SEC known Kelly hears secret tapes in Miami fraud trial
2003-10-01 10:10 ET - Street Wire
by Erik Schelzig in Miami
and Lee M. Webb
James T. Kelly, on trial for securities fraud in the U.S. District
Court for the Southern District of Florida in Miami, listened as
secretly recorded telephone conversations about an alleged kickback
and stock manipulation scheme were introduced by an undercover
FBI agent and played for the jury in Mr. Kelly's Bermuda Short
trial on Sept. 29 and 30. If convicted, Mr. Kelly could face a
maximum penalty of 25 years in prison.
Mr. Kelly is accused of conspiring with two former co-defendants
in a kickback and stock manipulation scheme involving shares of
Lighthouse Fast Ferry Inc. As previously reported by Stockwatch,
the Lighthouse Fast Ferry shares that were to be used in the scheme
allegedly belonged to the purported $1-billion (U.S.) Lancer Group,
which was shut down by the U.S. Securities and Exchange Commission
(SEC) on July 10 amid allegations of massive fraud. (All future
amounts are in U.S. dollars.)
The charges against Mr. Kelly stem from a two-year joint FBI-RCMP
undercover sting code-named Operation Bermuda Short that resulted
in 23 indictments and charges against 58 individuals from the U.S.
and Canada. Mr. Kelly, the former president of Shamrock Partners
Ltd., a brokerage firm based in Media, Pa., was arrested in August
of 2002 along with his Shamrock partner Joseph Huard and business
associate Bruce Cowen.
Mr. Huard, who also faced separate Bermuda Short charges along
with Howe Street promoter Les Price in connection with an alleged
kickback scheme involving Mr. Price's Medinah Minerals Inc., flipped
and pled guilty in both cases on Dec. 18, 2002.
Based largely on Mr. Huard's co-operation following his plea bargain,
the grand jury issued a superseding indictment against Mr. Kelly
and Mr. Cowen on May 22. In addition to the original charges involving
a kickback scheme, the superseding indictment charged Mr. Kelly
and Mr. Cowen with stock manipulation involving Lighthouse Fast
Ferry.
Mr. Cowen, a key figure in the allegedly fraudulent Lancer Group
and close associate of its disgraced leader Michael Lauer, maintained
his innocence with respect to the Bermuda Short charges until one
month before the trial. On Aug. 21, Mr. Cowen negotiated a plea
agreement, leaving Mr. Kelly to face the jury alone. Both Mr. Huard
and Mr. Cowen are now on the prosecution's witness list and are
expected to testify against Mr. Kelly.
In the prosecution's opening statement on Sept. 24, Thomas Hanusik
of the Fraud Section of the U.S. Department of Justice told the
jury that greed motivated Mr. Kelly to conspire to engage in securities
fraud. As outlined by Mr. Hanusik, in addition to stock manipulation
the alleged fraudulent scheme involved a planned $5-million transaction
for Lancer-owned restricted shares of Lighthouse Fast Ferry, a
$900,000 kickback to a purported corrupt fund manager and a further
$600,000 to be equally split among Mr. Huard, Mr. Cowen and Mr.
Kelly.
Miami defence attorney Norman Moscowitz, representing Mr. Kelly,
said in his opening statement that Mr. Kelly had done nothing wrong.
According to Mr. Moscowitz, his client was "going through
some very tough mental and physical problems" at the time
and was relying on his friends to operate his business. The defence
lawyer told the jury that Mr. Kelly's name did not appear on any
of the documents that would be introduced by the prosecution and
the ailing former Shamrock president only participated in three
of the 35 to 40 recorded telephone conversations.
On Monday and Tuesday the jury got to listen to a selection of
the conversations recorded by an undercover FBI agent and two co-operating
witnesses as the alleged kickback and stock manipulation scheme
was hatched and ironed out in the summer of 2001. Special Agent
Michael Palasek, who played the undercover role of a corrupt securities
trader for a fictitious British mutual fund, introduced the tapes
and provided testimony regarding the context of the conversations.
TAPING THE DEAL
Mr. Palasek testified that for most of his 14 years with the Federal
Bureau of Investigation he has worked with the White Collar Crime
Squad in Miami. The FBI agent told the court that he began working
on Operation Bermuda Short in May of 2000, but did not start participating
in the active investigation until June of 2001.
Mr. Palasek told the court that two co-operating witnesses, David
Jones and Robert Schlien, introduced him to Shamrock's Mr. Huard.
In the prosecution's opening statement, the jury heard that Mr.
Jones and Mr. Schlien were co-operating with the government under
pressure of pending fraud charges in the Southern District of Florida.
Defence attorney Mr. Moscowitz characterized the pair as "swindlers" who
ran pump-and-dump stock promotions. As reported by Stockwatch on
Sept. 26, Mr. Jones and Mr. Schlien are repeat securities violators
well known to regulators.
According to Mr. Palasek, the earliest conversations with Mr.
Huard were not taped because he was not yet a target of the investigation.
"The initial conversation with Mr. Huard came after the FBI
received a tip about a stock being manipulated," Mr. Palasek
testified, drawing a hearsay objection from Mr. Moscowitz. Judge
Cecilia Altonaga overruled the defence attorney's objection and
Mr. Palasek went on to explain that the allegedly manipulated stock
that was the subject of the FBI tip was Medinah Minerals.
In the recorded conversations played for the jury, Mr. Jones and
Mr. Schlien operate in tag-team fashion as they discuss the particulars
of the scheme with Mr. Kelly and his former co-defendants, Mr.
Cowen and Mr. Huard. Undercover FBI agent Mr. Palasek is seldom
heard speaking on the tapes. Mr. Palasek told the jury that he
spent much of his time during the recorded conversations taking
notes.
Mr. Palasek recounted for the jury how the co-operating witnesses
and Mr. Huard negotiated the deal for a $5-million purchase of
Lighthouse Fast Ferry shares. The government informants initially
asked for a 20-per-cent fee on top of the purchase price.
In a June 5, 2001, conversation, Mr. Huard is heard telling Mr.
Jones and Mr. Schlien that he had figured out a deal.
"Is Jim (Kelly) happy?" one of the co-operating witnesses
asked.
Mr. Huard replied that Mr. Kelly was out of town.
