fyi: SEC-aided Mob Bucket Shop Bust Surprises Brokerage
by Lee M. Webb
March 30, 2006
Great Eastern Securities Inc., a small U.S. brokerage headquartered in New York, is surprised and concerned over recent grand jury allegations suggesting that mobsters secretly controlled one of the firm's branch offices. Great Eastern's chief executive officer Jeff Ramson says the company, which is not accused of any wrongdoing, shuttered the rogue office several years ago.
As recently reported by Stockwatch, after a three-year investigation in which the U.S. Department of Justice was assisted by the U.S. Securities and Exchange Commission (SEC), on March 23 the FBI arrested 10 alleged New York mob members and associates on charges ranging from racketeering, securities fraud and extortion to money laundering and kidnapping.
Reputed Colombo family capo Joseph Baudanza, Colombo family associates Carmine Baudanza, Arthur Gunning, Craig Leszczak and Robert Podlog and Colombo family soldier Craig Marino are all charged with racketeering conspiracy including securities fraud, extortion, witness tampering, kidnapping and money laundering.
Luchese family associate Jerry Degerolamo and Luchese family soldier John Baudanza, who married the daughter of a Luchese capo but maintains an association with the Colombo family as the son of Carmine Baudanza and nephew of Colombo capo Joseph Baudanza, are also charged with racketeering conspiracy including securities fraud, extortion, witness tampering, kidnapping and money laundering.
Rounding out the charges, Bonanno family soldier Ronald Giallanzo and associate Vincent Rossetti are charged with extortion.
The 10 defendants entered pleas of not guilty when arraigned before Magistrate Judge Marilyn D. Go last Thursday.
According to the 73-page indictment unsealed in the U.S. District Court for the Eastern District of New York on March 23, as part of their criminal activity between 1994 and 2004, the mobsters "controlled stock promoters, brokerage firm owners and brokerage firm principals, brokers, traders and other employees" of 15 branch offices of brokerage firms located in Brooklyn, Manhattan and Staten Island.
Among other things, the U.S. Attorney for the Eastern District of New York claims that the mobsters used licensed and unlicensed brokers and cold callers to flog more than a dozen fraudulently overvalued penny stocks in classic pump and dump schemes in which unsuspecting victims lost more than $20-million. (All amounts are in U.S. dollars.)
In another scheme that led to charges including securities fraud and money laundering, investments were fraudulently solicited for America's Hedge Fund L.P. (AHF), which purported to seek above-average appreciation while preserving capital by investing in equity and debt instruments.
As set out in the indictment, the Staten Island branch of Great Eastern figured in the fraudulent hedge fund scheme.
According to the allegations in the indictment, approximately between September of 2001 and November of 2004, John Baudanza and Jerry Degerolamo along with others conspired in a fraudulent scheme "in connection with purchases and sales of securities at Great Eastern."
"It was further part of the scheme that registered and unregistered brokers and cold callers at Great Eastern solicited AHF investors by making false, fraudulent and misleading representations and omissions of fact to persuade investors to invest in the fund," the grand jury alleges.
Among other things, the brokers and phone chimps allegedly made false and fraudulent price predictions, lied about how the money invested in AHF would be used and sent investors bogus account statements that falsely exaggerated profits.
The indictment alleges that the defendants and others used money invested in AHF for paying personal expenses including credit card payments, car payments and home renovations; payment of undisclosed commissions and salaries to the fund's sales associates and manager; and personal investments.
According to the indictment, the misuse of investor funds was concealed by failing to send monthly statements to the investors; sending occasional statements that contained false, fraudulent and misleading information and omissions of fact about the investments; and refusing to return money to investors when requested.
Among the "overt acts" identified in the indictment, the grand jury alleges that some time in the fall of 2001, "John Doe #8 caused Investor No. 2, an individual whose identity is known to the grand jury, to invest $100,000 in AHF."
John Baudanza allegedly tapped "Investor #5," an individual also known to the grand jury, for several AHF investments. Between Aug. 19, 2002, and Sept. 9, 2002, the hapless investor reportedly sent five wire transfers totaling $285,000 to AHF.
Money laundering and extortion
In addition to securities fraud charges relating to the AHF scheme, Carmine Baudanza, John Baudanza and Jerry Degerolamo are charged with money laundering conspiracy that the indictment vaguely links to Great Eastern's Staten Island office.
The grand jury alleges that between September of 2001 and November of 2004 the three purported mobsters and others conspired to conduct financial transactions involving the proceeds of crime in an attempt "to conceal and disguise the nature, location, source ownership and control of such proceeds."
Mr. Degerolamo is also charged with extortion conspiracy and the attempted extortion of money from a Great Eastern employee identified only as "John Doe #9."
While the exact nature of the attempted extortion involving the "wrongful use of actual and threatened force, violence and fear" against the unidentified Great Eastern employee is not clear from the vague language in the indictment, the U.S. Attorney claims that the mobsters' extortionate tactics included beatings and stabbings.
In one instance possibly unrelated to the attempted extortion of the Great Eastern employee, prosecutors claim that an unidentified "cold caller was hit over the head with a golf club at the same time as a broker was beaten with a bat and stabbed after the broker said he wanted to leave the firm."
The arrest of 10 mobsters on charges of racketeering, securities fraud, extortion and money laundering over a 10-year period during which they secretly controlled 15 branch offices of brokerage firms in New York was widely reported by the U.S. media, but Great Eastern's chief executive officer Mr. Ramson was surprised to learn from a Stockwatch article that a branch office of his firm was among those mentioned in the indictment.
According to Mr. Ramson and the firm's general counsel Derick Johnson, Great Eastern was only associated with the Staten Island office for a matter of months before firing some problematic brokers and shuttering the operation several years ago.
