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[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]

                     ORGANIZED CRIME ON WALL STREET

=======================================================================

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                    FINANCE AND HAZARDOUS MATERIALS

                                 of the

                         COMMITTEE ON COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 13, 2000

                               __________

                           Serial No. 106-156

                               __________

            Printed for the use of the Committee on Commerce

                    U.S. GOVERNMENT PRINTING OFFICE
67-115CC                    WASHINGTON : 2000

                         COMMITTEE ON COMMERCE

                     TOM BLILEY, Virginia, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio               HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida           EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas                    RALPH M. HALL, Texas
FRED UPTON, Michigan                 RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio                FRANK PALLONE, Jr., New Jersey
  Vice Chairman                      SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania     BART GORDON, Tennessee
CHRISTOPHER COX, California          PETER DEUTSCH, Florida
NATHAN DEAL, Georgia                 BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma              ANNA G. ESHOO, California
RICHARD BURR, North Carolina         RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California         BART STUPAK, Michigan
ED WHITFIELD, Kentucky               ELIOT L. ENGEL, New York
GREG GANSKE, Iowa                    TOM SAWYER, Ohio
CHARLIE NORWOOD, Georgia             ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma              GENE GREEN, Texas
RICK LAZIO, New York                 KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming               TED STRICKLAND, Ohio
JAMES E. ROGAN, California           DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois               THOMAS M. BARRETT, Wisconsin
HEATHER WILSON, New Mexico           BILL LUTHER, Minnesota
JOHN B. SHADEGG, Arizona             LOIS CAPPS, California
CHARLES W. ``CHIP'' PICKERING, 
Mississippi
VITO FOSSELLA, New York
ROY BLUNT, Missouri
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland

                   James E. Derderian, Chief of Staff

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

            Subcommittee on Finance and Hazardous Materials

                    MICHAEL G. OXLEY, Ohio, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     EDOLPHUS TOWNS, New York
  Vice Chairman                      PETER DEUTSCH, Florida
PAUL E. GILLMOR, Ohio                BART STUPAK, Michigan
JAMES C. GREENWOOD, Pennsylvania     ELIOT L. ENGEL, New York
CHRISTOPHER COX, California          DIANA DeGETTE, Colorado
STEVE LARGENT, Oklahoma              THOMAS M. BARRETT, Wisconsin
BRIAN P. BILBRAY, California         BILL LUTHER, Minnesota
GREG GANSKE, Iowa                    LOIS CAPPS, California
RICK LAZIO, New York                 EDWARD J. MARKEY, Massachusetts
JOHN SHIMKUS, Illinois               RALPH M. HALL, Texas
HEATHER WILSON, New Mexico           FRANK PALLONE, Jr., New Jersey
JOHN B. SHADEGG, Arizona             BOBBY L. RUSH, Illinois
VITO FOSSELLA, New York              JOHN D. DINGELL, Michigan,
ROY BLUNT, Missouri                    (Ex Officio)
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
  (Ex Officio)

                                  (ii)

                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Fuentes, Thomas V., Chief, Organized Crime Section, Criminal 
      Investigation Division, Federal Bureau of Investigation....   114
    Goldsmith, Barry R., Executive Vice President, NASD 
      Regulation, Inc., Office of Enforcement....................   137
    Skolnik, Bradley W., Securities Commissioner, State of 
      Indiana, President, North American Securities 
      Administrators Association, Inc............................   131
    Walker, Richard H., Director, Division of Enforcement, 
      Securities and Exchange Commission.........................   119
Additional material submitted for the record:
    Skolnik, Bradley W., Securities Commissioner, State of 
      Indiana, President, North American Securities 
      Administrators Association, Inc., letter dated October 20, 
      2000, enclosing response for the record....................   280

                                 (iii)

  

 
                     ORGANIZED CRIME ON WALL STREET

                              ----------                              

                     WEDNESDAY, SEPTEMBER 13, 2000

                  House of Representatives,
                             Committee on Commerce,
           Subcommittee on Finance and Hazardous Materials,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:05 a.m., in 
room 2322, Rayburn House Office Building, Hon. Michael G. Oxley 
(chairman) presiding.
    Members present: Representatives Oxley, Largent, Shimkus, 
Fossella, Ehrlich, Bliley (ex officio), Barrett, Luther, and 
Markey.
    Staff present: Brian McCullough, majority professional 
staff; Robert Simison, legislative clerk; and Consuela 
Washington, minority counsel.
    Mr. Oxley. The subcommittee will come to order.
    Good morning. Today's hearing might sound like an episode 
of The Sopranos, but it is not HBO. It is real. We are going to 
hear the true stories about people getting bilked out of their 
hard-earned money by the Mob. I know from my own experience as 
a special agent in the FBI that the Mob will go wherever a 
dollar is being made. Today that is Wall Street. So it is 
really not surprising that organized crime is trying to suck 
some of the life out of the blossoming securities markets. The 
M-O-B has gone back to school and gotten an MBA. The wiseguys 
are getting smart. They used to play ponies. Now they are 
playing the markets and investors for everything they are 
worth.
    When I was in the FBI investigating the organized crime in 
Boston, the Mob was in shipping, racketeering, garbage, loan 
sharking and good old-fashioned shakedowns. Now they are moving 
from the old economy to the new, but using the same old tactics 
of intimidation, extortion and manipulation.
    As reported by Greg B. Smith of the New York Daily News, 
one anonymous regulator discussed what he called the maggot 
run, meaning the Mob-connected brokers moving from one firm to 
another, attempting to stay just ahead of the law. By the way, 
I would recommend Mr. Smith's article of this past Sunday to 
anyone interested in reading more about the topic. This happens 
to be the front page of the article ``The Mob on Wall Street: 
Inside the Mafia Stock Fraud Scams.'' And I think it says a lot 
about what we are going to be discussing today; the lure of 
quick profits in the securities markets that has turned 
businessmen into criminals and criminals into businessmen.
    It is our job to work with the organizations testifying 
before us today to ensure that the U.S. capital markets are 
clean and fair and remain the envy of the world. It is 
disturbing to know that there is an organized, concerted effort 
by criminals to enter and control one of the most successful 
sectors of our economy for the sole purpose of defrauding 
investors. We know about the ``pump it and dump it'' schemes 
that leave investors with worthless stock. We are aware of 
boiler rooms falsely promoting penny stocks of both legitimate 
and dummy companies. What is new is organized crime.
    I want to send my congratulations to the Federal and State 
authorities that netted 120 arrests in June for the biggest 
stock scam in U.S. History. Something tells me a lot of those 
Sopranos will be singing for the government as prosecutors 
bring their cases to court. We have the best markets in the 
world in part because we have the best and fairest regulatory 
system in the world. That continues to give investors 
confidence in capital markets that are increasingly the road to 
a comfortable retirement, the place to put your education nest 
egg. The markets are also a powerhouse of capital for companies 
to expand and create jobs. There is no coincidence that our 
economic growth overlaps the boom of new investors in the 
market.
    We are here today to examine how prevalent organized crime 
is in our markets and hear about efforts to stop the fraud. Our 
witnesses today are experts and can speak about battling 
securities crime on the front line. I welcome Mr. Fuentes of 
the FBI, Mr. Walker of the SEC, Mr. Skolnik representing the 
State Securities Administrators, and Mr. Goldsmith of NASDR. We 
thank you for your time and look forward to your testimony.
    I now want to--let me first indicate that our ranking 
member Mr. Towns is en route and hopes to get here for the 
hearing. He had a primary yesterday in the Empire State, and he 
may be a little bit tired from his victory in that primary, and 
so we look forward to having him with us at a later time.
    Now, let me turn to our friend from Illinois, the gentleman 
Mr. Shimkus, for an opening statement.
    Mr. Shimkus. Thank you, Mr. Chairman. I will be brief. I 
want to thank the panel for coming.
    I think we, as citizens of this great Nation having the 
great exchanges, great financial exchanges, the success only 
stems from faith and trust in the individual consumers. And so 
this, from what we have learned on the boiler rooms issue and 
its focus in schemes on senior citizens, it shakes the 
foundation of the faith and trust in the markets. That is why 
this hearing is so important. I appreciate your time.
    And with that, Mr. Chairman, I yield back my time.
    Mr. Oxley. I thank the gentleman from Illinois.
    [Additional statements submitted for the record follows:]
 Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
    Thank you Mr. Chairman.
    There has been an increase in organized criminal activity on Wall 
Street over the last few years. The modus operandi appears to be to set 
up a sham company, threaten brokers to hype the stocks, and when the 
paper value of the company inflates, dump the stock, leaving legitimate 
investors with nothing of value.
    This should come as no surprise--where there is money to be made, 
you will find organized crime. Being aware of such corruption should 
increase our vigilance.
     Organized crime on Wall Street threatens virtually every 
American--because it damages the integrity of our capital markets, the 
life blood of our economy. By infiltrating our markets, corrupt forces 
pose a very real threat to the prosperity this country is currently 
enjoying.
    The FBI and the SEC, as well as state regulators, are doing fine 
work to preserve market integrity and investor confidence. I thank them 
for that work and welcome all of our witnesses here today. I am pleased 
that Chairman Oxley has called this hearing today to increase awareness 
of organized crime in the financial marketplace and ensure that ``cops 
on the beat'' are using the strongest possible measures to fight this 
scourge.
                                 ______
                                 
    Prepared Statement of Hon. John D. Dingell, a Representative in 
                  Congress from the State of Michigan
    Due to the press of other Congressional business and a resulting 
schedule conflict, I was unable to participate in the hearing on 
organized crime's involvement in the securities markets. I commend the 
Subcommittee for holding this hearing and I thank Chairman Oxley for 
keeping the record open for Members' statements.
    As a former prosecutor for Wayne County, I have a strong commitment 
to the enforcement of our laws and a very healthy respect for the 
difficult and often thankless jobs carried out by the FBI and the 
federal and State securities regulators. They deserve this Committee's 
strong support.
    This hearing is overdue. In December 1996, Business Week warned us, 
in its seminal cover story, ``The Mob on Wall Street,'' that we had a 
serious problem: ``A three-month investigation reveals that organized 
crime has made shocking inroads into the small-cap stock market.'' In 
response, I wrote to the Department of Justice, the Securities and 
Exchange Commission, and NASD Regulation, asking them what they were 
doing about this travesty. I am submitting these documents and the 
article for the hearing record. In sum, Justice said that it could 
neither confirm nor deny the existence of an investigation. The SEC 
offered a confidential briefing and subsequently rescinded that offer 
to protect ongoing investigations. Therefore, I am pleased that we are 
finally getting some answers. Several of the individuals and entities 
mentioned in the Business Week article have been the subject of SEC and 
criminal enforcement actions.
    The Subcommittee witnesses testified that the mob-related activity 
was concentrated in the market for the smallest microcap stocks. In 
December 1997, I opened up an investigation into rampant fraud in 
microcap stocks and pressed the regulators to take prompt action to 
address it. I also am submitting the documents associated with that 
investigation for the hearing record. I commend the regulators for what 
they have done and note that dealing with this problem will require 
constant vigilance by all of us.
    On the basis of our combined record and the testimony of the 
witnesses at the Subcommittee hearing, I have the following concerns:

--A lot of this activity is migrating to the Internet and the Committee 
        has not done enough to make sure that our securities-crime cops 
        have the necessary tools to police the Internet;
--There has been scant progress in stemming the migration of crooked 
        brokers and more needs to be done, such as giving the NASD 
        express authority to provide a broker's disciplinary history to 
        investors over the Internet so that they can more readily 
        identify scoundrels;
--Staff turnover at the SEC Enforcement Division is straining the 
        agency's ability to investigate and litigate these and other 
        cases and I strongly encourage the Committee to pass pending 
        pay parity legislation to help the agency keep its best and 
        brightest on the job protecting the American public;
--A lot of these scams rely on fraudulent financial statements that 
        have been given a clean bill of health by the auditors, 
        suggesting that mob-related companies are exploiting the 
        Private Securities Litigation Reform Act provisions weakening 
        accountants' liability and accountability for securities fraud: 
        this ill-advised loophole needs to be closed.
    There is a Latin proverb: Nemo sine crimine vivit. That translates 
into: No one can live without crime. While it is true that the crooks 
are always with us, I believe that we can and should work together to 
make it a whole lot harder for them to operate and fleece our 
constituents. I pledge to work with my colleagues and the law 
enforcement authorities to that end.
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    Mr. Oxley. Let me now turn to our witnesses. And let me, 
before I begin, indicate to the media and make a note that the 
presentation by Mr. Fuentes of the FBI will include a sampling 
of court-ordered telephone wiretaps that have been collected in 
investigation and presented as evidence in a pending case. I 
understand these contain inappropriate and coarse language. So 
any young people or anyone who would prefer not to hear that 
might want to step in the hall for a few minutes when those 
tapes are on. Those listening on the live Webcast of this 
hearing on the Commerce Committee Web site and the television 
crews here today are similarly warned.
    With that caveat, I will ask Mr. Fuentes to testify first. 
Let me point out that perhaps after you have given your 
testimony, we can hear those tapes after the other witnesses 
have also completed their testimony.
    With those ground rules, let me now recognize Mr. Fuentes 
of the FBI.

    STATEMENTS OF THOMAS V. FUENTES, CHIEF, ORGANIZED CRIME 
  SECTION, CRIMINAL INVESTIGATION DIVISION, FEDERAL BUREAU OF 
    INVESTIGATION; RICHARD H. WALKER, DIRECTOR, DIVISION OF 
  ENFORCEMENT, SECURITIES AND EXCHANGE COMMISSION; BRADLEY W. 
SKOLNIK, SECURITIES COMMISSIONER, STATE OF INDIANA, PRESIDENT, 
NORTH AMERICAN SECURITIES ADMINISTRATORS ASSOCIATION, INC.; AND 
BARRY R. GOLDSMITH, EXECUTIVE VICE PRESIDENT, NASD REGULATION, 
                  INC., OFFICE OF ENFORCEMENT

