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» Kirk - StockGate: DTCC Sued Again, $49M Suit Related To Elgindy;

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StockGate: DTCC Sued Again, $49M Suit Related To Elgindy; NASD Expels, Censures

StockGate: DTCC Sued Again, $49M Suit Related To Elgindy; NASD Expels, Censures

Jul 28, 2004 (financialwire.net via COMTEX) -- (FinancialWire) The Depository Trust and Clearing Corp. has been sued again, this time along with Anthony Elgindy, Schwab Capital Markets (SCH), Ameritrade Holding Corp. (AMTD), ETrade Group, Inc. (ET), and Bear Stearns (BSC), for a total of $49 million.

In other StockGate activities, the NASD has expelled Ryan & Company, LP (RYCO) of West Conshohoken, PA, for failure to cooperate in an ongoing investigation into whether Ryan and the firm engaged in a widespread scheme of impermissible short selling activity on behalf of three hedge fund clients, and Track Data Securities of Brooklyn has been censured and fined $15,000 for accepting customer short sale orders in certain securities and, for each order, "failing to

make/annotate an affirmative determination that the firm would receive delivery of the security on behalf of the customer or that the firm could borrow the security on behalf of the customer for delivery by settlement date."

The lawsuit, #04-CV-80403, Capece v. Elgindy, et al, was filed in the Southern District of Florida in West Palm Beach. The plaintiff is Louis R. Capece Jr., represented by Robert Charles Stone. It has been assigned to Judge Kenneth L. Ryskamp and is expected to be heard by a jury.

In addition to those named, defendants include THE ELGINDY SITES, ROBERT HANSEN ELGINDY, BRADLEY ABELOW, MICHAEL C. BODSON, JONATHAN E. BEYMAN, FRANK J. BISIGNANO, STEPHENS P. CASPER, JILL M. CONSIDINE, PAUL F. COSTELLO, DONALD F. DONAHUE, MARY M. FENOGLIO, GEORGE HRABOVSHY, RONALD J. KESSLER, CATHERINE KINNEY, PETER B. MADOFF, EILEEN K. MURRAY,.JAMES P. PALERMO, THOMAS J. PERNA, RONALD PURPORA, DOUGLAS SHULMAN, ROBERT H. SILVER, DENNIS J. DIRKS, THOMPSON M. SWAYNE;

Also, KNIGHT SECURITIES, LP, SCHWAB CAPITAL MARKETS, L.P., LEEDS AND KELLOG, M. H. MYERSON, MORGAN STANLEY, GLOBAL SECURITIES OF CANADA, E-TRADE, FIERO BROTHERS, TD-WATERHOUSE, JEFFERIES & COMPANY , INC., BEAR STEARNS & CO., INC., Holly Robin Skolnick, Eliot Pedrosa, David E. Koropp, FLORIDA DISCOUNT BROKERS, PACIFIC SECURITIES OF CANADA, FLEET TRADING, INSTINET CORP., GRUNTAL & COMPANY, ARCHIPELAGO LLC, ING BARINGS FURMAN SELZ, FIRST BERMUDA, DLJ, DATEK, SHERWOOD SECURITIES, and DREYFUS BROKERAGE SERVICES.

Charles Schwab & Co. recently said it is exiting the market-making business. It is one of several market makers that have been the subject of accusations and/or legal entanglements over naked shorting allegations and issues.

The company had said it is either the number one or number two market-maker in more than half of all of NASDAQ's (NDAQ) listed stocks.

Recently observers were surprised to find a comment letter submitted to the SEC by Mike Alexander, Senior VP of Charles Schwab, that admits outright that brokerages regularly ignore rules and regulations, saying it is not rules that need to be written; it is changes in behavior that is needed.

The comments were directed towards proposed changes in the U.S. settlement system, but could easily apply to other regulations as well.

"Improvements in the U.S. settlement system will only be truly achieved if and when regulations are rationalized to ensure that all market participants are held accountable for compliance. For example, the industry has struggled with the issue of institutional trade affirmation for quite some time now. While the benefits to the clearance and settlement system are self-evident, Buy-Side firms and Custodian banks have been resistant to make those changes that provide for same-day trade confirmation / affirmation and assurance of trade settlement," said Alexander.

"Schwab opposes the notion that securities intermediaries such as broker-dealers be required to police compliance," he stated. "The NYSE and other SROs have had trade affirmation rules on their books for some time. However, such rules have not been effective in changing the behavior

of Buy-Side firms or their custodians; nor do the rules provide assurance that the affirmed trade will settle.

"Recognition of this fact is evidence that changes to the settlement cycle not only require overhauling systems, but also changing behavior. We believe that only by holding all market

participants directly accountable for making required affirmations will the necessary changes to behavior," he stated at http://www.sec.gov/rules/concept/s71304/... .

In a June 23 release, the SEC stated it has put into place Rule 202(T), which establishes procedures to allow the Commission to temporarily suspend the operation of the current "tick" test in Rule 10a-1, and any short sale price test of any exchange or national securities association, for specified securities.

Through a separate order, the Commission will suspend, on a pilot basis for a period of one-year, the tick test provision of paragraph (a) of Rule 10a-1, and any short sale price test of any exchange or national securities association, for approximately one-third of stocks in the Russell 3000 index.

The order also will suspend, on a pilot basis for a period of one year, the tick test provision of paragraph (a) of Rule 10a-1 for short sales executed in any security included in the Russell 1000 index after 4:15 p.m. Eastern, and all other securities after the close of the consolidated tape, and until the open of the consolidated tape the next day.

The pilot will commence on January 3, 2005 to permit broker-dealers and self-regulatory organizations to make the necessary programming adjustments.

The Commission deferred consideration of the proposal to replace the current "tick" test of Rule 10a-1 with a new uniform bid test. The Commission could reconsider any further action on these proposals after the completion of the pilot.

Rule 203, which will incorporate current Rule 10a-2 and will create a uniform Commission rule requiring broker-dealers, prior to effecting short sales in all equity securities, to "locate" securities available for borrowing.

There will be limited exceptions from the locate requirement, including for short sales by registered market makers in connection with bona-fide market making.

Rule 203 also imposes additional requirements on designated "threshold securities." Rule 203 defines a threshold security to mean an equity security for which there is an aggregate fail to deliver position for five consecutive settlement days at a registered clearing agency of 10,000 shares or more and that is equal to at least 0.5% of the issue's total shares outstanding.

Where a clearing agency participant has a fail to deliver position in threshold securities that persists for ten consecutive days after settlement, the participant must take action to close out the position. Until the position is closed out, the participant, and any broker-dealer for which it clears transactions, may not effect further short sales in the particular threshold security without borrowing or entering into a bona fide arrangement to borrow the security.

Rule 203 will become effective 30 days after publication with a compliance date of January 3, 2005, to permit firms to make programming and procedural adjustments.

Rule 200, which among other things, will redesignate current Rule 3b-3 with some modifications to define ownership and aggregation of securities positions, and include a requirement to mark all sell orders in all equity securities. Rule 200 will become effective 30 days after publication.

The Commission also adopted amendments to Rule 105 of Regulation M to remove the current shelf offering exception, and issued interpretive guidance addressing sham transactions designed to evade the rule.

The amendment applies to short sales effected within five days prior to the pricing of a shelf offering. Such short sales may not be covered with offering securities purchased from an underwriter or other broker-dealer participating in the offering.

The Rule 105 amendments will be effective 30 days after publication in the Federal Register, and the interpretive guidance will be effective upon such publication.

Opponents of naked short selling were, however, quick to denounce the provision that allows market makers an exemption, and many market observers said that the SEC should provide a public list of companies that fall into the "threshold security" category.

"The SEC claims that the number of companies involved in this 'threshold security' category is 4% of all publicly traded companies. If in fact it is that small the process is certainly manageable," said the website InvestigatetheSEC.com at http://www.investigatethesec.com . "It is also the right of every issuer, in protecting their business and their investors to know the status of their stock trading."

