San Diego San Diego wheeler-dealers dumping their stocks just can't get away -- whether to the Turks and Caicos Islands, a Caribbean tax haven, or to Wilmington, Delaware, a corporate "lax" haven.
Padres majority owner John Moores, who sold $487 million worth of Peregrine Systems stock during a three-year period in which the books were cooked, wanted to have civil suits against him and fellow former directors tried in Wilmington, Delaware, where the company was incorporated, rather than in California. Hordes of companies incorporate in Delaware because it is fraud-friendly: in an insider-trading case, investors have to prove that officers and directors had an intent to deceive. Under California law, defrauded investors have to prove only that insiders had negative material information that the public didn't have. Peregrine directors, including Moores, were told of accounting irregularities yet continued to dump stock, according to civil suits.
In March of this year, Superior Court Judge Joan M. Lewis ruled that a suit filed by the bankruptcy court-appointed trustee should be tried in Delaware. The decision would have overturned California law that's been in force since 1968. In May, the trustee protested the decision to the Fourth District Appellate Court. Immediately, the California attorney general's office wrote the court, siding with the trustee. Lewis's decision ran counter to "California's legitimate and compelling interest in preserving a business climate free of fraud and deceptive practices," said the attorney general.
Last Friday, the appellate court agreed emphatically. The case will be heard under California law, which comes down hard on perceived "immoral conduct" that is "destructive to the public interest," said the court. The appeals court appears to be applying the state's tough standards to behavior beyond insider trading, says Robert Friese, the trustee. Moores and his fellow defendants will no doubt appeal to the supreme court. For now, though, Wilmington is out of the picture.
On November 10, a federal jury in San Diego ruled that James E. Franklin raked in profits from a "pump and dump" stock scam funneled through an account at a Turks and Caicos financial corporation. After a three-week trial and a week of deliberations, a jury found Franklin and an associate, Samuel Wolanyk, liable for securities fraud.
The Securities and Exchange Commission said the pair, along with related institutions and individuals, took in more than $4 million from the Internet stock-touting scheme. The commission recommended that Franklin and Wolanyk cough up a total of $11 million for their transgressions. But U.S. District Judge Dana M. Sabraw, declaring that this sum was too high, would assess Wolanyk only $50,000 and Franklin $770,000.
In asking for a larger judgment, the federal securities commission said that Franklin and Wolanyk used various subterranean means to hide their "ill-gotten gains," including "foreign bank and brokerage accounts, particularly in jurisdictions notorious for their secrecy laws." The pair "refused to provide documents from foreign brokerage and bank accounts, and have destroyed such documents," charged the agency.
Their lawyers deny the commission's charges and claim it overstepped its mandate. Both say the offshore involvement prejudiced the jury. "It definitely colored the case. The jury used that offshore connection" in finding the two liable, says Darren J. Quinn, Franklin's attorney.
"I was disappointed in the jury," says Gregory M. Garrison, Wolanyk's attorney. "They said, 'These guys have offshore bank accounts; they must be doing something.' "
This case should be a lesson for San Diegans. If some lawyer or accountant is trying to talk you into stashing money offshore to hide it from the Internal Revenue Service or an ex-spouse, think more than twice: that black hole you believe you are creating may prove to be your personal abyss. Jurors will look askance at a defendant with money stashed in a secret account offshore. How do they know there isn't more stashed somewhere? Those jurors' suspicions are likely to be right on target.
For more than a decade in San Diego, Franklin has been immersed in dicey penny stocks. His company, Initial Public Offering Consultants, one of the defendants in the government's suit, has helped emerging companies tap the public market, often by merging into an empty-shell company rather than selling shares directly to the public.
Franklin has proved to be nimble in the rough-and-tumble penny-stock arena. Eleven years ago, he got into a dustup with a lawyer who represented speculators tied to the raucous Vancouver Stock Exchange. The lawyer had been disciplined by two British Columbia government agencies, but Franklin didn't know that. Among many things, Franklin called the lawyer a forger, thief, and computer saboteur, and the lawyer called Franklin a blackmailer and thief, according to lawsuits in the case. The lawyer claimed that Franklin physically threatened him -- a charge Franklin denied.
According to the Securities and Exchange Commission, Franklin hooked up with the Turks and Caicos corporation through Union Securities, a brokerage house in Vancouver. Franklin was assistant managing director of the offshore operation Vector Keel Ltd. and through it acquired and sold shares that were touted in the pump-and-dump scam, says the commission.
Quinn's response in court: the securities agency has no jurisdiction over transactions conducted outside the United States.
Wolanyk had formerly worked for Franklin at Initial Public Offering Consultants. In January of 1997, Wolanyk established Red Hot Stocks, which began touting stocks over the Internet. "Franklin orchestrated the fraudulent scheme to tout companies on the Red Hot website and then sell the stocks of the companies profiled," charges the commission's complaint. Franklin set up a company called Net Income to operate Red Hot and attempted to conceal his involvement, says the government.
During the bubble years of 1997 and 1998, Red Hot touted low-priced stocks of many companies that were also clients of Franklin's consulting firm, says the commission.
Investors got misleading information from Red Hot, says the agency. There were unreasonable price projections -- up, up, up in a hurry. Franklin and his confreres failed to disclose that they owned stock in the issues that got rave reviews and in some cases would be paid for hyping a stock. They bought stocks that were later touted on Red Hot "with the intent to sell the stock in coordination with the tout," says the agency. In short, the strategy was to buy the stock, pump it, and dump it, says the commission.
Garrison claims that in most instances, Wolanyk did not sell stock after he touted it. In the cases in which he did, the company whose stock was pumped had put a paid advertisement in Red Hot. But the jury said he committed fraud in 13 stocks.
Quinn asserts that Franklin sold only one stock after it was touted in Red Hot, although the jury said he was involved in seven pump-and-dump capers. Franklin really was not an officer of Vector Keel, despite what the securities agency avers, says Quinn. The individual who headed Vector Keel wrote an account statement stating "that Jim Franklin has authority to trade [through the offshore institution]. But did he get Franklin's consent? No," claims Quinn.
The jury believed the government and not the defendants. If I had been sitting on that jury, I suspect I would have voted the same way. A lawyer can say that "there is no proof" that his client traded through a secrecy-shrouded offshore institution, but of course there is no proof. That's what offshore secrecy is all about: covering up a paper trail.