    Mr. Fuentes. Thank you. Good morning, Mr. Chairman and 
members of the subcommittee.
    I am Tom Fuentes. I am Chief of the Organized Crime Section 
at FBI headquarters here in Washington. I am very pleased to 
appear before you today to discuss the FBI's role in 
investigating organized crime's involvement in the financial 
and securities markets. The FBI investigates financial and 
securities fraud schemes primarily through our financial crimes 
white collar crime program. However, we have recently 
documented a willingness on the part of organized crime groups 
to engage more frequently in this type of criminal activity, 
and as a result our organized crime program has become very 
active and engaged in pursuing these types of investigations.
    Organized crime has stepped into financial and securities 
frauds schemes for the same reason that it engages in any other 
type of criminal activity. It goes where the money is. And the 
bull market of the past few years with its extraordinary 
profits has caught the eye of organized crime. In the past 
approximately 8 years, organized crime's involvement in the 
financial and securities markets has become significant.
    Historically, organized crime's role in the financial and 
securities markets was limited to shaking down and extorting 
stockbrokers who had found themselves indebted to organized 
crime figures for any number of reasons and attempted to work 
off their debts through stock manipulation. Today elements of 
traditional organized crime groups to include the Bonanno, 
Colombo, Decavalcante, Gambino, Genovese and Luchese organized 
crime family as well as Eurasian organized crime groups have 
been linked to stock manipulation schemes. In some cases 
traditional Eurasian organized crime groups have worked 
together to infiltrate the financial and securities markets.
    New technologies such as e-mail and the Internet have made 
it easier for organized crime to conduct these schemes. Not 
only can it reach a broader pool of potential victims, but the 
perpetrators can operate with a certain measure of anonymity. 
Organized crime groups target small-cap or microcap stocks or 
over-the-counter stocks and other types of thinly traded stocks 
which can be easily manipulated.
    Organized crime schemes involving the financial and 
securities markets tend to use offshore bank accounts to 
conceal the conspirators' participation in the fraud scheme as 
well as provide a mechanism to launder the illegal proceeds of 
these type of fraud schemes. Thus criminal indictments tied to 
these schemes usually include money laundering and income tax 
evasion violations. Their victims tend to be elderly or 
inexperienced investors, and there is every reason to believe 
that the amount of money to be made increases more and more as 
this type of activity develops.
    What makes the financial and securities fraud schemes 
appealing to organized crime is the size of profits to be made 
in relatively short periods of time coupled with the difficulty 
of detecting these schemes. The sheer amount of money involved 
makes it a tempting target for exploitation by organized crime.
    Recently we have had a number of successful investigations 
and prosecutions in this area. In November 1997, after a 1-year 
investigation which included extensive electronic surveillance, 
the United States Attorney's Offices in the Southern District 
of New York indicted 19 defendants including a capo in the 
Bonanno organized crime family and a capo in the Genovese 
organized crime family and other organized crime associates. 
These individuals orchestrated an effort to gain control and 
influence over a brokerage firm known as Meyers, Pollock and 
Robbins through bribes and extortion. These defendants use 
their influence over the brokerage firm to manipulate the 
market price of Healthtech International, a small company whose 
stock traded on the NASDAQ small-cap market. Members and other 
defendants in this matter secretly obtained shares of 
Healthtech from its CEO in return for causing the brokerage and 
brokers to manipulate the price of Healthtech stock to 
artificially high levels. They then made substantial profits by 
selling their secretly obtained shares to the public at these 
artificially inflated prices.
    As a result of these investigations, 17 of the defendants 
were convicted and sentenced to various prison sentences as a 
result.
    In another investigation conducted in the Southern District 
of New York, 120 defendants including 11 members and associates 
of New York's 5 major organized crime families were charged 
with crimes related to the manipulation of the securities 
markets. This investigation, code-named Operation Uptick, 
centered on organized crime's involvement in a series of 
schemes to artificially inflate the market prices of 19 public 
companies and then sell to the unsuspecting public stock in 
those companies which was held by an investment firm known as 
DNM Capital, Incorporated.
    The investigation also revealed organized crime's 
involvement in a number of fraudulent private placements of 
stock in several small private companies.
    One other aspect of this investigation involved an effort 
by a Colombo organized crime associate to bribe an official for 
a pension fund who, in turn, would cause the pension fund to 
invest in a number of entities which had agreed to kick back 
portions of that pension fund to DMN Capital for the benefit of 
organized crime associates. Charges involved in this 
investigation are pending trial.
    On March 1, 2000, after a 3-year investigation by the FBI 
and the New York City Police Department, 19 individuals were 
indicted in the Eastern District of New York on RICO charges 
relating to the fraudulent manipulation of securities by 
members and associates of the Gambino and Genovese organized 
crime families working with a Russian organized crime group. 
Among those individuals were a capo and associate in the 
Bonanno crime family, a soldier in the Genovese family, a 
soldier and associate of the Gambino organized crime family, 
and associates from the Colombo family. Of the 19 defendants, 
17 have been charged with racketeering violations, and the 
investigation is ongoing.
    Another investigation recently conducted in the Eastern 
District of New York charged 23 defendants with participating 
in a large-scale stock fraud and money-laundering scheme that 
was controlled and directed by a confederation of traditional 
and Russian organized crime groups. This scheme generated more 
than $10 million in illegal proceeds by defrauding hundreds of 
innocent victims who, through false and misleading high-
pressure sales pitches, were induced by the defendants to 
invest in worthless stocks. The scheme was led by defendants 
and associates of the Colombo organized crime family. This 
investigation against other defendants is also ongoing.
    Finally, the YBM Magnex case initiated by our Philadelphia 
office in 1996, and as part of the criminal conspiracy, YBM 
Magnex was formed by an individual with ties to the former 
Soviet Union and associated with organized criminal activity in 
Eastern Europe. Once formed, YBM Magnex registered its stock 
with securities regulators in Canada and the United States in 
order to sell the stock to the public in both countries.
    In May 1998, agents from the FBI, Internal Revenue Service, 
U.S. Customs Service, Immigration and Naturalization Service 
and the Department of State, with assistance from the Security 
and Exchange Commission, executed a search warrant on the 
premises of YBM Magnex in Newtown, Pennsylvania, the 
organization's U.S. Base of financial operations. The 
conspirators in this investigation had engaged in a stock fraud 
scheme centering on YBM shares offered through the stock 
exchange originally in Calgary, Alberta, Canada. YBM Magnex was 
trading on the Toronto Stock Exchange, Ontario, Canada, as a 
member of the exchange's leading index of 300 companies until 
the time of the aforementioned raid at the Magnex office. It 
was then removed from the Toronto Stock Exchange after that 
raid.
    In June 1999, YBM pleaded guilty in U.S. District Court for 
the Eastern District of Pennsylvania to a one-count criminal 
information charging a multiobject conspiracy to commit 
securities fraud and mail fraud. As a part of the conspiracy 
YBM filed a prospectus with securities regulators at the 
Ontario Securities Commission for approval to issue their 
second public offering of its stock. The proceeds of that 
offering generated approximately $100 million Canadian.
    Beginning in August 1996, YBM filed a series of documents 
with the Securities and Exchange Commission and the NASDAQ in 
order to obtain authorization to issue stock in the United 
States. It is important to note that this plea constitutes a 
global resolution of the criminal conduct of the corporation, 
the corporate defendant only, that occurred between 1993 and 
the date of the plea. The investigation against the individual 
subjects involved is ongoing at this time.
    Although these investigations are financially complex, we 
utilize traditional investigative techniques such as the use of 
informants, undercover operations and electronic surveillance 
in developing cases suitable for prosecution. Our 
investigations are coordinated closely with the Securities and 
Exchange Commission so as to minimize losses to the investors 
once these schemes are uncovered. Both the SEC and the National 
Association of Securities Dealers have provided assistance by 
identifying victims, coconspirators and trading activity 
relative to these fraudulently manipulated stocks.
    In conclusion, I want to thank the subcommittee for giving 
me the opportunity to testify here today. This trend toward 
investing in the financial markets and the tremendous profits 
which have been realized in recent years, as well as the sheer 
volume of funds involved, make the financial and securities 
markets prime targets for exploitation by organized crime, as 
organized crime goes where the money is. The FBI is fully 
prepared to address the emerging area of criminal activity and 
have already realized significant successes as well as 
prevented substantial financial loses. We look forward to 
working with the Congress to insure that we continue to meet 
the investigative demands of this emerging and developing 
aspect of organized crime.
    This concludes my prepared remarks, and as the chairman 
mentioned, we have a tape which should wait until later on. 
Thank you very much.
    [The prepared statement of Thomas V. Fuentes follows:]
    Prepared Statement of Thomas V. Fuentes, Chief, Organized Crime 
      Section, Criminal Investigative Division, Federal Bureau of 
                             Investigation
    Good Morning, Mr. Chairman and members of the subcommittee. I am 
very pleased to appear before you today to discuss the Federal Bureau 
of Investigation's (FBI's) role in investigating organized crime's 
involvement in the financial and securities markets. The FBI 
investigates financial and securities fraud schemes primarily through 
our Financial Crimes Program. However, we have recently documented a 
willingness on the part of organized crime groups to engage more 
frequently in this type of criminal activity and as a result, our 
Organized Crime Program has become very active and engaged in pursuing 
these types of investigations.
    Organized crime has stepped into financial and securities fraud 
schemes for the same reason that it engages in any other area of 
criminal activity-it goes where the money is and the ``bull market'' of 
the past few years, with its extraordinary profits, has caught the eye 
of organized crime. In the past approximately eight years, organized 
crime's involvement in the financial and securities markets has become 
significant. Historically, organized crime's role in the financial and 
securities markets was limited to shaking down and extorting 
stockbrokers who had found themselves indebted to organized crime 
figures, for any number of reasons, and attempted to work off their 
debts through stock manipulation. Today, elements of traditional 
organized crime groups, to include the Bonanno, Colombo, Decavalcante, 
Gambino, Genovese, and Luchese organized crime families, as well as 
Eurasian organized crime groups, have been linked to stock manipulation 
schemes. In some cases, traditional Eurasian organized crime groups 
have worked together to infiltrate the financial and securities 
markets.
    New technologies such as E-mail and the Internet have made it 
easier for organized crime to conduct these stock and securities 
schemes. Not only can it reach a broader pool of potential victims, but 
the perpetrators can operate with a certain measure of anonymity. 
Organized crime groups target ``small-cap'' or ``micro-cap'' stocks, 
over-the-counter stocks, and other types of thinly traded stocks which 
can be easily manipulated. Organized crime schemes involving the 
financial and securities markets tend to use offshore bank accounts to 
conceal the conspirators' participation in the fraud scheme as well as 
provide a mechanism to launder the illegal proceeds of these type of 
fraud schemes. Thus criminal indictments tied to these schemes usually 
include money laundering and income tax violations. Their victims tend 
to be elderly or inexperienced investors and there is every reason to 
believe that as the amount of money to be made increases, more and more 
of this type of activity will develop. What makes the financial and 
securities fraud scheme appealing to organized crime is the size of the 
profits to be made in relatively short periods of time coupled with the 
difficulty of detecting these schemes. The sheer amount of money 
involved makes it a tempting target for exploitation by organized 
crime.
    Recently we have had a number of successful investigations and 
prosecutions in this area. In November of 1997, after a one year 
investigation which included extensive electronic surveillance, the 
United States Attorney's Office in the Southern District of New York, 
indicted 19 defendants including Frank Lino, a Capo in the Bonanno 
organized crime family, Rosario Gangi, a Capo in the Genovese organized 
crime family, and Eugene Lombardo, an organized crime associate. These 
individuals orchestrated an effort to gain control and influence over a 
brokerage firm known as Meyers, Pollock, and Robbins through bribes and 
extortion. Lino, Gangi, Lombardo and the other defendants used their 
influence over the brokerage firm to manipulate the market price of 
Healthtech International, a small company whose stock traded on the 
NASDAQ Small-Cap market. Lombardo and the other organized crime 
defendants in this matter secretly obtained shares of Healthtech from 
its CEO, in return for causing the brokerage and its brokers to 
manipulate the price of Healthtech's stock to artificially high levels. 
They then made substantial profits by selling their secretly obtained 
shares to the public at artificially inflated prices. As a result of 
this successful investigation, 17 of the defendants were convicted to 
include Lino, who was sentenced to 57 months in prison, Gangi who was 
sentenced to 97 months in prison, and Lombardo who was sentenced to 96 
months in prison. In addition, the CEO was sentenced to 87 months. In 
another investigation conducted in the Southern District of New York, 
120 defendants, including eleven members and associates of New York's 
five major organized crime families, were charged with crimes related 
to the manipulation of the securities markets. This investigation, 
code-named ``Operation Uptick,'' centered on organized crime's 
involvement in a series of schemes to artificially inflate the market 
prices of 19 public companies and then sell, to the unsuspecting 
public, stock in those companies which was held by an investment firm 
known as DMN Capital, Inc. The investigation also revealed organized 
crime involvement in a number of fraudulent ``private placements'' of 
stock in several small, private companies. One other aspect of this 
investigation involved an effort by a Colombo organized crime associate 
to bribe an official for a pension fund who, in turn, would cause the 
pension fund to invest in a number of entities which had agreed to 
kick-back portions of the pension funds to DMN Capital, for the benefit 
of the organized crime associates. Charges involved in this 
investigation are pending trial.
    On March 1, 2000, after a three year investigation by the FBI and 
the New York City Police Department, nineteen individuals were indicted 
by the Eastern District of New York on RICO charges relating to the 
fraudulent manipulation of securities by members and associates of 
Gambino and Genovese organized crime families working with a Russian 
organized crime group. Among those indicted were a Capo and an 
associate of the Bonanno organized crime family, a Soldier in the 
Genovese crime family, a Soldier and an associate of the Gambino 
organized crime family, and an associate of the Colombo organized crime 
family. Of the 19 defendants, 17 have been charged with racketeering 
violations. This investigation is ongoing.
    Another investigation, recently conducted in the Eastern District 
of New York, charged 23 defendants with participating in a large-scale 
stock fraud and money laundering scheme that was controlled and 
directed by a confederation of traditional and Russian organized crime 
groups. This scheme generated more than 10 million dollars in illegal 
proceeds by defrauding hundreds of innocent victims who, through false 
and misleading, high-pressure sales pitches, were induced by the 
defendants to invest in worthless stock. The scheme was led by 
defendants DOMINICK DIONISIO and ENRICO LOCASIO, associates of the 
Colombo organized crime family, who placed and supervised crews of 
registered and unregistered brokers and unlicensed cold callers in 
boiler rooms located in the branch offices of several brokerage firms. 
DIONISIO was sentenced to 8 years in prison and ordered to pay 10 
million dollars in restitution. LOCASIO was sentenced to 5 years in 
prison and ordered to pay 5 million dollars in restitution. This 
investigation is also ongoing.
    Finally, The YBM Magnex case was initiated by our Philadelphia 
office in 1996. As part of a criminal conspiracy, YBM Magnex was formed 
by an individual with ties to the former Soviet Union and associated 
with organized criminal activity in Eastern Europe. Once formed, YBM 
Magnex registered it's stock with securities regulators in Canada and 
the United States in order to sell the stock to the public in both 
countries. In May 1998, federal agents from the FBI, Internal Revenue 
Service, United States Customs Service, Immigration and Naturalization 
Service and Department of State executed a search warrant on the 
premises of YBM Magnex in Newtown, Pennsylvania, one of the 
organization's US bases for financial operations. The conspirators in 
this investigation had engaged in a stock fraud scheme centering on YBM 
Magnex shares offered through the stock exchange in Calgary, Alberta, 
Canada. YBM Magnex was trading on the Toronto Stock Exchange (TSE), 
Ontario, Canada, as a member of the exchange's leading index of 300 
companies until the time of the aforementioned raid of the YBM Magnex 
offices, when the TSE removed YBM Magnex from its index.
    In June 1999, YBM Magnex pleaded guilty in U. S. District Court, 
Eastern District of Pennsylvania, to a one count criminal information 
charging a multi-object conspiracy to commit securities fraud and mail 
fraud. As part of the conspiracy, YBM Magnex filed a prospectus with 
securities regulators at the Ontario Securities Commission (OSC), for 
approval to issue a second public offering of its stock, the proceeds 
of which generated approximately $100 million (CDN).
    Beginning in August of 1996, YBM Magnex filed a series of documents 
with the Securities and Exchange Commission (SEC) and the NASDAQ to 
obtain authorization to issue stock in the U. S. It is important to 
note that this plea constitutes a global resolution of all criminal 
conduct involving the corporate defendant only, that occurred between 
1993 and the date of the plea. The YBM investigation is ongoing.
    Although these investigations are financially complex, we utilize 
traditional investigative techniques such as the use of informants, 
Undercover Operations, and electronic surveillance in developing cases 
suitable for prosecution. Our investigations are coordinated with the 
Securities and Exchange Commission (SEC) so as to minimize losses to 
the investors once these schemes are uncovered. Both the SEC and the 
National Association of Securities Dealers (NASD) have provided 
assistance by identifying victims, co-conspirators, and trading 
activity relative to these fraudulently manipulated stocks.
Conclusion
    I want to thank the subcommittee for giving me the opportunity to 
testify here today. The trend towards investing in the financial 
markets and the tremendous profits which have been realized in recent 
years as well as the sheer volume of funds involved make the financial 
and securities markets prime targets for exploitation by organized 
crime, as it goes where the money is. The FBI is fully prepared to 
address this emerging area of criminal activity and have already 
realized significant successes as well as prevented substantial 
financial losses. We look forward to working with Congress to ensure 
that we continue to meet the investigative demands of this emerging and 
developing aspect of organized crime. This concludes my prepared 
remarks. I would like to respond to any questions that you may have.

    Mr. Oxley. Thank you, Mr. Fuentes.
    Mr. Walker from the SEC, Chief of the Enforcement Division. 
Thank you, and welcome back.