Some were discussing whether the SEC can keep such information private under the Freedom of Information Act.

The marketplace is already upset over promises by the Berlin Stock Exchange, since broken, that it would delist any company upon request.

"Please understand that cessation of trading in the shares of XRAYMEDIA Inc. (XRYM) is not possible," the exchange told one such requester.

It's not just U.S. companies such as Whistler Investments (WHIS), Sonoran Energy (SNRN), Celsion Corporation (CLN), and eLinear Inc. (ELU) or Israeli companies that have had serious concerns about their unannounced and unathrorized listings on the Berlin-Bremen Stock Exchange.

Apparently, some 150 British companies are protesting the same fate.

A number of UK-listed companies have demanded a London Stock Exchange investigation after they found that their shares are being traded.

Meanwhile, Whistler, Sonoran and eLinear have announced they have successfully secured their delistings, and the U.S. Securities and Exchange Commission has rescheduled its open hearing to consider the adoption of amendments to Regulation Sho to July 28 at 9:30 a.m. The announcement is at http://www.sec.gov/news/digest/dig061504... .

According to the London Money Telegraph, "several companies believe the market for their shares has been distorted and that they have fallen in value after trading started on the Berlin-Bremen exchange.

"Some smaller companies, whose shares are lightly traded in London, fear the Berlin market has been used by speculators to short-sell their shares."

The Telegraph said the number of companies are thought to be as high as 150, including even "larger companies" such as Matalan (OTC: MATNF) and Halfords.

Mladen Ninkov, the chairman of Aim-listed Griffin Mining (OTC: GFNMF), was quoted as saying: "We were put on the Berlin market without our knowledge by a German broker and now we've got about 8m shares out in a short sale. It is horrifying - that is about 4 per cent of the company and it is forcing the price down."

A spokesman for the London Stock Exchange said: "If there is evidence of market abuse we would refer that on to the appropriate authorities."

Whistler said that according to its transfer agent records, "we have 5,504,680 shares held by DTC, but the ADP broker search indicates of 6,217,458 shares being reported by broker/dealers as being held on behalf of their customers, indicating a short position of more than 700,000 shares. A summary report can be viewed at http://www.whistlerinvestments.com/short... .

"We have therefore commenced work with DTC for a formal review of the reported excessive broker/dealer holdings of our stock so that we can conduct our corporate affairs properly in view of our planned stockholders meeting and other upcoming corporate matters. We again advise our stockholders make sure that they receive delivery of any shares that they purchase, and also that their stock is not being borrowed without authorization.

Holly Roseberry, President of Whistler Investments, states "We intend to get to the bottom of the excessive short position and bring stability back into the trading of our stock. We're happy to say that we have 5,133 stockholders and we expect all our stockholders to benefit from the shorters having to cover their short positions."

FinancialWire has reported on the disclosure that "Dateline," the investigatory TV program aired by General Electric's (GE) NBC unit, has purportedly been preparing a blockbuster expose of "Stockgate" (see separate story at http://www.financialwire.net).

It is not known if "Dateline" has uncovered continuing underworld connections to the scandal, but FinancialWire reported that Dateline may be pointing a large finger of conflict at the U.S. Securities and Exchange Commission itself, which reportedly receives a slice of every transaction fee as part of its budget. According to court filings supported by the O'Quinn/Christian legal network, almost $1 billion annually is received by the Depository Trust and Clearing Corp. for its "Stock Borrow Program," which the lawsuits claim is just a fancy name for counterfeiting, as the DTCC purportedly lends out many multiples of the actual certificates in the float. Apparently the SEC receives a transaction fee for each transaction facilitated by these loans of non-existent certificates, which could knock a hole in its budget should the revenues from the practice be halted.

The North American Securities Administrators Association, comprised of state and Canadian regulators, has pointedly told the SEC that either it must rethink its cozy DTCC relationship, or it hints, some of its more aggressive state practitioners (think Eliot Spitzer) may do the rethinking for the SEC.

Naked short selling is worrisome for hundreds of small U.S. companies, including those recently asking to be delisted from the Berlin Stock Exchange, such as Golden Phoenix Minerals, Inc. (GPXM), Nannaco, Inc. (NNCO), 5G Wireless Communications, Inc. (FGWC), CyberAds, Inc. (CYAD), Provectus Pharmaceuticals, Inc. (PVCT), House of Brussels Chocolates (HBSL), InforMedix, Inc. (IFMX), Tissera, Inc. (TSSR), Americana Publishing, Inc. (APBH), Celsion Corporation (CLN), ChampionLyte Holdings, Inc. (CPLY), Pickups Plus, Inc. (PUPS), China Wireless Communications Inc. (CWLC), CareDecision Corp. (CDED), Titan General Holdings, Inc. (TTGH), IPVoice Communications, Inc. (OTCBB: IPVO), Whistler Investments (WHIS), WARP Technology Holdings, Inc. (WRPT), BGR Corp. (OTCBB: BGRR), ICOA, Inc., (ICOA), DICUT, INC. (OTCBB: DCUTE), NHC Communications Inc. (NHC), Stratus Services Group, Inc. (OTCBB: SERV), Golden Phoenix Minerals, Inc. (GPXM).

Berliner Freiverkehr (Aktien) AG has been singled out as the broker and market maker that has been "listing" the companies. It is suspected that one broker, RA Angsar Limprecht, is involved in all if not most of the listings.

Small public companies are squeezed not only by hedge funds, naked short sellers, overseas listers such as the Berlin Stock Exchange, and the out-of-control "Stock Borrow Program" run by the governance-conflict-laden Depository Trust and Clearing Corporation, but to the amazement of the industry, as often and not by their own regulators.

A new staff recommendation by Annette Nazareth, director of the division of market regulation at the U.S. Securities and Exchange Commission to "outlaw" ownership of paper certificates at the same time the Depository Trust and Clearing Corporation is under intense scrutiny for alleged electronic counterfeiting has begun hitting the small public company markets, company executives, shareholders and manipulative short-selling opponents like the proverbial ton of bricks.

A Dow Jones (DJ) article by Judith Burns sparked the uproar, as the inextricably intertwined web of connections between the SEC and the DTC, which is sagging from the weight of conflicted governance by representatives from a rollcall of industry heavyweights, including NASD, which owns NASDAQ (NDAQ), the New York Stock Exchange, Goldman Sachs (GS) and Lehman Brothers (LEH), to name only a few.

The rule proposal would bar stock transfer agents from handling shares that carry any limitations on transfer. Control over stock certificates is one of the ways that small companies have combated illegal naked short sellers. Burns quoted Nazareth as saying that these companies' "self-help" efforts "aren't helping U.S. markets overall." Nazareth was quoted as saying restrictions on stocks are "a significant step backwards" in the "move from paper stock certificates to automated computerized trading."

Nazareth said that abusive "naked" short selling has been a problem "in some cases," but that is "best dealt with by a pending SEC proposal," presumably Regulation SHO.

SEC Commissioner William Donaldson purportedly publicly refused to answer any questions from the NASD about the timing of the Commission's consideration of the Regulation at a conference where he was simultaneously proposing early reforms of the mutual fund scandals. The Dow Jones said, however, that Robert Colby, SEC deputy market regulation division director, predicted the SEC will take that to a vote in early June.

The Dow Jones report noted that "naked short-selling occurs when sellers don't buy shares to replace those they borrowed, a manipulative practice that can drive a company's stock price sharply lower.

The stock certiticate plan has been put to a 30-day comment periodl Then the SEC would have to vote to adopt it. If adopted, Colby was quoted as saying that regulators might "sue firms that seek to impose restrictions on stock transfers."

