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Stock-Rigging Sting Has a Familiar Face: Allen Wolfson, Felon
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While on Probation, He Paid Kickback to Agent Posing
As a Broker, FBI Says
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A Penchant for the `C' Word By Jeffrey Taylor
12/02/1996
The Wall Street Journal
Page A1
(Copyright (c) 1996, Dow Jones & Company, Inc.)
SALT LAKE CITY -- Richard Surber was 18 years old and working as a shrimper off Florida's Gulf Coast when his Uncle Allen called with a request: How about joining him here and enrolling at the University of Utah?
Allen Wolfson had big plans for his nephew. A year after Mr. Surber arrived, he became a director of a company his uncle controlled; two years later, he became president. Mr. Wolfson needed the young man's help because he couldn't run Canton Industrial Corp. himself: He was a thrice-convicted criminal, barred from serving as an executive of any company.
Together, they resurrected the old farm-equipment company from bankruptcy and reinvented it as purveyor of a "cybermall" for Internet surfers. Canton also gobbled up distressed real estate and ran a financial-consulting business. It incorporated 63 Internet-related companies with names like CyberArt, CyberFootball, even CyberLove. Mr. Wolfson, employees say, was so convinced the "C" word titillated investors that Canton eventually changed its name to CyberAmerica Corp.
But this flurry of activity masked Mr. Wolfson's real specialty, federal authorities say. He is, they assert, a state-of-the-art stock manipulator.
Arrested last month with 44 others in a stock-brokerage sting, Mr. Wolfson was engaging in schemes to "take pieces of paper and turn them into cash," says Henry Klehm, an enforcement lawyer at the Securities and Exchange Commission. Mr. Wolfson faces a criminal charge of conspiracy to commit securities fraud and an SEC administrative fraud complaint.
Mr. Wolfson cultivated a network of brokers and promoters -- including two who were later arrested in the same sting -- to boost the appeal of Canton and other stocks. Canton's staff cranked out glowing news releases about its fledgling computer operations. All this may have contributed to an extraordinary 152% run up in Canton's stock price during 10 days in June, regulators say.
The government's case against Mr. Wolfson, they say, underscores one of the principal perils of today's markets: Promoters are hyping small stocks and unloading them on a new generation of bull-market investors, flouting the civil penalties and other traditional techniques available to regulators.
Moreover, prosecutors say, small-stock operators can be a remorseless bunch. Last January, U.S. District Court Judge Bruce Jenkins warned Mr. Wolfson not to promote stocks, vowing to "put you inside if I have to." On April 11, the judge sentenced him to three years of probation for violating an earlier probation by improperly acting as a corporate executive.
That very day, Mr. Wolfson allegedly offered an illegal payment to an agent from the Federal Bureau of Investigation who was posing as a stockbroker. The payment, according to the federal charge, was a kickback for the agent's purchase of stock in a solar-energy company.
One of Mr. Wolfson's lawyers, Peter Stirba, says his client plans to plead not guilty to the criminal charge, filed in federal court in New York. As for the SEC, the agency "hasn't yet proven anything" to substantiate its allegations, Mr. Stirba says. Mr. Wolfson himself, free on a $100,000 bond co-signed by his nephew, declines to comment.
Mr. Surber, now 23 and chief executive, says the company has nothing to do with the allegations. Mr. Surber insists he runs the firm, but employees say Mr. Wolfson, described as a "consultant" in corporate filings, has made most of the decisions. (Mr. Surber "was just someone with a beeper who came to sign the checks," former staff lawyer James Schollian testified in Utah federal court last year.)
As for how Mr. Surber has for years balanced his management duties with his coursework as a full-time student, he says: "I'm a pretty damn smart guy." Limos and Barter Clubs
Friends and employees describe Mr. Wolfson, 50, as intelligent and tempestuous. He sports a close-cropped beard and shoulder-length white hair. When agents hauled him into jail Oct. 10 on the conspiracy charge, the portly Mr. Wolfson "looked like Santa Claus," a jail spokesman says.
