How not to design a pump-and-dump stock scheme

There often is some degree of subtlety in illicit efforts to manipulate stock prices.

But in a suit the Securities and Exchange Commission filed Thursday, the agency alleges that an East Coast stockbroker issued blatantly phony press releases about companies in attempts to push up their shares.

The case, as documented by the SEC, is downright comical, except for the fact that some hapless investors fell for the scam.

The SEC alleges that 34-year-old Lambros D. Ballas, a Merrick, N.Y., broker who works as an independent contractor for Global Arena Capital Corp., went on a four-day binge in late September and early October cooking up fake releases involving companies including Microsoft Corp., Google Inc., Walt Disney Co., Imax Corp. and Local.com Corp.

Here’s the summary of one of Ballas’ alleged escapades, detailed in the suit (which is well worth reading in full):

--- On Oct. 1, just before the market closed for the day, he bought 5,000 shares of Irvine-based Local.com, an Internet search engine, for $5.33 each.

In the following hour, Ballas posted press releases on two PR wire services announcing that Local.com had agreed to a buyout by Microsoft.

--- Ballas then went on the Yahoo message board for Local.com, directing people to the phony news releases and urging them to buy the company’s shares in after-hours trading. "Woo hooo .... daddy needs a new pair of shoes," he wrote in one post.

Some investors apparently fell for it -- and drove the stock as high as $9.65, the SEC said -- even though the release included sentences like this gem: "For those of you who own it, enjoy the success, for those of you who do not, mergers right now seem to be hot, and keeps [sic] your scanners peeled for opportunities."

--- Within a few hours, Local.com issued a statement denying that it was in a deal with Microsoft.

Undeterred, Ballas tried to issue yet another phony release about Local.com the very next day, this time saying that the company would be bought by Google. The first service he tried to use, WiredPRNews.com, expressed concern that the announcement might be a hoax. So Ballas went to another service, EIN Presswire, and got his fake announcement published for $49.95, the SEC said.

Not surprisingly, once the SEC got involved it wasn’t too difficult for the agency to trace the addresses of the computers that sent the press releases, said Michael Dicke, one of the SEC lawyers who investigated the case.

"This was one of those cases that looked like it was going to be fun to investigate, and it was," he said.

The SEC suit, filed in federal court in San Jose, seeks to get Ballas to disgorge any ill-gotten gains and pay penalties.

Ballas couldn’t be reached for comment.

-- Tom Petruno

Photo credit: Andrew Harrer / Bloomberg News

Galleon Group to liquidate hedge funds after founder's arrest

It didn’t take long for the blockbuster insider-trading charges against billionaire hedge-fund founder Raj Rajaratnam to take a toll on his once-mighty firm.

Galleon Group notified investors in a letter Wednesday morning that it is liquidating its hedge funds in the aftermath of Rajaratnam’s arrest last week on charges of running a massive insider-trading ring. “I have decided that it is now in the best interest of our investors and employees to conduct an orderly wind down of Galleon’s funds while we explore various alternatives for our business,” Rajaratnam wrote in the letter addressed to employees, clients and friends.

The move caps a dramatic downfall for Rajaratnam and Galleon, once a premier hedge fund that managed $3.7 billion. Galleon reportedly had been hit with heavy redemptions this week after Rajaratnam’s arrest Friday. Outside parties have expressed interest in purchasing the firm and some of its assets, according to Bloomberg News.

Federal authorities arrested Rajaratnam and five others on charges that they took part in a vast insider-trading conspiracy in which they swapped information on multiple companies. Rajaratnam proclaimed his innocence in Wednesday's letter. “I want to reiterate that I am innocent of all charges and will defend myself against these accusations with the same intensity and focus I have brought to managing our investors’ capital,” he wrote.

-- Walter Hamilton

Supreme Court to hear former Enron CEO Jeffrey Skilling's appeal

Chalk it up to the ghost of scandals past.

On the opening day of the trial of two Bear Stearns Cos. hedge fund managers, a prominent figure from the Enron scandal reappeared this morning when the U.S. Supreme Court agreed to hear his appeal.

Jeffrey Skilling, Enron Corp.’s former chief executive, is seeking to overturn his 2006 conviction for securities fraud and other crimes associated with Enron’s monumental collapse in late 2001.