The recent lawsuit filed by Nanopierce Technologies (NPCT) alleges that the Depository Trust and Clearing Corp. has a lot of reasons, almost one billion of them a year, to keep illegal naked short selling in operation. It was the shot across the bow by the legendary Houston law firms of Christian, Smith, Wukoson and Jewell, and OQuinn, Laminack and Pirtle, whose notches already include environmental targets, the breast implant industry and the tobacco industry, all brought to their knees.

In comments to the U.S. Securities and Exchange Commission, C. Austin Burrell, who is providing litigation support and research for the law firms, said that StockGate is more massive than anyone may have imagined. "Illegal Naked Short Selling has stripped hundreds of billions, if not TRILLIONS, of dollars from American investors," and have resulted in over 7,000 public companies having been "shorted out of existence over the past six years." Burrell said some experts believe as much as $1 trillion to $3 trillion has been lost to this practice.

He stated that the restrictions on short selling were deliberately put into the Securities Acts of 1933 and 1934 because of the first-hand evidence then available that the "sheer scale of the crashes was a direct result of intentional manipulation of US markets through abusive short selling by a massive conspiracy."

Burrell noted that the 65-lawyer team presided over by lead lawyers Wes Christian and John O'Quinn has uncovered more than 1,200 hedge fund and offshore accounts working through more than 150 broker-dealers and market makers in a joint cooperative effort to strip small and medium size public companies of their value.

Recently the NASD and U.S. Securities and Exchange Commission approved an interim naked short-selling band-aid, requiring U.S. brokers to make an "affirmative determination" that short-sellers, even foreign short-sellers, mostly Canadian, can find certificates to cover before processing the order.

Last year, many besieged public companies sought refuge from the manipulation by seeking to exit the DTC, but on July 28, 2003, the SEC stated "the issues surrounding naked short selling are not germane to the manner in which DTC operates as a depository registered as a clearing agency. Decisions to engage in such transactions are made by parties other than DTC. DTC does not allow its participants to establish short positions resulting from their failure to deliver securities at settlement. While the Commission appreciates commenters' concerns about manipulative activity, those concerns must be addressed by other means."

The Nanopierce lawsuit, said to be the first of many out of the box, emphatically suggests otherwise. According to lawyer Christian, et.al., the DTC is at the very heart of the problem, and has almost a billion dollars a year at stake in keeping the problem.

The Depository Trust Company (DTC) is a member of the U.S. Federal Reserve System, a limited-purpose trust company under New York State banking law and a registered clearing agency with the SEC. The depository supposedly brings efficiency to the securities industry by retaining custody of some 2 million securities issues, effectively "dematerializing" most of them so that they exist only as electronic files rather than as countless pieces of paper. The depository also provides the services necessary for the maintenance of the securities it has in "custody."

According to the suit, the DTCC has an enormous pecuniary and conflicted interest in the entire short selling scandal through the huge income stream they were realizing from it every day. They have made literally billions of dollars lending individual real shares, in most cases over and over, getting a fee each time they made a journal entry in the "Stock Borrow Program."

The Stock Borrow Program was purportedly set up to facilitate expedited clearance of stock trades. Somewhere along the line, the DTCC became aware that if it could lend a single share an unlimited number of times, it could collect a fee each time, according to Burrell. "There are numerous cases of a single share being lent ten or many more times," giving rise to the complaint that the DTCC has been electronically counterfeiting just as was done via printed certificates before the Crash.

"Such re-hypothecation has in effect made the potential 'float' in a single company's shares virtually unlimited and the term 'float' meaningless. Shares could be electronically created/counterfeited/kited without a registration statement being filed, and without the underlying company having any knowledge such shares are being sold or even in existence." Burrell said the Christian/O'Quinn lawsuits will seek to show that the "counterfeiting/creation of unregistered shares is a specific violation of the Securities Act of 1933, barring the 'Sale of Unregistered Securities'."

While the Nanopierce lawsuit has been filed at the state level, another companion lawsuit just heading to the courts on behalf of Exotics.com (EXII) will be argued at the Federal level.

Nanopierce's suit in the 2nd Judicial District Court in Nevada, is Case No. CV04-01079, alleges that the DTC's "stock borrow program" was "purportedly created to address SHORT TERM delivery failures," but that the "end result of the program has been to create tens of millions of unissued and unregistered shares to be traded in the public market," and in some instances resulting in "two or more shareholders who purchase shares in separate transactions to own the same shares."

The complaint alleges that the DTC has a colossal disincentive to stop the "stock borrow" program, booking revenues from services of $425,416,000 and similarly, the NSCC deriving revenues of $293,133,000.

Further, the suit alleges that "open positions" resulting from this activity at the close of business on December 31, 2003, "approximated $3,025,467,000" due to NSCC, and $2,303,717,000 due by NSCC, and unsettled positions of $721,750,000 for securities borrowed through the NSCC's "Stock Borrow Program."

Nanopierce claims that DTCC and NSCC have joined in a "scheme" to "manipulate downward the price of the affected securities, thereby reducing the market value of the open fail to deliver positions." The suit also claims that the s have permitted sellers to maintain open fail to deliver positions of tens of millions of shares for periods of a year and even longer.

It quotes the National Association of Security Dealers as admitting that "concerns have been raised by members, issuers, investors and other interested parties about potentially abusive short selling activities occurring in the marketplace. In particular, naked short selling, or selling short without borrowing securities to make delivery, can result in long term failures to deliver, including aggregate failures to deliver that exceed the total float of a security. NASD believes such extended failures to deliver can have a negative effect on the market. Among other things, by not having to deliver securities, naked short sellers can take on larger short positions than would otherwise be permissible, which can facilitate manipulative activity."

Nanopierce claims that it had "relied on material misrepresentations and omissions by DTC and NSCC in trading its shares in the stock market "without knowledge of s' fraud-on-the market through statements they made about the clearing and settlement services they provided." Further, it claims that the s acted with "scienter" since they had a major financial financial motivation to falsely represent their services, which Nanopierce claims are also anticompetitive.

The largely unregulated DTC has become something of a defacto Czar presiding over the entire U.S. markets system, wielding more day-to-day influence and control than the SEC, the NASD and NASDAQ combined. And, as the SEC's July 28 ruling indicates, its monopoly over the electronic trading system appears even to be protected.

The Depository Trust and Clearing Corp.'s two preferred shareholders are the New York Stock Exchange and the NASD, a regulatory agency that also owns the NASDAQ (NDAQ) and the embattled American Stock Exchange! Regulators, regulate thyself?

In an era when corporate governance is the primary interest for the SEC and state regulators, the DTCC is hardly a role model. Its 21 directors represent a virtual litany of conflict:

They include Bradley Abelow, Managing Director, Goldman Sachs (GS); Jonathan E. Beyman, Chief Information Officer, Lehman Brothers (LEH); Frank J. Bisignano, Chief Administrative Officer and Senior Executive Vice President, Citigroup / Solomon Smith Barney's Corporate Investment Bank (C); Michael C. Bodson, Managing Director, Morgan Stanley (MWD); Gary Bullock, Global Head of Logistics, Infrastructure, UBS Investment Bank (UBS); Stephen P. Casper, Managing Director and Chief Operating Officer, Fischer Francis Trees & Watts, Inc.; Jill M. Considine,Chairman, President & Chief Executive Officer, The Depository Trust & Clearing Corporation (DTCC);

Also, Paul F. Costello, President, Business Services Group, Wachovia Securities (WB); John W. Cummings, Senior Vice President & Head of Global Technology & Services, Merrill Lynch & Co. (MER); Donald F. Donahue, Chief Operating Officer, The Depository Trust & Clearing Corporation (DTCC); Norman Eaker, General Partner, Edward Jones; George Hrabovsky, President, Alliance Global Investors Service; Catherine R. Kinney, President and Co-Chief Operating Officer, New York Stock Exchange; Thomas J. McCrossan, Executive Vice President, State Street Corporation (STT); Eileen K. Murray, Managing Director, Credit Suisse First Boston (CSR); James P. Palermo, Vice Chairman, Mellon Financial Corporation (MEL); Thomas J. Perna, Senior Executive Vice President, Financial Companies Services Sector of The Bank of New York (BNY); Ronald Purpora, Chief Executive Officer, Garban LLC; Douglas Shulman, President, Regulatory Services and Operations, NASD; and Thompson M. Swayne, Executive Vice President, JPMorgan Chase (JPM).