Mr. Palasek testified that a deal was eventually hammered out
whereby 18 per cent of the planned $5-million transaction would
be paid to the undercover agent and his associates and a further
12 per cent would go to Mr. Kelly, Mr. Huard and Mr. Cowen. On
the $5-million transaction the undercover sting operatives would
receive $900,000 while Mr. Kelly, Mr. Huard and Mr. Cowen would
split another $600,000.
The deal also involved a $10,000 payoff for what the undercover
FBI agent referred to as the "due diligence kids" in
the Atlanta office of Connelly & Williams Associates Inc.,
the purported U.S. representative of the fictitious British fund
that was supposed to purchase the $5-million worth of Lighthouse
Fast Ferry shares.
In the taped conversations the co-operating witnesses told Mr.
Huard and Mr. Kelly that the 18-per-cent payment was to be deposited
to the account of Southern Star Shipping Ltd., a company registered
in Bern, Switzerland.
According to court filings in the case, Southern Star Shipping
was purportedly used by the undercover agent to receive kickbacks
without the knowledge of the fictitious fund.
(In a separate Bermuda Short money-laundering sting involving
disgraced Vancouver lawyer and Howe Street promoter Martin Chambers,
dubbed the "Lex Luthor of crime" in Western Canada, Southern
Star Shipping was made out to be the account of a cocaine cartel
front man. On Sept. 4, a Miami jury found Mr. Chambers guilty on
all five counts of money laundering.)
In explaining the Southern Star Shipping deal to Mr. Huard and
Mr. Kelly, the role-playing co-operating witness asked whether
their conference call was being recorded, and only continued after
being assured that it was not being taped.
In an earlier taped conversation with Mr. Cowen, Mr. Jones insisted
that "the paperwork cannot and will not mention the 18 per
cent put back to Southern Star Shipping." In the same conversation,
it was agreed that the $10,000 payoff for the Connelly & Williams
due diligence men would be invoiced as consulting fees by the undercover
agent for Mr. Mr. Cowen.
According to Mr. Palasek, Mr. Huard and Mr. Kelly told the undercover
crew that Lancer would sell the approximately 3.12 million Lighthouse
Fast Ferry shares to Berwin Capital or Mr. Cowen's Capital Research
for $1.12 per share.
"They would then sell them to us, Connelly & Williams,
for $1.60," Mr. Palasek testified, going on to explain that
the difference of 48 cents per share made up the total 30 per cent
that was going to be taken as undisclosed commission on the deal.
In a July 9, 2001, conversation, Mr. Kelly broaches the subject
of the trading in Lighthouse Fast Ferry shares and another fund's
involvement in the company. A transcript of portions of that conversation
is included in early prosecution court filings. According to the
allegations, the other unidentified fund is Lancer and Mr. Kelly
is talking about manipulating the month-end share price of Lighthouse
Fast Ferry.
"Yeah, we have a retail interest with the clients we also
have, uh, the largest holder, and institution that has made a significant
investment into it," Mr. Kelly says, according to the transcript. "I'm
a partner in a, in a group that filed a 13D in the company and
we are active buyers of the stock, uh, and participants in the
company along the way here."
"Okay," the co-operating witness responds.
"Uhh there one of the things that we need to understand is
what the, the fund, is it the fund's object that it be, is there
a, is there a reporting time or a time that they need the price
of stock to be at a, uh, significantly higher level, uh, in other
words do they mark to the market their portfolio at the end of
every month, on the fifteenth of the month is there a certain date
that each month or each quarter..." Mr. Kelly continues before
being interrupted by another telephone ringing.
"That it's important to have a print at a say, you know or
the last trade of the day or the month or the quarter, um, you
know how do they normally work their reporting?" Mr. Kelly
picks up the conversation.
The co-operating witness advises that the fund that he is involved
with reports its investment results at the end of every month.
"Under, understand that the institutions that are, in this
deal also have the same they like to, they try to buy the stock
as low as they can after month's end, and at month end they like
to get it at the highest possible price," Mr. Kelly says.
"Well what, what..." the co-operating witness begins.
"But they have the same objective," Mr. Kelly says.
Mr. Palasek testified that by "they," Mr. Kelly meant
Lancer.
In another recorded conversation, the undercover operatives indicated
to Mr. Huard, Mr. Cowen and Mr. Kelly that the British fund was
concerned that there might be a sell-off of Lighthouse Fast Ferry
shares after the $5-million investment was made and that was why
it was important for them to know who held shares in the company.
The undercover FBI agent said that Connelly & Williams would
open a $300,000 to $400,000 account at Shamrock that would be used
to "shore up" Lighthouse Fast Ferry's share price, if
it began to slip significantly.
"Is there any chance that Lancer would go crazy when they
get the money and not put the money back into the company?" one
of the co-operating witnesses asked Mr. Huard in a July 11, 2001,
conversation.
"No," Mr. Huard answered.
CONSULTING FOR CAPITAL
Mr. Palasek's testimony under direct examination by Thomas McCann,
Mr. Hanusik's co-counsel for the prosecution, continued on Tuesday.
In addition to further taped conversations, Mr. McCann introduced
a number of documents as evidence.
Using an overhead projector, Mr. McCann displayed an invoice written
by Mr. Palasek on July 11, 2001, billing Mr. Cowen's Capital Research
$10,000 for "research related to emerging growth companies."
Mr. Palasek testified that this money was meant for the kickback
to the purported due diligence men at Connelly & Williams.
Also projected by prosecutor Mr. McCann was a draft of the consulting
agreement between Southern Star Shipping and Capital Research,
which was a cover for the larger payback in the planned $5-million
stock deal, the FBI agent testified.
A recorded July 13 conversation had one of the co-operating witnesses,
Mr. Jones, asking Mr. Kelly to "stay on Bruce" to get
the documents done.
In a July 16 conversation with Mr. Cowen regarding the consulting
agreement, the co-operating witnesses told Mr. Cowen that they "left
things vague in there like we usually do," and that this was "boiler-plate
language."
Other documents presented by the government included an E-mail
between Mr. Jones and Mr. Cowen with detailed wire instructions
for the $16,000 test trade in which $10,000 was allegedly kicked
back for the due diligence officers at Connelly & Williams.
Mr. Kelly had some fun at one the co-operating witness's expense
in a July 18 phone call to Shamrock. Mr. Jones called Shamrock
to ask for Mr. Huard, and Kelly repeatedly asked Mr. Jones to spell
his name until finally acquiescing and passing the phone over to
Mr. Huard.