His eccentricity goes back a long way. During an early career in Florida real estate in the 1970's and 80's, he often rode around Tampa in a gray limousine and kept close ties to the city's political elite. He also displayed a knack for obtaining big loans with questionable collateral. His first run-in with the law was a 1977 state conviction for defrauding a Tampa bank; he received 10 years probation. In 1982, he was found guilty of funneling illegally large contributions to political candidates. That violated his probation, and Mr. Wolfson went to prison.
He was released in 1984, but two years later faced a federal indictment, accused of overstating a building's value as collateral for a loan. He was convicted of three felony counts in 1987.
In 1990, after serving a second prison term, Mr. Wolfson emerged with a five-year probation that strictly limited the work he could do: He was prohibited, for instance, from serving as "an officer or director of any corporation." Mr. Wolfson headed to Utah with limited personal assets but with a network of business contacts from his Florida days.
He also had a flair for trading goods and services of all sorts. He bartered for items his company needed -- trading surplus carpeting for copy-machine paper, for example. He could be endlessly imaginative in structuring deals. Rabbi Chaim Friedman of Monsey, N.Y., who runs a nonprofit educational foundation called the D'Var Institute, says he sold condominiums, given to his group by a donor, to Mr. Wolfson for cash and "trade dollars" negotiable in barter clubs.
In 1991, Mr. Wolfson asked his nephew to come to Utah. Mr. Surber says his widowed mother, Rita, Mr. Wolfson's sister, had no reservations about her son's decision to go. "Everybody pretty much looked up to Allen, regardless of his problems, because he came from nothing," Mr. Surber says. "My personal feeling about him was that he was a brilliant person."
With his nephew's help, Mr. Wolfson set out to acquire distressed real estate and stakes in struggling companies for a fraction of their potential value. His vehicle for this business was an unlikely one: Canton Industrial, a manufacturing company based in an old International Harvester plant in the small town of Canton, Ill. Canton Industrial was in Chapter 11 bankruptcy proceedings but was still listed on the Boston Stock Exchange. In June 1992, a company owned by Mr. Wolfson, A-Z Professional Consultants Inc., acquired a 49% stake in Canton in exchange for some stock in a third company, Mr. Surber says.
Mr. Surber, then 19, became secretary and a director of Canton; Mr. Wolfson, calling himself a consultant, worked in Canton's new Salt Lake City offices.
Over the next couple of years, the reconstituted Canton Industrial executed a series of transactions, including real-estate purchases. Canton often paid with stock; cash flow was tight, and Mr. Wolfson told employees he sometimes had to use his own money to meet payroll. Employees say they had no idea how much cash Mr. Wolfson or the company had at any given time. "The phrase that goes around in that building is, `Allen brings in the money,'" says Scott Bauer, a former public-relations employee.
The company launched a business in the Illinois plant to shred old tires and burn them to generate power. It failed, Mr. Surber says, because the shredding machine didn't tear the tires into small enough chunks. In 1994, Canton paid off some debts and emerged from bankruptcy. Canton stock still traded, thinly, on the Boston exchange and the over-the-counter bulletin-board market.
Mr. Wolfson wasn't secretive about his troubled past. He openly discussed it with business associates and employees, they say, occasionally brandishing a mounted clipping from a Florida newspaper and saying that he had gone to jail to protect colleagues. He also disclosed his legal problems in corporate filings.
In June 1994, a disgruntled employee blew the whistle on Mr. Wolfson. Allen Thomason, Canton's chief financial officer, wrote a letter to Mr. Surber complaining about accounting and payroll irregularities. He also declared that Canton and its board of directors were "controlled and dictated" by Mr. Wolfson, despite the terms of his probation. A few weeks later, Mr. Surber fired Mr. Thomason, later saying the CFO had threatened to beat up his uncle during a shouting match. Mr. Thomason took his beef to Mr. Wolfson's probation officer.