In their comments to the SEC regarding Regulation SHO in January, the 50 state regulators, through their association, the North American Association of Securities Administrators (NASAA) issued what many consider to be a strong warning that if the DTC is not dealt with in the final regulations, state regulators such as New York State Attorney General Eliot Spitzer may step to the plate.

In what many considered to have been explosive comments, Ralph Lambiase, NASAA president and Director of the Connecticut Division of Securities, warned "NASAA urges the Commission to reconsider its stance regarding the role of the Depository Trust and Clearing Corporation (the DTC). As a threshold matter, NASAA believes that the Commission should explicitly prohibit the DTC from lending more shares of a security than it actually holds. The ability of the overall proposed rule would be severely impared unless the Commission undertakes to implement such a prohibition."

As the Nanopierce lawsuit reveals, those were indeed strong words, meddling as it did, in a substantial revenues base for the DTCC.

Recently, leading market makers and brokers named in various lawsuits and other actions, including FleetBoston (NYSE: FBF), Goldman, Sachs & Co. (GS), H. Myerson & Co., Inc. (NASDAQ: MHMY), Olde / H&R Block (HRB), Charles Schwab (SCH), Toronto-Dominion's (TD), TD Waterhouse Group, Bank of America's (BAC) Banc of America Securities LLC, Societe Generale's (SCGLF) SG Cowen Securities Corp. vFinance, Inc. (VFIN), Knight Trading Group, Inc. (NITE), A.G. Edwards, Inc. (AGE), Ameritrade Holding Corp. (AMTD), Deutsche Bank AG (DB), and ETrade Group, Inc. (ET), were forced to comply with new short-selling market regulations imposed by the NASD after the SEC had "sat on" the NASD request to plug material loopholes for almost 2-1/2 years.

"The new rules expand the scope of the affirmative determination requirements to include orders received from broker/dealers that are not members of NASD ("non-member broker/dealers").

The new rule is on the web at http://www.nasdr.com/2610_2004.asp#04-03

The rule itself, while welcomed by small companies and their shareholders in the U.S., nevertheless raised an outcry because the NASD's request to put it into effect had set on a shelf at the SEC since 2001.

The scandal has embroiled hundreds of companies and dozens of brokers and marketmakers, in a web of internaitional intrigue, manipulative short-selling and cross-border acctions and denials.

Comments on Regulation SHO ended January 5, and may be viewed at http://www.sec.gov/rules/proposed/s72303... .

Some 122 companies, including 13 brokers, such as FleetBoston (NYSE: FBF), Goldman, Sachs & Co. (GS), H. Myerson & Co., Inc. (NASDAQ: MHMY), Olde / H&R Block (HRB), Charles Schwab (SCH), Toronto-Dominion's (TD), TD Waterhouse Group and vFinance, Inc. (VFIN). A.G. Edwards, Inc. (AGE), Ameritrade Holding Corp. (AMTD), Deutsche Bank AG (DB), Knight (NITE) and ETrade Group, Inc. (ET), have been embroiled for over a year in a raging controversy

The remaining 109 companies among the 122 named to date have issued press releases or been named in the media as having been victimized, or as taking various actions, either alone or in concert with other companies, to oppose manipulative trading in the form of illegal naked short selling. The actions have ranged from lawsuits to withdrawals and threatened withdrawals from the electronic trading system managed by the Depository Trust & Clearing Corp., to withdrawals from toxic financings, to the issuance of dividends or name changes designed to squeeze manipulators, to joining associations or networks or to contacting regulatory authorities to provide documentation of abuses or otherwise complain.

The complete list of those 108 companies include Advanced Viral Research Corp. (ADVR), AdZone Research, Inc. (ADZR), Amazon Natural Treasures (OTC: ANTD), America's Senior Financial Services (OTCBB: AMSE), American Ammunition, Inc. (AAMI), AngelCiti Entertainment (OTCBB: AGLC), ATSI Communications, Inc. (ATSC), Federal Agricultural Mortgage / Farmer Mac (AGM) Allied Capital (ALD), American Motorcycle (OTC: AMCYV), American International Industries (AMIN), Ameri-Dream (OTC: AMDR), Adirondack Pure Springs Mt. Water Co. (OTCBB: APSW), ATSI Communications,Inc. (ATSC) Bluebook International (BBIC), Blue Industries (OTCBB: BLIIV), Bentley Communications (OTCBB: BTLY), BIFS Technologies Corporation (BIFT), Biocurex (BOCX). Broadleaf Capital Partners, Inc. (BDLF), Chattem, Inc. (CHTT), Critical Home Care (CCLH), Composite Holdings (COHIA), CyberDigital, Inc. (CYBD). Diamond International Group (OTCBB: DMND), Dobson Communications Corp. (DCEL), Eagle Tech Communications (EATC), Edgetech Services (EDGH);

Also, Endovasc Ltd. (EVSC), Enviro-Energy Corporation (ENGY), Environmental Products & Technologies (OTC: EPTC), Environmental Solutions Worldwide, Inc. (ESWW), EPIXTAR Corp. (EPXR), eResearchTechnologies, Inc. (ERES), Flight Safety Technologies (OTCBB: FLST), Freddie Mac (FRE), FreeStar Technologies (OTCBB: FSRCE), Front Porch Digital,

Inc. (FPDI), Geotec Thermal Generators, Inc. (GETC), Genesis Intermedia (GENI), GeneMax Corp. (GMXX), Global Explorations Inc (GXXL), Global Path (OTCBB: GBPI), GloTech Industries, Inc. (OTCBB: GTHI), Green Dolphin Systems (OTCBB: GLDS), Group Management (OTCBB: GPMT), Hop-On (HPON), H-Quotient, Inc., (HQNT), Hyperdynamics Corp. (HYPD), International Biochem (IBCL), Intergold Corp. (OTCBB: IGCO), International Broadcasting Corporation (IBCS), InternetStudios, Inc. (ISTO), ITIS Holdings (ITHH), Investco Corp. (IVCO), Lair Holdings (LAIR), Lifeline BioTechnologies Inc. (LBTT), Life Energy & Technology (LETH), MBIA (MBI);

Also, MegaMania Interactive (MNIA), MetaSource Group, Inc. (MTSR),Midastrade.com (MIDS), Make Your Move (OTCBB: MKMV), Medinah Minerals (MDMN), MSM Jewelry Corp. (OTC: MSMC), Nanopierce Technologies, Inc. (NPCT), Nutra Pharmaceutical (NPHC), Nutek (OTCBB: NUTK), Navigator Ventures (NVGV), Orbit E-Commerce, Inc. (OECI), Pitts & Spitts (OTC: PSPP), Sales OnLine Direct (OTCBB: PAID), Pacel Corp. (OTCBB: PACC), PayStar Corporation (PYST),Petrogen Corp. (PTGC), Pinnacle Business Management (OTC: PCBM), Premier Development & Investment, Inc. (PDVN), PrimeHoldings.com, Inc. (PRIM), Phlo Corporation (PHLC), Resourcing Solutions (RESG), Reed Holdings (OTC: RDHC), Rocky Mountain Energy Corp. (OTCBB: RMECE), RTIN Holdings (OTCBB: RTNHE), Saflink Corp. (SFLK), Safe Travel Care (OTCBB: SFTVV), Sedona Corp. (SDNA);

Also, Sionix Corp. (SINX), Sonoran Energy (SNRN), Starmax Technologies (SMXIF), Storage Suites America (SSUA), Suncomm Technologies (OTC: STEH), Sports Resorts International (SPRI), Technology Logistics (TLOS), Swiss Medica, Inc. (SWME), Ten Stix, Inc. (TNTI), Tidelands Oil (TIDE), Titan Construction (TTCS), Trezac Corp. (OTCBB: TRZAV), Universal Express, Inc. (USXP), Valesc Holdings, Inc. (OTCBB: VLSHV), Vega Atlantic (OTCBB: VGAC), Viragen (VRA), Viragen International (VGNI), Vista Continental Corporation, (VICC), Viva International (VIVI), Vtex Energy (OTCBB: VXENE) and Wizzard Software (WIZD), WorldTradeShow.com (WTSW) and Y3K Secure Enterprise Software, Inc. (OTCBB: YTHK).

