Money Laundering On Wall Street?
By all outward appearances, Aleks Paul embodies the American dream. His nickname is Russian--"Losha"--but he came to the U.S. from Israel, not the former Soviet Union. In his 11 years running a jewelry business out of a tiny booth in Manhattan's 47th Street Diamond District, the 40-year-old Paul accumulated all the trappings of upper-middle-class solidity, from a two-year-old Mercedes-Benz to a modest home in the prosperous Long Island suburb of Kings Point.
But there is a dark side to Aleks Paul--or at least, so says the FBI in court papers filed under seal in the U.S. District Court in Manhattan. On July 17, Paul was quietly arrested by federal agents and charged with violating federal currency reporting laws. As alleged by an FBI agent in the sealed criminal complaint against Paul, a copy of which was obtained by BUSINESS WEEK, Paul is accused of having a sideline involving not gemstones but rather the fool's gold of Wall Street--fraudulent micro-cap stocks.
According to the federal complaint, the obscure jeweler led a double life. He allegedly used his wholesale jewelry business to act as a money-laundering service for micro-cap "chop houses" that rip off investors. As detailed in the complaint, Paul helped crooked brokers who had transferred the proceeds from stock scams to offshore accounts--presumably to avoid taxation and regulatory scrutiny. Paul allegedly got their money back home in a way designed to keep the feds unaware. In a brief telephone interview, Paul called the FBI's allegations "all lies." His attorney, Benjamin Brafman, says that the charges will be vigorously fought and that he expects they'll "ultimately prove to be baseless." He said that Paul has pleaded not guilty and was released on $300,000 bail.
Cross-border money transfers, almost invariably in contravention of federal money-laundering statutes, are crucial in the world of stock swindlers but are hard to track down by law enforcement. Still, they have been described as widespread by chop-house brokers and traders (BW--Dec. 15). What the feds usually lack is insiders to guide prosecutors, and then juries, through the web of deals. In this case, it seems, the feds struck gold. They have three cooperating witnesses, two of whom, described but not named in the complaint, have already pleaded guilty to money laundering and other charges.
Apparently the feds and their "cooperators" will be busy in the weeks and months ahead. People familiar with the inquiry say that further arrests are expected imminently, and that the feds' as-yet-unpublicized investigation is continuing. According to those familiar with the firms involved, investigators have been seeking details of possible involvement of Russian and Italian organized crime groups, though no such connections are alleged in the complaint.
RARE GLIMPSE. Even the limited details described in the complaint ensnare three of the most important names in the lower reaches of the micro-cap world--State Street Capital Markets (referred to in the FBI affidavit by its former name, White Rock Partners) as well as First Metropolitan Securities and Global Equities Group. State Street, which later changed its name again to State Capital Markets, and First Metropolitan are named in the FBI affidavit. Global is not, but its filings at the National Association of Securities Dealers list Paul as "owner" of that firm. The three firms are now defunct. Calls to their former top officers were not returned.
The one-count federal complaint against Paul gives a rare, detailed glimpse into the mechanics of an alleged "chop house" money-laundering scheme. As detailed in the complaint, the FBI got wind of the scheme in August, 1997, when a person identified only as "Confidential Source One"--evidently a White Rock Partners officer--approached the FBI. According to this FBI source, the informant's associates at White Rock were "making payments to stockbrokers to induce the brokers to aggressively promote the stock of certain companies the principals owned stock in to raise the stock's market price." According to the confidential informant, Paul "assisted the principals of White Rock"--none of whom are identified in the complaint--to hide the profits from regulators.
The first leg of the scheme, the FBI maintains, began when principals of White Rock opened accounts in Europe and the Caribbean and "transferred the proceeds of their securities trading into these accounts." The funds were then allegedly transferred to accounts in Israel and Switzerland controlled by Paul. When the money arrived in the Israeli and Swiss accounts, the FBI affidavit continues, Paul transferred an equivalent amount of cash from his 47th Street jewelry business to the principals of White Rock--in batches of $200,000 to $300,000 at a time. Since the cash did not go directly from the offshore accounts to the White Rock principals, the FBI alleged, Paul was able to avoid federal requirements that banks file "currency transaction reports" identifying the source of the cash. Paul's fee, according to the FBI, was a tidy piece of the action--5%.
According to the participant-turned-informer, who says he traveled to Europe to set up the accounts there, this scheme was used in 1995 to enrich White Rock's principals in the initial public offering of an obscure Corona (N.Y.) construction company called U.S. Bridge of N.Y. Inc. The informant told the FBI, the affidavit notes, that principals of White Rock "paid stockbrokers to aggressively promote U.S. Bridge stock." The White Rock principals cashed in their stock at inflated prices. Paul is quoted as saying this past February that the White Rock principals "had about $7 million in proceeds of stock deals overseas"--a reference, apparently, to other stock deals as well as U.S. Bridge. That company's president, Joseph Polito, vigorously denied knowledge of the wrongdoing alleged in the FBI affidavit. The firm recently changed its name to USA Bridge Construction of New York. The stock, which traded at $11 in late 1996, has fallen below $1.
RESILIENT SCHEMES. A "Confidential Source Two" materialized for the FBI in November, 1997. According to the FBI affidavit, this person has pleaded guilty to apparently unrelated charges of possession of forged securities and interstate transportation of stolen property. "CS2," as the FBI calls him, taped himself last December at a meeting with a person described only as "co-conspirator one." This person's name and brokerage affiliation are not disclosed in the affidavit, but the affidavit says he met the FBI informant at the Manhattan offices of First Metropolitan Securities--a recently defunct brokerage that has been the subject of a series of regulatory actions and investor complaints. According to the FBI, "co-conspirator one" had about $3.8 million in overseas accounts from stock deals that he wanted to bring into the U.S.
The FBI seized the opportunity presented by this wad of offshore funds. At the direction of the FBI, according to the affidavit, its informant converted about $1 million in overseas funds into cash for "co-conspirator one" and a similarly shadowy "co-conspirator two"--also apparently from First Metropolitan--and other unnamed persons. All this took place between January and April, 1998, the FBI maintains.
If nothing else, the Paul prosecution is notable for something not mentioned in the affidavit: the resiliency of chop-stock schemes. State Street/White Rock is no longer in business, but its former president, John Doukas, can be found at AIBC Investment Services' New York office--Suite 4047 at One World Trade Center. And that just happens to be the former offices of State Street. First Metropolitan is no longer in business. But a call to the old office phone number of its former chairman, Salvatore Morreale, is answered at his new offices--LCP Capital Management. The two men did not return calls.
Like AIBC, LCP was the subject of a recent "sweep" by state regulators, several of whom have sought penalties against LCP, notes Alabama securities commissioner Joseph Borg, who has acted against both firms. Usually, the principals of chop houses have been able to shrug off regulatory attacks. But with the feds targeting their all-important cross-border money spigot, they're starting to get hit where it really hurts.
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