"Basically, we took over an old office of Grady and Hatch," Mr. Johnson told Stockwatch in an e-mail. Grady and Hatch & Company Inc. is another of the 15 brokerage firms mentioned in the March 23 indictment.
"As it turned out the opening of this office was a mistake," Mr. Johnson wrote. "The firm soon closed the office because it failed to adhere to internal firm policies and they were not responsive to inquiries from the firm."
By Mr. Johnson's recollection, Great Eastern's Staten Island branch office was only officially open for about seven months and probably conducted business for only five months or less.
"Great Eastern was not involved in any way in the house stocks mentioned in the article nor was it involved in any of the stock manipulation schemes which were the subject of the FBI investigation," Mr. Johnson wrote.
Great Eastern's general counsel says that some of the registered representatives in the Staten Island office, specifically the "old Grady & Hatch representatives," were pushing AHF investments to the firm's clients without Great Eastern's approval or knowledge.
"Great Eastern brought suit against the organizers of America's Hedge Fund and won a judgment," the lawyer noted, adding that the firm co-operated with federal authorities in their investigation into AHF.
Mr. Ramson also had Great Eastern's outside counsel Robert Bertsch contact Stockwatch with some further information regarding the AHF scheme and the firm's short-lived Staten Island branch office, which Mr. Bertsch says was an "Office of Supervised Jurisdiction."
Among other things, Mr. Bertsch provided Stockwatch with a copy of Great Eastern's statement of claim against three former brokers and the subsequent award in an arbitration proceeding before the National Association of Securities Dealers (NASD) in connection with the AHF scheme.
According to the statement of claim filed in June of 2003, former Grady and Hatch brokers John Daniel Minerva, Joseph Frank Pappalardo, Jr., and Ronald James Turner began doing business as a Staten Island office of Great Eastern in December of 2001.
At the same time, AHF, allegedly administered by Christian Kuretski with the help of the three brokers, became a customer of Great Eastern.
The respondent brokers reportedly did not last long at Great Eastern. While the statement of claim does not provide any reason for their dismissal, Mr. Ramson says they were all fired in September of 2002.
About three months after the Staten Island brokers were sacked, a Dec. 23, 2002, complaint from Great Eastern customer Mary McNally reportedly triggered an internal investigation by the brokerage.
According to the statement of claim, the investigation of the Staten Island operation uncovered misconduct including forged documents relating to Ms. McNally's account and unauthorized trading in customers' accounts.
Other alleged misconduct included the rogue brokers improperly using the AHF account and, along with unlicensed Mr. Kuretski, soliciting Great Eastern clients to move their money to AHF without disclosing that the purported hedge fund was merely a customer of the firm and not otherwise associated with the brokerage.
Great Eastern claimed that as a result of the misconduct at the Staten Island office the firm suffered damages of approximately $500,000.
The brokerage firm asked the NASD panel to assess compensatory damages of $500,000 and further asked that an arbitration panel freeze the AHF account until the litigation was complete.
As it happened, while Great Eastern was awaiting the NASD decision in the matter, the SEC filed an emergency enforcement action against AHF and Mr. Kuretski and obtained an order freezing assets on Oct. 29, 2004.
On Dec. 2, 2004, the NASD panel issued its decision in favour of Great Eastern, determining that the three brokers were jointly and severally liable for compensatory damages in the amount of $121,627.97.
Mr. Bertsch, remarking that he thinks the respondents might be facing other problems, says that Great Eastern has not been able to collect on the NASD award of approximately $360,000.
As it turns out, Mr. Kuretski and two of the former Great Eastern brokers, Mr. Pappalardo and Mr. Turner, were charged with a number of offences relating to the AHF scheme including securities fraud, money laundering and extortion under a superseding indictment filed on Feb. 17, 2005.
Interestingly, that indictment charges Mr. Turner with attempted extortion of Great Eastern "in or about and between November 2002 and March 2003."
All three defendants in that case, which has not yet gone to trial, have entered pleas of not guilty.
In any event, according to Mr. Bertsch, who says that he last provided information to the FBI regarding the AHF matter about 14 months or so ago, Great Eastern was an innocent victim of the AHF scheme.
Mr. Ramson, who was surprised at the alleged mob involvement in AHF, also says that Great Eastern was a victim of the fraudulent hedge fund scheme and the rogue Staten Island brokers who were fired more than three years ago.
Great Eastern's chief executive officer is also clearly concerned that the firm's employees and clients might be left with the impression that the brokerage is implicated in the criminal activity alleged in the indictment or has some link to the mob.
As noted at the outset, Great Eastern is not charged with any wrongdoing with respect to the AHF scheme or any other matters raised in the March 23 indictment.
Moreover, there is nothing in the indictment to suggest that Great Eastern's management had a clue about any of the alleged criminal mob activity at the Staten Island branch or anywhere else.
The company's outside counsel Mr. Bertsch stressed much the same point in a telephone conversation with a Stockwatch reporter.
"There was no way that Great Eastern knew that any of these guys or the hedge fund itself was at all what we would call mob-connected, but the fact is that Great Eastern has never been indicted, never been charged with a crime," Mr. Bertsch said.
"There has never been any suggestion by the NASD, the SEC or the feds that Great Eastern did anything wrong here," the lawyer added.
Indeed, according to Mr. Bertsch, Great Eastern's 2003 NASD action against AHF and the Staten Island brokers and subsequent co-operation with the SEC and the FBI may well have played a role in the investigation that led to the March 23 arrests.
Stockwatch will continue to follow developments in the case. http://www.rgm.com/articles/GreatEastern.html