By July 19, the test trade had been made, and the co-operating
witnesses called Mr. Cowen to organize the payback of $10,000.
In a telephone conversation from California, Mr. Cowen said that
he would take care of it.
"I'm going to write the cheque now and it'll be there tomorrow
morning via FedEx," Mr. Cowen was recorded as saying.
Mr. McCann projected a copy of the $10,000 cheque on the overhead,
which was made out to Agent Palasek's undercover identity. In the
memo line, Mr. Cowen had written "Consulting."
Asked whether he had provided any consulting to Capital Research,
Mr. Palasek replied that he had not.
With the test trade completed and the purported due diligence
officers paid off, the undercover agent and the co-operating witnesses
began to focus on the larger transaction.
A "BLUNDER" IN NEW YORK
A meeting was set up in New York for July 24, 2001, where the
undercover operatives would meet with Mr. Huard and Mr. Cowen,
along with two executives from Lighthouse Fast Ferry, and Mr. Lauer,
the head of the Lancer Group.
According to Mr. Palasek, the men were told not to mention to
the unreported commission to the Lighthouse Fast Ferry officials.
Secretly, though, the co-operating witnesses and the agent agreed
to bring up Southern Star Shipping to see if the Lighthouse Fast
Ferry men knew about the arrangement.
When the co-operating witness Mr. Jones mentioned Southern Star
Shipping during the meeting he was quickly cut off by Mr. Cowen
and Mr. Lauer.
"Lauer said we'll talk about this later," Mr. Palasek
testified.
After the meeting Mr. Schlien acted as if he was upset with Mr.
Jones for bringing up Southern Star Shipping.
"It's not their concern about the commissions," Mr.
Huard chimed in.
"He was a little disgusted that he brought up the payment
in front of (the Lighthouse Fast Ferry principals)," Mr. Palasek
testified.
Discussions later that day centred on how the 18 per cent of the
deal would be wired back to the Southern Star Shipping account.
Eventually they settled on moving the money through Capital Research.
"I can get Jim (Kelly) to do it," Mr. Huard said, referring
to the wire transfer. "I'm not authorized, Jim is."
After the New York meeting, the FBI agent and the co-operating
witnesses began to devise a way to withdraw from the $5-million
deal without letting on that it had been a sting.
In subsequent conversations, Mr. Schlien said that the fictitious
partner in the kickback scheme, the British fund manager known
only as Nigel, was suffering from a slew of health and personal
problems.
Mr. Schlien said that Nigel had been caught cheating on his wife,
and after divorce proceedings were begun, he was hospitalized with
chest pains, he told Mr. Huard and Mr. Cowen in separate conversations.
Additionally, Mr. Schlien played up the purported "slip-of-tongue" from
his partner Mr. Jones in the New York meeting, and that Nigel had
become wary that the Lighthouse Fast Ferry representatives might
disclose the unreported commission if they were ever investigated
by the SEC.
Asked by Nigel what the Lighthouse Fast Ferry managers knew, Mr.
Schlien told Mr. Cowen on July 26, "I said they know more
than they should know, since our blond fat friend here made a blunder
and talked a little too much."
After the meeting in New York Mr. Schlien and Mr. Jones were involved
in heated discussion, Mr. Schlien told Mr. Cowen.
"David went a little too far with the Lighthouse people,
and in fact we had a little blowup about it later at the Waldorf," he
said.
Mr. Cowen tried to assure Mr. Schlien that the Lighthouse Fast
Ferry men had not understood what had been said about the Southern
Star Shipping account, and that Mr. Lauer "understands the
situation."
In ensuing conversations with Mr. Huard and then with Mr. Cowen,
Mr. Schlien said he would be travelling to England to meet with
Nigel and to try to convince him to make the deal happen.
Even after the trip, though, Mr. Schlien said he was unable to
convince Nigel, since he was a "different man."
In calls throughout August and ending on Sept. 5, Mr. Schlien
continued to blame Nigel's weariness, health and divorce for being
unable to make the deal happen. A worsening economic situation
and stock market also didn't encourage investment, he said.
Mr. Palasek testified that the $5-million deal never went off,
and Operation Bermuda Short continued on through August 2002.
For the last 30 minutes of the trial day on Sept. 30, Mr. Moscowitz
began his cross-examination of Mr. Palasek, which is expected to
last through much of Wednesday.
In a sample of things to come, Mr. Moscowitz questioned the FBI
agent as to why so little of the recorded conversations included
the sole remaining defendant and why Mr. Kelly had not been invited
to the New York meeting, the only face-to-face meeting between
the agent and the targets in this case.
Stockwatch will continue its coverage of the trial, picking up
Mr. Moscowitz's cross-examination of Mr. Palasek tomorrow.
SEC known Kelly hears FBI agent crossed in fraud trial
2003-10-02 18:20 ET - Street Wire
by Erik Schelzig in Miami
James T. Kelly, on trial for securities fraud
in the U.S. District Court for the Southern District of Florida
in Miami, listened on Oct. 1 as his defence attorney Norman Moscowitz
continued his cross-examination of undercover FBI agent Michael
Palasek. Under Mr. Moscowitz's close questioning, Mr. Palasek could
not say for certain whether Mr. Kelly was in the room during a
secretly recorded key conference call when the details of the illicit
deal were discussed.
The charges against Mr. Kelly stem from a two-year joint FBI-RCMP
undercover sting code-named Operation Bermuda Short that resulted
in 23 indictments and charges against 58 penny stock players from
the U.S. and Canada last year. Mr. Kelly, who faces a possible
25 years in prison if convicted, is accused is accused of conspiring
with two former co-defendants in a kickback and stock manipulation
scheme involving shares of Lighthouse Fast Ferry Inc.
As reported by Stockwatch, the Lighthouse Fast Ferry shares that
were to be used in the scheme were owned by the purported $1-billion
Lancer Group. (All amounts are in U.S. dollars.) In a separate
civil action, the U.S. Securities and Exchange Commission (SEC)
shut Lancer down on July 10, levelling allegations of massive fraud
against the hedge fund operation and its disgraced leader Michael
Lauer.
Mr. Kelly, the former president of Shamrock Partners Ltd., a Pennsylvania
brokerage firm with a checkered history known to U.S. regulators,
was arrested in August of 2002 along with his Shamrock partner
Joseph Huard and business associate and key Lancer figure Bruce
Cowen.