Earlier in 2003, the SEC fined Rhino Advisors, Inc., $1 million for its representation of Amro International in the financing and manipulation of Sedona Corp. Amro, also known as AMRO, was registered in Panama, a secretive offshore haven, but was not named in the SEC settlement. Another 60 public companies may have been manipulated by the fined Rhino Advisors and its indicted principals, or its funding apparatus, Amro.

These include:

All American Food Group Inc (AAFGQ), Amanda Co Inc (AMNA), Antra Holdings (RECD), Aquis Communications Group Inc (OTCBB: AQUIS), Avanir Pharmaceuticals (AVN), Bionutrics Inc (BNRX), Brilliant Digital Entertainment Inc (AMEX: BDE), Bravo! Foods International Corp. (OTCBB: BRVOE), Butler National Corp (BUTL),Calypte Biomedical Corp (CYPT), Chemtrak Inc/DE (CMTR), Clicknsettle Com Inc (CLIK), Corporate Vision Inc (OTC: CVIA), Crown Laboratories Inc/DE (CLWB), Dental Medical Diagnostic Systems Inc (DMDS), Detour Media Group Inc (DTRM),

Also, Digital Privacy Inc/DE (OTC: DGPV), Senior Services Inc (DISS), International Inc (DYNX), Endovasc Ltd Inc (EVSC), Esynch Corp/CA (OTCBB: ESYN), Focus Enhancements Inc (NASDAQ: FSCE), Frederick Brewing Co (FRBW), Greystone Digital Technology Inc (GSTN), Havana Republic Inc/FL (HVNR), Henley Healthcare Inc (HENL), Hollywood Media Corp (HOLL), Ibiz Technology Corp (IBZT), Diagnostic Systems Inc/FL (IMDS), Imaging Technologies (OTCBB: IMTO), Integrated Surgical Systems Inc (RDOC),

Also, Interferon Sciences Inc (IFSC), Interiors Inc (OTC: ITRNA), Laminaire Corp (THMZ), Medisys Technologies Inc (SCEP), Milestone Scientific Inc/NJ (MS), Nevada Manhattan Group Inc (NVMH), Innovations Inc (OTCBB: NTGE),Systems Group (OSYM), Pacific Systems Control Technology Inc (PFSY), Professional Transportation Group Ltd Inc (TRUC), Rnethealth Inc (RNTT),

Also, Sand Technology Inc (SNDT), Sedona Corp (SDNA), Silverado Foods Inc (SVFO), Stockgroup Information Systems (SWEB) Surgilight Inc (SRGL), Tasty Fries Inc (TFRY), Tech Laboratories Inc (TCHL), Teltran International Group Ltd (TLTG), Titan Motorcycle Co of America Inc (TMOTQ), Trans Energy Inc (TSRG), Motorcycle Co (UMCC), Universal Communication Systems Inc (UCSY), Medical Systems Inc (UMSI), Vianet Technologies Inc (VNTK),Viragen Inc (VRA), Webcatalyst Inc (WBCL), Worldwide Wireless Networks Inc (WWWNQ), and ZAP (ZAPZ).

For up-to-the-minute news, features and links click on http://www.financialwire.net

FinancialWire is an independent, proprietary news service of Investrend Information, a division of Investrend Communications, Inc. It is not a press release service and receives no compensation for its news or opinions. Other divisions of Investrend, however, provide shareholder empowerment platforms such as forums, independent research and webcasting. For more information or to receive the FirstAlert daily summary of news, commentary, research reports, webcasts, events and conference calls, click on http://www.investrend.com/contact.asp

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-- posted by Kirk

http://www.nypost.com/business/31218.htm

Top 184. Oct 5, 2004 9:28 AM

» Kirk - GAGGING THE MARKET

.
From http://www.siliconinvestor.com/readmsg.a...

October 4, 2004 -- JURY selection for an unusual and potentially far- reaching white-collar crime case begins this week in a Brooklyn federal court.

GAGGING THE MARKET

By CHRISTOPHER BYRON
--------------------------------------------------------------------------------

October 4, 2004 -- JURY selection for an unusual and potenti ally far- reaching white-collar crime case begins this week in a Brooklyn federal court. In it, prosecutors are charging that an Egyptian-born Wall Street investor named Amr Elgindy, along with two of his associates as well as two ex-FBI Special Agents, ran an illegal investment ring based on confidential information stolen for Elgindy by the agents from the Bureau's own computers.

But there is an unseen co-defendant standing trial in this case along with Elgindy and the others, and prosecutors plainly intend to keep mentioning his presence whenever possible.

We speak, of course, of the convenient Wall Street whipping boy known as the Short Seller, who gets dragged into the town square for a ritual thrashing every time bear markets bring inflated stock prices tumbling back to earth.

We'll get into the particulars of all that in a minute, as Elgindy — already demonized by prosecutors in open court for allegedly having had advance knowledge of the terrorist attacks of 9/11 — gets smeared all over again at trial. Last time around, the FBI subsequently disavowed the 9/11 claim. This time he's reemerging as Wall Street's poster boy for the evil Dr. No: the stock market short-seller.

In one sense, prosecutors are doing the Lord's work in pursuing Elgindy, who seems as bad a character as any law-abiding person in the stock market is likely ever to encounter.

Over the course of his brief but notorious career, the colossally self-admiring Elgindy has managed to promote himself to the media as a friend and protector of the Wall Street little guy, and at one point a few years ago succeeded in getting himself profiled on ABC's 20/20 news magazine.

Yet in the shadows of that reputation lurked another man entirely. Now 36, Elgindy emigrated from Egypt to the U.S. with his family at the age of three, and eventually wound up dropping out of high school and becoming a used car salesman. According to published reports, he was arrested in Los Angeles at the age of 18 on a charge, later dropped, of assault with a deadly weapon.

THEREAFTER, he drifted into the crime- soaked world of penny stocks, landing a job as a broker at the notoriously corrupt firm of Blinder Robinson & Co., where he became involved in a penny-stock promotion kickback scheme.

When the feds began investigating, Elgindy saved himself by becoming a government informant. Thereafter he got in trouble all over again and wound up serving four months in prison on a guilty plea to insurance fraud charges. By then, Elgindy had opened his own brokerage firm and begun marketing himself on the internet as a wizard at spotting over-priced stocks that were riding for a fall.

On Wall Street, a person can profit from such knowledge by "selling the stock short." In a so-called "short sale," an investor bets, in effect, that the stock in question is about to take a tumble, so he tells his broker to sell it even though he doesn't actually even own it.

IN so doing, the investor is betting that by the time he actually has to hand over the shares he's already "sold," their price will have fallen and he'll be able to buy them for cheap on the open market and make a quick killing.

Though selling something you don't even own sounds as fishy as claiming to "find" something that isn't yet even lost, short-selling is both entirely legal and universally practiced throughout Wall Street, adding stability and liquidity to the market while preventing over-hyped stocks from spinning totally out of control.

