DJ UPDATE:Organized Crime Members Charged In Penny Stk Fraud
03/23/2006
Dow Jones News Services
(Copyright © 2006 Dow Jones & Company, Inc.)
(Updates with additional details of branch locations in third paragraph, stocks manipulated in 10th paragraph.)
By Chad Bray
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Members of the reputed Colombo and Luchese organized-crime families have been charged with manipulating the market for penny stocks as part of a broader racketeering case in Brooklyn, federal prosecutors said.
In an indictment unsealed Thursday, the U.S. Attorney's Office in Brooklyn alleges at least six of 10 men the Federal Bureau of Investigation arrested on Thursday on racketeering charges secretly controlled at least 15 branch offices of brokerage firms in the New York City boroughs of Brooklyn, Manhattan and Staten Island.
Through those branches, prosecutors claim they ran a scheme to artificially inflate the price of penny stocks. Many of the branches were in the heart of Manhattan's Financial District within blocks of the New York Stock Exchange.
Prosecutors described it as a classic "pump and dump" scheme, in which licensed and unlicensed brokers misrepresented the prospects of certain stocks to potential investors, in exchange for large commissions.
The defendants then sold their holdings in those stocks at inflated values, costing investors more than $20 million, the government said.
The ten men arrested are: Joseph Baudanza, 61 years old; Carmine Baudanza, 63 years old; John Baudanza, 36 years old; Jerry Degerolamo, 34 years old; Arthur Gunning, 40 years old; Craig Leszczak, 31 years old; Craig Marino, 36 years old; Robert Podlog, 32 years old; Ronald Giallanzo, 35 years old; and Vincent Rossetti, 40 years old.
They are facing charges ranging from racketeering and extortion to conspiracy and securities fraud.
Lawyers for the men couldn't immediately be reached for comment Thursday.
Prosecutors allege the prices of more than a dozen stocks were artificially manipulated as part of the scheme.
They included shares of Legends Sports Inc., Axxess Inc., HTTP Technology Inc., Learner's World Inc., Rollerball International Inc., SIMS Communications Inc., Flexweight Corporation, Rick's Cabaret International Inc., Blini Hut Inc., Orex Gold Mines Corporation, Motorsports USA Inc., Evans Systems Inc., Silver Star Foods Inc. and America's Hedge Fund.
Many of the stocks, which were allegedly referred to as "house stocks" by the defendants, were traded on the Over-the-Counter Bulletin Board or the NASDAQ small-cap stock market, the government said. They were mostly small companies, start-ups or companies that did no business at all, according to the indictment.
Prosecutors said commissions of as much as 20% to 50% of the price of the house stock were paid to encourage brokers to tout them to the public. The brokers didn't disclose these commissions to the public, instead telling investors they would receive a nominal commission or no commission would be charged, according to the indictment.
In order to hide the proceeds, the profits were laundered by wiring funds and making cash transfers through domestic and foreign banks, while utilizing nominee accounts and corporations to hide the true ownership of the illegal proceeds, the government said.
-Chad Bray; Dow Jones Newswires; 212-227-2017; chad.bray@dowjones.com
