Stock Loan Traders Paid Phony Finder Fees and Received Kickbacks in Schemes Netting More Than $12 Million in Unlawful Profits
Washington, D.C., Sept. 20, 2007 – LAWFUEL – The Legal Newswire – The Securities and Exchange Commission today charged 38 defendants in a series of fraudulent schemes involving phony finder fees and illegal kickbacks in the “stock loan” industry. The defendants include 17 current and former “stock loan” traders employed at several major Wall Street brokerage firms, including Morgan Stanley, Van der Moolen (VDM), Janney Montgomery, A.G. Edwards, Oppenheimer, and Nomura Securities. These traders conspired in various schemes with 21 purported stock loan “finders” to skim profits on stock loan transactions. The defendants pocketed more than $12 million from their unlawful schemes over a period of nearly a decade.
In two separate complaints filed in federal court in Brooklyn, N.Y., the SEC alleges that from 1998 until June 2006, the stock loan traders named as defendants routinely defrauded the brokerage firms that employed them and others by engaging in collusive loan transactions and causing the firms to pay sham finder fees to companies controlled by the traders themselves or by their friends and relatives. Acting as fronts for the traders, these companies received hefty finder fees on several thousand stock loan transactions even though they did not provide any legitimate finding services and, in many cases, were simply shell companies that were not even involved in the stock loan business. These phony finders included a mailman, a perfume salesman, a pharmacist and a dental receptionist. The defendants shared in the sham finder fees through secret kickback arrangements. In some cases, defendants met monthly at New York City bars and restaurants to exchange thousands of dollars in cash, often wrapped in newspapers or stuffed into envelopes.
Linda C. Thomsen, Director of the Commission’s Division of Enforcement, said, “The defendants in these cases devised a host of brazen schemes to enrich themselves and others at the expense of firms engaged in securities lending transactions. The Commission will respond forcefully to misconduct in the securities industry, whether it occurs on Wall Street or Main Street and whether it is committed by individuals or large firms.”
David Rosenfeld, Associate Director of the New York Regional Office, added, “As the breadth of today’s action demonstrates, fraud was rampant in certain segments of the securities lending industry. Securities professionals who engage in collusion, cash kickback payments and outright theft undermine the integrity of our markets and will be confronted with aggressive enforcement action.”
Complaint Alleging Schemes by Morgan Stanley Traders
In one of the complaints filed today, SEC v. Darin DeMizio, et al., the Commission alleges that over the course of several years, two stock loan traders employed by Morgan Stanley – Darin DeMizio and Peter Sherlock – and three other individuals, including relatives of the two traders, skimmed millions of dollars in stock lending profits from Morgan Stanley and another brokerage firm through illegal kickback schemes with a stock loan finder named Anthony Lupo. From July 2000 through June 2006, Lupo collected more than $4 million in finder fees as a result of these schemes and paid more than $1 million in undisclosed kickbacks. Pursuant to the scheme, Darin DeMizio and Sherlock caused Morgan Stanley to enter into unnecessary loan transactions at inferior interest rates for the purpose of artificially generating finder fees for Lupo. In exchange, Lupo paid kickbacks directly to Sherlock in cash and paid nearly $600,000 to shell companies controlled by Darin DeMizio’s brother, Craig DeMizio, and Sherlock’s brother-in-law, Donato Tramontozzi, a full-time pharmacist.
In a second and related scheme, Joseph Miller, a finder and former stock loan trader at Morgan Stanley, paid undisclosed cash kickbacks to a stock loan trader at a division of The PNC Financial Services Group Inc. (PNC) in exchange for receiving PNC stock loan orders from the trader. Lupo also participated and shared in the profits from the scheme. From January 2002 to June 2004, Lupo and Miller split more than $1.2 million in finder fees generated by PNC orders. Miller ended his arrangement with Lupo in May 2003, but Miller continued the kickback scheme with the PNC trader on his own until January 2005.
The Complaint Alleging Multiple Interrelated Schemes
In the second complaint filed today, SEC v. Joseph Simone, et al., the Commission alleges that 21 individuals, including 15 securities industry professionals, and seven entities involved in the stock loan business, engaged in widespread fraudulent conduct by using various schemes to skim stock lending profits from several brokerage firms. In these schemes, stock loan traders routinely defrauded their firms by causing the firms to pay finder fees to entities that did not perform any services at all on the relevant loans and, in most cases, were simply shell companies controlled by traders or their relatives. Where the traders were unaffiliated with the finders, the finders paid undisclosed cash kickbacks to the traders. From 1999 to 2005, the finders named as defendants received more than $8 million in sham finder fees. The named traders either arranged or facilitated the payment of these sham fees. Some of the traders also paid undisclosed cash kickbacks out of their illegal profits to other traders that facilitated those loan transactions. This complaint specifically alleges as follows.
