U.s. Attorney Lynch And N.y.s. Attorney General Spitzer Announce 20 Defendants Indicted In $50 Million Boiler Room Stock Fraud Scheme
LORETTA E. LYNCH, United States Attorney for the Eastern District of New York, ELIOT SPITZER, New York State Attorney General, BARRY W. MAWN, Assistant Director-in-Charge of the Federal Bureau of Investigation in New York, and RICHARD H. WALKER, Director of the Division of Enforcement of the Securities and Exchange Commission, today announced the unsealing of an indictment charging 20 defendants with participation in a massive stock fraud scheme that defrauded thousands of individual investors out of more than 50 million dollars. The scheme alleged in United States v. Jonathan Winston, et al., extended over a four year period from February 1994 through March 1998, involved three separate corrupt brokerage firms, and resulted in the manipulation of the securities of at least 5 companies. The defendants are charged with securities, mail and wire fraud and money laundering, as well as conspiracies to commit these crimes. This case is the result of a joint investigation conducted by the United States Attorney's Office, the New York State Attorney General's Office, the FBI and the SEC.
The scheme was led by defendants JONATHAN WINSTON, JASON COHEN, HUNTER ADAMS, MICHAEL REITER, GREGG ADAMS and ROBERT MANGIARANO, who, together with others, controlled the following brokerage firms: First United Equities Corporation ("First United"), which had offices in Garden City, Manhattan and Woodbridge, New Jersey; Lexington Capital, which had offices in Hauppauge, Long Island; and AGS Financial Group ("AGS"), which had offices in Manhattan and Chicago. Each of these firms is now defunct. Defendant JOHN GREMMO was First United's Head Trader. The other defendants were brokers at the three firms. The indictment alleges that HUNTER ADAMS and MICHAEL REITER are associates of the Gambino Organized Crime Family.
The defendants are charged with utilizing various means to manipulate the market price of the securities of companies that traded their securities on the NASDAQ National Market System ("NASDAQ"), the NASDAQ small cap stock market, the Over-the-Counter Bulletin Board market and the Philadelphia Stock Exchange, and engaged in other deceptive sales practices with respect to public investors.
The companies whose securities (hereinafter referred to as "House Stocks") were the subject of manipulation, included the following: Ashton Technology Group, Inc. ("Ashton"); EquiMed, Inc. ("EquiMed"); IRT Industries, Inc. ("IRT"); Mama Tish's Italian Specialties, Inc. ("Mama Tish's"); and National Medical Financial Corporation ("National Medical").
As alleged in the indictment, the defendants' schemes followed a pattern: JONATHAN WINSTON, JASON COHEN, HUNTER ADAMS, MICHAEL REITER, GREGG ADAMS and ROBERT MANGIARANO acquired secret control over large blocks of stock and stock warrants of the House Stocks. The defendants acquired the House Stocks for little consideration, usually by paying kickbacks or prearranging trades with those who controlled the House Stocks.
Having obtained control of the House Stocks, the defendants then artificially and illegally inflated the stocks' prices. The defendants made false and fraudulent representations to retail customers, used high pressure and deceptive sales tactics, paid and accepted excessive, undisclosed commissions and sales credits, made unauthorized trades in retail customer accounts, and authorized unregistered brokers and cold callers routinely to misrepresent to customers that they were registered brokers.
The high pressure and deceptive sales tactics used by the brokers included forecasting enormous returns on investments, luring customers to buy or hold House Stocks by promising that the customers would be allowed to participate in future lucrative deals, and verbally abusing customers who resisted advice to buy or hold House Stocks.
As the price of the House Stocks rose as a result of these unlawful techniques, the defendants sold their shares of House Stocks from accounts that they secretly controlled to First United's and Lexington Capital's customers, reaping huge profits.
The defendants then sought to maintain the price of the House Stocks held by First United's and Lexington Capital's customers so that the scheme would go undetected and the First United and Lexington Capital customers could be solicited again to purchase other artificially inflated House Stocks. The defendants artificially maintained the price of the House Stocks by a variety of techniques designed to insulate the House Stocks from the adverse pressure of a lack of genuine market demand, which would cause the stock price to collapse. These techniques included using high-pressure tactics and false statements to persuade customers not to sell House Stocks, failing to take and execute customer orders to sell, and threatening individuals with bodily harm unless they ceased engaging in transactions that had the effect of causing the price of the House Stocks to decrease, such as short-selling those stocks.
Eventually, after the defendants sold all or most of their shares of a House Stock at artificially inflated prices, they withdrew their support of the price of the House Stock and allowed it to collapse, causing their customers to sustain heavy losses. For example, between May 1996 and November 1997, the defendants drove the price of Ashton stock up to $15.25 per share before allowing it to plunge to less than a dollar per share. Similarly, during the charged conspiracy, EquiMed traded from a high of $16.50 to a low of $1.75 per share, IRT traded from a high of $7.25 to a low of 25 cents per share and National Medical traded from a high of $13.50 to a low of approximately 6 cents per share. Currently, Ashton is listed at approximately $1.94 per share, EquiMed is listed at 3 cents per share, IRT (now called Xpedian Inc.) is listed at approximately 4 cents per share and National Medical is listed as having no value.