Mr. Kelly's Shamrock partner Mr. Huard was also charged in connection
with a separate Bermuda Short kickback sting allegedly involving
Medinah Minerals Inc., headed by co-accused Howe Street promoter
Les Price. Mr. Huard copped a plea in both cases last December.
Based largely on information provided to authorities as part of
his plea agreement, a U.S. grand jury issued a superseding indictment
against Mr. Kelly and Mr. Cowen on May 22, adding stock manipulation
charges to the earlier kickback conspiracy charges.
Mr. Cowen maintained his innocence until just one month before
the trial, finally hammering out his plea bargain on Aug. 21. As
first revealed in Mr. Moscowitz's opening statement on Sept. 24,
Mr. Cowen's wife Kathryn signed a non-prosecution deal on the same
day that her husband inked his plea agreement with the government.
More information regarding the deal that Ms. Kathryn Cowen,
also known as Kathryn Braithwaite in SEC filings,
signed with the government appears in a Sept. 16 affidavit filed
by Mr. Lauer in connection with the SEC civil case against Lancer
and its leader.
"On information and belief, a key incentive used to induce
Cowen to plead guilty was a written promise by the Government not
to prosecute his wife," Mr. Lauer states in his affidavit. "This
promise is not in the plea agreement, but in a side letter."
According to Mr. Moscowitz, Mr. Cowen and Mr. Huard have much
to gain by pleasing the government with their testimony. Both former
co-defendants are expected to testify against Mr. Kelly.
In his opening statement, Mr. Moscowitz claimed that his client
Mr. Kelly was suffering from mental and physical problems and was
relying upon his friends to operate his business during the period
of the undercover sting operation.
The defence lawyer said that the prosecution would try to link
Mr. Kelly to the allegedly fraudulent scheme through the testimony
of Mr. Huard and Mr. Cowen. Mr. Moscowitz said that Mr. Kelly's
name did not appear on any of the documents that the prosecution
planned to introduce as evidence. Moreover, Mr. Moscowitz told
the jury that Mr. Kelly only participated in three of the 35 to
40 telephone conversations secretly recorded by the undercover
sting operatives.
On Sept. 29 and 30, the jury listened as a selection of the recorded
conversations were introduced by FBI agent Mr. Palasek and played
for the court.
Mr. Moscowitz briefly opened his cross-examination of Mr. Palasek
before the court session ended on Tuesday and then picked it up
again on Wednesday.
ONLY FOR SIX CALLS
Taking the stand once more as Mr. Moscowitz continued his cross-examination,
Mr. Palasek acknowledged that he had never met Mr. Kelly in person
before seeing him in court during the trial.
Mr. Moscowitz asked the FBI agent whether it was a normal procedure
in a sting operation to try to set up a face-to-face meeting with
the targets. Mr. Palasek told the court that was indeed the normal
procedure.
However, Mr. Kelly was not part of the only face-to-face meeting
with the then co-defendants in the case, a July 24, 2001, meeting
in New York.
Mr. Moscowitz repeatedly challenged the undercover agent with
respect to Mr. Kelly's participation in the events during the sting
operation.
Mr. Palasek agreed with the defence lawyer that Mr. Kelly had
not been sent a copy of a $10,000 invoice for "consulting" that
was allegedly a kickback for two purported due diligence officers
for a fictitious British fund that was part of the undercover sting.
The FBI agent also acknowledged that Mr. Kelly was not sent a
copy of a consulting agreement between Mr. Cowen's Capital Research
and another fictitious undercover entity purportedly based in Switzerland,
Southern Star Shipping Ltd., in connection with the planned $5-million
Lighthouse Fast Ferry share transaction.
In a taped July 13 telephone conversation involving two co-operating
witnesses and the undercover FBI agent, Mr. Kelly was asked to "stay
on Bruce (Cowen)" to get the contracts processed.
Mr. Palasek agreed with Mr. Moscowitz's suggestion that a legitimate
deal would also involve contracts. He also agreed that there was
nothing in the characterization of a contract as "a boilerplate
contract that connotes an illicit deal."
Mr. Moscowitz asked the FBI agent why Mr. Kelly was not identified
as the Shamrock account representative for Connelly & Williams,
another fictitious FBI entity involved in the sting operation.
Mr. Palasek replied that it was unusual for the president of a
brokerage firm to be the account representative.
After obtaining that answer, Mr. Moscowitz quickly confronted
Mr. Palasek with some broker transaction tickets entered into evidence
earlier by the prosecution that identified Mr. Kelly as the Shamrock
account representative for Lancer. Mr. Palasek said that he had
never seen those transaction tickets.
Under further questioning from Mr. Moscowitz, Mr. Palasek acknowledged
that Mr. Kelly did not directly send or receive any faxes or exchange
E-mail communications with the undercover team.
On a poster board blow-up of a calendar, Mr. Moscowitz charted
out all the phone calls made between the former co-defendants and
his client and the undercover team. When he was done, the chart
showed heavy communication with Mr. Cowen and Mr. Huard, marked
in red, but much less communication with Mr. Kelly, which was marked
in green.
Thirty-five calls were made and received by Mr. Huard between
May and September of 2001. Mr. Cowen accounted for 15 calls. Mr.
Kelly participated in only six calls.
In his cross-examination of Mr. Palasek, Mr. Moscowitz established
that after the co-operating witnesses and the undercover agent
decided they were going to let the sting targets know that the
planned $5-million transaction was not going to proceed, they called
Mr. Huard and Mr. Cowen. They made no direct calls to Mr. Kelly.
Mr. Palasek tried to explain that, as the president of Shamrock,
Mr. Kelly would have been informed by his Shamrock partner Mr.
Huard about the communications with the undercover team.
Mr. Moscowtiz would have none of Mr. Palasek's explanation. The
undercover team knew that Mr. Huard and Mr. Cowen communicated,
too; nonetheless, they still called Mr. Cowen, the defence lawyer
pointed out. That was true, Mr. Palasek acknowledged.
The defence lawyer suggested that even if the undercover operatives
thought Mr. Kelly was kept informed by Mr. Huard, they did not
ask any questions that might have drawn a confirmation that Mr.
Kelly knew the $5-million deal had been cancelled.