Known for his trademark scowl, Skilling is serving a 24-year sentence in a Colorado prison. Skilling could win a new trial if the Supreme Court sides with him.

Skilling has argued that lower courts misapplied the so-called honest services statute on the grounds that the government did not prove that he sought to benefit personally from his actions.

A federal appeals court in New Orleans upheld his conviction in January, though it ruled that his prison sentence should be adjusted.

The monumental fall in late 2001 of Enron, once a globe-girdling energy giant that claimed to have ushered in a new era of energy trading, was the highest profile in a spate of corporate scandals that followed the late-1990s Internet boom.

Skilling was convicted alongside his one-time boss, Kenneth Lay. But Lay’s conviction was vacated following his death two months later.

-- Walter Hamilton

Photo: Former Enron CEO Jeffrey Skilling shortly after he was sentenced in October 2006 to 292 months in federal prison. Credit: David J. Phillip / Associated Press

Madoff judge freezes Beverly Hills money manager's assets

A bankruptcy judge in New York has frozen the assets of a Beverly Hills money manager accused of funneling hundreds of millions of his clients’ dollars to a Ponzi scheme operated by disgraced financier Bernard L. Madoff.

The order, signed Wednesday by U.S. Bankruptcy Judge Burton R. Lifland, prohibits Stanley Chais from accessing funds held at Goldman Sachs, City National Bank or any other institution. The order stands until an Oct. 22 hearing, at which the freeze could be extended.

Lifland permitted Chais, 83, and his wife, Pamela, to access $100,000 during that period -- $50,000 for legal expenses and $50,000 to use as they wish.

Irving Picard, a trustee representing victims of Madoff’s $65-billion Ponzi scheme, has accused Chais of collecting more than $800 million from his dealings with Madoff. Picard has sued Chais in an attempt to collect funds to return to Madoff investors.

A forensic accountant retained by Picard, Matthew Greenblatt, has alleged that Madoff transferred $45 million to Chais’ Goldman Sachs and City National accounts in 2008, just as the scheme was collapsing. He said Madoff transferred more than $1 billion to Chais and his wife from 1995 to 2008.

Chais’ attorney, Eugene Licker, said his client didn't know that Madoff was operating a scam. Licker said that Chais and his family were among the largest victims of Madoff’s fraud.

The Securities and Exchange Commission and California Atty. Gen. Jerry Brown have also sued Chais in an attempt to recover stolen money for Madoff victims. 

-- Stuart Pfeifer

Madoff trustee wants $199 million back from brother, sons and niece

Four Madoff family members who worked at Bernard L. Madoff’s investment firm may not have known about his epic Ponzi scheme -- but they certainly should have, according to a lawsuit filed today by the government-appointed trustee liquidating the convicted swindler’s assets.

The suit seeks to force Madoff’s brother, two sons and niece to repay almost $199 million they allegedly withdrew from the firm over the years to pay for luxury homes, swanky lifestyles and even a hair salon.

The suit doesn’t accuse the four -- Peter, the brother; Andrew and Mark, the sons; and Shana, the niece -- of direct involvement in Madoff’s scheme.

But it paints a damning picture of them, saying it’s hard to imagine that they didn’t detect what was going on. At best, the suit says, they were "derelict" for failing to catch the wrongdoing; at worst, they were complicit.

"Either they failed completely to carry out their required supervisory/compliance roles, or they knew about the fraud but covered it up," according to the suit filed by trustee Irving Picard.

The four worked in supervisory or compliance positions that required them to keep close tabs on the business.

"Simply put, if the family members had been doing their jobs -- honestly and faithfully -- the Madoff Ponzi scheme might never have succeeded, or continued for so long," according to the suit.

Of Shana Madoff, the firm’s compliance officer, the suit says: "It would seem impossible for her to carry out her compliance duties, year in and year out, without questioning or wondering whether the company’s [investment] business was a fraud . . . she ignored every red flag of the massive fraud taking place right in front of her."

Instead, according to Picard, the Madoffs treated the business "as if it were the family piggy bank." The defendants were paid tens of millions of dollars and given cushy financing to buy apartments in Manhattan, vacation homes in Nantucket, boats and club memberships. Andrew used $300,000 to buy into a hair salon.