                 STATEMENT OF RICHARD H. WALKER

    Mr. Walker. Good morning. Thank you, Chairman Oxley. Good 
morning, members of the subcommittee.
    I am Richard Walker, the SEC's Director of Enforcement. I 
appreciate the opportunity to testify today on behalf of the 
Securities and Exchange Commission concerning the involvement 
of organized crime on Wall Street. This issue, though not new, 
has received heightened attention in the past several years as 
reported Mob involvement on Wall Street has increased. The 
increase is likely the confluence of two different factors. 
First, the Mob is being driven from certain of its traditional 
havens such as garbage hauling cartels. And second, as 
previously noted, the longest-running bull market in our 
Nation's history has created new opportunities for illegal 
profits.
    Based on Commission efforts in combatting illegal conduct 
in our markets, we believe three conclusions can be stated at 
the outset. First, organized crime activity on Wall Street does 
not threaten the overall integrity of our Nation's securities 
markets. Second, such activity has been confined to the 
microcap sector of the securities market, a market for low-
priced, thinly traded securities, and Mob activity taints only 
a small fraction of that sector. And third, aggressive civil 
and criminal law enforcement actions attacking microcap fraud 
have shut the doors of some of the most notorious boiler rooms 
which provide a point of entry to the securities markets for 
organized crime.
    While Hollywood has sensationalized organized crime on Wall 
Street during the past year by making it the story line of 
various movies and television shows, the Commission, not 
surprisingly, finds little entertainment value in the subject. 
Rather, the Commission believes that any unlawful activity by 
organized crime on Wall Street is cause for serious concern and 
requires the strongest possible response by law enforcement.
    The Commission employs a two-prong plan for fighting 
organized crime: Vigorous enforcement efforts plus regulatory 
initiatives designed to safeguard the microcap market and 
eliminate some of the abusive practices that have plagued that 
market.
    I would like to use my remaining minutes to highlight some 
of our achievements in each of these areas. The Commission has 
worked closely with the FBI, various United States Attorneys' 
Offices, State and local prosecutors and regulators, and the 
NASDR to bring a number of significant enforcement actions in 
recent years targeting fraudulent practices in the microcap 
market, particularly stock manipulations. In a number of these 
cases, charges have been asserted against members of organized 
crime. These joint prosecutions have been highly successful, 
and we will continue to make sure that each and every instance 
of organized crime on Wall Street is vigorously prosecuted.
    The key to success in this area is close cooperation among 
both civil and criminal regulators and prosecutors. The reasons 
are several. First, members of organized crime are not deterred 
by civil sanctions alone. They view injunctions and money 
penalties as costs of doing business. Rather, the threat of 
jail time is the most effective deterrent in this area. Second, 
civil regulators and criminal prosecutors each possess unique 
expertise that is necessary to root out the involvement of 
organized crime on Wall Street. The SEC, NASDR and other 
regulators surveil our capital markets and identify suspicious 
trading activity. We react quickly to red flags that securities 
fraud is occurring, such as unexplained surges in stock price 
and spikes in trading volume.
    If our investigation turns up potential involvement by 
organized crime, we immediately telephone our colleagues at the 
Justice Department or the FBI. The Justice Department, U.S. 
Attorneys and FBI have great expertise in surveilling organized 
crime. They do so through a variety of means not available to 
civil regulators, including electronic surveillance and 
undercover operations. We assist criminal authorities by 
conducting parallel civil investigations, providing substantive 
expertise to the criminal authorities, and even detailing 
members of our staff to various U.S. Attorneys' offices to work 
on these cases and to help with the prosecutions.
    These joint efforts have paid substantial dividends. We 
have partnered with the U.S. Attorneys' Offices for the 
Southern and Eastern Districts of New York, the FBI, NASDR, and 
our State counterparts to prosecute some of the most notorious 
boiler rooms and associated underworld figures. There have been 
nine major actions attacking organized crime on Wall Street in 
the last 3 years alone. These cases included charges against at 
least 30 defendants who are specifically alleged to have ties 
to the major crime families.
    Of particular value have been recent undercover ``sting'' 
operations. For example, on June 14, 2000, the SEC, United 
States Attorney for the Southern District of New York, FBI, and 
NASDR jointly announced the results of a 1-year undercover 
operation targeting microcap fraud, including fraud perpetrated 
by organized crime operating in this market. The results were 
eye-opening. The SEC sued 63 individuals and entities in five 
enforcement actions. The U.S. Attorney's Office indicted 120 
defendants, including 11 members and associates of 5 organized 
crime families, in connection with several securities fraud 
scams. The indictments allege an array of microcap 
manipulations and private placement frauds.
    The sentences handed down in recent securities fraud cases 
against members of organized crime should send a strong message 
that this behavior will not be tolerated. Three members of 
organized crime were sentenced just last week on September 7 in 
the Eastern District of New York for their role in several 
stock manipulations. Prison terms for the three were 97 months, 
63 months and 60 months.
    Working with the NASDR and Federal and State authorities, 
we have made tremendous advances in shutting down some of the 
most notorious boiler rooms, including: Sterling Foster, 
Stratton Oakmont, A.S. Goldmen and A.R. Baron. Other boiler 
rooms have also closed in the face of regulatory pressure. They 
include Hanover Sterling, Monroe Parker, Kensington Wells, Duke 
and Company, Biltmore Securities, the list goes on and on.
    We have also collectively charged both civilly and 
criminally some of the most notorious individuals who operate 
in this market, including: Robert Brennan of First Jersey 
Securities, Andrew Bressman and Roman Oken of A.R. Baron, 
Jordan Belfort and Daniel Porush of Stratton Oakmont, and Adam 
Lieberman and Randolph Pace of Sterling Foster. I am pleased to 
report that Randolph Pace, a seasoned boiler room operator, 
pled guilty to 13 felony counts this past Friday and will be 
sentenced on December 21.
    These collective efforts have had a major impact in curbing 
microcap fraud and have helped to rid the microcap market of 
destructive influences. And if potential manipulators migrate 
to the Internet in the wake of these boiler rooms, they will 
quickly find that we have a vigilant enforcement program there 
as well.
    Finally, we have supplemented our enforcement efforts to 
safeguard the microcap market with regulatory efforts. Our 
experience shows that the most frequent form of securities 
fraud committed by organized crime is the ``pump and dump'' 
manipulation of low-priced securities. The scheme centers on 
the spreading of false information--principally either through 
a boiler room or the Internet--to inflate a stock's price. The 
manipulators then sell their stock that they have amassed for 
little or nothing at an inflated price to innocent investors. 
The spreading of lies then ceases, and the stock price 
generally collapses.
    An effective pump and dump scheme requires that those 
committing the fraud be able to quickly and cheaply obtain a 
supply of stock that can be manipulated. Our rulemakings in 
this area have created obstacles for manipulators seeking to 
obtain stock while at the same time not unduly hampering 
legitimate capital-raising efforts by small businesses.
    On behalf of the Commission, we appreciate your interest in 
this very important issue. Our Nation's securities markets have 
long enjoyed a reputation as the safest and fairest in the 
world. We cannot and will not allow that reputation to be 
tarnished by organized crime. We have done much to prevent that 
and are firmly committed to continuing these efforts in the 
future. As always, we stand ready to assist the subcommittee as 
it goes forward in addressing this issue. Thank you.
    [The prepared statement of Richard H. Walker follows:]
    Prepared Statement of Richard H. Walker, Director, Division of 
     Enforcement, United States Securities and Exchange Commission
    Chairman Oxley, Ranking Member Towns, and Members of the 
Subcommittee: I appreciate the opportunity to appear before this 
Subcommittee on behalf of the Securities and Exchange Commission 
(``SEC'' or ``Commission'') to address the involvement of organized 
crime on Wall Street and the Commission's efforts to end this 
involvement. The Commission commends the Chairman, the Ranking Member, 
and the Members of the Subcommittee for holding hearings on this 
important topic. These hearings are particularly timely in light of the 
announcement this past June by the SEC, the United States Attorney's 
Office for the Southern District of New York, the FBI, and NASD 
Regulation of a major strike against organized crime on Wall Street. 
Over 100 individuals were indicted, including 11 members and associates 
of five different organized crime families.
                          i. executive summary
    The government has charged affiliates of organized crime families 
with securities law violations in several recent cases. While any 
unlawful activity by organized crime on Wall Street is cause for 
concern, the Commission believes such activity to be limited and not a 
threat to the overall integrity of our nation's securities markets. The 
Commission's experience shows that the activities of organized crime 
have been confined to the ``microcap'' securities market 1 
and taint only a small fraction of that sector. Moreover, through joint 
prosecutions with various United States Attorney's Offices and state 
and local prosecutors, as well as the adoption of regulatory 
initiatives designed to safeguard the microcap market, the Commission 
has made significant strides in curtailing organized crime activity on 
Wall Street.
---------------------------------------------------------------------------
    \1\ Although ``microcap'' is not a term defined in the federal 
securities laws, microcap companies are generally thinly capitalized 
companies whose securities trade in the over-the-counter market, 
primarily on the OTC Bulletin Board or in the pink sheets.
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    This testimony is designed to provide the Subcommittee with (i) a 
chronological account of enforcement actions by the SEC and other law 
enforcement and regulatory bodies in response to reported organized 
crime activity on Wall Street; and (ii) a summary of the recent 
regulatory initiatives designed to protect the microcap market from 
fraud.
ii. a chronological account of reported mob involvement on wall street 
                     and the response by regulators
    Mob involvement on Wall Street is not new. As organized crime 
advanced into the white-collar arena, the stock market became one of 
its targets.2 Indeed, there is evidence that organized crime 
had made inroads on Wall Street back in the 1970's.3 Then, 
as now, organized crime reportedly focused its efforts on the 
manipulation of microcap stocks.4
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    \2\ James Cook, The Invisible Enterprise, Forbes, Sept. 29, 1980 at 
60 (``As its power, experience and cash flow have mounted, organized 
crime has advanced into increasingly sophisticated areas--into white-
collar crime like . . . the securities business.'').
    \3\ One of the earliest reported securities fraud cases involving 
organized crime came on November 18, 1970 when the U.S. Attorney for 
the Southern District of New York and the SEC jointly announced 
indictments against Michael Hellerman, John Dioguardi, Vincent Aloi and 
others for securities fraud. Lit. Rel. No. 4826, 1970 SEC LEXIS 959 
(Nov. 18, 1970). As reported in the 1980 Forbes article, Hellerman, who 
entered the witness-protection program, was a corrupt stockbroker 
manipulating several stocks, including Imperial Investments, with 
assistance from Dioguardi and Aloi, who allegedly had connections to 
organized crime. A 1977 book details the exploits of Michael Hellerman. 
Wall Street Swindler, 1977 at 2 (``I had been manipulating stocks for 
years. Some of Wall Street's biggest swindles, frauds that had ripped 
off millions of dollars from brokerage houses and banks, had been my 
brainchild. In most of those frauds, the mob and some of its most 
notorious members had been my partners.'').
    \4\ Forbes, supra note 2 (``[O]rganized crime would logically move 
into areas where there is the least regulation--the over-the-counter 
market, shell companies, unregistered securities--companies with less 
than $1 million in assets and fewer than 500 stockholders.'').
---------------------------------------------------------------------------
    During the last 20 years, the government has brought a number of 
significant cases against organized crime figures operating on Wall 
Street. The SEC assisted criminal prosecutors in virtually all of the 
investigations leading to these actions. In some of these cases, the 
SEC did not bring separate civil actions in order to avoid the risk of 
impairing a parallel criminal proceeding.5 The risk stems 
from the defendant's right to discovery in the SEC's civil action, 
which would be unavailable in a criminal proceeding. Criminal 
prosecution of organized crime figures takes priority over civil 
prosecution because most such defendants are not going to be deterred 
by civil sanctions alone. Rather, the threat of jail time is the most 
effective deterrent in this area.6
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    \5\ In addition, the SEC lacks the tools that Congress has given 
the Justice Department to fight organized crime. For example, the 
Justice Department has authority to conduct wire taps and engage in 
undercover operations. The SEC, on the other hand, is subject to the 
Privacy Act of 1978, which requires SEC staff to identify themselves 
when seeking information from witnesses. In addition, Federal Rule of 
Criminal Procedure 6(e) generally prevents the Justice Department from 
sharing grand jury materials with the SEC, though the SEC immediately 
notifies the Justice Department of a matter if we suspect organized 
crime involvement.
    \6\ See Bud Newman, Fraud, Organized Crime Said Rampant in ``Penny 
Stock'' Market, UPI, Sept. 8, 1999 (quoting Congressional testimony of 
Lorenzo Formato, an admitted penny stock manipulator with ties to 
organized crime: ``Jail . . . is one of the biggest deterrents to what 
is going on in the industry today.'').
---------------------------------------------------------------------------
    The most notable case brought during the 1980's that named 
defendants having alleged links to organized crime was a joint action 
by the SEC and the U.S. Attorney's Office for the District of New 
Jersey on October 2, 1986. This action, against Marshall Zolp, Lorenzo 
Formato, and others, alleged that the defendants manipulated the stock 
of Laser Arms Corp, a purported maker of a self-chilling 
can.7 In fact, Laser Arms was a complete fraud. The company 
generated fictitious financial statements and the product was non-
existent. Zolp was reportedly recruited by organized crime to conduct 
penny-stock manipulations, including the Laser Arms 
manipulation.8 Co-defendant Formato testified in 
Congressional hearings that during the years he promoted and sold penny 
stocks, he was involved in organized crime.9 Formato also 
testified to rampant penny stock manipulation by organized 
crime.10 The Congressional hearings at which Formato 
testified led to passage of the Penny Stock Reform Act of 
1990.11
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    \7\ U.S. v. Zolp, Lit. Rel. No. 11236, 1986 SEC LEXIS 635 (Oct. 2, 
1986).
    \8\ Securities Investigators Get a Handle on the Mob, The Toronto 
Star, Feb. 26, 1989 at F2.
    \9\ See Witness Tells of Mob Influence in Penny Stocks, Los Angeles 
Times, Sept. 8, 1989 at B2.
    \10\ Id.
    \11\ Congressional passage of the Penny Stock Reform Act of 1990 
helped curb fraud in the penny-stock market (a sub-group of the larger 
microcap market, and generally defined as stocks trading at $5 or 
less). Among other things, this Act requires a broker-dealer to 
disclose its compensation on all penny stock trades, provide a risk 
disclosure statement to all penny stock customers, and provide a 
monthly statement to clients disclosing the market value of all penny 
stocks in their accounts.
---------------------------------------------------------------------------
    Next, on December 13, 1988, the SEC sued F.D. Roberts Securities, 
Inc., a New Jersey boiler room, and four associated persons for 
manipulating a microcap stock, Hughes Capital Corp. At least one of the 
four individuals sued, Dominick Fiorese, an F.D. Roberts consultant, 
had reported ties to organized crime.12
---------------------------------------------------------------------------
    \12\ See Claire Poole, Good-Bye, Fellas, Forbes, March 18, 1991 at 
10 (stating that Fiorese had ties to the Gambino and Colombo crime 
families).
---------------------------------------------------------------------------
    Mob activity on Wall Street reportedly increased in the 1990's. On 
February 10, 1997, The New York Times reported that ``Mafia crime 
families are switching increasingly to white-collar crimes'' with a 
focus on ``small Wall Street brokerage houses.'' 13 
According to The New York Times story, the Mafia's entry into the 
securities markets was spurred by its reported loss of $500 million a 
year in profits from the dissolution of its garbage-hauling cartels, 
and its reported loss of $50 million a year in profits following its 
eviction from the Fulton Fish Market.14 Around the time of 
The New York Times story, Business Week also ran a cover story 
entitled, ``The Mob on Wall Street.'' 15 Several of the 
individuals and entities mentioned in the story were then the subject 
of SEC and criminal investigations.
---------------------------------------------------------------------------
    \13\ Selwyn Raab, Officials Say Mob is Shifting Crimes to New 
Industries, The New York Times, Feb. 10, 1997 at A1.
    \14\ Id.
    \15\ Gary Weiss, The Mob on Wall Street, Business Week, December 
16, 1996 [the ``Business Week Article'']. The Business Week Article 
reported: (i) the mob had established a network of stock promoters, 
securities dealers, and boiler rooms to engage in ``pump and dump'' 
manipulations; (ii) four organized crime families (as well as elements 
of the Russian mob) controlled approximately two dozen broker-dealers; 
(iii) the mob was engaging in Regulation S scams; (iv) the mob's 
activities were confined to the OTC Bulletin Board and Nasdaq Small-Cap 
markets (the article found no indication of mob exploitation on the 
NYSE and AMEX); (v) the Hanover Sterling brokerage firm was under the 
control of the Genovese crime family; and (vi) mob-linked short sellers 
were associated with the Stratton Oakmont brokerage firm.
---------------------------------------------------------------------------
    A series of criminal indictments and civil prosecutions of several 
securities law violators with alleged connections to organized crime 
began in 1997.16 In May 1997, a FBI sting operation led to 
charges by the U.S. Attorney for the Eastern District of New York 
against Louis Malpeso, Jr., a reported Colombo crime family associate, 
for conspiring to commit securities fraud.17 The indictment 
alleged that Malpeso conspired with stock broker Joseph DiBella and 
Robert Cattogio, one of the heads of the Hanover Sterling brokerage 
firm, to inflate the price of a penny stock, First Colonial Ventures. 
The Business Week Article had reported that organized crime was 
manipulating First Colonial stock and warned legitimate market makers 
to steer clear of the stock. The indictment alleged that Malpeso 
offered an undercover FBI agent posing as a money manager a kickback of 
25 percent in exchange for the agent purchasing $2.5 million of First 
Colonial stock. All three defendants pled guilty.18
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    \16\ Two notable law enforcement actions were taken in the early 
half of the 1990's. First, on November 15, 1993, Eric Wynn and four 
others were indicted in the District of New Jersey for conspiracy to 
commit securities fraud based on numerous penny stock manipulations. A 
jury found Wynn guilty and he was sentenced to 52 months imprisonment. 
Wynn was reportedly an associate of the Bonanno crime family.
    Second, in 1994, the SEC sued a public issuer, Atratech, Inc., and 
several affiliated persons, including Anthony Gurino, for securities 
fraud. The Commission charged that: ``Gurino secretly controlled 
Atratech to circumvent bars that were imposed on Gurino by New York 
City and the federal government prohibiting Gurino from bidding for 
municipal works contracts. In 1986, the City barred Gurino and his 
plumbing company, Arc Plumbing and Heating Co., because of their 
failure to disclose in a bid application that Gurino had been indicted 
for obstruction of justice in connection with an organized crime 
prosecution. During the hearing which led to the bar, Gurino was cited 
for failing to cooperate with the City and produce as a witness John 
Gotti, the head of the Gambino crime family and an alleged `salesman' 
for Arc.'' SEC v. Atratech, Lit. Rel. No. 14201, 1994 SEC LEXIS 2631 
(Aug. 22, 1994). A judgment by default has been issued against 
Atratech. Lit. Rel. No. 14862, 1996 SEC LEXIS 981 (April 4, 1996). 
Gurino settled the matter by agreeing to an injunction, $25,000 civil 
penalty, and a bar preventing him from serving as an officer or 
director of a public reporting company. Lit. Rel. No. 15529, 1997 SEC 
LEXIS 2129 (Oct. 7, 1997).
    \17\ See Helen Peterson, Mafioso Held in Stock Fraud, N.Y. Daily 
News, May 3, 1997 at 12. Malpeso pled guilty on February 5, 1998.
    \18\ Malpeso was sentenced to 18 months imprisonment.
---------------------------------------------------------------------------
    A major strike against organized crime on Wall Street came on 
November 25, 1997 when the U.S. Attorney for the Southern District of 
New York indicted 19 persons, including four with alleged ties to 
organized crime, for racketeering. The charges stemmed from a year-long 
investigation by the SEC, the U.S. Attorney's Office, the FBI, and the 
New York Police Department with the assistance of NASD Regulation. The 
25-count indictment outlined the infiltration of a brokerage firm, 
Meyers Pollock & Robbins, by the Bonanno and Genovese crime families 
for the purpose of manipulating the stock price of HealthTech 
International. Alleged Bonanno captain Frank Lino and alleged Genovese 
captain Rosario Gangi caused numerous Meyers Pollock brokers, through 
bribes and intimidation, to artificially drive up HealthTech's stock 
price. The brokers were paid excessive commissions for selling this 
stock, and often used high-pressure sales tactics and made 
misrepresentations about HealthTech. An associate of Lino and Gangi had 
received thousands of shares of HealthTech stock from HealthTech's CEO 
Gordon Hall in exchange for their efforts to inflate its price.
    The SEC suspended trading in HealthTech on November 17, 1997. On 
January 21, 1999, Lino, Gangi, and Eugene Lombardo, an alleged Bonanno 
family associate, pled guilty to securities fraud.19 John 
Cerasini, an alleged Bonanno soldier, pled guilty to an extortion 
conspiracy charge. On May 11, 1999, a federal jury found Hall guilty of 
racketeering.20 In addition, in April 2000, Michael 
Ploshnick, Meyers Pollock's President, and 11 brokers were indicted for 
their role in the fraud.
---------------------------------------------------------------------------
    \19\ Lino was sentenced to 49 months imprisonment, Gangi to 97 
months imprisonment, and Lombardo to 96 months imprisonment.
    \20\ The SEC detailed a member of its staff to the U.S. Attorney's 
Office to assist in the prosecution of this action. Recognizing the 
value of criminal prosecution of organized crime efforts on Wall 
Street, the SEC has detailed members of its staff to U.S. Attorney's 
Offices in other cases as well. For example, one of the lead 
prosecutors in the Hall case was detailed from the SEC's Northeast 
Regional Office to the U.S. Attorney's Office for the Southern District 
of New York.
---------------------------------------------------------------------------
    At the time, the HealthTech case was the largest law enforcement 
action taken against organized crime operating on Wall Street. Despite 
the size of the case, law enforcement officials cautioned that, based 
on their experience, they did not believe the problem to be 
widespread.21
---------------------------------------------------------------------------
    \21\ See Sharon Walsh, Mob Bust on Wall Street, International 
Herald Tribune, Nov. 27, 1997 at 3 (quoting Mary Jo White, U.S. 
Attorney for the Southern District of New York, as stating that 
attempts by organized crime to invade Wall Street were ``relatively 
isolated and do not threaten the overall stability of the market''); 
Richard Tomkins, Mob Linked to Pump and Dump Scheme, The Financial 
Post, Nov. 29, 1997 at 24 (quoting then-SEC Enforcement Director 
William McLucas: ``I would be very cautious about coming to any 
conclusion to the effect that organized crime in the securities 
markets, including the small capitalization and micro-capitalization 
markets, is rampant. I do not believe that's the case.'').
---------------------------------------------------------------------------
    Also during 1997, the Manhattan District Attorney's Office, working 
with the NASD, arrested 53 people in a broker licensing test-taking 
scandal. More than 50 stockbrokers were charged with paying two 
impostors to take their licensing tests. The brokers worked at several 
boiler rooms including some with alleged ties to organized 
crime.22
---------------------------------------------------------------------------
    \22\ See Barbara Ross & Douglas Feiden, Sting Nets Bad Stock, N.Y. 
Daily News, Jan. 9, 1997 at 6 (``The brokers worked at 17 small and 
medium-sized brokerage firms, including three companies that reportedly 
have links to the Genovese crime family. The firms include Stratton 
Oakmont; and Hanover Sterling & Co.'').
---------------------------------------------------------------------------
    On April 23, 1998, the Commission sued Sovereign Equity Management 
Corp. and its president Glen T. Vittor for a scheme to manipulate the 
market price of two microcap companies, Technigen Corp. and TV 
Communications Network, Inc. Five days later, Vittor was separately 
charged by the SEC for his role in another microcap manipulation. The 
Business Week Article reported that Sovereign was controlled by 
organized crime.
    On December 16, 1998, the U.S. Attorney for the Eastern District of 
New York charged seven people, including Robert Cattogio and Dominick 
Froncillo, who was alleged in the indictment to be an associate of the 
Genovese crime family, with a multi-million dollar stock manipulation 
and money laundering scheme. The scheme was carried out through a New 
Jersey brokerage firm, Capital Planning Associates, Inc. According to 
the charges, Capital Planning was under the secret control of convicted 
stock swindler Catoggio, who used the firm as a vehicle to carry out a 
series of stock manipulations. Catoggio was barred from the securities 
industry by the SEC in 1995 as a result of securities fraud at another 
brokerage firm under his control.
    The stock that was the subject of the manipulation was Transun 
International Airways, Inc. (``TSUN''), which traded on the Nasdaq OTC 
electronic bulletin board stock market. According to the indictment, 
TSUN purported to be a chartered airline; however, it never owned or 
operated any planes, never conducted any airline business, and never 
generated any revenues. The defendants were charged with gaining 
control of the company's stock at minimal cost, artificially inflating 
its price by touting it aggressively at Capital Planning and issuing 
spurious claims about the health of the fly-by-night company, and then 
unloading over $8 million worth of stock on unsuspecting customers. 
Froncillo, as well as four other defendants, plead guilty to the 
charges.23
---------------------------------------------------------------------------
    \23\ Froncillo was sentenced to 21 months imprisonment.
---------------------------------------------------------------------------
    The next major strike against organized crime on June 16, 1999 when 
the U.S. Attorney for the Eastern District of New York indicted 89 
persons for engaging in microcap ``pump and dump'' manipulations at 
eight brokerage firms that defrauded investors out of more than $100 
million. The SEC assisted in the investigation, including detailing a 
staff member to the Eastern District.
    In one 23-defendant case, the three defendants who were charged 
with leading the scheme reportedly had ties to organized crime: 
Dominick Dionisio (Colombo family), Enrico Locascio (Colombo family), 
and Yakov Slavin (associate of the Bor organized crime group of Russian 
immigrants). Each has pled guilty.24
---------------------------------------------------------------------------
    \24\ Dionisio was sentenced to 97 months imprisonment, Locascio to 
63 months imprisonment, and Slavin to 60 months imprionment.
---------------------------------------------------------------------------
    The indictment alleges that ``[t]he Colombo Organized Crime Family 
of La Cosa Nostra controlled boiler rooms at brokerage firms that 
engaged in fraudulent schemes to sell securities to the public on the 
basis of false and misleading statements and omissions.'' Specifically, 
the indictment charges that Dionisio, Locascio, and Slavin placed and 
supervised registered and unregistered brokers and cold callers at 
several boiler rooms. The criminal enterprise allegedly manipulated 
several microcap stocks.
    The U.S. Attorney for the Eastern District of New York, with the 
assistance of the SEC, also brought criminal charges on June 16, 1999, 
against 55 defendants for their participation in fraud at a network of 
four related brokerage firms. The lead defendants, Robert Catoggio and 
Roy Ageloff, were alleged to be the heads of the Hanover Sterling firm, 
the Norfolk Securities firm, PCM Securities, and Capital Planning, 
which operated in New York, New Jersey and Florida, and employed 
hundreds of brokers.
    The defendants were charged with securities fraud in connection 
with a vast ``pump and dump'' manipulation that involved at least 17 
OTC Bulletin Board and Nasdaq Small Cap stocks and resulted in over 
$100 million in fraud losses. The charges included not just securities 
fraud and money laundering, but an unusual use of RICO charges in 
connection with Catoggio's and Ageloff's operation of this enterprise. 
Ageloff, who recently pled guilty to the RICO charge, was the focus of 
the Business Week Article, in which he and Hanover Sterling were 
alleged to have ties to the Genovese crime family. Catoggio was charged 
with running the RICO enterprise with Ageloff, and had pled guilty to 
conspiring with Malpeso, Jr., an alleged Colombo family associate, in 
connection with an FBI sting. To date, 48 of the 55 defendants charged 
have pled guilty, with seven awaiting trial.
    The next day, June 17, 1999, in an unrelated action in federal 
district court in Tampa, Philip Abramo, a captain of the DeCalvacante 
organized crime family, Louis Consalvo, a member of the DeCalvacante 
family, and three others were criminally charged for their role in 
numerous microcap ``pump and dump'' frauds. The indictment alleged that 
the defendants, through a brokerage firm previously sued by the SEC, 
Sovereign Equity Management Corp., solicited corporations in need of 
capital to conduct initial public offerings and Regulation S offshore 
offerings. The defendants obtained discounted stock of the issuers. The 
stock was then manipulated in ``pump and dump'' schemes run through 
Sovereign. Brokers at Sovereign were paid excessive commissions to 
``push'' the stock on investors and were instructed not to permit 
retail customers to sell the stock, thereby keeping its price 
artificially propped up.
    In addition, the defendants would ``short'' the stocks once they 
instructed Sovereign brokers to cease their ``pumping'' efforts. This 
would allow the defendants to make an additional profit as the price of 
the stock declined. A short seller must borrow the shares that he is 
selling short. The indictment alleged that ``[w]hen the defendants 
could not find stock to borrow and sell `short' . . . the defendants 
engaged in extortion of other brokers in order to obtain the stock 
using their stated relationship to the `mafia' and also using threats 
to commit bodily harm.''
    Violence turned the public's attention to possible organized crime 
involvement within the securities markets on October 26, 1999. Stock 
promoters Maier S. Lehmann and Albert Alain Chalem were found shot to 
death execution style in a home in Colts Neck, New Jersey. At the time, 
Lehmann and Chalem ran an Internet web site, Stockinvestor.com, which 
touted penny stocks. The SEC had previously sued Lehmann for his role 
in a penny stock manipulation. Chalem had been a broker at A.S. 
Goldmen, a now-defunct boiler-room operation that has been the subject 
of both civil and criminal securities fraud charges. While no one has 
been charged yet in the murders, media reports have cited close ties 
between Chalem and organized crime.25
---------------------------------------------------------------------------
    \25\ See Diana B. Henriques, A Brutal Turn in Stock Frauds, N.Y. 
Times, Nov. 2, 1999 at B1.
---------------------------------------------------------------------------
    Another major strike against organized crime in the securities 
markets came on March 3, 2000 when the U.S. Attorney for the Eastern 
District of New York indicted 19 people, including six with alleged 
ties to organized crime. The indictment alleged that a broker-dealer, 
White Rock Partners (later renamed State Street Capital Markets), 
working with brokers at several notorious boiler rooms, including J.W. 
Barclay & Co., A.R. Baron & Co., and D.H. Blair, engaged in microcap 
``pump and dump'' manipulations. The indictment also alleged that the 
defendants most frequently relied on fraudulent Regulation S offerings 
to obtain their inventory of stock to manipulate. The six alleged 
organized crime members in the criminal enterprise are as follows:

