 million, on $3.5 million in revenue. When the company filed financial results with the SEC last September, the audited 1998 sales had dropped to $2.3 million. In a later SEC filing, ZIASUN again revised downward its 1998 sales, to $760,529, and cut net income to $769,320. ZIASUN earnings included profits from securities transactions involving other public companies. Some of ZIASUN's securities holdings include companies that also issue large amounts of Regulation S stock and whose shares have been sold by IAM and affiliates.

ZIASUN officials decline to be interviewed, citing a pending lawsuit filed by ZIASUN in federal court in San Francisco against a group of Internet critics of the company for allegedly mounting a "cybersmear campaign" against ZIASUN. In a written statement in response to written questions, ZIASUN officials say they are "fully committed to preserving and developing the shareholders' equity."

More than half of ZIASUN's own 27 million shares outstanding have been sold to foreigners under Regulation S, according to the company's SEC filings. In two transactions in 1997, ZIASUN sold 15 million shares at 10 cents a share under Regulation S to foreign investors, whose identities didn't have to be disclosed in public records. At about the same time, investors in Europe and Asia say they received calls from salesmen from IAM and related brokerages offering ZIASUN stock at $4.50 or more a share. In the U.S. during the same period, ZIASUN, under previous corporate names, was trading on the Nasdaq Bulletin Board at between $1.25 and $5.50 a share on average daily volume of several thousand shares.

Vladimir Kaplan, a Zurich doctor, bought some of those ZIASUN S shares. His Barcelona-based IAM broker, Lynn Briggs, offered ZIASUN at $4.50 a share on Oct. 7, 1998 -- when the stock was trading in the U.S. for between $2.50 and $4 a share. Unable at the time to independently determine ZIASUN's stock price, Dr. Kaplan bought nearly 8,000 shares to start, and more over the ensuing weeks. Dr. Kaplan knew his broker as a senior portfolio manager at IAM and trusted his judgment, especially after Mr. Briggs flew to Zurich to make a personal sales call. What he says he didn't know: According to SEC filings, Mr. Briggs also was one of ZIASUN's founders. Mr. Briggs couldn't be located for comment.

Tapping Overseas Buyers

Titan Motorcycle Co., a Phoenix, Ariz., motorcycle manufacturer, is another favorite of IAM brokers. Between 1996 and 1998, Titan issued about 5.3 million shares of Regulations S securities in chunks to unidentified overseas buyers for an average price of $1.32 a share, even as clients such as Dr. Kaplan were purchasing stock in the company for far more. According to SEC filings, about a third of the company's total shares outstanding have been sold to foreigners.

Titan officials didn't return calls. In a brief written statement, Titan Chief Executive Frank Keery said that all company Regulation S sales "were conducted precisely as required by law." Titan's "knowledge of subsequent resale activities is essentially nil as these resales take place exclusively outside the U.S.A.," he added.

ZIASUN and Titan have something in common besides IAM. Bryant CRAGUN, a former president and chief executive of ZIASUN and now a consultant to the company, describes himself in court documents as "investment adviser and fund-raiser" for ZIASUN, Titan and other small companies whose shares are sold by IAM and related brokerages. He co-owns four Titan motorcycle dealerships.

Several investors say their brokers referred to Mr. CRAGUN as a senior official of IAM. Stefan Van Rooyen, a Swiss investor, says he was told by his Barcelona-based broker in June that Mr. CRAGUN was IAM's president. A recent SEC filing shows IAM has the same U.S. address as Mr. CRAGUN, at a gated condominium project in Solana Beach, not far from ZIASUN's headquarters.

In a letter, Mr. CRAGUN says he was never an IAM officer. He says he leases the condominium in Solana Beach. He acknowledges that between 1991 and 1997, he was chairman of Oxford International, a Philippine brokerage firm that MARKets many of the stocks IAM touts and that, according to SEC filings, has bought Regulation S shares in two such companies.

Mr. CRAGUN says the SEC spent five years investigating his role in selling Regulation S shares overseas and "never filed anything against me." An SEC spokesman declines to comment. An offering statement for an overseas investment fund founded by Mr. CRAGUN says he has a U.S. securities broker's license. The National Association of Securities Dealers says its records show that Mr. CRAGUN hasn't held a license since 1988. Mr. CRAGUN, in a written response, says that putting his license status in the present tense was a "typographical error."

Mr. CRAGUN says he sold his interest in Oxford in 1997 to a company headed by William STRONG, who shows up as an account representative on monthly statements received by several IAM customers. Mr. STRONG, who says he was merely an IAM consultant, confirms that he bought Oxford. He says IAM and Oxford are "essentially the same company. They are two different entities in the same arena with the same people."

In an April filing, Titan said it issued 724,638 shares of Regulation S stock early this year to Oxford International in connection with a 1996 loan. As Oxford's owner, Mr. STRONG says he never received any of the stock (doing so could violate Regulation S, since he's an American). Titan officials didn't respond to questions on this matter.

No Outward Signs

In Barcelona, IAM has in the past shared offices, telephones and personnel with at least three other brokerage firms -- including one owned for at least a time by Mr. STRONG. But the exact location of IAM's current office is a mystery. A phone receptionist provides only a mailing address. That address leads to a small office building that has no identifying signs and that on three visits during business hours was locked and dark. Another location, often cited on IAM's correspondence, is an unMARKed and rundown suite of offices in an unfashionable part of town staffed by a woman who appears to run a phone service for dozens of companies. A woman who answered the phone at the firm's Manila office said all sales operations had ceased.

Several investors say their brokers, though hard to locate, have recently been pushing them to exchange stock in ZIASUN and other companies for shares in a British Virgin Islands-registered mutual fund called the Morgan Fund. Mr. Fletchere-Davies says he agreed to move his money into the Morgan Fund as an alternative to losing a large chunk of his investment in individual stocks, though he says he has been told he might not be able to cash out of the fund for at least several months.

A Morgan Fund brochure shows that Mr. CRAGUN, the former ZIASUN executive and former Oxford owner, is one of the fund's two directors. Mr. CRAGUN says he set up the fund because buying companies' shares directly "is way too much risk to individual investors."

Write to JOHN R. EMSHWILLER at [e-mail] and Christopher Cooper at [e-mail]