Heat From The Boiler Room
Feb. 23 was John McAndris' 56th birthday. For the former chief financial officer of A.R. Baron & Co., the defunct micro-cap brokerage, this was a birthday to remember--because it was also judgment day. On that rainy Monday afternoon, a New York State Supreme Court jury began considering 25 felony counts that could send the mild-mannered grandfather to prison for up to 25 years. But whatever the verdict, the trial has troublesome implications for the array of brokers, firms, and stock promoters mentioned in the six-week trial--notably Baron's clearing firm, Bear Stearns & Co. The trial shed new light on a nagging question: Was Bear Stearns aware of illegal activities at Baron?
The trial revealed close, even intimate, links between Bear Stearns and Baron. Among other things, testimony pointed to a close relationship between former Baron Chief Executive Andrew Bressman--who has pleaded guilty to illegal activities at Baron--and Bear Stearns' chief of clearing, Richard Harriton. Bear Stearns' links to Baron are being scrutinized by Manhattan District Attorney Robert M. Morgenthau, and the trial indicated yet another "spin-off" investigation, mentioned in testimony by a Morgenthau investigator. The target of that inquiry is also unclear, though prosecution witnesses testified that they had been questioned about D.H. Blair, a 300-broker firm with customers around the country. A Blair spokeswoman said the company is cooperating with all inquiries.
If Bear Stearns had knowledge of illicit trading at its now-defunct client, the implications would be serious. Apart from the Morgenthau investigation, class actions have been brought against the firm by former Baron customers. (Bear Stearns has said it is vigorously contesting the suits.) Bear Stearns has denied knowledge of illegal actions at A.R. Baron and has also pledged cooperation with all inquiries.
The Bear Stearns-Baron links emerged from the prosecution's efforts to prove that McAndris knew about alleged illegal trading at Baron. Defense lawyer John J. Rieck Jr. maintained that Bear Stearns knew at least as much as McAndris, if not more. As part of their contention that McAndris was guilty of enterprise corruption--the state anti-racketeering law--prosecutors alleged that Baron traders, supervised by McAndris, engaged in rampant unauthorized trading to prop up share prices. Customers, claiming they never placed the orders, refused to pay for the trades when they received their confirmation slips from the clearing firm, Bear Stearns. And that allegedly resulted in an extremely high rate of "sellouts," forced sales of stocks when customers won't pay.
Prosecution witnesses testified that sellouts were so astronomical that McAndris had to have known they were red flags of illicit trading. According to former Baron trader Charles Plaia, the rate of sellouts was as high as 60% to 70% of all trades for months at a time. In a grueling cross-examination of Plaia, Rieck expressed wonderment that "Bear Stearns didn't come roaring into A.R. Baron" and ask the traders, "What the heck is going on?"
Or would they? According to the transcript of a Feb. 10 court discussion outside the hearing of spectators, prosecutor Eric R. Dinallo observed that Bear Stearns' "position is as long as they have their money in a certain place, they don't care if the place closes down as long as they are covered." For his part, Plaia testified that Bear Stearns was aware of the sellouts. He said that he and chief trader Nicholas Marino were both mystified "why Bear Stearns kept us open" and didn't "know what kind of relationship Bressman and Bear Stearns had."
Similar views were brought out in the cross-examination of another prosecution witness, Roman Okin. (Both Plaia and Okin were indicted along with McAndris, and pleaded guilty to one count of enterprise corruption, as did Bressman and Baron.) The former star broker, who earned millions at Baron and was a part-owner of the firm, said he and Bressman would discuss that "we had a lot of sellouts and a lot of liquidations, and at times it looked like" Baron was "parking" stock--putting stock in customer accounts for a short period to manipulate share prices. As a result, Okin testified, he felt that "if they're not stupid, Bear Stearns will catch on." Okin said he "had a suspicion Bear Stearns was aware we were breaking a lot of securities rules and conducting business in an illegal fashion."