------------------------------------------------------------------------
                                                        Organized Crime
              Name                     Position             Family
------------------------------------------------------------------------
Frank Coppa Sr..................  Captain...........  Bonanno
Edward Garafola.................  Soldier...........  Gambino
Eugene Lombardo.................  Associate.........  Bonanno
Ernest Montevecchi..............  Soldier...........  Genovese
Daniel Persico..................  Associate.........  Colombo
Joseph Polito Sr................  Associate.........  Gambino
------------------------------------------------------------------------

    The indictment alleges that the organized crime defendants, among 
other things, (i) resolved disputes relating to the hiring and 
retention of brokers, (ii) halted attempts by other members of 
organized crime to extort members of the criminal enterprise, and (iii) 
halted efforts to reduce the price of securities underwritten by White 
Rock and State Street through such techniques as short selling.
    The most recent law enforcement action against organized crime on 
Wall Street came on June 14, 2000. The SEC, U.S. Attorney for the 
Southern District of New York, FBI, and NASD Regulation jointly 
announced the results of a one-year undercover operation targeting 
microcap fraud, including organized crime operating in this market. The 
SEC sued 63 individuals and entities in five enforcement actions. The 
U.S. Attorney's Office indicted 120 defendants, including 11 members 
and associates of five different organized crime families, in 
connection with several securities fraud scams conducted through 
various criminal enterprises. The indictments allege fraud in 
connection with the publicly traded securities of 19 companies and the 
private placement of securities of an additional 16 companies. The 11 
alleged members and associates of organized crime are as follows:

------------------------------------------------------------------------
                                                        Organized Crime
              Name                     Position             Family
------------------------------------------------------------------------
John M. Black...................  Associate.........  Luchese
James F. Chickara...............  Associate.........  Colombo
Robert P. Gallo.................  Associate.........  Genovese
Michael T. Grecco...............  Associate.........  Colombo
James S. LaBate.................  Associate.........  Gambino
Vincent G. Langella.............  Associate.........  Colombo
Robert A. Lino..................  Capo..............  Bonanno
Frank A. Persico................  Associate.........  Colombo
Salvatore R. Piazza.............  Associate.........  Bonanno
Sebastian Rametta...............  Associate.........  Colombo
Anthony P. Stropoli.............  Soldier...........  Colombo
------------------------------------------------------------------------

    The indictments allege that the criminal enterprises engaged in the 
following illegal conduct:

 The manipulation of numerous microcap stocks.
 To further its manipulations, the enterprises infiltrated and 
        gained control of certain brokerage firms, including Monitor 
        Investment Group, Meyers Pollock & Robbins, and First Liberty 
        Investment Group.
 To control the supply of stock that it was manipulating, the 
        enterprises bribed brokers at other firms to ``put away'' (i.e, 
        ensure their clients held) certain securities. The bribed 
        brokers included a crew of brokers working for William Scott & 
        Co., principals of a Meyers Pollock branch office, and a crew 
        of brokers from Atlantic General Financial Group.
 The enterprises engaged in numerous private placement frauds, 
        including offerings involving Ranch*1 Inc., World Gourmet 
        Soups, and Jackpot Entertainment Magazine, Inc. Here, members 
        and associates of the enterprise dominated and controlled each 
        of the issuers. Brokers selling the securities were paid 
        undisclosed exorbitant sales commissions of up to 50 percent. 
        The enterprises profited by retaining a portion of the 
        excessive sales commissions for itself.
 The enterprises engaged in a union pension fund fraud and 
        kickback scheme. The enterprise devised two fraudulent 
        investments that appeared to be suitable for the pension funds, 
        but would secretly divert a portion of the investment proceeds. 
        For example, in one corrupt offering, $2 million of every $10 
        million invested was to be ``kicked back'' to the enterprises 
        and corrupt union officials.
 The indictment also charged that the enterprise used 
        extortion, threats and intimidation to further its securities 
        frauds. Specifically, the enterprises instilled fear in brokers 
        and other market participants who did business with the 
        enterprises, in particular those brokers who agreed to ``put 
        away'' stock.
    Simultaneous with the filing of the criminal indictments, the SEC 
instituted civil administrative proceedings against several of the 
criminal defendants with alleged ties to organized crime, including 
Black, Gallo, Grecco, LaBate, and Piazza. NASD Regulation had 
previously filed a complaint against 18 persons and Monitor Investment 
Group for fraud-related activities arising out of Monitor's activities.
    Organized crime often either infiltrates or otherwise employs the 
assistance of ``boiler room'' operations to commit manipulations. The 
SEC and other regulators have brought significant enforcement actions 
against a number of notorious boiler rooms in recent years. These 
include: 26 A.R. Baron & Co.; Baron's president Andrew 
Bressman, seven Baron registered representatives; Stratton Oakmont; 
three Stratton principals--Jordan Belfort, Daniel Porush, and Kenneth 
Greene; nine Stratton registered representatives; several Meyers 
Pollock registered representatives; Sterling Foster & Co.; over 20 
Sterling Foster registered representatives, including its president 
Adam Lieberman; A.S. Goldmen & Co.; A.S. Goldmen's president, Anthony 
J. Marchiano and its financial and operations principal, Stuart E. 
Winkler; five A.S. Goldmen registered representatives; several D.H. 
Blair registered representatives; HGI Securities and 13 of its 
registered representatives; M. Rimson & Co. and several Rimson 
registered representatives including its president Moshe Rimson; 
Biltmore Securities and seven Biltmore registered representatives; F.N. 
Wolf & Co; Hibbard Brown & Co.; several registered representatives 
associated with J.T. Moran & Co. and its predecessor firms (First 
Jersey Securities, Inc. and Sherwood Capital Group); Blinder Robinson & 
Co. and its president Meyer Blinder; Rooney, Pace Inc. and its 
president Randolph K. Pace; First Jersey Securities, Inc. and its 
president Robert E. Brennan; Wellshire Securities and several of its 
registered representatives; Investors Associates, Inc. and its 
president Lawrence J. Penna; J.S. Securities and its president Jeffrey 
Szur; La Jolla Capital Corp. and several of its registered 
representatives; and several Barron Chase Securities Inc. registered 
representatives.
---------------------------------------------------------------------------
    \26\ Most of these actions did not allege the involvement of 
organized crime.
---------------------------------------------------------------------------
    In addition, Hanover Sterling ceased doing business in February 
1995 when it fell out of compliance with net capital requirements after 
a group of outside investors began aggressively short selling Hanover's 
house stocks. At the time, Hanover Sterling was the subject of 
regulatory investigation. Meyers Pollock closed down in 1997 in the 
face of regulatory investigation.27 In July 2000, D.H. Blair 
& Co., already defunct, and 15 of its officers and directors were 
indicted by the Manhattan District Attorney's Office on charges that 
the firm was run as a criminal enterprise.
---------------------------------------------------------------------------
    \27\ In March 1997, the Commission brought an antifraud action in 
federal district court against Meyers Pollock and its president Michael 
Ploshnick for their role in a fraudulent debt offering. SEC v. Namer, 
Lit. Rel. No. 15307, 1997 SEC LEXIS 666 (March 26, 1997).
---------------------------------------------------------------------------
  iii. regulatory initiatives designed to protect the microcap market
    Existing evidence indicates that organized crime activity on Wall 
Street has been limited to the microcap market. The reasons for this 
are several. Effective market manipulations require control of the sell 
side of the market and keeping the truth about the company from 
prospective investors. The float and trading volume for securities of 
large-cap companies make it almost impossible to control the sell side 
of the market, even with strong-arm tactics. In addition, such 
companies tend to be more seasoned in terms of public reporting and, as 
a result, it is more difficult to create sudden, exciting hype about a 
company that would generate real buying volume from innocent investors. 
In addition, analysts are more likely to cover larger cap companies and 
regularly provide information on such companies to the marketplace.
    The most prevalent fraud in the microcap market is the ``pump and 
dump'' manipulation. The scheme centers on the spreading of false 
information--principally through either a ``boiler room'' or via the 
Internet--designed to artificially inflate a stock's price. Investors 
often receive information that is either exaggerated or completely 
fabricated. Those spreading the false information typically hold large 
amounts of stock and make substantial profits by selling after the 
price peaks. Upon selling their shares, the promoters cease their 
manipulative efforts, the stock price plummets, and innocent investors 
incur substantial losses.
    Several rule and regulation amendments have been proposed and 
adopted by the SEC. An effective ``pump and dump'' scheme requires that 
those committing the fraud be able to quickly and cheaply obtain a 
supply of stock that can then be manipulated. The rulemakings to date 
have focused on creating obstacles for potential manipulators obtaining 
stock, while not unduly hampering legitimate capital raising efforts by 
small businesses. This section outlines these recent rulemakings which, 
we believe, have proven successful in abating microcap 
fraud.28
---------------------------------------------------------------------------
    \28\ SEC staff is also working with the securities industry to 
develop other measures to reduce microcap fraud. For example, SEC staff 
is working with the NSCC/DTC, NYSE, NASD, and members of the SIA 
Clearing Committee on a data repository that will be used to store 
information that may be useful in detecting on-going fraudulent 
activities. The repository, located at the NASD, will receive daily 
information related to the clearing process from a number of different 
sources, including clearing firms, the NYSE, the NASD, and NSCC/DTC. 
The clearing firms will send information on their correspondents' 
cancelled and ``as-of'' trades, proprietary account equity, and 
unsecured customer debits. The NYSE and NASD will send information on 
Regulation T extensions, and NSCC/DTC will send exception reports when 
a member dominates the market in a given security or holds a 
substantial amount of the DTC inventory in a given security. A pilot 
program using the NASD's INSITE software system is currently underway.
---------------------------------------------------------------------------
    Regulation S--Regulation S provides a safe harbor from SEC 
registration for certain offshore offerings. Following the adoption of 
Regulation S, the SEC found that some issuers were using Regulation S 
as a means of indirectly distributing securities into the United States 
markets without registration. SEC investigations suggested that 
organized crime was using Regulation S offerings to obtain a cheap 
supply of stock to manipulate. In light of these problems, on February 
10, 1998, the SEC adopted amendments to Regulation S. The amendments 
require, among other things, that: (i) equity securities placed 
offshore pursuant to Regulation S be classified as ``restricted'' 
securities, so that resales without registration are subject to holding 
periods and quantity limitations; and (ii) Regulation S securities 
cannot be resold into the United States for a period of one year, as 
opposed to the prior 40-day period. Based on our experience in recent 
investigations, our initial impression is that these amendments have 
been effective in reducing Regulation S abuses.
    Rule 504--This rule, known as the ``seed capital'' exemption, 
allows non-reporting (generally start-up) companies to sell up to $1 
million in securities without registration or restriction. To curb 
microcap abuses, in February 1999, the SEC modified Rule 504 to limit 
the circumstances where general solicitation is permitted and 
unrestricted ``freely tradable'' securities could be 
issued.29
---------------------------------------------------------------------------
    \29\ Specifically, the amendments require registration under state 
law requiring public filing and delivery of a disclosure document to 
investors before sale, or reliance on an exemption under state law 
permitting general solicitation and general advertising so long as 
sales are made only to experienced (i.e. ``accredited'') investors. 
1933 Act Rel. No. 7644 (February 26, 1999).
---------------------------------------------------------------------------
    Form S-8--Form S-8 is a short form available to register the offer 
and sale of securities to an issuer's employees as part of their 
compensation. These registration statements become effective 
automatically without SEC review. The staff has seen Form S-8 used 
improperly to raise capital, either by using the shares to pay broker-
dealers or other consultants that assist in capital raising or by using 
employees or ``consultants'' as intermediaries to raise capital 
indirectly. The amendments adopted in February 1999 clarify that 
consultants and advisors can be treated as employees only if (i) they 
are natural persons, (ii) they provide bona fide services to the 
issuer, and (iii) their services are not related to capital-raising or 
the promotion of the issuer's securities.30
---------------------------------------------------------------------------
    \30\ Another amendment also intended to address enforcement 
concerns provides that offerings registered on Form S-8 will no longer 
be presumed to have been filed on the proper form if the Commission 
does not object to the form before the effective date. 1933 Act Rel. 
No. 7646 (Feb. 26, 1999).
---------------------------------------------------------------------------
    Rule 701--This rule allows private companies to sell securities to 
their employees without the need to file a registration statement. 
Amendments to the rule adopted in February 1999, among other things, 
harmonize the definition of consultant and advisor to that contained in 
Form S-8 and require specific disclosure from issuers that sell more 
than $5 million in 701 securities in a 12-month period.31
---------------------------------------------------------------------------
    \31\ 1933 Act Rel. No. 7645 (Feb. 26, 1999).
---------------------------------------------------------------------------
    Rule 15c2-11--This rule is intended to deter the publication of 
stock quotations in the OTC Bulletin Board, the Pink Sheets and similar 
media that may be used in manipulative schemes. The current rule 
requires the first broker-dealer that publishes a quotation for a 
particular stock to review certain issuer information, including its 
most recent balance sheet, profit and loss, and retained earnings 
statements. Subsequent broker-dealers publishing quotations in that 
stock do not have to review this information; rather they are subject 
to a ``piggyback'' exception. To deter microcap manipulations, the SEC 
has proposed certain amendments to Rule 15c2-11 that would place 
greater information review requirements, and thus accountability, on 
broker-dealers publishing quotations and would provide greater investor 
access to information about those securities.
    In addition, the Commission has recently approved two NASD rule 
proposals that are aimed at combating microcap fraud.
    NASD OTC Bulletin Board Eligibility Rule--The Business Week Article 
reported, ``[t]he Mob's activities seem confined almost exclusively to 
stocks traded in the over-the-counter `Bulletin Board' and NASDAQ 
small-cap markets.'' 32 Bulletin board securities have 
traditionally been easier to manipulate than exchange traded securities 
because less public information was made available. NASD rule 
amendments, approved by the Commission on January 4, 1999, provide for 
enhanced disclosure of issuer information in this market. Specifically, 
the Commission approved the NASD's proposed amendments to NASD Rules 
6530 and 6540. The amendment to Rule 6530 limits quotations on the OTC 
Bulletin Board to the securities of issuers that file reports with the 
Commission or banking or insurance regulators and are current in those 
reports. The amendment to Rule 6540 prohibits brokers from quoting a 
security on the Bulletin Board unless the issuer has made current 
filings.
---------------------------------------------------------------------------
    \32\ The Business Week Article, supra note 14 at 94.
---------------------------------------------------------------------------
    NASD Taping Rule--On April 17, 1998, the Commission approved the 
NASD's proposed new rule requiring brokerage firms that employ a 
certain percentage of brokers who were employed by an expelled 
brokerage firm 33 within the last two years to tape record 
all of their brokers' telephone conversations with investors. The rule 
is designed to combat ``boiler room'' conduct. The threshold for 
triggering the taping requirement varies according to the size of the 
firm. In large firms, the rule applies if 20 percent of the firm's 
brokers were previously employed by disciplined firms, and in small 
firms the trigger is 10 percent.
---------------------------------------------------------------------------
    \33\ The rule defined ``expelled firm'' as one that has been 
expelled from a self-regulatory organization in the securities industry 
or has had its registration revoked by the Commission for sales 
practice violations or telemarketing abuses.
---------------------------------------------------------------------------
    Finally, a bill currently introduced in the Senate could also help 
combat microcap fraud. On June 9, 1999, Senator Susan Collins, Chairman 
of the Senate Permanent Subcommittee on Investigations, introduced the 
``Microcap Fraud Prevention Act of 1999'' [the ``1999 
Bill''].34 Among other things, the 1999 Bill would: (i) 
allow the SEC to bar fraudulent actors from participating in any 
securities offering, as opposed to only penny stock offerings; (ii) 
allow SEC enforcement actions to be predicated on state enforcement 
actions; 35 and (iii) allow the SEC to bar fraudulent actors 
from serving as officers or directors of any company, as opposed to 
only SEC reporting companies.
---------------------------------------------------------------------------
    \34\ The 1999 Bill is co-sponsored by Senators Daniel Akaka, Max 
Cleland, and Judd Gregg.
    \35\ To date, the states have orchestrated two sweeps aimed at 
boiler rooms. In May 1997, 20 states accused 14 brokerage firms of 
violations including high pressure sales tactics. In July 1998, NASAA 
announced 100 enforcement actions against boiler rooms, including 64 
actions involving brokers peddling microcap stocks.
---------------------------------------------------------------------------
    While the 1999 Bill enhances civil, and not criminal, remedies, it 
could still help deter organized crime involvement on Wall Street. 
Members of organized crime often need to recruit those in the 
securities industry, including brokers and promoters, to complete their 
schemes. The provisions of the 1999 Bill could make it harder to 
recruit these persons.
                             v. conclusion
    The Commission will continue to implement a vigilant program to 
safeguard the microcap securities market from involvement by organized 
crime or anyone else aiming to commit fraud. We will also continue to 
work closely with the Justice Department to make certain that every 
instance of organized crime on Wall Street is prosecuted criminally. As 
always, the Commission and its staff will be pleased to assist the 
Subcommittee as it goes forward.

    Mr. Oxley. Thank you, Mr. Walker.
    The Chair would note that we have a vote on the floor, as 
we had predicted. So I will recess now so that we can then 
begin with Mr. Skolnik when we return, hopefully within 10 
minutes or so. The subcommittee stands in recess.
    [Brief recess.]
    Mr. Oxley. The subcommittee will reconvene.
    We now recognize Mr. Bradley Skolnik, the Securities 
Commissioner from the State of Indiana. Welcome. It is good to 
have you here.

