In a cramped courtroom in lower Manhattan, 14 unhappy investors trooped to the witness stand over the past few days. From the Bronx widow to the Connecticut truck driver to the Florida retiree, each told a tale of hard-driving brokers, misleading sales pitches, and unauthorized trades. All were customers of A.R. Baron & Co., a now-defunct micro-cap brokerage, and all were ripped off. The tales were grindingly familiar, but this time the investors were venting their misfortune not before the usual regulatory hearing or arbitration proceeding but before the New York State Supreme Court. And this time, the possible sanction isn't a fine or regulatory wrist slap but as much as 25 years in jail for the man on trial--Baron's former chief financial officer, John McAndris.
The trial has drawn surprisingly scant attention since it began two weeks ago, but it has potentially explosive implications for Wall Street. It is the first full-blown criminal trial to emerge from the regulatory campaign against micro-cap fraud. The trial has already begun to provide an extraordinarily detailed picture of how a sleazy micro-cap brokerage operates, replete with tales of blatant fraud, forgeries, and payoffs. And it is likely to highlight the role of the firms that handled Baron's trades--notably Bear, Stearns & Co. McAndris' lawyer, who is vigorously fighting the charges, has subpoenaed Bear Stearns's head of clearing, Richard Harriton, to testify about Bear Stearns's dealings with Baron during its last year of existence in 1995 and 1996. The aim: to deflect blame from McAndris by pointing the finger at Bear Stearns.
"CRIMINAL ENTERPRISE?" For the DA and defense alike, the McAndris trial will be grueling. It may drag on for as long as three months, and it won't be a slam dunk for either side. The investor tales of woe that began the trial are likely to stir the sympathy of jurors--but so may the soft-spoken, 55-year-old McAndris, who is hardly the stereotypical fast-talking broker. The testimony so far has concentrated on acts committed by brokers, with McAndris largely in the background. However, prosecutors allege that McAndris engaged in criminal acts, such as falsifying financial records, to advance Baron's interests, which they say put him afoul of the New York law against "enterprise corruption"--a kind of state version of the federal Racketeering-Influenced & Corrupt Organizations Act. New York's law targets anyone who engages in a "pattern of criminal activity" to "advance the affairs of the criminal enterprise."
In the case of what the prosecutors call the "Baron criminal enterprise," the government indicted the firm and 13 former brokers and executives. All have pleaded guilty except for McAndris. His attorney, John J. Rieck Jr., maintains that McAndris was a poorly compensated "bean counter" who is being unfairly prosecuted for the alleged misdeeds of others. "The prosecution of McAndris, which grows out of his function as CFO, should send a chill through similar executives in the brokerage industry and any industry," says Rieck. "If he's at peril, then everybody's at peril."
That, of course, might just be what Manhattan District Attorney Robert M. Morgenthau had in mind--to send shivers through the micro-cap community. And so far, the testimony has been chilling, particularly from former Baron ace broker Roman Okin. The 30-year-old Okin, who has pleaded guilty to enterprise corruption, testified that he earned $5 million in his six years as a broker, mainly at Baron--much of it from defrauding customers and from excessive commissions. Okin testified that Baron's "house stocks"--stocks dominated by the firm--were routinely manipulated to enrich the brokers, sometimes through phony trades arranged with confederates at other firms.
Okin, who owned a 10% interest in Baron, apparently was a superb salesman--to the unending misfortune of his customers, who seemed to span the globe. That was vividly demonstrated in the testimony of a 53-year-old Englishman named Don Tendell--one of three British customers to testify at the trial. Tendell, an accountant by trade, testified that Okin made unauthorized stock trades totaling $450,000. When Tendell protested, Okin agreed to sell the stock--but talked him into parlaying $375,000 of the proceeds into a loan that Baron needed to keep afloat. Tendell and a colleague, he testified, each loaned $375,000 to Baron, after flying to New York to meet with Okin, McAndris, and other Baron honchos. The loans were never repaid.
In matter-of-fact tones, Okin dropped yet another bombshell--that he and other Baron brokers received payoffs for buying stock that would later be dumped on customers. Okin testified that early in 1996, he was paid in cash to buy a large block of shares of a company named Jockey Club. Okin testified the cash came from "either Michael Reiter or on behalf of Barry Gesser or [Baron chief executive] Andrew Bressman, who received it from Michael Reiter." Reiter and Gesser, who are independent traders not previously named in any law enforcement action, have been identified by Wall Street sources as allegedly engaged in extortionate short-selling (BW--Dec. 15). Both men denied that accusation. Gesser's attorney, Ira Lee Sorkin, said the two decline comment on Okin's testimony.
"BROWN BAG" STOCKS. According to Okin, the cash payoffs for Jockey Club shares stopped--and later came in the form of a "loan." Okin said the $450,000 "subordinated loan," which was never repaid, was actually a disguised payoff. Okin testified that McAndris was aware of the "brown bag" payment from Gesser. Okin also said that other brokers received payoffs for buying other "brown bag" stocks, including Comprehensive Environmental Systems, whose chairman, Donald Kessler, has pleaded guilty to stock fraud, and a company he identified only as "Icis"--apparently Icis Management Group, another company also linked to Kessler.
If the jury believes McAndris knew of the "brown bag" payment, that could prove damaging to the quiet-spoken defendant. Morgenthau's prosecutors, led by assistant district attorney Eric R. Dinallo, have maintained that McAndris had a central role at Baron as a member of the "inner circle" of top brokers and execs. But Rieck has sought to minimize McAndris' role, and he plans to emphasize what he describes as the crucial role of Bear Stearns--whose relationship with Baron remains under investigation by Morgenthau's office. Rieck maintains that Bear Stearns had "the right to pick up every chair and look at every scrap of dust and go over the books up one side and down the other." The closeness of the Bear Stearns-Baron relationship was borne out by Okin's testimony for the prosecution. He noted that the clearing firms generated customer confirmations and a daily tally of commissions charged by Baron brokers--which, Okin testified, were often excessive in his case. "If my client should have known what was going on, Bear Stearns should have known too, and they were in a much better position to know," says Rieck. He asserts that three Bear Stearns employees, whom he named, were actually present on the Baron trading desk at various times during 1995-1996, the firm's final year of existence. Bear did not respond to requests for comment on that assertion.
Indeed, the troubles for Bear Stearns may be only just beginning. A senior law enforcement official, who requested anonymity, said he understood that former Baron CEO Bressman, who has pleaded guilty and pledged cooperation, is cooperating with Morgenthau's office in a probe of possible links between Harriton and Baron. Bear Stearns spokeswoman Hannah Burns declined comment on that, and maintained that "we had the knowledge that a clearing broker would have in processing the business of an introducing broker, but we reiterate that we had no knowledge of the illegal activity to which the Baron people pleaded guilty." That explanation may suffice in the months ahead. But if it does not, Harriton--and his employer--may have a lot more to fear than a grilling by a defense lawyer.