On Oct. 3, federal prosecutors indicted and arrested six men in connection with an elaborate and highly sophisticated stock fraud. Among the alleged participants are two convicted felons. A third was a broker with a record of disciplinary actions by securities regulators. But one defendant stands out as an unlikely accused con man: James W. Nearen, a former enforcement attorney at the Securities & Exchange Commission who once was responsible for investigating the scheme.
The alleged fraud--first reported in BUSINESS WEEK's Oct. 14 issue--involved dummy foreign accounts to hide cash and the illicit issuance of millions of shares of corporate stock. Participants attempted to artificially inflate the stocks of two companies: ICIS Management Group Inc., an auto parts wholesaler based in Lighthouse Point, Fla., and Comprehensive Environmental Systems Inc., an environmental remediation company in West Babylon, N.Y.
FAMILIAR FACE. Former SEC prober Nearen, released on $250,000 bond, declined to respond to written questions. According to the indictment, though, he led a 1994 investigation of Comprehensive when it was called Integrated Resources Technologies Inc. and "learned of massive fraud" there. Yet Nearen left the SEC in 1995 to work for Comprehensive as a "special regulatory consultant." The indictment states "his role was to stymie regulatory and other efforts to uncover the fraud." SEC enforcement chief William R. McLucas says: "Based on what's alleged in the indictment, Nearen's conduct is outrageous. This is one of the most serious breaches of public trust."
Nearen joined the SEC in 1988 in the Denver regional office after attending the University of Alabama and the Cumberland School of Law in Alabama and working as a solo practitioner. In 1994, according to the filing, Nearen began looking for work in the private sector. He approached a brokerage, which sources say was Chatfield Dean & Co., an Englewood (Colo.) penny-stock firm that then was the target of an SEC probe. To ingratiate himself, Nearen allegedly fraternized with the "lead target" at the firm and "disclosed nonpublic information to help the target firm defend the SEC action."
That same year, Nearen became involved with the probe of Comprehensive Environmental. The company was controlled by Grant R. Curtis, who was convicted of bank fraud in 1994; Leo Mangan, who had been sentenced twice for dealing drugs; and Timothy H. Masley, whose broker license was suspended in 1990 by the National Association of Securities Dealers. Curtis, Mangan, and Masley were accused of fraud in the indictment. Mangan's attorney, Kenneth I. Wirfel, says his client has pleaded not guilty. Curtis' lawyer did not return phone calls, and Masley, still in custody, couldn't be reached.
By early 1995, the SEC learned of Nearen's "extensive misconduct" in relation to his Chatfield Dean activities. In February, after being placed on administrative suspension, he resigned. Within weeks, he joined the Curtis group.
The investigation has its genesis in a federal inquiry into possible securities violations by CNBC commentator Dan Dorfman and his stock-promoter friend, Donald Kessler (BW--Nov. 6, 1995.) On Aug. 29, CNBC said an internal review of Dorfman's records showed no violation of securities laws or network policies. A CNBC spokesman says Dorfman won't comment on the new indictments. In a letter to BUSINESS WEEK, Kessler's attorney, Nicholas M. De Feis, stated: "Kessler denies that he engaged in any wrongdoing in connection with the recently filed indictment."
TV BOOST? The Oct. 3 indictment makes two references to "efforts to inflate and maintain the share price" of ICIS and Comprehensive. It says that Masley and Pedro Gomez, another defendant, gave an individual $60,000 in cash to arrange for Comprehensive to be the subject of a TV report. BUSINESS WEEK has learned that the individual referred to by the indictment was Kessler and that the report was by Dorfman, airing on Nov. 8, 1994. Kessler denies he got the $60,000, but he does say he received 20,000 shares of ICIS stock for various services. Nick Morf, the former CEO of what was later called ICIS, claims Kessler told him he made $150,000 selling Comprehensive shares after a Dorfman report on Apr. 18, 1995. Gomez couldn't be reached for comment.
Assistant U.S. Attorney Mark P. Ressler declined to comment on whether Dorfman and Kessler figure in the continuing investigation. But BUSINESS WEEK has learned that Dorfman and Kessler are still under investigation by the government. Nearen's indictment may not be the end of this probe.