                 STATEMENT OF BRADLEY W. SKOLNIK

    Mr. Skolnik. Thank you, Mr. Chairman.
    Chairman Oxley and members of the subcommittee, I am Brad 
Skolnik, Indiana Securities Commissioner and President of the 
North American Securities Administrators Association. I thank 
you for the opportunity to appear today to present our views.
    Why is the Mob making inroads on Wall Street? Because as 
bank robber Willie Sutton once said, that is where the money 
is. Wall Street is booming because in the past generation, we 
have become a Nation of investors. Half of American households 
are invested in the stock market. While that is bullish for the 
legitimate securities industry, it is also bullish for the 
crooks.
    State securities regulators have been fighting a bull 
market in securities fraud, from microcap fraud to promissory 
notes, from foreign currency trading schemes to Internet scams.
    Is there organized crime in the securities markets? Yes, we 
believe there is. How much securities fraud is Mob-related? No 
one can say precisely. From my experience in Indiana alone, I 
can tell you that organized crime on Wall Street is targeting 
investors on Main Street. In recent years my office has brought 
enforcement actions against firms such as Meyers Pollock, 
Stratton Oakmont, Toluca Pacific and PCM Securities, all 
microcap firms suspected of having ties in one form or another 
to organized crime figures.
    Microcap fraud, some of it linked to organized crime, has 
cost Americans hundreds of millions of dollars, perhaps 
billions. Unlike The Godfather or The Sopranos, there is 
nothing entertaining or particularly endearing about the Mob on 
Wall Street.
    While we can't tell you exactly how big the problem of the 
Mob on Wall Street is, we can tell you how to best fight it: by 
bringing more criminal prosecutions. The prospect of serious 
jail and prison time is the only way to deter calculating, 
cold-blooded recidivist criminals. Anything less could be 
viewed as just a cost of doing business.
    The problem is securities cases are complex, costly and 
time-consuming, and some prosecutors shy away from them because 
of that. But from my perspective as a State securities 
regulator, white collar criminals who commit securities frauds 
deserve prison time just like thieves, muggers and murderers. 
Think about it. Someone steals your car, they go to prison. A 
con artist steals money your parents saved for retirement, and 
all too often they only get fined. That is simply not right.
    Securities regulators have been successful in overseeing 
the activities of legitimate brokerage firms; however, we face 
serious challenges when outright criminal organizations enter 
the markets. Traditional weapons to sanction firms and brokers 
who violate market regulations such as administrative fines and 
suspensions often have little effect on these criminals. They 
readily pay the crimes and consider them a cost of doing 
business. Regulators must provide deterrence to corrupt brokers 
and firms by bringing criminal cases and putting perpetrators 
in prison, period.
    The closure of one firm and the barring of principals does 
not necessarily end the problem. Brokers at firms shut down by 
regulators have migrated to other firms or started new firms to 
continue their criminal activities. As you can see from this 
chart, a copy of which is attached to our testimony today, this 
agent-to-principals chart demonstrates how the microcap firm 
Stratton Oakmont was the beginning or the centerpiece, if you 
will, of a sophisticated network of corrupt brokers, promoters 
and agents. This interlocking web of companies and the 
migration of brokers from firm to firm is, in my view, evidence 
of enterprise corruption, if not outright racketeering.
    As Mr. Walker noted today, by prosecuting the principal 
figures in the rogue firms, regulators and law enforcement 
agencies have made large strides toward removing criminal 
elements from the marketplace, but we need to keep the pressure 
on, as some of these criminal elements now migrate from the 
boiler rooms to the Internet.
    Unfortunately many white collar criminals are creative and 
sophisticated. Therefore, if we hope to continue to protect our 
Nation of investors from fraud and abuse, our enforcement 
efforts must be enhanced and improved. Currently the SEC cannot 
take action based upon State actions against brokers and firms. 
The SEC should be empowered to rely on certain State actions as 
a basis for pursuing appropriate remedies under Federal law. 
This authority is similar to that used by the States at the 
current time. For example, in the case of Meyers Pollock, 
Indiana suspended the firm's license based on the initial 
action taken by the Secretary of State's office in 
Massachusetts.
    Yes, Mr. Chairman, the Mob has made inroads in Wall Street. 
To fight it and other forms of organized crime, we need to 
bring many more criminal actions. If we do not, a cancer will 
grow on our securities markets, which could have very serious 
and perhaps very dire consequences. We need to put these crooks 
in prison. I pledge the support of the entire NASAA membership 
to work with you and to provide any additional information or 
assistance you may need. Thank you very much.
    [The prepared statement of Bradley W. Skolnik follows:]
     Prepared Statement of Bradley W. Skolnik, Indiana Securities 
   Commissioner, President, North American Securities Administrators 
                           Association, Inc.
    Chairman Oxley and Members of the Subcommittee: I am Brad Skolnik, 
Indiana Securities Commissioner and President of the North American 
Securities Administrators Association, Inc. (NASAA).1 I 
commend you for holding this hearing and thank you for the opportunity 
to appear today to present our views.
---------------------------------------------------------------------------
    \1\ The oldest international organization devoted to investor 
protection, the North American Securities Administrators Association, 
Inc., was organized in 1919. Its membership consists of the securities 
administrators in the 50 states, the District of Columbia, Canada, 
Mexico and Puerto Rico. NASAA is the voice of securities agencies 
responsible for grass-roots investor protection and efficient capital 
formation.
---------------------------------------------------------------------------
    Why is the Mob making inroads on Wall Street? Because, as bank 
robber Willie Sutton once said, that's where the money is. Wall Street 
is booming because in the past generation we've become a nation of 
investors. Half of American households are invested in the stock 
market. While that's bullish for the legitimate securities industry, 
it's also bullish for the crooks. Unfortunately, many of today's 
investors are relatively unsophisticated and susceptible to high-
pressure sales tactics and bogus promises of guaranteed returns--the 
stock and trade of microcap stock firms and promoters.
    State securities regulators have been fighting a bull market in 
securities fraud. From microcap fraud to promissory notes, from foreign 
currency trading schemes to Internet scams. Is there organized crime in 
the securities markets? Yes, we believe there is.
    How much securities fraud is Mob related? No one can say precisely. 
From my experience in Indiana alone, I can tell you that organized 
crime on Wall Street is targeting investors on Main Street. For 
example, in recent years, the Securities Division of the Indiana 
Secretary of State's office has brought enforcement actions against 
Meyers Pollock Robbins, Stratton Oakmont, Inc., Toluca Pacific 
Securities Corp., and PCM Securities Limited--all these microcap firms 
are suspected of having ties, in one form or another to organized crime 
figures. The experience is similar in many other states. Microcap 
fraud, some of it linked to organized crime, has cost Americans 
hundreds of millions of dollars, perhaps billions. Unlike The Godfather 
or The Sopranos, there is nothing entertaining or endearing about the 
Mob on Wall Street.
    While we can't tell you exactly how big the problem of the Mob on 
Wall Street is, we can tell you how to best fight it. By bringing more 
criminal prosecutions. The prospect of serious jail and prison time is 
the only way to deter these calculating, cold-blooded, recidivist 
criminals. Anything less could be viewed as just a cost of doing 
business.
    The problem is, securities cases are complex, costly and time-
consuming. The truth is some prosecutors shy away from them because the 
subject is complicated and difficult to understand. But from my 
perspective as a state securities regulator, white-collar criminals who 
commit securities fraud deserve prison time just like thieves, muggers 
and murderers.
    Think about it: Someone steals your car--they go to prison. A con 
artist steals the money your parents saved for retirement and they get 
fined. That's not right.
    We need to change our collective mind-set about white-collar crime. 
Make no mistake: Securities fraud is not a victimless crime. It 
destroys lives just as surely as street crime does.
    State securities regulators bring more criminal cases for 
securities fraud than other regulators, obtaining an average of nearly 
300 criminal convictions a year. But we need to get more convictions, 
many more.
    I would like to acknowledge the cooperative efforts of the U.S. 
Attorney's Office and the Manhattan District Attorney's Office in 
working with the states securities agencies, the Securities and 
Exchange Commission (SEC) and the NASD Regulation (NASDR) and 
committing the resources to build cases against corrupt microcap stock 
firms. I believe the willingness to pursue these cases, which resulted 
in criminals going to jail, has sent a message and had an impact in 
reducing certain types of securities fraud.
    Meyers Pollock Robbins fits the pattern state regulators have 
observed in the war against microcap stock fraud--commercial bribery, 
extortion, money laundering, market manipulation and suspected mobsters 
or their associates as clients.
    In January of this year, Gordon Hall, the chief executive of 
HealthTech International, was convicted on charges he hired stock 
promoters--some with ties to organized crime--to bribe brokers to 
artificially inflate the price of his company's stock. Prosecutors said 
Hall entered into a bogus stock promotion consulting agreement with two 
individuals who allegedly had ties to the Bonnano crime family. That 
agreement led to Mob control of Meyers Pollock Robbins. At the trial, 
one of the defendants testified that he arranged for three brokers to 
be hired at Meyers Pollock Robbins to promote certain stocks, including 
HealthTech, which jumped 53% in a single day during the alleged scheme.
    In April of this year, the New York District Attorney, in 
partnership with state regulators around the U.S., announced the 
indictment of 20 people on charges that they carried out a nationwide 
stock fraud scheme in connection with Meyers Pollock Robbins. In total, 
42 individuals were under investigation but, by the time of the 
announcement, 22 individuals had already pled guilty to various 
criminal charges including enterprise corruption, money laundering, 
criminal possession of stolen property, criminal bribe receiving, grand 
larceny, falsifying business records and antitrust violations.
    State regulators from Alabama, Colorado, Connecticut, Georgia, 
Indiana, Massachusetts, New Jersey, Pennsylvania, and Utah collected 
and analyzed brokerage records from Meyers Pollock Robbins to uncover 
and document fraudulent activities. State investigators also located 
and interviewed investor-victims of this criminal enterprise in states 
from New York to California. They heard heartbreaking testimony of 
stolen money, broken dreams and loss of faith--faith in our financial 
markets and faith in our regulatory and legal systems.
    For example, a woman who lived in a nursing home lost more than 
$100,000 when brokers at Meyers Pollock Robbins made unauthorized 
trades in her account. She lost 95% of her assets and her 50-year-old 
son-in-law had to take a second job just so that she could stay in the 
nursing home.
    The District Attorney brought some of these victims to New York, 
where they testified before a grand jury that returned indictments 
against those involved in the Meyers Pollock Robbins criminal 
enterprise. Among other things, the indictment alleged that the 
president of Meyers Pollock Robbins assisted stock promoters to sell 
overvalued and worthless stock through the firm and assisted would-be 
principals of securities firms to own and operate branches of Meyers 
Pollock Robbins, even if they were not licensed. He collected 
``consulting fees'' from the promoters and collected a percentage of 
the gross from each of the branch offices. The indictment alleged that 
other criminals provided stock to Meyers Pollock Robbins as undisclosed 
promoters of the stocks. Each paid bribes or other undisclosed 
compensation to brokers to sell their securities.
    At these firms and others, state securities investigators have seen 
``pump and dump'' schemes similar to those reported in press accounts 
describing Mob involvement on Wall Street. Here's how it works: The 
mobsters pay, say, 50 cents a share to buy a stake in a company that's 
going public. Then they go to a brokerage firm they control and have 
its brokers cold-call unsuspecting clients and hype the stock so that 
it sells for, say, $5 a share. Once the shares are pumped and dumped on 
the market, the hype stops and the mobsters sell their shares for a big 
profit. As a result of the sudden glut of shares on the market, the 
stock price plummets, investors are left with often nearly worthless 
pieces of paper, the brokers get their fat commissions and the Mob 
makes a killing. Why would a company go to the Mob for help? ``Because 
the Mob guys have the cash and the wherewithal to make it happen.'' 
2
---------------------------------------------------------------------------
    \2\ ``Wise Guys on Wall Street'' by John Connolly; George Magazine; 
December, 1998
---------------------------------------------------------------------------
    Time and time again state securities regulators, in their 
investigations of microcap stock fraud cases, have turned up people who 
are afraid to testify, or who if they do agree to go on the record wear 
hoods at hearings to conceal their faces out of fear of retaliation.
    Historically, securities regulators have been successful in 
overseeing the activities of the legitimate brokerage firms. However, 
they faced serious challenges when outright criminal organizations 
entered the markets in recent years. Traditional weapons to sanction 
firms and brokers who violate market regulations--such as 
administrative fines and suspensions--have little effect on these 
criminals. They readily pay fines and consider them a cost of doing 
business. Regulators must provide deterrents to corrupt brokers and 
firms by bringing criminal cases and putting the perpetrators in 
prison. Period.
    It's important to note that the closure of one firm and the barring 
of several principals who have already made their money does not end 
the problem. Brokers at firms shut down by regulators have migrated to 
other firms, or started new firms, to continue their criminal 
activities.
    The poster child for microcap stock fraud was Stratton Oakmont, 
which had its headquarters in New York. An indicted mobster, one Philip 
Barretti Sr., was a stockholder in a Stratton backed Initial Public 
Offering (IPO). Other microcap firms associated with Stratton included 
Biltmore Securities, Duke & Company, Monroe Parker, First Jersey 
Securities and Hibbard Brown. As you can see from the attached ``Agent 
to Principal'' chart, this was a sophisticated network of corrupt 
brokers, promoters and agents. This interlocking web of companies and 
the migration of brokers from firm to firm is, in my view, evidence of 
enterprise corruption, if not racketeering.
    In response to the criminal threat to the marketplace, NASAA member 
states have developed a task force concept to share personnel, 
information and resources. In addition, NASAA has developed a close 
working relationship with experienced criminal prosecutors in states 
where corrupt brokerage firms are located. NASAA member states provide 
the securities market expertise to detect and document crime in the 
marketplace. The prosecutors then present the cases for trial. However, 
even this concept does not provide the manpower needed to adequately 
address the problem. Therefore, NASAA has been forced to adopt a 
strategy of concentrating primarily on those rogue brokers and 
principals who are capable of establishing new firms, or migrating to 
existing firms and continuing their criminal activities.
    For example, as a result of the Duke & Company investigation, 24 
owners, principals, supervisors and brokers were indicted on criminal 
charges. It is believed that perhaps dozens more brokers, sales 
assistants and cold callers could have been charged, but the manpower 
was not available to administer such a heavy case load.
    NASAA member states have tracked an ``Agent to Principal'' 
progression in and among rogue brokerage firms. This tracking has 
demonstrated that some talented criminals who begin as brokers, go on 
to manage their own firms. By prosecuting the principal figures in the 
rogue firms, regulators and law enforcement agencies have made large 
strides toward removing criminal elements from the marketplace. We need 
to keep the pressure on, as some of these criminal elements migrate out 
of the boiler room and onto the Internet, arguably a more efficient 
medium to commit fraud.
    Unfortunately, many white-collar criminals are creative and 
sophisticated. Therefore if we hope to continue to protect our nation 
of investors from fraud and abuse our enforcement efforts must be 
enhanced and improved. Currently, the Securities and Exchange 
Commission cannot take action based upon state actions against issuers, 
brokers, dealers, investment advisers and affiliated persons. This 
creates duplication of enforcement effort and expenditure of limited 
resources. Our system of regulation works best when each regulator 
complements the other, leveraging resources, strengths and expertise.
    We recommend that where a state has issued an administrative 
enforcement adjudication, obtained a conviction or where a state court 
has issued an order or injunction, the SEC should be empowered to rely 
on that state action as a basis for pursuing appropriate remedies under 
federal law. The SEC should not be required to expend the time and 
resources to replicate state investigations in order to obtain relief 
or sanctions authorized by federal law.
    This authority is similar to that regularly utilized by the states. 
For example, in the case of Meyers Pollock Robbins, Indiana suspended 
the firm's license based on the initial action taken by the Secretary 
of State's office in Massachusetts. A number of states, including 
Indiana, had pending investigations based on the firm's problems within 
their borders, but relied on the Massachusetts case for their actions. 
This allowed us to move faster, thereby protecting investors within our 
jurisdictions.
    Mr. Chairman, I applaud you for holding these hearings in an effort 
to shed light on the criminal abuses in the securities markets. The 
problems in this area are serious and systemic, but can be successfully 
addressed if securities regulators and policy makers work together on 
solutions.
    Yes, the Mob is making inroads on Wall Street. To fight it and 
other forms of organized crime, we need to bring many more criminal 
actions. If we don't, a cancer will grow on our securities markets, 
which could have very serious and perhaps very dire consequences. We 
need to put these crooks in prison.
    I pledge the support of the entire NASAA membership to work with 
you and provide any additional information or assistance you may need. 
Thank you.
[GRAPHIC] [TIFF OMITTED] T7115.111

    Mr. Oxley. Thank you, Mr. Skolnik.
    Our final witness today is Mr. Barry Goldsmith, Executive 
Vice President for NASD Regulations.
    Mr. Goldsmith.