Last year, federal authorities prosecuted Mr. Wolfson in Utah for violating his probation. A series of witnesses testified that Mr. Wolfson, not Mr. Surber, had ultimate control over the company. And in October 1995, Judge Jenkins ruled that Mr. Wolfson violated his probation by acting "as both a manager and de facto chief executive officer" of Canton. In sentencing him to a new three-year probation term, the judge forbade Mr. Wolfson to engage in stock trades "in connection with stock promotion or any stock offering."
"I understand, your honor," Mr. Wolfson said.
The Sting
The FBI, in an ambitious effort to attack would-be stock manipulators with penalties harsher than fines, had launched a sting just a few months earlier. Agents posing as brokers sought kickbacks in exchange for placing small, speculative stocks in wealthy customers' accounts. The agents found a willing audience among unscrupulous stock promoters , the FBI said, because it doesn't take many transactions to push up the price of a scantily traded stock. The key is to coordinate the trading with brokers who can persuade their clients not to sell, even if the price rises, the SEC's Mr. Klehm says.
Through his network of business contacts, Mr. Wolfson had met a Sunrise, Fla., stock promoter named Richard Mallion. Neither Mr. Mallion nor Mr. Wolfson knew it, but Mr. Mallion was a primary subject of the sting unfolding in New York.
Mr. Mallion had repeatedly paid the undercover agents to buy stocks he was promoting, according to documents filed by prosecutors in Manhattan's federal court. Last April, the documents say, he spoke to an agent about buying stock in a Phoenix solar-energy company called Alpha Solarco Inc. A few days later, Mr. Mallion set up a three-way conference call with the agent and Mr. Wolfson, whom Mr. Mallion identified as being "behind" Alpha Solarco, the documents say.
At the time, Mr. Wolfson had no formal connection to Alpha Solarco, though Canton would later carry out a stock-swap arrangement with Alpha Solarco in which each company invested in the other. Regulators want to know whether Mr. Wolfson personally owned or controlled any of Alpha Solarco's stock; Mr. Surber says Mr. Wolfson didn't.
What is clear is that Alpha Solarco's stock price was rising and falling like a piston during the first few months of 1996, frequently making market lists of top weekly gainers and losers, despite a dearth of significant news about the outlook for the solar cells it manufactured. On April 11, the charging documents allege, Mr. Wolfson agreed to pay an undercover agent a kickback of 20% of the value of Alpha Solarco stock the agent purchased.
The 5,000-share transaction went through on April 15 at a price of $4.375 a share, the documents say, and the agent phoned Mr. Wolfson to arrange for his $4,375 payment, which was promptly wired to the agent's offshore account. "So," Mr. Wolfson allegedly asked the agent, "do you think we can do some more?"
Edward Schmidt, president of Alpha Solarco, declines to discuss his dealings with Mr. Wolfson. He denies involvement in Mr. Wolfson's alleged crime and says his firm has been hurt by the bad publicity. (The Nasdaq Stock Market delisted Alpha Solarco on Nov. 12, saying it failed to maintain sufficient assets and "to protect prospective investors and the public interest.") Mr. Mallion's lawyer declined comment.
Regulators say Canton's dealings with other stockbrokers also appeared unusual. For instance, internal corporate documents show that a group of brokers outside Utah were signed up as vice presidents of a Canton unit called CyberConnect Inc. A former Canton executive says this was done so the brokers could sell stock in CyberConnect under a securities-law exemption.
The exemption permits small companies to sell up to $1 million of their stock per year without registering it with regulators. It was intended to spare start-up companies the high costs of registration, but lately it has been exploited "to market penny stocks and shell companies to middle-class investors," says Columbia University law professor John Coffee Jr.
In all, CyberConnect and its new vice presidents sold about $185,000 worth of the stock to investors, employees say. But the brokers were removed as executives on Aug. 1 because of concerns about whether the arrangement was legal, Mr. Surber says. The money raised in the stock sales is being returned to investors, he says.