"You could have asked, 'How does Jim feel about the deal
being off?'," Mr. Moscowitz offered.
Mr. Palasek acknowledged that they never did that.
CONSULTING CRIMINALS
Mr. Moscowitz spent a large portion of his cross-examination of
Mr. Palasek attempting to impeach the co-operating witnesses, David
Jones and Robert Schlien.
The FBI agent testified that Mr. Jones and Mr. Schlien were already
co-operating with the government when he joined the case.
"You knew they were con men, correct?" Mr. Moscowitz
asked. "You know they earned a living by cheating ordinary
people, correct?"
Mr. Palasek said that he did know that, but he argued that he
was not certain that the total damage to investors, which Mr. Moscowitz
pegged at up to $40-million, was accurate.
Mr. Moscowitz did not quibble over the exact amount. "But
you don't dispute that they caused a lot of people to lose a lot
of money, correct?" the lawyer asked.
Mr. Palasek did not dispute that suggestion. He acknowledged that
Mr. Jones and Mr. Schlien earned money from pump-and-dump promotions
in which they would purchase cheap shares, promote the stock partly
through paying off brokers and then sell their shares off at higher
prices, leaving investors stuck with quickly declining and ultimately
worthless stock.
The FBI agent testified that he knew that when Mr. Jones and Mr.
Schlien were finally snagged by law enforcement authorities, the
two men lied under oath and then failed to repay $1-million in
restitution.
"In 1999, after he pleaded guilty and was ordered to pay
a million dollars, (Mr. Schlien) bought a house worth $2-million...Jones
also has a house worth $1-million, correct?" Mr. Moscowitz
asked.
Mr. Palasek said that he was not sure of the worth of the houses,
but he agreed that they were nice abodes.
The FBI agent acknowledged that even once they were working in
an undercover role for the government, Mr. Jones and Mr. Schlien
continued to promote stock.
Mr. Moscowitz pointed out that when Mr. Palasek was out of the
Boca Raton, Fla., office run by Mr. Jones and Mr. Schlien, he had
no way of knowing who the two men were calling or faxing in their
business dealings.
Mr. Palasek said that he was not involved in supervising the pair's
Boca Raton business, called Financial Fraud Recovery Consultants
Inc.
Mr. Moscowitz said that on their Web site Mr. Jones and Mr. Schlien
said that they worked in a consulting and advising role for law
enforcement.
The FBI agent testified that he had not seen the Web site, but
he had heard about it.
The defence attorney remarked that Mr. Jones and Mr. Schlien referred
to themselves as consulting for law enforcement, but made no reference
on the Web site to having pleaded guilty to felony crimes.
(As reported by Stockwatch on Sept. 26, the understated biographical
information provided for Mr. Jones and Mr. Schlien on their fraud
consulting Web site does not do justice to the pair's regulatory
and stock promotion history.
"In 1996, Mr. Jones was found to have been involved with
receiving non-disclosed compensation while he was a stockbroker
in 1993," the Web site discloses.
"He reached an agreement with the United States Attorney's
Office in 1996 to accept responsibility for his actions and cooperate
fully.
"Additionally, in 1998 they both reached an agreement with
the United States Attorney's Office to resolve legal problems they
had incurred due to their association with activities largely stemming
from their trading and promotional activity involving a public
company. As part of this agreement, they accepted responsibility
for their actions and agreed to work undercover and assist the
government in the area of White Collar Crime.
"This is by no means a complete or full disclosure of their
legal and compliance history or current legal status, but due to
the pending nature of several trials they have assisted with as
well as certain security concerns shared by both the United States
Government and themselves, no other details can be disclosed at
this time."
As revealed by Stockwatch, the regulatory history of both Mr.
Jones and Mr. Schlien involves a number of securities violations
and dates back to at least 1989.)
"Do you think it is misleading for a man who has pled guilty,
and both who have signed plea agreements, to call themselves consultants
and advisers to law enforcement?" Mr. Moscowitz asked.
Mr. Palasek replied that it might be a matter of "semantics."
"In this sense, anybody who has signed a cooperation agreement
is a consultant?" Mr. Moscowitz asked.
Mr. Palasek struggled to reply, finally adding that it might be "a
stretch" to call them consultants.
"Generally the U.S. government doesn't have consultants who
are criminals," the defence attorney remarked incredulously.
WAS KELLY THERE?
Mr. Moscowitz returned to another theme introduced in his opening
statement when he argued that the Lighthouse deal was considered
a good deal by all participants in the deal, and was not like the
pump-and-dump schemes run by the co-operating witnesses in the
past.
"Nobody on your side of the table said 'This is a bad investment,
but we're going to do it anyway because you're going to pay us,'" Mr.
Moscowitz queried.
Mr. Palasek said they did not.
Mr. Palasek agreed with Mr. Moscowitz's characterization that "The
crime here is not the deal, but the agreement to pay you, Schlien,
Jones and Nigel an undisclosed compensation."
Mr. Moscowitz stuck to his earlier contention that his client
was never made aware of the illegal deals proposed by the cooperating
witnesses.
In a lengthy July 9 conversation between the undercover team,
Mr. Huard and Mr. Kelly, Mr. Moscowitz pointed out that in the
sections of the tape where Mr. Kelly was heard speaking, he was
very active, interjected acknowledgements ("right") when
others were speaking, and made his presence felt.
During that conversation, Mr. Palasek had earlier testified, the
term "clean as a whistle" was used by Mr. Schlien to
indicate that the deal being discussed was anything but clean.
"There is no playbook, or codebook that says when Mr. Schlien
uses this term, he really means the opposite of what it means," Mr.
Moscowitz mocked.
During later parts of the July 9 tape, when the undisclosed compensation
for the undercover team was discussed, Mr. Kelly could not be heard
at all. Mr. Moscowitz took advantage of a reported technical problem
with the recording equipment during that conversation. Toward the
end of the discussion, when the agent's notes said Mr. Kelly indicated
he knew what was going on, the tape had ceased to record.
"You don't know as you sit here, as Schlien and Jones were
talking about the undisclosed payment, that Mr. Kelly was there?" Mr.
Moscowitz asked.
"I can't say 100 per cent," the agent replied.
"You can't say at all, can you?" Mr. Moscowitz said
pointedly before telling the judge he had no further questions.
