SEC known James Kelly hears secret tapes in Miami fraud trial
2003-10-01 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 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 James Kelly hears Huard testimony in fraud trial
2003-10-03 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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