Okin testified that Bressman and Bear Stearns clearing chief Harriton were in close contact. He alleged that the two met for lunch every week, and that Harriton was also a guest of Bressman's at a New Jersey country club. Under questioning by Rieck, Okin said he didn't know the specific reason for the lunches--which McAndris did not attend--but did have a "general idea" they discussed "our financial situation." Okin added that he was never told by Bressman that they discussed illegal activity, or that Harriton suspected illegal activity at Baron. But Okin testified that he and Bressman both suspected Harriton was aware of chicanery at Baron.
Neither Bressman nor Harriton shed light on the subject. Both were subpoenaed by Rieck, but neither was called to testify before the jury by either side. Bressman, testifying outside the presence of the jury, invoked his Fifth Amendment privilege and refused to answer any questions. A Bear Stearns spokesman, Larry Rand of Kekst & Co., said that Okin was wrong--that Harriton did not have weekly lunches with Bressman. Rand declined further on-the-record comment on the questions raised by the trial.
Some of the trial testimony pointed to Bear Stearns as a kind of stern overseer of Baron--demanding, for example, that Baron conduct its "sellouts" by selling to the Street and not by shifting to other accounts within the firm. Indeed, Okin and Plaia both testified that a Bear Stearns official--one of two delegated to the task--occasionally monitored trading at the Baron trading desk.
If the two Bear Stearns officials hung around enough, apparently they would have seen a lot. Plaia and Okin both testified that a stock promoter, Ray Irangy, frequented the Baron trading desk in 1995 and 1996, in violation of rules prohibiting outsiders from the trading floor. (Irangy was indicted for stock fraud by a federal grand jury in October, 1996, in a case unrelated to Baron, and subsequently pleaded guilty.) If Irangy was at the trading desk, it would be hard not to notice him--the trading room was just 15 feet by 30 feet. Moreover, testimony indicated that Irangy may have been at Baron at about the same time as the two officials--though there was no testimony that Irangy met either Bear Stearns representative.
In his testimony, Plaia said that Baron came under intense pressure from Bear Stearns to get shares off the books--a perfectly legitimate response to what Bear Stearns perceived as excess market risk. Plaia said that when McAndris, because of the Bear Stearns pressure, ordered him to get the shares out of Baron's trading account, he reacted by sending the shares "into space." By that, he meant illegally putting the stocks in customer accounts without their knowledge.
Plaia said that when shares were sent into "space," they were handled differently than ordinary, authorized buy orders. Both types of trades would be immediately entered into the NASDAQ system. But ordinary trades would be immediately entered into the Bear Stearns system as well. Plaia testified that phony trades would all be entered into the Bear Stearns system at the end of the day. The firm would then generate confirmations for the customers--and they would often refuse to pay. If there was an after-close avalanche of buy orders, could that have been a tipoff to Bear Stearns that possibly illicit trading was taking place? That is one of the most intriguing questions raised by the Baron trial.
Other firms and persons also found themselves snared by the wide-ranging testimony. Okin testified that he paid a Merrill Lynch & Co. broker $3,000 to $4,000 in cash in return for selling Baron stocks to his customers. A Merrill spokesman said the broker no longer works for the firm, and that Merrill had no knowledge of any payoffs to the broker. Other testimony from Okin pointed to alleged improper trading at D.H. Blair, where he worked before coming to Baron. The testimony also featured a host of minor characters, such as a stock promoter who Plaia maintained gave him $120,000 in a brown paper bag that weighed a bit more than a "medium-size ham." Plaia testified that he drove from the stock promoter's Long Island home into New York, gave the money to Bressman, and "we thanked each other."
McAndris was not implicated even indirectly in receiving cash payments. But prosecutors maintained that he knew what was going on. Some of the most damaging evidence consisted of a sworn statement from McAndris that, prosecutors contend, put forth a false picture of Baron's financial position. Dry stuff--but if the prosecution prevails, that could be enough to send McAndris to prison for a long time. Conviction or acquittal, however, may prove to be almost a side issue--if other shoes begin to drop.
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