In his redirect, U.S. prosecutor Thomas McCann attempted to undermine
some of Mr. Moscowitz's points.
Turning to Mr. Moscowitz's contentions regarding the small number
of taped conversations in which Mr. Kelly participated, the prosecutor
drew out in his redirect of Mr. Palasek that four of those conversations
came in the same week, the very week that the arrangements for
the allegedly fraudulent deal were being made.
Mr. McCann went on to ask the FBI agent whether anybody in the
case had ever asked the undercover team not to discuss the kickback
deal with Mr. Kelly. Mr. Palasek responded that the only people
they were told not to discuss the deal with were the executives
from Lighthouse Fast Ferry, though they did it anyway.
The prosecutor also attempted to address why a direct call was
not made to Mr. Kelly to inform him that the $5-million transaction
had been cancelled. Mr. Palasek said that calling Mr. Kelly to
tell him that the deal was off after already calling Mr. Huard "wouldn't
have sounded very natural" in his undercover role.
As far as the "clean as a whistle" usage by Mr. Schlien,
Mr. McCann played some of the tapes to try to establish the context
in which it was said.
Mr. Palasek explained that the deal had to appear "clean
as a whistle" to the investors in England, even thought the
principals were going to be receiving a secret cut.
The trial continues Thursday with Mr. Huard taking the stand.
(With files from Lee M. Webb.)
SEC known Kelly hears Huard testimony in fraud trial
2003-10-03 18:28 ET - Street Wire
by Erik Schelzig in Miami
James T. Kelly, on trial for securities fraud,
listened to the testimony of his former business associate and
former co-defendant Joseph Huard in the U.S. District
Court for the Southern District of Florida in Miami on Thursday.
Mr. Huard negotiated a plea bargain in the case and is now a key
prosecution witness. Mr. Kelly faces a possible 25 years in prison
if convicted.
The charges against Mr. Kelly stem from a two-year joint FBI-RCMP
undercover sting code-named Operation Bermuda Short that resulted
in 23 indictments and charges against 58 penny stock players from
the U.S. and Canada last year. Mr. Kelly is accused of conspiring
with former co-defendants Mr. Huard and Bruce Cowen in
a kickback and stock manipulation scheme involving shares of Lighthouse
Fast Ferry Inc.
The Lighthouse Fast Ferry shares that were to be used in the scheme
were owned by the purported $1-billion Lancer Group.
(All amounts are in U.S. dollars.) In a separate civil action,
the U.S. Securities and Exchange Commission (SEC) shut Lancer down
on July 10, levelling allegations of massive fraud against the
hedge fund operation and its disgraced leader Michael Lauer.
Mr. Kelly, the former president of Shamrock Partners Ltd.,
a Pennsylvania brokerage firm with a checkered history known to
U.S. regulators, was arrested in August of 2002 along with his
Shamrock partner Mr. Huard and business associate and key Lancer
figure Mr. Cowen.
Mr. Huard pled out last December, providing enough information
to the authorities for a U.S. grand jury to issue a superseding
indictment against Mr. Kelly and Mr. Cowen on May 22. The superseding
indictment added charges of stock manipulation to the original
kickback conspiracy charges.
On Aug. 21, just one month before the trial was set to open, Mr.
Cowen also turned, hammering out his own plea bargain with prosecutors.
Mr. Cowen is also on the prosecution's witness list.
As previously reported by Stockwatch, the alleged kickback scheme
involved a proposed $5-million transaction for approximately 3.12
million restricted shares of Lighthouse Fast Ferry owned by Mr.
Lauer's Lancer. A fictitious British fund operated by a purported
corrupt manager known only as Nigel was supposed to ante up the
$5-million through another fictitious U.S. company called Connelly & Williams
Associates Inc.
As part of the proposed deal, $900,000 was supposed to be kicked
back to the undercover sting operatives and another $600,000 was
to be split equally among Mr. Cowen, Mr. Huard and Mr. Kelly. The
sting also involved a $10,000 payoff to two purported due diligence
officers of Connelly & Williams through a $16,000 "test
trade." Once the test trade and $10,000 payoff had been executed,
however, the planned $5-million transaction was cancelled.
The alleged stock manipulation also involved Lighthouse Fast Ferry
shares. According to the prosecution, Lancer used Mr. Kelly's Shamrock
Partners to fraudulently run up the price ofLighthouse
Fast Ferry by buying blocks of the thinly traded stock
at the end of the month, a fraudulent practice known as "marking
the close." The rigged month-end price was then used
to value Lancer's holdings of Lighthouse Fast Ferry.
According to prosecutors Thomas Hanusik and Thomas McCann of the
U.S. Department of Justice Fraud Section, Mr. Kelly was motivated
by greed and was a knowing participant in the kickback and stock
manipulation scheme.
Norman Moscowitz, representing Mr. Kelly, disputes the government's
allegations, claiming among other things that Lighthouse Fast Ferry
was a legitimate company and the proposed $5-million transaction
was a good deal. In his opening statement, Mr. Moscowitz also claimed
that Mr. Kelly was suffering from physical and mental problems
at the time and relied upon his friends to operate his business.
Mr. Huard, presumably one of the friends Mr. Kelly claims to have
relied on, took the stand to testify against his former Shamrock
associate.
DON'T UPSET A GOOD CLIENT
Mr. Huard's testimony, which began late Wednesday afternoon and
ran through all of Thursday, began with him admitting his guilt
in two separate Bermuda Short cases.
In addition to the case in which he is now testifying, Mr. Huard
pled guilty in another stock manipulation sting involving Howe
Street promoter Les Price's Medinah Minerals
Inc. Mr. Price's Bermuda Short trial is scheduled to begin
on Nov. 3.
"I pled guilty, because I was guilty of these charges," Mr.
Huard said.
Mr. Huard said he had known Mr. Kelly for 18 years, and that they
had worked together at a company that later went out of business.
Mr. Huard testified that the co-operating witnesses in the case, David
Jones and Robert Schlien, who helped
the undercover FBI agent organize the sting, were also employees
in a Florida branch office of the now defunct company.
Mr. Huard told the court that he went on to other jobs after that,
and eventually started up a brokerage of his own. He sold 100 percent
of that brokerage to Mr. Kelly in 1988 for $15,000, Mr. Huard testified.