JONATHAN WINSTON, JASON COHEN, HUNTER ADAMS, MICHAEL REITER, GREGG ADAMS and ROBERT MANGIARANO are also charged with laundering millions of dollars of proceeds of securities, mail and wire fraud through various domestic and foreign bank accounts.
The charges in the indictment carry the following maximum sentences: as to each money laundering count, 20 years imprisonment, 3 years of supervised release, a $250,000 fine (or twice the gross gain or loss) and an order of restitution; as to each securities fraud count, 10 years imprisonment, 3 years of supervised release, a $1,000,000 fine (or twice the gross gain or loss) and an order of restitution; as to each mail and wire fraud count, 5 years imprisonment, 3 years of supervised release, a $250,000 fine (or twice the gross gain or loss) and an order of restitution; and as to each conspiracy to commit securities, mail and wire fraud count: 5 years imprisonment, 3 years of supervised release, a $250,000 fine (or twice the gross gain or loss) and an order of restitution. In addition, the tens of millions of dollars of ill-gotten gains laundered by JONATHAN WINSTON, JASON COHEN, HUNTER ADAMS, MICHAEL REITER, GREGG ADAMS and ROBERT MANGIARANO are subject to criminal forfeiture.1
In announcing the indictment, United States Attorney LORETTA E. LYNCH, stated: "This case is a striking example of the rigged investment 'opportunities' that are presented to the unsuspecting investing public by 'boiler room' operations like First United, Lexington Capital and AGS. Here, thousands of investors throughout the United States, sophisticated and unsophisticated, lost tens of millions of dollars because of the defendants' fraudulent practices. This prosecution should send the strong and clear message that unlawful high pressure and deceptive sales practices, including threats of bodily injury, and market manipulation will not be tolerated. Those responsible will be brought to justice, and we and our partners in law enforcement will continue our efforts to protect the fairness and integrity of our nation's securities markets."
ELIOT SPITZER, New York State Attorney General, stated: "This is really a case of life imitating art - it's a combination of the Sopranos and Boiler Room. Unfortunately, this isn't the movies or TV, it's real life and we have real victims - thousands of them who combined have lost $50 million. This was a classic 'pump and dump' case where corrupt brokers gained control of worthless stocks, illegally inflated their value, and then sold their shares at enormous profits, leaving their victims holding the bag. Those behind this scam berated and threatened victims, made unauthorized trades, failed to execute sell orders and took their clients for all they were worth."
BARRY W. MAWN, Assistant Director-in-Charge of the Federal Bureau of Investigation in New York, stated: "In addition to describing the boiler room tactics and the pump and dump schemes allegedly engaged in by the defendants as they committed the traditional white collar crimes of securities fraud, wire fraud and mail fraud, this indictment also identifies two of the defendants as associates of organized crime. As the law enforcement community has successfully reduced organized crime's influence and control of its traditional sources of income, the mob has been forced to look for new opportunities. To insure that our financial markets do not become a cash cow for the mob, the FBI has drawn, and will continue to draw, upon the expertise of both its white collar crime and organized crime programs to collaborate in this effort. History has taught us that early and swift intervention combined with unrelenting pressure on the part of the FBI and its law enforcement partners is critical to keeping our markets mob-free."
RICHARD H. WALKER, Director of the Division of Enforcement of the Securities and Exchange Commission, stated: "Today's charges involved a classic boiler-room operation, carried out by individuals who were willing to tell any lie - no matter how brazen - in order to get their hands on the public's hard-earned money. These cases demonstrate our continuing commitment to rooting out fraud in the microcap market. Finally, for those who would contemplate engaging in this kind of activity, including members of organized crime, the most daunting news about today's action is that it is the result of outstanding coordination among the SEC, the U.S. Attorney for the Eastern District of New York, the FBI and the Attorney General for the State of New York."
The defendants were arrested earlier this morning. Those defendants arrested in New York will be arraigned this afternoon by United States Magistrate Judge Viktor V. Pohorelsky at the United States Courthouse in Brooklyn.
The government's case is being prosecuted by Assistant United States Attorneys Kenneth M. Breen and Arthur Hui, and Special Assistant United States Attorney/Assistant Attorney General John Panagopoulos.
JONATHAN WINSTON JASON COHEN HUNTER ADAMS MICHAEL REITER GREGG ADAMS JAMES BILA CHRISTIAN BLAKE STEVEN COHEN LOUIS FACCHINI, JR. DAVID HIRSCH ROBERT MANGIARANO JOSEPH MANNINO JOHN GREMMO, III DAVID MARGULES JAMES PELLIZZI DAVID PASSO MICHAEL PUGLIESE CHRIS RUSSO HOWARD WEINSTEIN ROBERT WINSTON 1 The charges contained in the indictment announced today are merely accusations, and the defendants are presumed innocent unless and until proven guilty.
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1 The charges contained in the indictment announced today are merely accusations, and the defendants are presumed innocent unless and until proven guilty.