In some cases, family members extracted millions of dollars from investment accounts into which they had put little or even no money, according to the suit.

Peter Madoff, for example, invested only $32,146 in his multiple accounts -- including a mere $14 after December 1995 -- yet withdrew $16.2 million, the suit says. One account into which he put no money was credited with an $8.7-million gain from trading in Microsoft shares. He took out $6 million.

Accounts for Andrew and Mark Madoff recorded purchases of thousands of shares of Dell Inc. a full 18 months before the accounts themselves were opened, the suit says.

Lawyers for the three men did not immediately return phone calls. A spokesman for Shana Madoff, who is married to a former Securities and Exchange Commission attorney, had no comment.

-- Walter Hamilton

Photo: Bernard L. Madoff leaves federal court in March. Credit: Louis Lanzano / Associated Press

Prosecution scores in legal wrangling ahead of Broadcom options trial

Federal prosecutors today won a legal victory in their stock options backdating case against former Broadcom Corp. Chief Financial Officer William J. Ruehle.

The 9th U.S. Circuit Court of Appeals ruled that the U.S. attorney’s office could introduce statements that Ruehle had made to company lawyers about the alleged backdating scheme. Ruehle is scheduled to stand trial beginning Oct. 20 in federal court in Santa Ana.

The opinion reverses a decision earlier this year by U.S. District Judge Cormac J. Carney, who said the statements to the company lawyers were protected by the attorney-client privilege and would not be admissible at trial.

In June 2008, a federal grand jury indicted Ruehle and Broadcom co-founder Henry T. Nicholas III on charges of conspiracy and securities fraud. The indictment accused Ruehle and Nicholas of secretly backdating options from 1999 to 2005 to enrich certain employees of the Irvine chip manufacturer.

Today’s opinion focused on Broadcom’s decision to retain the law firm Irell and Manella in 2006 to investigate its stock option grants, which had become the focus of media scrutiny.

The firm’s review -- which included interviews with Ruehle -- prompted the company to restate its earnings in January 2007 and report $2.2 billion in previously undisclosed compensation to employees.

Federal prosecutors launched an investigation after the restatement and interviewed Irell attorneys regarding their prior conversations with Ruehle.

Ruehle claimed that he believed his statements to the lawyers were protected because they were working for his employer.

The appeals court disagreed, noting that Ruehle knew the lawyers would disclose the statements to an outside accounting firm. "That he might regret those statements after later learning of the subsequent corporate disclosure to law enforcement officials is not material," the opinion said.

-- Stuart Pfeifer

SEC a sloth on crime? Not in this case

The Securities and Exchange Commission, forever criticized for being too slow to ferret out Wall Street crime, reacted with lightning speed this week to signs of insider trading ahead of a big merger deal.

The agency today charged a Texas man with illegally reaping $8.6 million by buying option contracts of Perot Systems Corp. before Dell Inc. announced its takeover of the firm on Monday, then dumping them.

The defendant, Reza Saleh, works for Perot Investments Inc. and Parkcentral Capital Management, private firms affiliated with Perot Systems. Parkcentral is the investment firm of H. Ross Perot, who isn't implicated in the case.

From Reuters:

According to a complaint filed on Wednesday with the federal court in Dallas, Saleh, 53, bought 9,332 call option contracts on Perot through two TD Ameritrade brokerage accounts between Sept. 4 and Sept. 18, after learning about merger talks through his employment.

The SEC said the Richardson, Texas resident sold the contracts after the $3.9 billion takeover was announced on Monday, resulting in the illicit profit.

"What's significant here, clearly, is the amount of money," said Rose Romero, regional director for the SEC's office in Fort Worth, Texas, in an interview. "It's incredible. It's a lot of money for a single individual to realize."

Saleh did not immediately return a call seeking comment, Reuters said.

News reports on Monday noted that trading in Perot Systems options contracts had surged before the deal was announced, suggesting that someone had been tipped off.

Nothing like calling attention to yourself by buying in bulk . . .

-- Tom Petruno

Weekend reading: Full report on SEC's Madoff mess

Now available on the Securities and Exchange Commission’s website: the full 457-page report by the SEC’s inspector general on how the agency repeatedly failed to detect Bernie Madoff’s 16-year-long Ponzi scheme.