Mr. Kelly renamed the company Shamrock Partners, and relocated
it to Media, Pa., just outside of Philadelphia. Mr. Huard, identifying
himself as a Shamrock "employee" to prosecutor Mr. Hanusik,
said he then went to work for Mr. Kelly.
"I wore a number of hats at the firm," Mr. Huard said. "I
did what had to be done."
Mr. Huard told the court that he deferred to Mr. Kelly on important
issues.
"Jim was the boss, he owned the firm," he said. "What
he said went."
The most important function that Mr. Kelly had with Shamrock was
his relationship with the Lancer Group, Mr. Huard said.
Mr. Hanusik walked Mr. Huard back through the buy tickets he had
shown earlier government witnesses to establish that Mr. Kelly
orchestrated the Lancer orders for Lighthouse Fast Ferry, especially
at the end of the month.
"Primarily they put their orders in at the end of the month,
and at first it wasn't so obvious," Mr. Huard said. "But
as time went by, it became more obvious that they were buying stock
at the end of the month so they could drive up the price."
The handwriting on the buy tickets was that of Mr. Kelly, Mr.
Huard testified.
"The primary contact at Lancer was Marty Garvey,
the secondary contact was Michael Lauer and after
that it was Bruce Cowen," Mr. Huard testified.
Shown the purchase trends of Lighthouse Fast Ferry shares by Shamrock,
Mr. Huard showed Mr. Hanusik how the stock was purchased overwhelmingly
at the end of the month.
"Mr. Kelly would come out and tell me and Mr. Doyle and anyone
else who was still around to go out and buy the stock, so we could
reach a target price," Mr. Huard testified.
"Did you think this was wrong?" the prosecutor asked.
"Yes I did," answered Mr. Huard.
Mr. Huard said that when he left Shamrock in January 2002, he
was still working with Lancer and expressed his concern about the
end of month trades to Mr. Garvey.
Mr. Huard testified that he later received a call from Mr. Kelly
to tell him that "Marty was upset, and you shouldn't upset
a good client."
BLATANTLY ILLEGAL
Mr. Huard recounted how he heard from the co-operating witnesses
Mr. Jones and Mr. Schlien for the first time when they called to
ask whether they could get in on a deal with Medinah Minerals.
Mr. Huard said he called Mr. Price to find out whether he was
interested in investors, but at the time Mr. Price said he was
not.
"They called me back and I told them that Mr. Price at Medinah
had no interest, and they said is there anything else that you're
working on, anything else we can do," he said.
Mr. Huard told the court that Mr. Kelly encouraged him to pitch
Lighthouse Fast Ferry to Mr. Jones and Mr. Schlien.
"Jim said show them Lighthouse and see if they're interested," Mr.
Huard said.
Mr. Kelly was informed about the proposed unreported commission
of 15 per cent to 30 per cent, Mr. Huard said.
"He said check it out with Bruce first," Mr. Huard said. "I
called Bruce Cowen and I told him Jim said 'I had to talk to you.'
And he said, 'Yeah, let's do it.'
"He said he wanted to get it done in the next 10 days. He
suggested that we ask for 12 per cent, which we would split four-four-four
between Cowen, Mr. Kelly and myself."
The next day, when he called to tell the co-operating witnesses
that he could make the deal work, he said he was "shocked" to
hear that they also wanted a $10,000 kickback on a test trade to
pay off due diligence officers.
"It was obvious they wanted to get some sort of payoff," Mr.
Huard said. "I was thinking out loud and said I had to find
out if this was legal and appropriate ... because this was blatantly
illegal," Mr. Huard testified.
Mr. Huard said that Mr. Kelly responded by telling him to check
it out with Mr. Cowen, which he did, and Mr. Cowen said he checked
and it was okay.
In a later teleconference with Mr. Kelly and Mr. Huard, the undercover
team spoke openly about their need to get their undisclosed payment
returned to a Swiss company called Southern Star Shipping Ltd.
Before going on, they asked whether they were speaking on a call
recorded by Shamrock. Mr. Huard was recorded as saying the call
was not being taped.
Mr. Moscowitz had earlier challenged the undercover FBI agent
as to whether there was any certainty that Mr. Kelly was even in
the room when this conversation had taken place. The agent said
he could not guarantee it.
In court on Thursday, Mr. Huard testified that Mr. Kelly was in
the room with him during that conversation.
COWEN'S "LAWYER" TALK
Under Mr. Hanusik's direct examination, Mr. Huard's testimony
with respect to his reservations regarding the legality of the
deal and his subsequent call to Mr. Cowen to check it out caused
something of a kerfuffle. In fact, that matter was the subject
of a number of pretrial pleadings.
The court had earlier granted the prosecution's motion to exclude
testimony that Mr. Cowen purportedly checked with a lawyer about
the proposed transaction. Just five days before the trial opened,
however, Mr. Moscowitz filed another motion to admit that evidence
in support of a "good faith defence."
Put simply, a good faith defence addresses the matter of intent.
Evidently Mr. Moscowitz wanted the evidence admitted in order to
show that Mr. Kelly had been told by Mr. Huard that Mr. Cowen had
checked the deal out with a lawyer and it was legal.
Mr. Moscowitz argued that it did not matter whether Mr. Cowen
had really checked with a lawyer. In effect, Mr. Kelly did not
intend to be involved in an illegal deal, but in good faith had
accepted Mr. Cowen's passed-on claim that a lawyer had vetted the
deal.
The prosecution countered that Mr. Kelly was simply attempting "an
end-run around the requirements of the Advice of Counsel defense
by claiming a Good Faith defense based upon advice of counsel." The
government also argued that the matter would just confuse the jury.
In its pretrial pleading, the government also disputed the claim
underpinning the defence motion.
"Defendant claims that Huard and Cowen told Kelly of comments
by an attorney," the prosecution stated. "This is not
true. Neither Cowen nor Huard told Kelly of an attorney's opinion
of the undercover kickback scheme."
Another twist was added to the whole matter in a defence filing
on Sept. 22, just one day before the trial started. In that filing
Mr. Moscowitz reported that on Saturday, Sept. 20, the prosecution
turned over a memo recording a prior statement made by Mr. Cowen
regarding having checked with a lawyer about the deal.
The document submitted by Mr. Moscowitz was an undated memo to
file by a Lancer lawyer, Frank Fico, regarding a Sept. 12, 2002,
conversation with Mr. Cowen.