As a group, short-sellers also develop what is far and away the best and most accurate stock research on Wall Street, which is hardly surprising when you consider the size of the risk they run if their research turns out to be faulty. Unlike an investor who is "long" a stock and can lose no more than 100 percent of his investment no matter how far a stock falls, a short-seller who bets wrong can be financially wiped out since there are no limits to how high a stock's price can ultimately soar.

Nonetheless, it is easy to view short-selling as being somehow disreputable, and Elgindy's oily reputation only bolsters that impression, which is further strengthened by the remarkable allegations in the indictment.

According to that document, in the year 2000 Elgindy began secretly paying bribes to an FBI Special Agent named Jeffrey Royer who responded by passing along classified information from the FBI's National Crime Information Center database.

ELGINDY allegedly used this information to pick short-sale targets from the thousands of companies then trading in the market. Having placed his own short-sale bets, Elgindy then spread the information to other short-sellers to induce them to place short-sale bets of their own, putting further downward pressure on the shares.

According to the indictment, Royer eventually entangled an FBI Special Agent named Lynn Wingate in the matter, persuading her to obtain still more information from government computers. In fact, when it began to seem that federal investigators had opened a probe of Elgindy's activities, Wingate allegedly began roaming through the computers looking for information on the progress of the investigation.

That alone would seem to be enough of a basis to convict Elgindy and his entire network. But the indictment goes further, alleging that Elgindy used the information to commit crimes like extortion and market manipulation, when the supporting evidence seems flimsy at best. In fact, at least some of the information fished from the FBI computers by Royer and Wingate and passed along to Elgindy wasn't confidential at all but was available to the public at large via the Internet.

Yet instead of stopping with the argument that Elgindy had schemed to acquire the information illegally, the government went further and in a pretrial memorandum in the case argued that Elgindy had no right to publicize the information in order to drive down the price.

But why not? Where does it say in any statute or case book of securities law that the public dissemination of accurate and truthful, but negative, information about a stock is illegal? What if the information had caused the stock price to go up instead of down? Would it still have been illegal to distribute it to the public?

Gratuitous overreaching got the feds in trouble in the Martha Stewart case, when they foolishly attempted to extend the concept of insider trading at the expense of Martha's First Amendment right to speak publicly in her own defense. And something similar may be about to unfold in the Elgindy matter, as prosecutors set out to prove that his crimes went beyond the specific and provable things he did and enveloped the more general issue of what he was: a Wall Street short-seller.

Being such a person isn't automatically a crime yet, but the case of the United States v. Amr I. Elgindy seems bent on making it one.

*Please send e-mail to: Cbyron@nypost.com

-- posted by Kirk

Top 185. Nov 5, 2004 9:55 AM

» Kirk - Witness: FBI Agent Helped Direct Probe Away From Elgindy

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Witness: FBI Agent Helped Direct Probe Away From Elgindy

By Carol Remond
Of DOW JONES NEWSWIRES
524 words
4 November 2004
http://www.siliconinvestor.com/readmsg.a...

NEW YORK (Dow Jones)--Special Agent Jeffrey Royer used his position at the Federal Bureau of Investigation to redirect a budding investigation of short seller Anthony Elgindy's dealings with Sulphco Inc. (SLPH) into an investigation of the company, a government witness said Thursday in a Brooklyn, N.Y., courtroom.

Testifying in the criminal case against Elgindy and former FBI agent Royer, Derrick Cleveland said that after Elgindy became aware that the FBI was looking into his actions, Elgindy asked Cleveland to contact Royer to figure out what was going on. Elgindy and others in the case are charged with securities fraud, market manipulation and extortion.

Federal prosecutors claim that Elgindy and others used confidential information obtained from Royer to trade the stocks of small-cap companies. Cleveland has testified in court that he and Royer had an agreement and the FBI agent would provide him with information about government investigations into companies and their insiders - information that Cleveland would then share with Elgindy. Cleveland said his deal with Royer was one in which trading profits reaped from the information the agent gave him would be split 50-50.

Under questions by Assistant U.S. Attorney Ken Breen, Cleveland said that he first got information about Sulphco and its insiders Chief Executive Rudy Gunnerman and Chief Financial Officer Mark Cullen in the spring of 2001. Cleveland said he shared that information with Elgindy, who shared it with members of his private investing Web site. Cleveland told jurors that Elgindy and two other members of the site, visited the company posing as potential investors and that Elgindy was trying to get a block of discounted shares from Gunnerman.

Cleveland said Elgindy discussed the block of Sulphco stocks with members in a private chat room in June 2001 and that Elgindy wanted to know how many shares of Sulphco members trading through Canadian brokerage firm Global Securities were short. Cleveland said the block trade never happened and that Sulphco was trying to stop the publication by Elgindy of a negative report about the company. Shortly thereafter, Cleveland said, Elgindy told him he had heard he was under FBI investigation and asked Cleveland to check with Royer.

Royer "told me that the idiots in the Reno FBI office were investigating Elgindy while they should be investigating Sulphco," Cleveland said. The witness told jurors that Royer later told him that he had contacted the Reno office and that Elgindy was no longer under investigation, but that the company was.

Lawrence Gerzog, Royer's lawyer, said in his opening statements earlier this week that Todd Orme, an employee of Sulphco, had filed a complaint against Elgindy, but that he later recanted it.

Cleveland pleaded guilty to conspiracy to commit securities fraud and is helping the government make its case against Elgindy and Royer. Others charged in the case in the U.S. District Court for the Eastern District of N.Y. will be tried separately.

- By Carol Remond, Dow Jones Newswires; 201-938-2074; carol.remond@dowjones.com [ 11-04-04 1424ET ]

-- posted by Kirk

Top 186. Nov 5, 2004 9:58 AM

» Kirk - Govt Witness Continues Testimony In Elgindy Case

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Govt Witness Continues Testimony In Elgindy Case

By Carol Remond
Of DOW JONES NEWSWIRES
4 November 2004
http://www.siliconinvestor.com/readmsg.a...

NEW YORK (Dow Jones)--Government witness Derrick Cleveland testified in court this week that he used a Federal Bureau of Investigation agent as his personal research assistant.

Cleveland said that on several occasions in 2000 and 2001, he used information gleaned from FBI agent Jeffrey Royer to better profit from short selling the stocks of small companies, some of which were under investigation by government agencies.

Cleveland pleaded guilty to conspiracy to commit securities fraud in 2002 and is assisting the government in its case against short seller Anthony Elgindy and Royer. Others charged in the case will be tried separately.

The government alleges in the U.S. District Court for the Eastern District of New York that Elgindy and other short sellers used confidential government information to trade, and on occasion, to extort free or cheap shares from companies.

On the witness stand Wednesday, Cleveland testified that after he came across a company which he thought would be a good short selling target, he would contact Royer for further information about the company and its insiders.

Cleveland said Royer passed on information about a number of companies including: Freedom Surf (FRSH), Softquad (SXML), Biopulse (BIOP), SeaView Video Technologies Inc. (SEVU) and Genesis Intermedia (GENI). Cleveland said he shared that information with Elgindy, who then passed it on to members of his private investing Web site.

Cleveland said he and Royer traveled to San Diego to personally meet with Elgindy in February 2001. At that time, Cleveland said Elgindy offered Royer a job as a researcher to help him identify fraudulent companies that could make good short selling targets. Cleveland said Royer agreed during the meeting that he would come to work for Elgindy later that year, after he left the FBI.

During that visit, Cleveland said that Elgindy thanked Royer for information the FBI agent had provided about FBI and Securities and Exchange Commission investigations into SeaView. Cleveland said that Elgindy told Royer and Cleveland that he made $750,000 in profit on his SeaView trades.

Cleveland has testified that Elgindy used confidential government information to write two negative reports about SeaView to push the stock of the company down and profit from his short selling activities.