Big Volume, High Price
Regulators say they also are troubled by the rapid surge of Canton's own stock price in June. The company was plunging into its Internet-related business at this time, seeking to develop its cybermall and a computer search engine called WebSafari to help net surfers locate items to purchase on the mall.
On June 3, Canton hired Denver-based American Investment Resources Inc. as a "financial public-relations counsel" and "adviser to the company with respect to . . . market markers, broker-dealers, underwriters and investors," according to Canton's contract with the firm.
Canton's public-relations operation went into high gear the first two weeks of June. One press release declared that Canton's projects would "revolutionize commerce on the Internet." Trading volume in Canton's stock surged to 255,250 shares a week, dwarfing its weekly average of 78,486 shares over the previous five months. The share price doubled and kept rising. A Canton release proclaimed: "Canton's guess is that the investing public likes what it sees which has translated into a frenzy of buying." The company announced it would change its name to CyberAmerica on June 18.
Another release reported that the company had applied for a listing on the Nasdaq Small-Cap Market, the next step up from the humble bulletin-board system on which Canton stock was then trading. Such a listing is "a feather in a small company's cap," says Mark Griffin, Utah's chief securities regulator, leading to "broader exposure, market participation and liquidity." The press release predicted that Canton would "indefinitely" meet Small-Cap market-listing requirements, including the $3-a-share minimum price.
But after reaching a high-water mark of $4.25 on June 12, heavy selling sent the stock price below $2 a share in less than a week. "That's exactly the kind of thing you see in the classic hype-and-dump scheme," says Mr. Klehm, the SEC lawyer. "People are lured in by press releases . . . and then the bottom falls out." (The stock now trades under 25 cents a share.) The SEC continues to investigate trades by Mr. Wolfson and others arrested in the sting, Mr. Klehm says. No one else at CyberAmerica has been charged with wrongdoing.
Mr. Surber denies the June stock surge was the work of the company's promoter, American Investment Resources. He says CyberAmerica terminated its contract with American in August because the firm overcharged for advertising and didn't perform as expected.
Early on the morning of Oct. 10, FBI agents raided the offices of their targets across the country. The agents arrived that morning at CyberAmerica headquarters to arrest Mr. Wolfson. Also arrested was American's president, Gerald Larder; like Mr. Wolfson, he was accused of paying an FBI "broker" to buy stock, though not Canton's stock. Mr. Larder didn't do anything wrong, says his lawyer, Jeff Pagliuca: "I know of no evidence that would suggest that Larder did anything illegal." Mr. Pagliuca also says it was American that terminated the contract with CyberAmerica; the reason, he says, was concern about Mr. Wolfson's legal history.
Since his uncle's arrest, Mr. Surber has trimmed CyberAmerica's work force to 37 people from 69, he says. He insists that he is in full control of a company with a bright future. "For many people, the initial impression is that Wolfson's nephew is only 23 and he probably doesn't do anything," he says. "That's not true, and I resent being classified that way. I deal with all the personnel issues. When it comes time for doing the quarterly reports and annual reports, I'm the person that sits down with the independent auditor and the accounting staff. When a potential client comes in, I'm one of the people that sits down with them and tells them what the company can do for them."
Mr. Surber has told associates he expects his uncle's relationship with the company to end, but whether Mr. Wolfson will extricate himself is far from certain. Shortly after Mr. Wolfson made bail, he headed back to CyberAmerica's headquarters. He called a staff meeting and broke down in tears, employees say, thanking them in advance for remaining loyal to him. Though Mr. Wolfson's formal consulting contract with CyberAmerica ended in August, he still "has a lot of influence" on the company, Mr. Surber says.
Mr. Wolfson has also been on the phone with old associates, such as Rabbi Friedman. "He still wants to do future deals with me," the rabbi says.
Does he plan to take Mr. Wolfson up on the offer? "Let's see what happens with these charges," Rabbi Friedman says. "It's obviously not a plus."
(See related letter: "Letters to the Editor: A Stockbroker's Widow" -- WSJ Dec. 26, 1996)
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