                 STATEMENT OF BARRY R. GOLDSMITH

    Mr. Goldsmith. Thank you, Chairman Oxley. And I wish to 
thank the entire subcommittee for the opportunity to testify 
here today.
    My name is Barry Goldsmith. I am the Executive Vice 
President of Enforcement for NASD Regulation, Inc.
    America's securities markets are essential to the capital 
formation process and economic well-being of our Nation. Ours 
are the strongest, the safest and the best regulated markets in 
the world. Only a tiny fraction of the 5,600 securities firms 
and the more than 650,000 registered industry professionals are 
involved in any form of criminal activity, and even a smaller 
number are ever involved with organized crime. Nevertheless, 
any attempt by organized criminal elements to influence the 
securities markets is unacceptable.
    NASDR jurisdiction extends only to member securities firms 
and their associated persons. It does not include criminal 
prosecution authority, nor do we have the same investigative 
powers available to the FBI and other law enforcement agencies. 
While we can and we do throw the worst offenders out of the 
industry, last year nearly 500 of them, we can't throw them in 
jail, but we certainly can and do help the criminal prosecutors 
do just that. NASDR, along with the SEC, has assisted law 
enforcement agencies in every recent major public prosecution 
involving organized crime in the securities markets. It is the 
criminal prosecutors with ours and others' assistance who have 
the powers and broad jurisdictional reach to effectively 
prosecute these cases and impose the necessary criminal 
sanctions.
    That being said, we recognize the critical role NASDR must 
play in protecting our markets from criminal activity and 
organized crime. We do this in three main ways. First, we 
provide hands-on assistance to criminal prosecutors through our 
enforcement, market and member regulation departments, and in 
particular through our criminal prosecution assistance group 
known as CPAG; second, by enacting tough new rule proposals, in 
particular the NASDR taping rule which I will discuss in a 
moment; and third, by enhanced efforts to train Federal, State 
and local prosecutors in the technical workings of our markets.
    NASDR has a long history of supporting criminal securities 
prosecutions spanning the past 25 years. Our market regulation 
department here in Rockville conducts ongoing surveillance of 
all NASDAQ and over-the-counter market activity. This is an 
enormous task that includes monitoring over 10,000 securities 
on a daily basis. That department referred over 230 matters to 
the SEC and criminal law enforcement agencies last year.
    Our enforcement department's criminal prosecution 
assistance group, known as CPAG, works directly and extensively 
with criminal prosecutors on time-intensive securities 
investigations and prosecutions. CPAG provides law enforcement 
agencies with what we can bring to the table, and that is 
expertise in the securities markets.
    CPAG has been involved in about 200 separate criminal 
matters since its inception 2\1/2\ years ago. Among other 
things, it provides detailed analysis of trading records and 
related documentation, offers advice and training to 
prosecutors and agents, provides summary and expert testimony, 
creates demonstrative exhibits, and assists in the trying of 
cases by becoming special prosecutors or special district 
attorneys.
    Several of the most important criminal cases we have worked 
on are outlined in my written testimony. I would like to submit 
for the record a set of press releases from those cases which 
describes our joint efforts.
    Mr. Oxley. Without objection. Thank you.
    [The information referred to follows:]
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    zMr. Goldsmith. Thank you.
    One of these cases, and I believe we may hear some tapes 
from it later on, is known as the Mob on Wall Street case, 
which involves secret organized crime control of brokerage 
firms to manipulate the price of Healthtech stock by upticking 
their quotes and bribing brokers. In that matter NASDR's market 
regulation department first identified problematic accounting 
and disclosure irregularities as well as suspicious Internet 
activity. This was referred to the government for action. After 
the government initiated its investigation, CPAG provided 
hundreds of hours of assistance to the prosecutors in that 
case. In the ultimate trial of that case, which led to a 
conviction, our director of enforcement provided important 
expert testimony to the jury.
    In addition to assisting law enforcement officials and 
prosecuting organized crime, the NASDR has provided a taping 
rule to reduce recidivism by brokers. The rule requires a firm 
to tape record all of its brokers sales calls with existing and 
potential customers if a significant percentage of a firm's 
brokers were previously employed by problem firms. When brokers 
migrate from firm to firm, they do not necessarily lose their 
old bad habits.
    NASDR has also provided and will continue to provide 
training programs on securities issues to prosecutors around 
the country.
    In closing, I want to emphasize that we are committed to 
providing a fair, well-regulated environment for the trading of 
all securities free of the taint of organized crime. We promise 
to continue to work diligently with the SEC, the States, and 
law enforcement officials and Congress toward that end. Thank 
you very much.
    [The prepared statement of Barry R. Goldsmith follows:]
  Prepared Statement of Barry R. Goldsmith, Executive Vice President, 
                         NASD Regulation, Inc.
    The NASD would like to thank the Subcommittee for this opportunity 
to testify on organized crime in the securities markets, the scope of 
the problem and our efforts to address it. America's securities markets 
are essential to the capital formation process and economic well being 
of our nation. It is our job to work together with the SEC and law 
enforcement authorities to protect investors and the markets from fraud 
and abuse of any kind, including organized crime.
    Your invitation letter asked us to discuss, among other things, the 
level of organized crime that NASDR has discovered in our capital 
markets through brokerage houses or other NASDR regulated entities. In 
addition, you requested that we discuss past, present and future 
efforts to detect and prevent organized crime in the securities 
markets, as well as the results of these efforts.
    Our securities markets are the strongest, safest and best regulated 
markets in the world. The overwhelming majority of individuals in the 
securities industry are honest, ethical professionals who treat their 
obligation to comply with the law seriously and put the investor's 
interest first. There are, however, a small number of dishonest 
individuals and firms in the securities business. The problem firms and 
brokers represent a tiny portion of the almost 5,600 securities firms 
and more than 650,000 registered industry professionals in this 
country. Importantly, only a tiny fraction of these are involved in 
criminal activity and an even smaller number are involved with 
organized crime. Nevertheless, any attempt, however limited or small, 
by organized criminal elements to influence the securities markets is 
unacceptable. We will not tolerate it. NASD Regulation, along with the 
SEC and criminal prosecutors, have stepped up its already significant 
surveillance, enforcement and prosecutorial efforts to rid the industry 
of these criminals and to better educate and protect the investing 
public. The recent spate of successful organized crime prosecutions in 
securities cases, and NASD Regulation's substantial assistance to 
criminal prosecutors in those cases, demonstrates our strong commitment 
and success in this area.
    I believe that the securities industry may be a target for 
organized crime for several reasons. We have experienced the longest 
sustained bull market in the history of our country. This market has 
attracted record numbers of new, sometimes relatively unsophisticated, 
individuals as investors. Inexperienced investors looking for a quick 
doubling or tripling of their money can too easily fall prey to those 
unscrupulous few in our industry and on its fringes. In addition, the 
number of small, newly capitalized companies in the non-listed or over-
the-counter markets has increased. While many of these smaller 
companies provide significant growth potential for our capital markets 
and investors alike, these companies' securities are also much more 
susceptible to manipulative conduct. This can be done the ``old 
fashioned way'' through rows of telephone banks housed in ``bricks and 
mortar'' boiler rooms, or now, much more efficiently, with a few clicks 
of the mouse over the Internet.
    As securities regulators, we must adopt a ``zero-tolerance'' 
approach not just to organized crime, but to any criminal conduct in 
the securities marketplace. We must continue to look at ways of 
improving our enforcement and surveillance, as well as the rules we 
adopt to protect investors, especially as it concerns organized crime. 
Most importantly, we must also look at new ways of ``investor 
outreach,'' so that the individual investor is armed with the 
information he or she needs to resist the criminals and scamsters and 
make responsible investment decisions. This is the best defense to any 
type of securities fraud.
                                the nasd
    Let me briefly outline the role of the NASD in the regulation of 
our securities markets. Established under authority granted by the 1938 
Maloney Act Amendments to the Securities Exchange Act of 1934, the NASD 
is the largest self-regulatory organization for the securities industry 
in the world. Every broker dealer in the U.S. that conducts a 
securities business with the public is required by law to be a member 
of the NASD. The NASD's membership comprises almost 5,600 securities 
firms that operate in excess of 83,000 branch offices and employ more 
than 652,000 registered securities professionals.
    The NASD is the parent company of NASD Regulation, Inc. (NASDR), 
the Nasdaq Stock Market, Inc., the American Stock Exchange LLC, and 
NASD Dispute Resolution, Inc. These subsidiaries operate under 
delegated authority from the parent, which retains overall 
responsibility for ensuring that the organization's statutory and self-
regulatory functions and obligations are fulfilled. The NASD is 
governed by a 31-member Board of Governors, a majority of whom are not 
securities industry affiliated. The NASDR subsidiary is governed by a 
10 member Board of Directors, balanced between securities industry and 
non-industry members. Board members are drawn from leaders of industry, 
academia, and the public. Among many other responsibilities, the 
boards, through a series of standing and select committees, monitor 
trends in the industry and promulgate rules, guidelines, and policies 
to protect investors and ensure market integrity.
NASD Regulation
    NASD Regulation is responsible for the registration, education, 
testing, and examination of member firms and their employees. In 
addition, we oversee and regulate our members' market-making activities 
and trading practices in securities, including those that are listed on 
the Nasdaq Stock Market and those that are not listed on any exchange. 
Although activities involving these securities may be reflected in 
different quotation media, NASDR is ultimately responsible for 
regulating the trading activity of its members whether it occurs in the 
Nasdaq Stock Market, the over-the-counter market, or any other area 
over which the NASD has jurisdiction.
    In 1999, NASDR brought 1,175 new enforcement actions involving 
violations of the federal securities laws and NASD rules. This 
represents approximately a 12 percent increase from the prior year and 
more than a 30 percent increase over the past five years. In addition, 
NASDR barred nearly 500 individuals from the securities industry in 
1999, almost a 30 percent increase from 1998.
    The 1,500 member staff of NASDR is devoted exclusively to carrying 
out the NASD's regulatory and enforcement responsibilities. NASDR 
carries out its mandate from its Washington headquarters and 14 
district offices located in major cities throughout the country. 
Through close cooperation with federal and state authorities and other 
self-regulators, overlap and duplication is minimized, freeing 
governmental resources to focus on other areas of securities 
regulation.
    NASDR rulemaking is a widely participatory process with broad input 
from industry members, other regulators, and the public. By the 
requirements of the Securities Exchange Act of 1934, NASDR rules do not 
become final until they are filed with and approved by the SEC. The SEC 
staff carefully reviews each rule filing and publishes NASDR rules for 
comment in the Federal Register.
    NASDR has examination responsibilities for all of its 5,600 
members. In addition to special cause investigations that address 
customer complaints and terminations of brokers for regulatory reasons, 
NASDR has established a comprehensive routine cycle examination 
program. This program is carried out through a regulatory plan that 
focuses each District's examination efforts on the firms, individuals, 
issues and practices that present the greatest regulatory challenges 
and concerns. Annual on-site inspections are conducted of high priority 
areas. In addition, NASDR has established an examination frequency 
cycle for all of its members, which is based upon the type of business 
conducted by the member, the scope of that business, the extent of 
customer exposure, method of operation, past regulatory history, and 
other factors. During 1999, more than 2,400 main office routine 
examinations were completed and over 6,700 customer complaints and 
2,900 terminations for cause were investigated.
    Another key factor in NASDR's overall regulatory program involves 
developing and administering qualifications testing for securities 
professionals. All sales and supervisory persons associated with NASD 
member firms must demonstrate a requisite understanding of the products 
offered by their firms, as well as regulatory requirements for the 
functions they are to perform for their employer-members. Individuals 
acting in a management capacity must pass the appropriate principal's 
examination, while sales personnel must demonstrate specific 
understanding of the products they intend to sell and the regulations 
that govern those products. In 1999, NASDR administered 353,778 
qualifications tests.
    NASDR's Central Registration Depository (CRD) maintains the 
qualification, employment, and disciplinary histories of more than 
650,000 registered securities employees of member firms through this 
automated, electronic system. Developed jointly by the North American 
Securities Administrators Association (NASAA), the organization of 
state securities regulators, and the NASD, CRD is an on-line 
registration data bank and application-processing facility to which 
each of its regulatory participants are linked by a nationwide network 
of on-line computer terminals.
    Records of securities professionals are available to the public 
through NASDR's Public Disclosure Program. Background information is 
supplied, including all reportable criminal convictions and dismissed 
indictments, final disciplinary actions taken by the NASD or any other 
securities self-regulatory organization and state and federal 
regulators, pending NASD and other SRO disciplinary actions, dismissed 
NASD complaints, arbitration decisions, and civil judgments in 
securities or commodities disputes. This information is provided 
without charge to requestors.
The Over-The-Counter Market
    The NASD has regulatory responsibilities for what is known as the 
OTC or over-the-counter market. The over-the-counter market is a vast 
amalgam of publicly traded companies that list neither on Nasdaq nor on 
any exchange. It is in the thinly traded, micro-cap securities that 
characterize the over-the-counter-market where we find the greatest 
potential for fraudulent activity.
    A part of the over-the-counter market is what is known as The OTC 
Bulletin Board (OTCBB). While it is a system operated by Nasdaq, the 
Bulletin Board is markedly different and distinct from the Nasdaq Stock 
Market. It is an electronic quotation service for subscribing members. 
While the system displays real-time quotes, last sale prices, and 
volume information in domestic securities, there is no formal legal 
relationship between the OTC issuers whose shares are quoted there and 
Nasdaq. The companies need not meet any listing standards to have their 
stock included in the Bulletin Board. This system provides a 
centralized and automated alternative to the Pink Sheets, which 
historically have been published on paper once each day, but which are 
now available electronically.
    Until recently, there were no periodic public reporting 
requirements for companies who wanted their shares included on the 
OTCBB. Thus, investors who wanted to evaluate the merits of companies 
whose shares were quoted there, had little available information. In 
January 2000, the SEC approved the NASD's OTC Bulletin Board 
Eligibility Rule. This rule permits only those companies that report 
their current financial information to the SEC, banking, or insurance 
regulators to be quoted on the OTCBB. This new rule ensures that 
investors are provided with more and better information about OTCBB 
stocks. In particular, investors will now have access to companies' 
current financial information when considering investments in OTCBB 
securities.
                  nasdr criminal enforcment activities
    The U.S. securities industry is one of the most comprehensively 
regulated in the country. This regulation has helped make our markets 
the deepest and safest in the world. In the overwhelming majority of 
situations, securities rule violations by market participants can be 
and are dealt with by administrative or civil sanctions. NASDR's 
administrative sanctions include suspensions and bars of registered 
representatives, business restrictions on or expulsions of member 
firms, restitution to customers, and the imposition of monetary fines. 
We believe that this comprehensive web of regulation is a major reason 
that the limited organized crime involvement in the industry that we 
have seen to date has rarely been by those who are registered to 
operate in the industry, but rather by those who operate outside the 
periphery of that regulation.
    There are, however a very small number of violations that are so 
pernicious or are committed by such hardened securities law recidivists 
that they can only be dealt with criminally. Importantly, NASDR 
jurisdiction extends only to member securities firms and their 
associated persons, and thus does not have the jurisdictional reach or 
the necessary array of governmental investigative tools--wiretap, 
search warrant and subpoena authority--that are available to the FBI 
and other law enforcement officials. While we pursue our own 
investigations and take administrative action against registered 
persons and entities in these types of cases, we also refer the most 
serious of these matters to criminal law enforcement officials. It is 
the criminal authorities who are best positioned to fully prosecute 
those involved in these cases. In these instances, we work closely with 
the criminal authorities to assist them in any way we can.
    The type of assistance we provide to criminal authorities depends 
upon the nature of the case and the needs of the particular prosecutor. 
Many of these cases involve very complex fraudulent schemes with 
thousands of customer trades, months if not years of illicit activity 
and tens of millions of dollars of illegal profits. While prosecutors 
often obtain important evidence in these cases from informants, 
coconspirators, and wiretap evidence, not all of this evidence may be 
of the quality necessary to bring a successful criminal prosecution. 
Criminal cases require proof of guilt beyond a reasonable doubt.
    NASDR has unique access to the audit trail that accompanies nearly 
every securities trade. This audit trail includes detailed information 
on the billion-plus shares that trade hands in our markets each day, 
each share of which must be reported within 90 seconds of a trade to 
power computer systems we maintain. Likewise, we capture and maintain, 
on a real time basis, every quote to buy or sell a security and every 
change to those quotes that brokerage firms make in these securities.
    Our investigators come from a variety of securities industry and 
professional backgrounds and are well versed in the technical and 
sometimes difficult to understand language of the securities industry. 
They are also computer proficient and are able to efficiently analyze 
thousands of trades and quotes to detect patterns of potentially 
illicit conduct. Working side-by-side with criminal prosecutors, they 
are able interpret tape recordings, heavily laden with technical 
jargon. Likewise, they are able to recreate the trading in particular 
securities that may corroborate the testimony of a cooperating witness 
that the trading in that security was manipulated.
    NASDR investigators are able to work with criminal prosecutors to 
graph and chart the evidence into compelling demonstrative exhibits 
that can be presented to the jury at trial. Sometimes, NASDR 
investigators and examiners serve as fact witnesses in criminal trials, 
describing to the jury the underlying factual basis of demonstrative 
exhibits or compilations of trading data. On other occasions, in 
organized crime and other criminal matters, NASDR officials have served 
as expert witnesses explaining the regulations and workings of the 
securities markets.
    NASDR has reacted to the potential criminal conduct primarily 
through three approaches: (1) Stepped-up assistance to criminal 
prosecutors through its recently formed Criminal Prosecution Assistance 
Group (CPAG), as well as through its Market Regulation Department; (2) 
Implementation of its new taping rule; and (3) Enhanced training of 
federal, state and local prosecutors and law enforcement officials.
CPAG, Market Regulation, and Other Assistance to Prosecutors
    Our commitment to assisting criminal prosecutors has been on-going 
and of a long-standing nature. The NASD's record of assistance to and 
cooperation with criminal authorities goes back many years. At least as 
early as the 1980's, the NASD had investigative staff working full-time 
to assist in the investigation and criminal prosecution of securities 
fraud. We continue to play an active role in this work through close 
relationships between our 14 district offices and prosecutors in their 
locales.
    Our Market Regulation Department conducts an ongoing surveillance 
program of the market activity for all Nasdaq and over-the-counter 
securities. While this is an enormous task given that it includes 
watching over 10,000 securities on a daily basis, NASDR has committed 
significant resources to develop technology to identify suspicious 
scenarios that require further investigation. Our surveillance staff 
works closely with the U. S. Securities and Exchange Commission and 
criminal law enforcement agencies and has quickly uncovered numerous 
fraud schemes that have been successfully investigated and prosecuted. 
In 1999, the Market Regulation Department referred over 230 cases of 
potential insider trading and fraud to the SEC and other law 
enforcement agencies.
    To ensure that prosecutors have the expertise and support that they 
need to bring securities cases, and responding to the numerous requests 
of criminal law enforcement officials, NASDR's Enforcement Department 
created the Criminal Prosecution Assistance Group, or CPAG, in April 
1998. It is through CPAG that NASDR most directly takes part in the 
fight against organized crime in the securities industry.
    The purpose of CPAG is to make available to criminal prosecutors 
and investigating agents throughout the country the expertise and 
experience of the NASD for the identification, investigation and 
prosecution of securities fraud and related offenses. CPAG is the first 
unit within a self-regulatory organization to be devoted to working 
directly and exclusively on criminal investigations and prosecutions 
involving securities-related crimes.
    The office is headed by a CPAG Chief Counsel who was both a Special 
Assistant United States Attorney and an Assistant Chief Litigation 
Counsel with the SEC. The group includes securities examiners who are 
widely experienced and knowledgeable about the securities industry 
generally, the computerized databases of the NASD, and the analysis of 
trading records maintained in the industry.
    CPAG has been involved in about 200 separate criminal matters, 
ranging from hundreds of hours of work on lengthy investigations and 
trials to brief telephone consultations with prosecutors and agents. 
The group provides detailed analysis of trading records and related 
documentation, offers advice and training to prosecutors and agents, 
provides summary and expert testimony, creates demonstrative exhibits, 
assists with complex securities law motions, and provides attorney 
assistance through appointment as a Special Assistant United States 
Attorney or Deputy District Attorney. Many of these matters involve 
non-public investigations, and thus cannot be disclosed.
Cases
    CPAG and the Market Regulation Department have assisted criminal 
prosecutors on all of the significant publicly available matters 
involving allegations of Mob activity in the securities markets, 
including the following cases:
    U.S. v. Gangi, et al.--United States Attorney's Office (SDNY)--This 
case was the first prosecution of organized crime involvement in the 
securities industry, and came to be known as the ``Mob on Wall Street'' 
case. It involved secret organized crime control of several brokerage 
firms to manipulate the price of Healthtech common stock and warrants 
by artificially upticking their quotes and bribing brokers to provide 
retail. All of the organized crime figures pleaded guilty, and the 
remaining defendants, including a notorious stock promoter named Gordon 
Hall, were convicted at trial on May 11, 1999. The charges included 
racketeering and conspiracy as well as securities fraud. Hall was 
sentenced to 87 months in prison. The organized crime figures received 
sentences ranging from 4-8 years in prison.
    NASDR provided hundreds of hours of assistance to the SEC and 
prosecutors on this important case. NASDR's Market Regulation 
Department referred it to the Nasdaq Listing Investigations Department 
to investigate questionable assets, potential false disclosures by the 
company, suspicious Internet activity, and a significant increase in 
the total shares outstanding. Evidence uncovered in the resulting 
investigation was referred to the government. After the government 
initiated its investigations, CPAG analyzed trading data, reviewed 
transcripts of government tape recordings post-indictment and 
identified data that corroborated particular statements on the tapes, 
such as statements by Mob associates about manipulation of Healthech's 
stock on particular days. CPAG prepared demonstrative exhibits, such as 
a comparison of the reported brokers' commissions to the conspirators' 
secret listing of actual payments of bribes to brokers. CPAG also 
created bar charts that graphically displayed the dominance of the 
corrupt brokerage firm in sales to the public of Healthtech common 
stock and warrants. NASDR staff also participated in interviews of 
cooperating witnesses and a defendant who ultimately pleaded guilty. 
NADR also provided expert witness testimony in the trial of this case.
    U.S. v. Ageloff, et al.--United States Attorney's Office (EDNY)--
This on-going matter involves fraudulent sales practices and 
manipulation of Initial Public Offerings (IPOs). Ageloff was reported 
in the media to have extensive Mob connections. The defendants in this 
case included primarily top producing brokers and managers from the 
brokerage firms of Hanover Sterling, Norfolk Securities, Capital 
Planning, and PCM Securities. Approximately 50 of these defendants have 
agreed to plead guilty in this case. CPAG's Chief Counsel is serving as 
a Special Assistant U. S. Attorney and will assist in the trial of the 
remaining seven defendants, currently scheduled to begin October 30. 
CPAG is also assisting in analyzing trading records, creating 
demonstrative exhibits, and preparing for summary trial testimony.
    U.S. v. Coppa, et al.--United States Attorney's Office (EDNY)--This 
IPO manipulation case involves 19 defendants, including the principals 
of the brokerage firms of State Street and White Rock Partners. It also 
involves members of the Gambino, Genovese, Bonnano, and Colombo crime 
families who had been enlisted by other defendants to settle internal 
disputes. CPAG was extensively involved in analyzing data and 
interviewing potential witnesses in this matter over an 18-month 
period, and will provide summary trial testimony and demonstrative 
trial exhibits.
    ``UPTICK'' Indictments--United States Attorney's Office (SDNY)--In 
June 2000, the U.S. Attorney for the Southern District of New York 
announced criminal charges against 120 defendants named in 21 separate 
charging documents, as part of ``Operation Uptick.'' The defendants 
included members and associates of all five New York Mob families, and 
allegations that they had controlled or infiltrated several brokerage 
firms, including First Liberty Investment Group, William Scott & 
Company, Bryn Mawr Investment Group, Monitor Investment Group, Meyers 
Pollack & Robbins, and Atlantic General Financial Group. The cases 
included allegations of kickbacks to an investment adviser in 
connection with a New York Stock Exchange listed Real Estate Investment 
Trust (American Realty Trust), as well as a union pension fund. The 
allegations included fraudulent Internet touting of stocks, fraudulent 
private placements, pump and dump schemes, prearranged trades, bribes, 
``no net sales'' policies, and brokers being subjected to ``beatings, 
intimidation and threats.''
    Market Regulation and CPAG have provided trading analyses and 
background information from the NASD's Central Registration Depository, 
as well as customer loss information for purposes of sentencing 
calculations, and plans extensive involvement in assisting the U.S. 
Attorneys Office and the FBI in trial preparation.
    U.S. v. Abramo--United States Attorney's Office (SDFL)--This case 
involved ``pump and dump'' manipulations by a brokerage firm named 
Sovereign Equity Management Corporation, which a ``capo'' in the 
Decavalcante crime family, Philip Abramo, secretly controlled. NASDR's 
Atlanta district office and, to a lesser extent, CPAG, assisted in this 
matter in Tampa.
    People v. Spero--Manhattan District Attorney--CPAG assisted the 
Manhattan District Attorney in this case involving an alleged enforcer 
for the Genovese crime family. This securities fraud consisted of 
telemarketers posing as brokers and selling fictitious stock in 
imaginary trucking companies. All of the defendants pleaded guilty, and 
the alleged Genovese enforcer is serving up to 5 years for securities 
fraud.
Other Matters
    CPAG and the Market Regulation Department are also currently 
involved in assisting in several non-public investigations involving 
allegations of organized crime involvement, but is unable to comment on 
these confidential matters.
    Although CPAG has had extensive involvement in assisting 
prosecutors and agents on organized crime-related cases, this is a 
relatively small part of that unit's work. Of the approximately 200 
matters CPAG has assisted on, fewer than a dozen have involved any 
allegations of organized crime involvement. The non-Mob cases have in 
fact often involved more defendants and, in some cases, more extensive 
securities frauds than the Mob-related cases.
    For example, CPAG is currently assisting the U.S Attorney for the 
Southern District of New York on U.S. v. Randy Pace, et al., a case 
involving numerous fraudulent initial public offerings, primarily 
involving a notorious penny stock firm named Sterling Foster. NASD 
Regulation brought a major regulatory action against Sterling Foster 
and its principals and brokers in 1996, an action that preceded SEC and 
criminal charges. CPAG has spent many months analyzing the trading 
records of the securities involved in the criminal case. On September 
8, 2000, the two primary defendants in that case--Randy Pace and Warren 
Schreiber ( pleaded guilty to criminal charges that they helped cheat 
investors of $170 million by manipulating the price of stocks the firm 
underwrote.
    In U.S. v. Swan, et al, CPAG's Chief Counsel, also supported by the 
Market Regulation Department, was the lead prosecutor in a series of 
related cases in Las Vegas in which thirty-eight defendants, including 
stock promoters, stockbrokers, financial public relations consultants, 
officers and directors of the public company, and the company's 
accountant, pleaded guilty or were convicted at two trials on charges 
including racketeering, conspiracy, securities fraud, wire fraud, 
money-laundering, illegal structuring of financial transactions, and 
tax evasion. In essence, the Chairman and CEO of a company named 
Teletek recruited a nationwide network of stockbrokers and bribed them 
to recommend Teletek stock to their customers, often by sending 
thousands of dollars in cash by Federal Express. The most culpable of 
these defendants are facing likely sentences of approximately 10-14 
years in prison.
    CPAG has also provided assistance to the Manhattan District 
Attorney's Office in People v. Victor Wang, et al., an indictment 
issued on May 5, 1999, charging 17 defendants with 109 counts of 
Enterprise Corruption, Grand Larceny, violations of the Martin Act, and 
related charges at Duke & Company. This case grew out of an independent 
NASD Regulation investigation that was ultimately referred to the 
prosecutors.
    More recently, CPAG assisted the Manhattan District Attorney's 
Office in a case involving allegations of manipulation of numerous 
stocks over a nine-year period by the brokerage firm D.H. Blair. This 
case was preceded by an independent NASD Regulation action in 1997, in 
which D.H. Blair was fined $2 million and ordered to pay $2.4 million 
in restitution to customers.
    Just as a small part of CPAG's work involves organized crime, it 
also makes up a small part of the work of the Market Regulation 
Department. Market Regulation has also assisted prosecutors in 
referring investigations of insider trading and fraud to the SEC and 
criminal law enforcement agencies around the country. These referrals 
resulted in numerous criminal cases filed. Market Regulation has been 
particularly active in surveilling fraudulent Internet activity, 
particularly so-called ``pump and dump'' schemes. Two examples of our 
ability to act quickly are cases involving Uniprime Capital and NEI Web 
World, both over-the-counter micro cap companies.
    In the Uniprime case, the issuer claimed in press releases that it 
had developed a cure for AIDS. This information combined with Internet 
message board chat spurred investors' interest, causing a 300% price 
rise in Uniprime shares and over $20 million in market transactions. 
This scenario was identified immediately and referred within the same 
day to the SEC and U.S. Attorney's Office. This referral resulted in 
the SEC taking civil action and the U.S. Postal Inspector service 
arresting the architect of the scheme, a paroled convicted murderer. 
The U.S. Attorney's office for the Southern District of New York is 
currently prosecuting this case as U.S. v. Flores.
    In the NEI Web World case, Internet message board activity 
containing false merger information caused investors to purchase NEI 
Web World shares, driving the share price from $0.09 to over $15 in 
less than an hour of trading. Again, this scenario was identified 
immediately and referred the same day to the SEC. This referral 
resulted in the SEC taking civil action and the FBI arresting three 
recently graduated UCLA students for perpetrating this scheme in which 
they dumped previously purchased NEI Web World shares into the rising 
market created by their fraudulent Internet postings.
NASDR's Taping Rule
    When NASDR succeeds in putting a securities firm out of business, 
our job is not over. Sometimes the principals in those firms turn 
around and form new firms under a different name; other times the 
brokers go in clusters or en masse to a new firm or to existing broker-
dealers. When a large number of these brokers become employed at 
another broker-dealer, this raises the risk that their new firm will 
have significant sales staff that may have taken their bad habits with 
them.
    In September 1997, NASDR filed with the SEC a significant new rule 
proposal on the taping of broker's conversations with their customers. 
After comment and approval by the SEC, Conduct Rule 3010(b)(2) went 
into effect on August 17, 1999. The rule requires a brokerage firm to 
tape record all brokers' calls with existing or potential customers if 
a certain percentage of the firm's brokers were employed by firms that 
have been expelled or had their registration revoked due to sales 
practice violations. The numerical criteria vary, depending on the size 
of the firm. The threshold percentage of brokers from a ``disciplined 
firm'' that would require recording ranges from 40% for a small firm to 
20% for a large firm. Once a member becomes subject to the Taping Rule, 
it must not only tape telephone calls for two years, it must establish, 
maintain and enforce special written procedures to supervise the 
telemarketing activities of all of its registered persons.
Training
    NASD Regulation has also been very active in providing training on 
securities issues to prosecutors and investigating agencies. In each of 
the last three years, the FBI has held a week-long training program on 
securities cases at its facility in Quantico, Virginia; CPAG and 
NASDR's Market Regulation Department have taught agents as part of this 
program every year.
    On September 26-28, 2000, CPAG's Chief Counsel will be one of the 
instructors at the Department of Justice's Securities Fraud Seminar at 
the government's training facility in Columbia, South Carolina. This 
seminar is being given to approximately 70 Assistant United States 
Attorneys from offices throughout the country. Market Regulation staff 
regularly take part in SEC training to develop investigative techniques 
and inform staff of tools available through NASDR. Representatives of 
NASDR's Enforcement Department frequently provide training to 
prosecutors and agents, including recent sessions in Boston, Miami, and 
San Francisco. NASDR's New York district office regularly provides 
various levels of training to agents and prosecutors, including 
intensive programs in which FBI agents, federal prosecutors, and 
prosecutors from the New York Attorney General's Office and the 
Manhattan District Attorney's Office spend two to three full days 
learning how the securities industry is structured, how NASDR conducts 
its examinations of brokerage firms, and how to understand the various 
records maintained by brokerage firms and NASDR, among other topics. In 
addition, that office coordinates quarterly meetings with Federal, 
state and local prosecutors in the New York City area that include 
discussion of identification of the influence of organized crime. NASDR 
has also provided training for foreign securities regulators on a 
number of occasions.
                               conclusion
    In closing, I wish to emphasize that the NASD is committed to 
providing a fair, well-regulated environment for the trading of all 
securities, even the most thinly-traded stocks, free of the taint of 
organized crime. We promise to continue to work diligently with federal 
and state law enforcement towards that end. Thank you.