Cleveland is scheduled to resume testimony Thursday.

-By Carol Remond, Dow Jones Newswires; 201-938-2074 [ 11-04-04 1023ET ]

-- posted by Kirk

Top 187. Nov 5, 2004 10:09 AM

» Kirk - San Diego financial analyst profited when stock went down

.
Posted on Fri, Nov. 05, 2004

I should note that the defense says this information was in the public domain. You could make a good case they believed this because it seems they made little attempt to cover their tracks or hide their associations.

San Diego financial analyst profited when stock went down

http://www.montereyherald.com/mld/monter...
MICHAEL WEISSENSTEIN
Associated Press

NEW YORK - A corrupt FBI agent in cahoots with inside traders revealed a steady stream of sensitive information, including one corporate executive's alleged ties to the Russian mob and an undercover agent's presence at another firm, according to court testimony Thursday.

The companies' negative information was posted on the Web site of San Diego financial analyst and self-styled stock guru Anthony Elgindy, who profited when their stock went down, a former Elgindy associate testified in federal court in Brooklyn.

Derrick Cleveland testified that he rewarded the FBI agent, Jeffrey Royer, with a pickup truck and half the proceeds from trades based on the government information.

Cleveland is cooperating with prosecutors against Elgindy and Royer in their trial on racketeering and fraud charges.

Lawyers for Elgindy deny the charges, saying their client had a solid reputation for protecting investors by working with regulators to expose fraud by small publicly traded companies. Royer's attorney told the jury that he was an ambitious agent who recruited Cleveland and Elgindy as confidential informants and shared information with them with no corrupt intent.

Royer did a terrible job of concealing his tracks, Cleveland testified Thursday. He sent Cleveland a photocopy of the pickup truck title from the fax machine at the FBI's Gallup, N.M., office. The fax arrived bearing an FBI stamp and was introduced into evidence Thursday.

Royer also partied in Las Vegas with Elgindy and associates and chatted about his job as a federal agent in a chat room run by Elgindy for traders who paid him a monthly fee, Cleveland said.

Prosecutors showed the jury photographs of Elgindy and fellow traders cavorting in Vegas with Royer's FBI business cards stuck to their foreheads.

Also on display was the transcript of an online chat among Royer, Elgindy and his subscribers that included the boasts, "FBI in the house" and "FBI rules."

Cleveland described a near-constant flow of information from Royer about small companies with penny stocks, including several that were under Securities and Exchange Commission investigation, one whose CEO had Russian mob links and another that was the subject of an undercover federal probe.

Royer, who left the FBI before his arrest, did not jeopardize any federal investigations, said Bill Elwell, a spokesman for the bureau's Albuquerque office.

Cleveland told the jury he was protective of his FBI source and cautioned Royer against direct contact with Elgindy and the other traders.

"I told Royer that I didn't think it was very smart that he did that," Cleveland testified.

Cleveland said he made thousands of dollars on some trades and lost money on many others. He said he agreed to a 50/50 split with Royer and planned to help the agent purchase a new home, until his wife put her foot down.

After his arrest in late 2002, prosecutors suggested the Egyptian-born Elgindy may have known about the Sept. 11, 2001, terrorist attacks. The charge, which his lawyers dispute, has not been mentioned again in court.

Elgindy telephoned his broker on Sept. 10, 2001, and asked him to liquidate his children's $300,000 trust account, prosecutor Ken Breen said at the time. The defendant predicted that the Dow Jones industrial average, then trading at about 9,600, would drop to 3,000, Breen said.

-- posted by Kirk

http://www.signonsandiego.com/news/busin...

Top 188. Nov 5, 2004 12:11 PM

» Kirk - Feds pressing charge of stock manipulation

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Feds pressing charge of stock manipulation

UNION-TRIBUNE STAFF AND NEWS SERVICES

November 2, 2004

Union-Tribune file photo
<img src=http://www.signonsandiego.com/news/busin... align=left>
Before the FBI arrested him in 2002, Anthony Elgindy was a successful stock speculator, with a $2.2 million home in Encinitas and a collection of expensive cars.

Now the 36-year-old naturalized American is on trial in a federal courtroom in Brooklyn in an unusual case that offers a glimpse into the fervid world of short-sellers and the companies they bet against.

To federal prosecutors, Elgindy orchestrated a criminal enterprise that used tips supplied by an FBI agent to influence the stock price of thinly traded small companies known as "penny stocks."

But to defense lawyer Barry Burke, Elgindy was a crusader who exposed stock manipulation schemes by insiders at some small companies who sought to pump up the price of their stocks as they profitably dumped their own shares.

In her opening statement yesterday, federal prosecutor Valerie Szczepanik told jurors that the case against Elgindy and former FBI agent Jeffrey Royer was one of corruption, fraud and betrayal.

"They operated under the guise of exposing fraudulent companies when they themselves were involved in the fraud," Szczepanik said.

Elgindy used information from Royer to make insider trades, manipulate markets and, sometimes, extort money from companies that paid him to stop badmouthing them, Szczepanik said.

Elgindy and Royer, 41, are accused of racketeering, securities fraud and other crimes. Authorities contend Elgindy used his AnthonyPacific.com web site and online stock chat sites to spread negative information about companies, based on information Royer gave him.

Elgindy did not even fully disclose his trades to subscribers, who paid $600 a month for his online newsletter.

Royer "broke his oath" as an agent of the FBI and stole confidential information from FBI databases, Szczepanik said. He exploited relationships with other agents to get information about investigations, she said.

"Instead of chasing down criminals, Royer was chasing down information for his personal profit," Szczepanik said.

Short-sellers profit by correctly predicting a stock's decline. They sell borrowed shares and then replace the stock at a cheaper price, pocketing the difference.

Berke, who is Elgindy's lead defense lawyer, told jurors his client and the individual investors who followed Elgindy's advice and investigated companies – performed a public service by exposing frauds.

"They were investigating, uncovering and exposing these fraudulent companies," Berke said.

Short-sellers like Elgindy were unpopular because the "big boys" on Wall Street didn't like the way he challenged them, the defense lawyer said. Elgindy was an early skeptic of technology and Internet companies in the late 1990s, asserting on a Web site, Silicon Investor, that they were overvalued, he said.

"They're going against Wall Street and they're going against the ways of Wall Street," Berke said.

Berke told jurors that Elgindy had many admirers, citing an unnamed lawyer with the Securities and Exchange Commission who described him as "a crusader against these fraudulent companies."

Another admirer was Royer, Berke said, describing him as "someone who saw the value of what they were doing."

Elgindy's followers were usually doing their own probes of companies the FBI was interested in, Berke said. Royer simply tried to put them in touch with the appropriate people in law enforcement, he said.

Elgindy has been in jail since April after trying to board a domestic flight to Phoenix with a connection to San Diego. He was carrying fake identification, $25,000 in cash and $40,000 worth of jewelry, according to court papers.

Staff writer Bruce V. Bigelow, Bloomberg News, and the Dow Jones News Service contributed to this report.

-- posted by Kirk

http://www.nytimes.com/2004/11/09/busine...

Top 189. Nov 9, 2004 12:58 PM

» Kirk - Judge Bars Testimony on Terrorism

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Judge in Stock Adviser's Trial Bars Testimony on Terrorism

November 9, 2004

By ERIC DASH

For five days, jurors have seen dozens of e-mail messages, a litany of Internet chat room logs and countless company reports as federal prosecutors presented their conspiracy case against Anthony Elgindy, the San Diego stock adviser accused of obtaining illegal information from an F.B.I agent to manipulate the stock market.

But they will not hear evidence supporting an assertion that prosecutors once made suggesting that Mr. Elgindy might have had advance knowledge of the Sept. 11 terrorist attacks, a judge said yesterday.