While Joseph Simone was co-head of the stock loan trading desk at VDM, he engaged in several schemes to defraud VDM using Island Capital Management, Inc., a shell company that he controlled. Simone caused VDM to pay several million dollars in sham finder fees to Island. The following traders also colluded with Simone to increase Simone’s illegal profits through circular loan transactions known as “ring” and “run-through” deals: Joseph Lando, the head of sales for Janney’s stock loan desk; Joseph Caracciolo at National Investor Services Corp.; Alfred Varricchio at A.G. Edwards, and Anthony Pianelli at Weiss, Peck & Greer, LLC. Simone paid monthly cash kickbacks to these traders out of the sham finder fees paid to Island. Simone himself made approximately $3.6 million.
Brian Fabrizzi, the other co-head of VDM’s stock loan trading desk, also defrauded VDM through the payment of sham finder fees from which he benefited. Fabrizzi conspired with Anthony Carannante, a finder who did business as A&C Management, and Donald Sorrentino, a trader at Oppenheimer. Fabrizzi and Sorrentino colluded to arrange “run-through” loans between VDM and Oppenheimer that enabled Fabrizzi to cause VDM to pay sham finder fees to A&C. Carannante kept a portion of the fees and funneled the rest back to Fabrizzi, who paid monthly cash kickbacks to Sorrentino.
Rochelle Roman and Shaun Sarnicola, two traders at Kellner Dileo & Co., conspired with Carannante and one of his associates, Steven Daronzio, to cause Kellner to pay sham finder fees to A&C. Carannante and Daronzio kept a portion of the sham fees, and Carannante paid the balance in cash kickbacks to Roman and Sarnicola.
Roman also defrauded Kellner by causing it to pay sham finder fees to AJT Ltd. and AJGT Ltd., two finder firms run by relatives of Joseph Lando: Anthony Tanico and Andrea Lando-Tanico, who is Lando’s sister and Tanico’s wife. Anthony Tanico paid Roman monthly cash kickbacks and kept the balance of the sham finder fees for himself and his wife. Joseph Lando also caused Janney to pay sham fees to AJT and AJGT.
Michael McCormack, a trader at A.G. Edwards, schemed with his wife, Donna Centola, Joseph Lando and Roman to defraud A.G. Edwards through sham finder fees paid to DMAC Services, Inc., a shell company owned by Centola. McCormack arranged for Joseph Lando and Roman to have Janney and Kellner borrow stock from A.G. Edwards at low rates and then lend the stock to other firms specified by McCormack at higher rates. DMAC’s sham finder fees were paid out of these artificial profits.
Andrew Caccioppoli, a trader who supervised Janney’s stock loan desk, schemed with his sister, Donna Macli, and her husband, Thomas Macli, to defraud Janney by having it pay sham finder fees to LUMAC Corp., a shell company owned by the Maclis. Thomas Macli was a mailman, and Donna Macli was a dental receptionist.
Gary Manfre, a trader at Nomura, schemed with his brother, Richard Manfre, Simone and Joseph Lando to defraud Nomura through sham finder fees paid to RAM Solutions, Inc., a shell company owned by Richard Manfre, a perfume salesman. Simone and Lando had VDM and Janney pay sham fees to RAM after Gary Manfre had Nomura lend stock to VDM and Janney at low interest rates. Simone and Lando loaned the same stock to other firms at higher rates, and RAM’s finder fees were paid out of these artificial profits.
Anthony Pianelli also schemed with Joseph Lando to defraud Weiss Peck and Janney by paying sham finder fees to JAP JAP Enterprises, LLC (JJE), a purported finder owned by Jill Pianelli, Anthony Pianelli’s wife. Lando had Janney pay fees to JJE on loan transactions with Weiss Peck that were arranged entirely by Anthony Pianelli and Lando.
Relief Sought and Obtained by the SEC and Other Authorities
The Commission’s complaints seek permanent antifraud injunctions, disgorgement of illegal profits with prejudgment interest, and civil monetary penalties.
The United States Attorney’s Office for the Eastern District of New York has filed parallel criminal charges against 16 of the individuals named in the Commission’s complaints. Ten of those individuals have entered guilty pleas: Simone, Caracciolo, Sorrentino, Carannante, Daronzio, Roman, Sarnicola, McCormack, Gary Manfre and Miller. In connection with his guilty plea, Simone also agreed to pay a total of $3.6 million in forfeiture.
Simone, Island, Gary Manfre, Richard Manfre and RAM have agreed to settle the SEC charges by consenting, without admitting or denying the allegations of the complaint, to the entry of permanent antifraud injunctions. Gary Manfre, Richard Manfre and RAM also will jointly disgorge $94,262, the total amount of their ill-gotten gains plus prejudgment interest. Because Simone has agreed to forfeit an amount equivalent to his ill-gotten gains in conjunction with his guilty plea in the parallel criminal case, the consent judgment in the SEC case does not require disgorgement of those same ill-gotten gains. The Commission’s claims for civil penalties against Simone, Island and Gary Manfre, and all of its claims against the other defendants in both cases, remain pending. In addition, the Commission today issued administrative orders respectively barring Simone, Gary Manfre and Caracciolo from association with any broker-dealer. The three respondents consented to the issuance of the respective orders.
The Commission’s investigation is ongoing. The Commission acknowledges the assistance and cooperation of the United States Attorney’s Office for the Eastern District of New York and the Federal Bureau of Investigation.List your legal jobs on the LawFuel Network