One theme of the report, as highlighted in the summary the SEC released on Wednesday, is how Madoff was able to intimidate inexperienced SEC staffers who conducted examinations of the swindler’s business.

The report includes this testimony from an SEC attorney, recounting an episode during a 2005 examination:

"[W]e were asking for documents or something and he got . . . it was sort of disconcerting how angry he became. I mean his veins were popping out of his neck, and . . . he just repeatedly said, you know, ‘What are you looking for?’ And his voice level got increasingly loud and the veins were popping out, and one of us -- I may have said something, you know, ‘What do you want us to look for? What do you think we’re looking for?’ "

-- Tom Petruno

SEC repeatedly fumbled Bernie Madoff probes, agency watchdog says

The Securities and Exchange Commission "never properly examined or investigated" Bernie Madoff’s trading and "never took the necessary, but basic, steps to determine if Madoff was operating a Ponzi scheme," the SEC’s inspector general says in a report released today.

The agency, the report says, fumbled "numerous credible and detailed complaints" that could have uncovered the $65-billion scheme, which mushroomed for 16 years until Madoff confessed in December.

The postmortem by Inspector General H. David Kotz paints a picture of SEC incompetence, and asserts that the agency’s repeated failures to expose Madoff -- even after undertaking three examinations and two investigations of the firm over the years -- allowed Madoff to suck in more victims.

"We . . .found that investors who may have been uncertain about whether to invest with Madoff were reassured by the fact that the SEC had investigated and/or examined Madoff, or entities that did business with Madoff, and found no evidence of fraud," Kotz said in a summary of his report posted on the SEC’s website.

"Moreover, we found that Madoff proactively informed potential investors that the SEC had examined his operations," Kotz said. "When potential investors expressed hesitation about investing with Madoff, he cited the prior SEC examinations to establish credibility and allay suspicions or investor doubts that may have arisen while due diligence was being conducted."

SEC Chairwoman Mary L. Schapiro, who took over the helm of the agency in January, said in a statement that the report "makes clear that the agency missed numerous opportunities to discover the fraud. It is a failure that we continue to regret, and one that has led us to reform in many ways how we regulate markets and protect investors."

Kotz’s report depicts the SEC as bumbling, but doesn’t find evidence of wrongdoing by agency staff in connection with Madoff.

The probe "did not find evidence that any SEC personnel who worked on an SEC examination or investigation of Bernard L. Madoff Investment Securities, LLC had any financial or other inappropriate connection with Bernard Madoff or the Madoff family that influenced the conduct of their examination or investigatory work," Kotz said.

The investigation "also did not find that former SEC Assistant Director Eric Swanson's romantic relationship with Bernard Madoff’s niece, Shana Madoff, influenced the conduct of the SEC examinations of Madoff and his firm."

Swanson, who worked at the SEC in the first half of this decade, married Shana Madoff in 2007. She was a compliance lawyer at Madoff Investment Securities.

The Kotz report on the SEC website today is the executive summary of the investigation. Schapiro said the full 450-page report would be released in the next few days.

-- Tom Petruno

Photo: Bernie Madoff leaves federal court in March. Credit: Louis Lanzano / Associated Press

SEC to release report on how it botched Madoff case

Ready to settle into your beach chair this weekend with a good book?

The Securities and Exchange Commission is expected to make public later this week its inspector general’s report on how the agency failed to detect Bernie Madoff’s massive Ponzi scheme.

From the Wall Street Journal:

The report by SEC Inspector General David Kotz was sent to SEC Chairman Mary Schapiro’s office late Monday. The SEC protocol requires it to be reviewed by all five commissioners before its release.

The report, 450 pages long with more than 500 exhibits, delves into the numerous tips the agency received from hedge funds, news articles and Harry Markopolous, a former Madoff rival turned whistleblower, who spent nearly a decade trying to persuade the SEC to follow up on his suspicions.

In an email, Kotz called the report "an exhaustive summary of the investigative work that the SEC [Office of Inspector General] has conducted over the past 8 months." He said it is "a comprehensive review of the complaints issued to the SEC regarding Madoff, and the investigations and examinations that the SEC conducted of the Madoff firm."

-- Tom Petruno