    Mr. Oxley. Thank you, Mr. Goldsmith.
    And thanks to all of our panel.
    We now go to recognize Mr. Fuentes of the FBI, who has a 
presentation of some tapes that were obtained in the 
investigation of a particular case. Again, I would admonish the 
members of the audience as well as the media that some of these 
tapes are rather graphic and off-color, to say the least. The 
Chair thinks that as based on getting a real flavor for what 
these folks are involved in, that it would be appropriate and 
the media can make their own editorial judgments as to what, if 
anything, to redact or delete.
    With that, Mr. Fuentes of the FBI.
    Mr. Fuentes. Thank you, Mr. Chairman. These tapes in 
summary----
    Mr. Oxley. Get your mike closer.
    Mr. Fuentes. Thank you, Mr. Chairman.
    In summary, these tapes were made in 1997 pursuant to the 
Mob stocks investigation, and what you will hear are members 
and associates of organized crime, and promoters of the stock, 
and the CEO from the Healthtec Company discussing basically the 
scheme of pumping up the stock. And later when the 
coconspirators stop trusting each other, rather graphically 
they try to persuade each other to continue the scheme and not 
start pulling their money out early. And when that falls apart, 
they begin to make disparaging remarks about each other in very 
graphic terms.
    In any event, these tapes were evidence. They were obtained 
pursuant to court-ordered electronic surveillance; therefore, 
they are not edited in any way or form, and they were provided 
to the defendants pursuant to discovery in that prosecution. So 
these are the raw tapes made during the wiretaps in that case.
    Mr. Oxley. For the record, this case now is completed?
    Mr. Fuentes. Yes. These defendants were convicted. They 
pled guilty in this case, but nevertheless the tapes and all 
the electronic surveillance conducted during the investigation 
was provided to all defendants during the discovery process in 
that prosecution.
    Mr. Oxley. Thank you.
    Let me yield to the gentlemen from Maryland for a question.
    Mr. Ehrlich. This went to trial and these tapes were used 
as evidence at trial?
    Mr. Fuentes. The defendants pled guilty. The tapes were 
provided to the defendants. It became part of public record. 
The transcripts and the tape recordings themselves were 
provided to all defendants that were intercepted or prosecuted.
    Mr. Ehrlich. Thank you.
    Mr. Oxley. Staff can roll tape.
    [Tape recording played.]
    Mr. Oxley. Thank you, Agent Fuentes, for that most 
interesting tape in Realism 101, I guess.
    Let me recognize myself for beginning a series of 
questions.
    In your estimation, what--is it possible to prosecute a 
case like this without the use of electronic surveillance?
    Mr. Fuentes. We don't believe so. We think that the 
electronic surveillance is the most effective tool, as well as 
the use of undercover operations where possible, because it 
enables us to identify all of conspirators and not have to rely 
on just one of these individuals later being the basis of our 
prosecution. As you can hear, at some point in this proceeding 
they did not trust each other. They began to threaten each 
other and pull their money out of the scheme. And if we didn't 
have electronic surveillance, one of the individuals we just 
heard would have to be a witness and testify against the other 
individuals, and, of course, would lack the credibility in many 
cases to be effective in front of a jury.
    The other aspect is--it is very difficult--as you can hear, 
if you are confused by the nature of these transactions, 
everyone is. These are very difficult cases to understand 
exactly how they are doing it and then to be able to educate a 
jury into exactly what occurred, how the scheme was set up by 
the subjects, how they actually make money in the scheme, how 
they threaten violence and other methods of extortion to carry 
this out. And these are very complex cases to do, and we 
believe electronic surveillance is critical in being able to do 
it.
    Mr. Oxley. I wonder if you could take us through a 
situation where you start with probable cause and are able to 
have a court order. The reason I ask you this is because the 
Judiciary Committee is considering changing the standard from 
what it is now, which is probable cause, to the--to a crime is 
going to be committed or has been committed. That is changing 
that standard rather substantially. Hopefully that bill will go 
no place, but it is interesting that that issue has come up, 
and particularly in this context, because my guess is that 
knowing the complicated nature, as you pointed out, it would be 
very, very difficult to go into a magistrate or a Federal judge 
and say with any degree of certainty and specification what 
kind of crime was being committed or about to be committed.
    So I wonder if you could take us through what investigators 
are faced with in terms of getting approval up and down the 
line for that legal wiretap.
    Mr. Fuentes. Well, the reason we believe that the standard 
is extremely strict, and justifiably so, but strict enough, is 
that we have to show that the telephone, if it is going to be 
the instrument of interception, or the office is being used to 
further the crime, and that no other investigative technique 
will work; that if we subpoena individuals before the grand 
jury, they are likely to lie, they are likely to intimidate 
witnesses into either forgetting or not wanting to offer 
truthful testimony; other methods of surveillance will not 
identify all of the subjects of the conspiracy and all of the 
complexities of how the financial scheme is unfolding. We have 
to prove that all of these have been attempted and failed and 
will continue to fail without electronic surveillance.
    Mr. Oxley. Let me back up a little bit. And that is one of 
the bases for the affidavit that is filed with the Federal 
court?
    Mr. Fuentes. Yes, it is. We refer to that as requisite 
necessity. In other words, it is the tool of last resort. 
Nothing else will be successful. It is the only option we have 
left, we believe, to successfully identify all of the subjects 
involved in the conspiracy, to obtain evidence that will 
support a successful prosecution at the end of the conspiracy 
and further the investigation, and that no other technique will 
enable that to happen.
    Mr. Oxley. So you have to show that, and you have to show 
that is probable cause that a crime is being committed.
    Mr. Fuentes. Yes.
    Mr. Oxley. That is basically an affidavit by an FBI agent 
that goes to the Federal court, correct?
    Mr. Fuentes. Correct.
    Mr. Oxley. But now it is not that easy, is it? In other 
words, you have to--from the time the agent is involved in the 
case, let me--take us through the bureaucratic maze that you 
have to go through with the Bureau and with the Justice 
Department before you even get to a Federal court.
    Mr. Fuentes. Well, in the beginning it would entail the 
debriefing of informants, witnesses, citizens, individuals 
knowledgable of the industry involved; obtaining a tremendous 
amount of information as to what the conspiracy is about; and 
then later becoming specific as to where those conversations 
occur, whether they are occurring on the street corner as we 
see in organized crime when they do the so-called ``walk 
talk,'' when they are walking around the block, or whether it 
is occurring in a vehicle or in an office or over office or 
cellular telephones. We have to show that we have probable 
cause that not only are they engaged in the crime and probable 
cause as to what specific crimes are involved, what individuals 
are involved, but specifically how they are talking to each 
other, where these conversations occur, and that we have reason 
to believe that a particular telephone or a particular 
microphone at a certain location will be the only way to 
capture those conversations.
    Mr. Oxley. Okay. Now, if you are an agent working on that 
case, and you have put that together in affidavit form, 
working, I assume, with your supervisor, correct me if I am 
wrong, how this works, the agent works with the supervisor; the 
supervisor basically okays the information in the affidavit.
    Mr. Fuentes. Right.
    Mr. Oxley. Then does it go to the SEC, does it go directly 
to Justice? What is the next step?
    Mr. Fuentes. During the first step this would always be a 
team effort because it is so labor-intensive on the part of the 
investigators and the analysts who are involved in the 
investigation. But the team of agents and the case agent would 
prepare the affidavit. It would also be prepared in 
consultation with the prosecutor of the case, the assistant 
United States attorney assigned to the investigation. These are 
also partnerships with our counterpart strike force attorneys.
    While the affidavit is being prepared, it would be reviewed 
by the supervisor of that squad, the assistant in charge of 
that field office as well as supervisory staff at the U.S. 
Attorney's Office, because we have to show not only that this 
is the way to gather the evidence, but that the result will be 
worth all of the resources, because other things will stop 
while this occurs.
    Normally this would require an entire squad of agents and 
maybe assistance from a number of squads of agents for a long 
period of time. And so while that happens, individual 
management staff will have to determine whether this will be 
worth the resource expenditure.
    In addition, it would be going through the legal review, 
that there is sufficient probable cause, that all the legal 
requirements and constitutional safeguards will be met while 
this is being prepared.
    Now, these affidavits can vary anywhere from 40 pages to 
140 pages typically, but will identify who will be intercepted, 
who are the conspirators, what the violations are, and the 
reason or basis for knowing that those conversations will occur 
either at a particular location or over a particular device or 
by e-mail, if that is the method of communication.
    Once it has gone through all of the field office review and 
all of the review in that United States Attorney's Office for 
that district, in coordination with supervisors in my section 
at FBI headquarters and strike force supervisors from the 
Department of Justice, then the affidavit would be submitted to 
our headquarters and simultaneously to the Department of 
Justice.
    Within the FBI I have the signing authority for electronic 
surveillance in these matters unless it is at a higher degree 
of sensitivity. Depending on where the microphone will be 
placed, it might require the Director of the FBI to personally 
authorize it. But for the vast majority of these type of 
investigations, I would sign at FBI headquarters for the 
authority to do it. My counterpart at the Department of Justice 
would also sign, and then once those two signatures and 
authorizations are obtained, then the case agent takes the 
affidavit with the order that has been prepared to intercept 
the conversations to the chief judge of that circuit, and then 
the judge would issue the order to conduct the surveillance and 
then would also set the order for continued reporting on the 
part of the agents and the prosecutor as the wiretap occurs.
    These authorities are in 30-day maximum increments with 
reviews generally each 10 days where we would submit to the 
court how many conversations have been intercepted; have we 
intercepted the individuals that we said we would intercept; 
what evidence has been obtained to date; do we recommend or 
seek continued authority to conduct that surveillance. And 
generally, again, in a case like this, these surveillances will 
only go long enough--because they are so resources-intensive 
and so intrusive, they will only go long enough for us to gain 
the evidence we need for a successful prosecution, and then, 
again, the team will determine at what point that will be.
    One of the difficulties in these types of investigations is 
that while we are gathering that evidence, individual investors 
are losing money, people are becoming victims on a daily basis. 
And we have to balance the potential threat to those victims 
with the greater good of trying to stop all of these 
individuals, because we have learned from past experience if 
the case isn't pursued to its logical conclusion, they will 
jump to another firm, reform another company and start all over 
again the next day. Then we will go back to the beginning, 
trying to conduct surveillance, and talk to informants and 
start the process over.
    Mr. Oxley. Thank you.
    Mr. Walker, do you have a comment on the electronic 
surveillance issue?
    Mr. Walker. Only that it is vitally important in this kind 
of a war. Civil regulators don't have that kind of authority, 
nor do we have access to communications that are contained by 
the FBI. But certainly, even though it is not available to us 
in the short run, the long-term value to us of being able to 
get that kind of evidence is significant. Even if we do not 
know what the substance of the communications is, we can assist 
criminal prosecutors in bringing cases through other means. We 
can help explain how the markets operate, how they work, 
provide technical expertise and also provide assistance in 
terms of helping people prosecute the cases.
    But the fundamental evidence-gathering process is very, 
very important to these kinds of cases.
    Mr. Oxley. I appreciate that. There is a great 
misconception, I think, out in the public, and certainly here 
on Capitol Hill, in some quarters, that electronic 
surveillance, A, is always bad and, B, is unconstitutional and 
violates the individual's rights.
    And the reason I wanted you to go through this whole 
process was to indicate how difficult it is to investigate 
these cases and how difficult it is to get approval from a 
court for wiretaps or bugs in the nature of the investigation. 
And it is something I think that the public needs to understand 
a little better, particularly as we enter into the new world of 
digital communications and the obvious difficulty it may 
present to law enforcement in terms of intercepting that kind 
of information.
    So I thank you both. I have gone well beyond my time.
    Let me recognize the gentleman from Wisconsin, Mr. Barrett.
    Mr. Barrett. Thank you, Mr. Chairman. Thank you for holding 
this hearing.
    As a layperson, it is fascinating to listen to the tapes. 
Salty as it may be, I think it certainly is the color of what 
is going on out there. And my first question is--and any of you 
can answer--how widespread do you see this problem?
    Mr. Walker. I guess from a securities regulator point of 
view--I am Richard Walker from the SEC--we have seen an 
increase in this kind of activity, to be sure. I think it 
corresponds with the growth of our markets and the bull market 
which has extended over 10 years. I think over the last 3 years 
there have been nine large, major cases that have been brought 
that netted 30 people specifically identified as members of 
organized crime.
    At the same time, I don't believe that there is cause for 
alarm in terms of the overall integrity and fairness of our 
markets. They are terrific. They are fair and they will 
continue to be fair.
    Most of this activity occupies what some might call a dark 
corner of the market. A market involving low-priced, thinly 
traded securities that aren't subject to some of the same 
regulations as exist in other parts of the market. It is an 
area where we have to spend very close and careful attention to 
make sure that this kind of activity is carefully monitored.
    I think we have had some enormous successes, and I think 
that future successes will build on existing cases.
    We had one very large undercover operation that we worked 
on with the FBI, which was hatched back in 1996, that resulted 
in over 100 cases. Predictably, those hundred cases have led to 
leads in other cases. And the cases that were announced this 
past June--there were 120 indictments handed up in the Southern 
District of New York, and the SEC brought a number of cases as 
well--have been a fertile pot of leads and evidence to make 
future cases.
    I think we have had some terrific successes, and we 
anticipate continuing very vigorous law enforcement in this 
area.
    Mr. Barrett. As an investor, a small investor, are there 
things that I should be looking for or other small investors 
should be looking for? Obviously, you indicate penny stocks 
that are seldom traded. Are there certain things out there that 
Joe Blow should be concerned about?
    Mr. Walker. Certainly in the penny stock and the low-priced 
arena there is often less information available to small 
investors, which means that greater care has to be exercised. 
Investors have to do more homework before they put their money 
in that kind of a stock.
    There is a lot of help investors can get. Certainly we have 
a very full Web site which gives tips to investors. That is 
available to anybody. The State securities regulators and the 
NASD also have a lot of help that they can provide to investors 
that have questions about investing. And we always encourage 
and hope that investors will avail themselves of those 
resources.
    Mr. Goldsmith. If I might add one comment, I think that 
some of the pitches you might see, whether it is organized 
crime, regular crime or just garden variety securities fraud 
that investors need to be aware of are promises of guaranteed 
returns, doubling, tripling your money in a short period of 
time. And I think Dick mentioned this, that in this type of 
bull market with more and more new investors and investors 
having the expectation of quick profits, 100, 200 percent 
returns on their money, that investors need to be very careful 
when anyone over the telephone, over the Internet, in person, 
whatever, makes those kind of promises.
    And I think the regulators need to continue to work and do 
an even better job of educating investors, because it is much 
harder to get the money back to people after it is taken than 
to have them protect themselves at the outset.
    Mr. Skolnik. Congressman Barrett, one of the common themes 
we observed in connection with a lot of the microcap fraud over 
the past decade is that these stocks were sold in large part by 
high pressure phone sales solicitation campaigns. And we at 
that level routinely urge investors to be very careful before 
they invest with strangers over the telephone.
    Mr. Barrett. Are they hitting the elderly, or who is their 
market?
    Mr. Skolnik. It was not confined solely on the elderly. 
Understandably, the elderly are oftentimes targets of scam 
artists and con men, but we have witnessed situations where 
rather sophisticated, knowledgeable businessmen and women and 
professionals have been targeted by these microcap firms. In 
fact, many of them worked off of leads they had obtained from 
lists of small business owners and the like who oftentimes will 
have some income that they can utilize to invest in the market.
    So this is not solely confined just to senior citizens or 
the elderly. To a large degree, we are all potentially 
vulnerable to this type of activity.
    Mr. Barrett. Mr. Fuentes, after listening to that tape, 
what was going through my mind was, how do you initially come 
onto these guys? How do you find out that they are up to no 
good? Is it something you see in the stock or something you 
hear on the street? What is sort of the general area that you 
can say there is something going on?
    Mr. Fuentes. It would come from both--we have in--many 
times getting referrals from our regulatory agencies, from the 
SEC, informing us that they are observing something that is 
unusual--which these days is harder to tell, because I guess 
there are so many amateur investors on line that it is harder 
to tell when stocks start changing hands, whether some other 
factor is at play that may be legal, but just misguided 
investment transactions.
    But I would like to add that we have had a very aggressive, 
and we believe successful penetration of the American la Cosa 
Nostra over the last 20 years in our organized crime program; 
and in connection with that, as was mentioned, ``The 
Sopranos,'' many of them now sing for us. And a number of our 
cases have begun because we have gotten information from 
someone we have developed as a confidential informant, a 
cooperative witness, a cooperative defendant who is informing 
us of a given scheme and identifying who the individuals are 
and generally identifying how the crime is being committed.
    So I would say at this point that probably about half of 
our case initiations are based on informant information as a 
result of our intelligence base within the crime families as to 
what they are looking at as new money-making opportunities.
    But additionally our partnership has been very, very good 
with the other agencies; and as I mentioned, the SEC is coming 
with us and being part of these joint investigations, and then 
they spawn leads. And many of investigations are part of prior 
investigations or identifying subjects that we know to be 
identified as criminals. And if they switch to another company, 
we know they will not suddenly become legitimate in most cases 
and go from there.
    I would like to add also, in terms of the warning signs, 
many of these warning signs are the same in this industry as in 
any other fraud arena. So we have always had people selling 
swampland in Florida. Now we have people selling stock in 
companies that have swampland in Florida. So it is still the 
same thing. If the scheme sounds too good to be true, if they 
are guaranteeing that you are going to make a huge amount of 
money on a minimal investment, chances are it is too good to be 
true.
    What has happened though in the last year or 2 under the 
bull market, particularly with the dot.com IPOs, the word in 
the media that individuals were attending class in college 1 
day and were multimillionaires the next as a result of various 
offerings, I think that contributes to people thinking they can 
do it also, that they can get on line without guidance, without 
seeking professional assistance or without doing research or 
due diligence into whether a company really is making what it 