The matter came up in the fourth full day of testimony in United States District Court in Brooklyn. Derrick Cleveland, a former business associate of Mr. Elgindy who is now a government witness, was asked by an assistant United States attorney, Kenneth Breen, about a mid-September 2001 F.B.I. investigation into Mr. Elgindy. When Mr. Cleveland responded that the investigation was related to "terrorism," Judge Raymond J. Dearie brought the hearing to a halt.

"This case has nothing to do with terrorism," he said to the jury in a planned set of instructions. "You will hear no evidence that Mr. Elgindy or others were involved in 9/11."

Mr. Cleveland was allowed to continue with his testimony, recounting how he learned that Mr. Elgindy was a subject in a criminal investigation. Mr. Cleveland said that Jeffrey A. Royer, an F.B.I. agent who was the source of that information and a defendant in the case, told him that investigators were looking into $6 million that Mr. Elgindy had liquidated from two brokerage companies, Charles Schwab and Salomon Smith Barney, shortly before Sept. 11.

Mr. Royer also relayed information that the government was examining the money Mr. Elgindy gave to Mercy International, which Mr. Breen described as a "Middle Eastern charity."

Mr. Royer promised to "keep an eye" on the case, Mr. Cleveland testified, "and as new things came out, he would let me know."

The judge's comments emerged from a 25-minute discussion early yesterday between the prosecutors and the lawyers for the defendants before the trial resumed, and sought to resolve months of legal wrangling.

In public reports and in court, Mr. Elgindy's lawyers have argued that there is no basis for suggesting that their client had ties to terrorism.

But in May 2002, Mr. Breen argued in a bail hearing that the decision of Mr. Elgindy to sell $300,000 in stock on the afternoon of Sept. 10 might suggest that he had "preknowledge of Sept. 11 and rather than report it he attempted to profit from it."

An F.B.I. spokesman said yesterday that "no evidence was found about any individual" to support that assertion. The judge's comments come a week into a trial on securities fraud. Mr. Elgindy is accused of having published negative information on several Internet chat rooms about small-capitalization companies to drive down their stock price. The information had been obtained by Mr. Royer from confidential government databases.

Mr. Elgindy also faces extortion and obstruction of justice charges related to the stock-selling arrangement.

-- posted by Kirk

Top 190. Dec 13, 2004 7:35 AM

» Kirk - Prosecution Case Vs. Elgindy Lingers On

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DJ UPDATE: Prosecution Case Vs. Elgindy Lingers On
http://www.siliconinvestor.com/readmsg.a...

By Carol S. Remond
Of DOW JONES NEWSWIRES

(This article was originally published Friday)

NEW YORK (Dow Jones)--Just one more day. That's the promise that federal judge Raymond Dearie made to jurors in his Brooklyn courtroom Friday afternoon.

Federal prosecutors had been expected to conclude their fraud case against short-seller Anthony Elgindy and former Federal Bureau of Investigation special agent Jeffrey Royer on Friday. But as the testimony of FBI special agent David Chaves continued after lunch, it quickly became apparent that more time would be needed for defense lawyers to cross-examine him.

Chaves was the case agent for the FBI investigation into potential links between Elgindy and terrorism after 9-11. That terror investigation started a chain of events that resulted in the current charges against Elgindy, Royer and three others who will be tried separately.

In five weeks of testimonies, witnesses for the prosecution, some of which pleaded guilty and made deals with the government, have told jurors how FBI agent Royer would share confidential information with Elgindy and others who would use it to manipulate the stock of small companies.

Elgindy, Royer and others are charged in the U.S. District Court for the
Eastern District of New York with securities fraud, market manipulation
and extortion.

Defense lawyers for Elgindy and Royer will now start putting forward witnesses Monday to substantiate their contention that Royer was simply trying to uncover securities fraud and that he developed a relationship with Elgindy and others to do so. Elgindy's lawyers have said that the San Diego short seller would pass information about crooked companies to Royer who would then pass it on to others at the FBI or the Securities and Exchange Commission. Elgindy's lawyers have said they will call SEC lawyers to show that the short seller and online stock guru would share information about stock fraud with them.

Prosecutors and defense lawyers late Friday argued in front of judge Dearie - without the jurors present - about the defense's plan to have former members of Elgindy's private investment Web site testify.
Prosecutors argued that they should be allowed to interview the potential witnesses before they took the stand, particularly because of the potential danger of self-incrimination.

The government has previously alleged that members of the Web site may have been engaged in the same crimes as Elgindy, Royer and others are charged with. A number of unidentified Web site members have been fingered by the prosecution as unindicted co-conspirators and could potentially be charged in the case if the government chose to.

Defense lawyers argued that any interaction with prosecutors or FBI agents prior to their testimony could intimidate the witnesses and affect their willingness to testify.

Court proceedings are expected to resume at 11 a.m. Monday.

FBI agents who testified for the prosecution earlier this week said that Royer freely admitted that he planned to work for Elgindy and other short sellers after he left the Federal Bureau in December 2001.

According to the testimony of FBI special agent Raymond Gonzales, Royer said he wanted to open a private investigation business and work with short sellers to uncover scams. Gonzales said Royer told him in December 2001 that he wanted to expose crooked companies because he himself had once lost a large investment in a bogus company.

Gonzales testified that Royer, who was then aware of the FBI investigation into Elgindy and potential ties to terrorism, offered to help the Bureau's probe.

E-mails introduced in court showed that Royer asked Elgindy about how to best deal with his mounting debts. But Elgindy's answers indicated that the short seller was mostly preoccupied with securing an early release for his probation relating to a past mail-fraud infraction.
Witnesses testified that Elgindy made it a condition that his probation was terminated before Royer could start working for him. Elgindy asked Royer to write a letter supporting his early release from probation. Royer eventually wrote that letter.

FBI supervisory special agent Doug Beldon told jurors Friday that it was improper for Royer to write a letter of recommendation for Elgindy in his capacity as an FBI agent. He said the FBI was not aware of it and wouldn't have approved it.

Beldon, who in May 2002 was part of a team of agents that arrested Royer, said that Royer was compliant and that he freely admitted to using FBI databases to check out some information he got from Elgindy and another defendant named Derrick Cleveland. Cleveland pleaded guilty to conspiracy to commit securities fraud and testified earlier for the government.

-- posted by Kirk

Top 191. Jan 3, 2005 12:34 PM

» Kirk - FBI agent defends conduct in insider trading case

FBI agent defends conduct in insider trading case

By MICHAEL WEISSENSTEIN
Associated Press Writer

January 3, 2005, 2:38 PM EST

NEW YORK -- A former FBI agent charged with giving confidential information to inside traders portrayed himself Monday as a well-meaning but naive investigator who had been seeking to win the trust of market experts.

Testifying in his own defense, Jeffrey Royer said he began working with trader Derrick Cleveland because he needed help probing a technology company whose dealings he did not fully understand.

"He was the only person I knew, or had known, who was interested in the stock market," Royer said.

Royer began to get valuable information about other fraudulent companies from Cleveland and Anthony Elgindy, an Internet penny stock picker, Royer said. The relationship between the FBI agent and the traders quickly became a two-way street, he said.

Royer started giving Elgindy and Cleveland sensitive government information, including FBI files, in order to assist their research and maintain their trust, he said.

Prosecutors, however, say the relationship was criminal. Elgindy is accused of paying Royer for the information and using it to manipulate stock prices and extort companies that were the subjects of government investigations.

The two men are on trial together and Elgindy watched as Royer described their relationship from the stand.

Elgindy's head was wrapped in a white bandage. Lawyers said Elgindy had been assaulted at the Metropolitan Detention Center in Brooklyn, where he is being held during trial. A spokesman for the jail said he could not provide information about the incident.

Cleveland has pleaded guilty to conspiracy to commit securities fraud and testified against Elgindy and Royer.

-- posted by Kirk