"Mr. Cowen stated that Lighthouse's SEC legal counsel verified
the transaction in which he was arrested and gave their authorization," the
memo states in part.
The matter was still unresolved when the trial opened on Sept.
23. In a hearing without the jury present on the first day of the
trial, Mr. Huard testified before Judge Cecilia Altonaga that upon
hearing that the undercover team wanted a $10,000 payment, he called
Mr. Cowen to find out whether that would be legal.
Mr. Huard testified that Mr. Cowen had told him that he checked
with a lawyer who said it was okay to make the deal.
After the Sept. 23 hearing, Judge Altonaga ruled that statements
about Mr. Cowen's legal counsel would not be admissible into trial.
On Oct. 2, the jury was again ushered out while Mr. Moscowitz
argued that since Mr. Hanusik's direct examination of Mr. Huard
had raised the subject of the telephone call to Mr. Cowen to check
out the deal, the door was now open to asking the witness about
why Mr. Cowen said the deal could take place.
Mr. Hanusik became animated at Mr. Moscowitz's request. "I
saw this coming a mile away," the prosecutor said.
Mr. Hanusik argued that if suddenly Mr. Moscowitz were allowed
to ask Mr. Huard about the lawyer that Mr. Cowen allegedly spoke
to, it would make it seem as if the government had tried to hide
something from the jury, "even though we were following the
judge's ruling."
"It's not fair for the jury to think we left this out on
purpose," he said.
Judge Altonaga was not convinced.
"So you want to tell them about one part of the conversation,
but not about another?" she asked.
"We were operating under orders of the court," Mr. Hanusik
said.
The judge said that the versions of the stories had changed with
Mr. Huard's testimony.
"What I heard outside the jury's presence was very different
from what I heard in the presence of the jury," she said.
Mr. Moscowitz argued that the government had gone into the telephone
call with Mr. Cowen knowing that the defence attorney would not
be allowed to explore it further.
"It think it's only fair that the jury hear the full extent
of the conversation," he said.
The judge reserved judgment on the issue to give the attorneys
time to file motions on the issue overnight.
Mr. Moscowitz moved on to other issues for the remainder of the
day.
EMPLOYEE OR EQUAL?
In cross-examination, Mr. Moscowitz asked whether Mr. Huard considered
himself a loyal business partner and friend of Mr. Kelly's. Mr.
Huard said he did.
Mr. Moscowitz then went on to outline other business deals that
Mr. Huard had involved himself in, outside of his relationship
with Mr. Kelly and Shamrock. On a number of occasions Mr. Huard
had to be handed documents about possible deals to refresh his
memory before trying to explain them.
Mr. Moscowitz did not appear to be interested in the details,
often cutting Mr. Huard off before he finished a response.
Mr. Moscowitz asked Mr. Huard about his understanding about his
plea agreement with the government.
In return for pleading guilty to one count each in both of his
indictments, he could expect a sentence of 46 to 57 months, Mr.
Huard acknowledged.
The only way he could expect a sentence of less than 46 months
was if the prosecutors thought he did a good enough job as a witness
to warrant a recommendation for a lower sentence, he agreed.
Mr. Huard was far more than the "employee" of Shamrock
as he had portrayed himself during direct testimony, Mr. Moscowitz
suggested. He showed Mr. Huard documents where he had referred
to himself as a partner, founder, vice-president and chief financial
officer of Shamrock.
Mr. Huard acknowledged that he had used those terms. He also acknowledged
that he was responsible for compliance and clearance issues within
Shamrock.
"In fact as far as your responsibilities at the firm, you
ultimately considered yourself equal to Mr. Kelly, did you not?" Mr.
Moscowitz asked.
"Not equal, but close," Mr. Huard replied. "He
owned the firm."
Mr. Kelly did not want his names on many of the official forms;
he wanted Mr. Huard and others to deal with everyday affairs, Mr.
Moscowitz said.
"Mr. Kelly's favorite thing to do was to get on the phone,
get on the machines, and make trades, correct?" Mr. Moscowitz
asked.
"Yes, that was his favorite pastime," Mr. Huard replied.
PHONE RECORDS
Towards the end of the afternoon's questioning, Mr. Moscowitz
returned to the original deal between the co-operating witnesses
and Shamrock.
Mr. Moscowitz asked Mr. Huard if he "started out here trying
to commit a crime" when he suggested to Mr. Jones and Mr.
Schlien that they might be interested in Lighthouse Fast Ferry.
Mr. Huard replied that he had not, and acknowledged that it was
only after preliminary calls with the co-operating witnesses that
the two men said they needed an undocumented payment.
"What they tell you is 'the only negative' in this deal is
you will have to pay them to get the deal done," Mr. Moscowitz
said. "That didn't make you comfortable did it?" Mr.
Moscowitz asked.
Mr. Huard said it did not.
"But with approval you'd go through with it, correct?" the
defence lawyer asked.
Mr. Huard answered that he would.
Mr. Moscowitz moved on to a series of questions regarding telephone
calls and records of those calls.
Mr. Huard acknowledged that once he agreed to cooperate with the
government he had reconstructed his telephone conversations during
the sting operation with the help of Shamrock phone records.
Those phone records showed numerous telephone conversations with
Mr. Cowen in California, but not with Mr. Kelly at his beach home.
Mr. Huard explained that this had to do with a certain phone line
in the office that did not keep records when he called Mr. Kelly.
Mr. Moscowitz said that after the original discussion of the 18-per-cent
payment took place, phone records showed Mr. Huard called Mr. Cowen
to discuss it.
"You have no record that you called Jim Kelly, do you?" Mr.
Moscowitz asked.
"No, I don't," Mr. Huard replied.
Wrapping up his questioning for the day, Mr. Moscowitz asked whether
Mr. Huard had expressed his negative feelings about the $10,000
kickback to Mr. Kelly.
Mr. Huard said he did.
"You expressed to Jim Kelly that you had concerns about this
deal that were legal?" Mr. Moscowitz asked.
"No, I did not," Mr. Huard conceded.
The trial continued Friday with the remainder of Mr. Huard's cross-examination
and the government redirect. Mr. Cowen is expected to be the next
witness.
(With files from Lee M. Webb.)
(More information regarding Mr. Kelly's trial is available in
Stockwatch articles published on Sept. 25, 26 and 29; and Oct.
1 and 2, 2003.)
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