says it is going to make or providing a service that it says it 
is providing.
    So the opportunities for fraud really are the same as they 
have always been, except in this area. Now, with the increase 
in amateur on-line trading, the opportunities for organized 
crime or other criminals who may not be part of organized crime 
to find victims, we believe, has just increased exponentially 
as people are on line.
    Mr. Oxley. The gentleman's time has expired.
    The Chair will recognize Mr. Shimkus, the gentleman from 
Illinois.
    Mr. Shimkus. Thank you, Mr. Chairman.
    All these phrases come to mind: ``Oh, what a tangled web we 
weave when first we practice to deceive''; ``No free lunch''; 
``Let the buyer beware.'' And there is in traditional 
investments in the stock market, the basic premise that the 
higher the return, the bigger the risk. And I guess nowhere 
else is that more true than in these schemes.
    People need to realize that, especially as amateurs are 
getting into the market. They only get a big return if there is 
a big risk, but they also can lose a lot. This only adds to it, 
with the corruption.
    I don't know if we can do this, but Mr. Skolnik, you had 
that flow chart of the organization. Mr. Fuentes, these two 
guys that we have the tape on, Mr. Lombardo and Mr. Hall, where 
would they be in that chart?
    I know I am talking to two different agencies and I 
understand that. Based upon that, where do you think they are? 
Where are they located somewhere in there?
    Mr. Fuentes. I apologize for not having seen the chart 
before.
    Mr. Shimkus. I know it is a tough question.
    Mr. Skolnik. Let me emphasize, this chart is just a 
snapshot of----
    Mr. Shimkus. Organized crime?
    Mr. Skolnik. Yes, a network.
    Mr. Shimkus. We are basically saying, since we have a 
broker and a CEO, that they are probably at least the third or 
fourth level down in that chart of organized crime.
    Mr. Skolnik. What this chart illustrated was really the 
flow of agents who had ties with one firm or had been employed 
by one firm. They moved on to a new generation of firms in 
which many of them became principals or played a leadership 
role in the new firm. This is where we began to discover that 
there was a real network that existed out here.
    In many instances, some of these firms were closed down 
through the good work of Federal and State regulators. But the 
agents kind of scattered like--as one of my colleagues said, 
like cockroaches, and formed alliances with these new firms. 
And many of these agents could not have become principals at 
the second or third generation of firms, frankly, without some 
type of backing from some place, because many of them did not 
have the financial wherewithal or even experience in the 
industry, but they were able to set up shop elsewhere.
    This is just a snapshot of some firms in which we 
determined a linkage, many of them to Stratton Oakmont, which 
is one of the most notorious microcap firms that existed back 
in the mid-1990's. It is certainly by no means exclusive, and 
there are many other firms which have been discussed today in 
testimony that are not reflected on this chart.
    Mr. Walker. In fact, on the tape that was played, Mr. 
Lombardo had infiltrated another firm called Meyers, Pollock, 
which is now defunct. He was operating on the sell side, if you 
will. He was in charge of manipulating the price upwards and 
selling it out at a retail level.
    Mr. Hall, who I don't believe was identified as a member of 
an organized crime family, was behind the issuer. He was trying 
to have the broker/dealer manipulate the price of the stock to 
make money.
    Mr. Shimkus. Thank you.
    We, not only on this committee but my other Subcommittee on 
Telecommunications, with the chairman and his background, have 
been at odds on some of the electronic surveillance issues that 
we have had on that committee.
    Had that conversation been over the Internet, would we 
still have access to transcripts of that conversation?
    Mr. Fuentes. Depending on the encryption, probably not.
    Mr. Shimkus. That also goes for real time? Now we have 
real-time Internet transactions?
    Mr. Fuentes. Yes.
    Mr. Shimkus. What about digital phones? What if it was from 
cell phone to cell phone, both digital?
    Mr. Fuentes. That part can be done either way, the digital, 
but it depends on whether it is an encrypted system, which most 
of the e-mails will have some sufficient encryption to prevent 
that.
    I would like to also add that the difficulty with e-mail is 
that you really do not hear the tone of voice. You can't tell 
in the person is screaming or----
    Mr. Shimkus. Unless there are exclamation points and frowny 
faces.
    Mr. Fuentes. It helps to hear the tone of voice in trying 
to determine, are they saying this tongue in cheek? Does he 
really mean it? Is he really going to fly to Arizona and kill 
somebody and kill his wife, hold him hostage? Is he kidding?
    Does the other person at the other end show fear in that 
conversation so that we can say they are using intimidation and 
threats of violence, and that it is serious?
    You can hear these kinds of conversations, you know, in the 
locker room at your health club and the people do not really 
mean it. They are getting ready for a tennis game or something. 
But in our cases, they mean it more often than not, and that is 
the part that is conveyed through the telephone or through 
microphone interception that e-mail interception will never 
substitute for.
    Mr. Shimkus. And do you accept the premise that even if--
that encryption technology is readily available to be 
downloaded even overseas to be used?
    Mr. Fuentes. Yes.
    Mr. Shimkus. I know my time is up, Mr. Chairman, but if I 
could just finish up.
    We focus on the microcap market for the most part. How do 
we, without closing down that market, because it is valuable to 
the small, emerging companies, how--what type of--what is the 
recommendation from the panelists here on how we can help, 
other than the ``buyer beware''--and you all mentioned it. What 
institutionally can we do?
    Mr. Goldsmith. I think that is a very good point.
    There are many legitimate small firms and business persons 
looking to raise capital. Where I think we have seen most of 
the problems has been on the over-the-counter bulletin board 
and the pink sheets. We received approval from the SEC last 
year to implement a new rule on the over-the-counter bulletin 
board that, for the first time, would require companies whose 
shares are quoted there to file periodic and current financial 
reports with the SEC, so at least investors have some source of 
information about these companies.
    I think investor education and due diligence is a theme we 
have heard from everybody today. And there are many, many good 
companies out there whose shares at one time were traded and 
could be viewed as thinly capitalized and have gone and grown 
into good companies. But I think rules like our bulletin board 
rules and encouraging investors to get the information they 
need before they invest is probably the best way of 
accomplishing that.
    Mr. Shimkus. Does anybody else want to add to that?
    Mr. Walker.
    Mr. Walker I agree completely with what Mr. Goldsmith said.
    I think one of the other things that we tried to do is 
recognize that every manipulation begins with a manipulator 
getting a cheap and large supply of stock. Manipulators obtain 
this stock basically for pennies or for almost nothing. And 
again it is important that small companies be able to sell 
stock to raise money to grow their businesses, but there have 
to be some safeguards so that this kind of situation doesn't 
occur.
    And what we have tried to do is look at some of our 
capital-raising tools, and without unduly hindering the small 
businesses, add some disclosure features so that people will be 
able to identify where this small stock came from.
    If it is restricted stock, we seek to have be known as 
well. These steps are designed to stop the bad guys from too 
easily getting large blocks of stock, pumping it up, and 
unloading it on the public.
    Mr. Shimkus. Mr. Skolnik.
    Mr. Skolnik. Congressman, in addition to strong 
enforcement, which I outlined in my remarks today, I think we 
need to emphasize the importance of investor education. I 
believe a well-educated investor is ultimately the best weapon 
against securities fraud. And at the State level we have really 
elevated investor education within NASAA; for the first time 
ever we now have an Investor Education Section.
    I think that is an important role that regulators need to 
play, and I think we are beginning to play, is to help 
investors arm themselves with the tools they need to make sound 
decisions.
    Mr. Shimkus. Thank you. Fascinating testimony. I appreciate 
your time.
    Mr. Chairman, I yield back.
    Mr. Oxley. Thank you. The gentleman's time has expired.
    Mr. Largent, the gentleman from Oklahoma.
    Mr. Largent. Thank you, Mr. Chairman.
    I am embarrassed to say I saw the movie ``Boiler Room.'' I 
think that was the name of it. Did anybody see that movie, any 
of our witnesses? It was a terrible movie.
    Mr. Oxley. Are you the Gene Shalit check of the Commerce 
Committee?
    Mr. Largent. Two thumbs down.
    Is that actually a somewhat good portrayal of what is 
taking place?
    Mr. Walker. I think in some respects it is an accurate 
portrayal of some aspects of how classic boiler rooms operated. 
Certainly a number of the firms that we have identified and 
taken action against, have large numbers of people manning 
telephone banks, making calls to potential investors, selling 
swamplands in Florida or making other false promises about 
companies.
    There is a lot of high pressure activity in those kinds of 
firms, and the hallmark has always been that they have to be 
prepared to close down and move on quickly. And I think one of 
the scenes in the movie showed that they had rented a space 
close by, and it had the phone lines already installed, so that 
if the government arrived and shut them down, they had a new 
place to go and move in very quickly.
    I do think that because of the enforcement efforts that 
have occurred over the last 5 years, and principally the strong 
involvement of the FBI and criminal law enforcement, the 
historic boiler rooms of the past aren't as likely to spring up 
in the future. I think people have found--which is a scary 
challenge to all of us--that the Internet now provides cheap, 
efficient and easy means of communicating with large numbers of 
people without the kind of overhead that traditional boiler 
rooms required. So our fear is that the challenge of the future 
is going to be policing some of this kind of activity as it 
migrates from the traditional boiler rooms of the past to the 
Internet of the future.
    We have not seen the same kinds of large, 100-plus person 
boiler rooms sprout up in recent years in the aftermath of the 
efforts to shut down the firms that we have identified today. 
Though, having said that, I want to caution that there will 
always be firms that are telemarketers that engage in this type 
of activity, whether it is securities or other types of 
investments. This is something that is going to be a perennial 
problem.
    Mr. Largent. Mr. Goldsmith, you talked about the new 
reporting requirements for financial reports for over-the-
counter bulletin board companies. Are companies complying with 
that?
    Mr. Goldsmith. That is an interesting question. About half 
of the companies that were quoted on the over-the-counter 
bulletin board at the time the rule went into effect have 
complied with that rule, and the others have now migrated off 
there to the pink sheets or who knows where. This is a first 
step for investors to have some information.
    So we are hoping that the quality of the issuer will be 
enhanced by these rules, but many have decided, for whatever 
reason, not to comply.
    Mr. Largent. I wanted to ask--Mr. Skolnik, in your 
testimony you said that the State security commissions are 
averaging about 300 criminal convictions per year. Could you 
give us an idea or breakdown of those convictions, based on the 
type of crime and which States have had the most convictions?
    Mr. Skolnik. Let me clarify, that is an aggregate amount 
that States average across the country.
    The convictions oftentimes, I think, arise from what I 
would refer to as many so-called homegrown securities frauds. 
Oftentimes a corrupt broker or financial advisor in a community 
will bilk investors in that community, costing them maybe even 
millions of dollars. And that is oftentimes what will trigger a 
criminal investigation by prosecutors working with the State 
securities commission.
    I don't have data regarding the number of convictions or 
actions that are filed on a State-by-State basis. Possibly we 
can provide that information to you. I will check with the 
office.
    Mr. Largent. This says 300 convictions. How many cases were 
prosecuted?
    Mr. Skolnik. Again, I don't have that number right now. I 
would assume some of those involve multiple convictions. There 
are probably hundreds of criminal cases that are filed annually 
throughout the country.
    Mr. Largent. How many of those would you say involve 
organized crime?
    Mr. Skolnik. Probably not as many as we really need to 
focus on.
    As I indicated, I think a lot of them are directed--at 
least if the experience in my State is any indication, are 
directed really toward individuals who are based in that State. 
They may have ties to organized crime, but oftentimes not.
    These are folks that have set up maybe storefront 
operations, that are in small towns--whether Indiana, Oklahoma 
or any State. And I think we need to do more in terms of 
working with State prosecutors that target some of the types of 
firms that we have discussed here today. Obviously it is very 
difficult, because these types of actions are very time 
consuming, very paper intensive and they oftentimes involve 
firms that are located many miles away from our jurisdictions.
    Mr. Largent. Mr. Fuentes, would you have any information on 
that? If there are 300 convictions a year across the country, 
how many of those would you say involve organized crime?
    Mr. Fuentes. I would have really no way to easily identify 
that.
    But the other problem you would have in State and local 
statistics where they were reporting would be that in some 
cases you would have a conviction for fraud, but not 
necessarily a securities fraud. If it is violating Federal 
violations, it possibly would be referred up; and actual 
Federal statutes will be used, which regulate the securities 
industry.
    So in some State cases you would have a regular financial 
fraud that might not rise up to be reported and tracked as this 
industry or involving directly the securities industry.
    I would also like to add that one of the things that we see 
as changing and making this area extremely threatening over the 
future is, we have had a thorough penetration of la Cosa Nostra 
here from a variety of other prosecutions over the last 
decades. And we are able, usually early on if one of major 
crime families is involved, to identify that, because in 
organized crime, and particularly the Cosa Nostra, if someone 
comes up with some scheme that will make a lot of money, that 
immediately rises to their senior levels. So we hear about it 
at some point because the bosses and the capos are going to get 
involved in nurturing their golden goose who came up with this 
scheme to make money.
    So we believe we have a pretty good handle on those types 
of crimes and have attacked that very thoroughly, as we talked 
about, in these prosecutions.
    The difficulty now is, we have companies, in some cases 
based overseas with U.S. Subsidiaries, filing documentation in 
a variety of jurisdictions, U.S. And outside of the U.S., and 
have a tremendous difficulty in even verifying that that record 
keeping is accurate. When they have their audits from major 
accounting firms conducted overseas, it is difficult for us or 
U.S. Agencies to obtain that information or to be able to go 
behind the documents and verify that they are accurate and true 
and are actually depicting what operations that company has.
    In the case of some of the groups we are seeing from the 
former Soviet Union and Eastern Europe, we have companies 
engaged in a business. It is not an entire shell organization 
or a complete fraud. They are engaged in some legitimate 
production of a product, but cooking their books, inflating 
their sales or their production capacity; and therefore, when 
they issue stock offerings on one of the exchanges in the 
world, they are able to fraudulently claim huge profits that 
don't exist and get people interested.
    In the YBM case that I spoke of earlier, that company began 
trading in Alberta, Canada, at 18 cents a share. And a few 
short years later, with virtually no increase in production 
capacity, they are offering a $100 million offering on the 
Toronto Exchange, simultaneously with documents being filed 
here in the U.S. To issue offerings to U.S. Investors on 
NASDAQ.
    On that situation we were luckily and fortunately, from 
very early in that case, involved in working jointly with the 
SEC in particular to stall that, to not respond to their 
request to issue that stock offering in the U.S., which enabled 
us to have enough time to conduct our wiretap investigation and 
obtain other evidence.
    But we jointly, in that case, prevented a large investment 
fraud which would have occurred in the U.S. And we are not 
talking about the penny stocks any more. We are talking about 
multimillions, in some cases $100 million offerings suddenly 
being put up there.
    Mr. Largent. Thank you, Mr. Chairman.
    Mr. Oxley. The gentleman's time has expired.
    Let me ask in regard to penalties. All of you have made a 
cogent point that the biggest deterrent is jail time.
    What are the maximum penalties for this, and is the RICO 
statute the statute of choice in most cases in the prosecution 
of these? Let us begin with Mr. Fuentes.
    Mr. Fuentes. Yes, we hope to obtain the evidence to support 
a RICO prosecution because the penalties are more substantial.
    Mr. Oxley. Most of the prosecutions so far have been under 
RICO?
    Mr. Fuentes. Wherever possible, we have used the RICO 
statute to do it.
    Mr. Oxley. What is the difference in the maximums under 
RICO versus standard fraud statutes?
    Mr. Fuentes. It could be the difference of 1 or 2 years' 
exposure for jail time in a case to 20 years, depending on the 
violation. It substantially increases the threat of prison 
sentences.
    And I might add, the other aspect of it is the forfeiture 
provisions of the RICO statute and the damages of either civil 
RICO or criminal RICO proceedings against them.
    One of the things I would like to add is that the FBI 
agrees that prison sentences are a strong deterrent and need to 
be there, but we will also add that organized crime exists for 
the financial aspect of it. It is to make money. And we have to 
have the means to take it away from them, once they have made 
it, and not be able to pass their wealth on or hide it with 
other members of their families, or friends, or move it 
offshore.
    So we regard forfeiture in the other provisions of the RICO 
statute to be very important in these statutes.
    Mr. Oxley. The Judiciary Committee is looking at the 
forfeiture laws, and you make an excellent point regarding 
that. What about restitution? Is there any real chance that 
some of these people that get ripped off--whether it is 
organized crime or whether it is a run-of-the-mill crook or a 
broker gone bad, what are the ways that people can get at least 
some of their money back?
    Mr. Goldsmith.
    Mr. Goldsmith. Individually, and this is really without--
the regulator, certainly can try to file arbitrations, which is 
very hard to do when a firm goes out of business or is put out 
of business.
    The SEC does an excellent job of getting what money there 
is back to investors. Each year we return millions of dollars 
to investors. But where you see the large sums of money coming 
back really are from the criminal prosecutions. Once someone is 
facing jail time that is a very good incentive for somebody to 
suddenly find their bank account numbers offshore and bring 
back large amounts of money.
    In many of these scams and frauds, the money is used up, 
high living styles, cost of doing business. So I really think 
if you are looking for the large dollars to come back, 
indicting someone, prosecuting them criminally, you see the 
money start coming in from offshore.
    Mr. Oxley. Mr. Skolnik.
    Mr. Skolnik. I would concur with Mr. Goldsmith. We 
oftentimes tell investors that once you part with your money, 
it is oftentimes very difficult to recoup any loses that occur. 
Certainly when attempting to bring civil or administrative 
actions against some of these worst players or actors on Wall 
Street, the likelihood of State regulators recovering money is 
limited.
    We too have found that criminal action is what--as Mr. 
Goldsmith said, is oftentimes what leads people to rediscover 
that they had offshore accounts.
    Having said that, State securities regulators have been 
successful in any given year of recouping and recovering many 
millions of dollars for investors. However, that is really just 
a small percentage of the amount of losses that are out there.
    Mr. Oxley. Mr. Fuentes, you talked about the fact, in one 
of those particular cases, there were the five New York 
families involved in one way or another; and also you mentioned 
a Eurasian Mob as well as Russian. Specifically, as to the 
issue of Russian organized crime and the Eurasian, do they tend 
to prey on their own ethnic group within the United States or, 
in other words, do you have the Russian Mob basically focusing 
in on the Russian-American community in parts of New York?
    Mr. Fuentes. We had that initially in the early phases of 
our crime problems with them. But these are a group of 
individuals who are three or four levels above the street thug 
level. So while we have Eurasian and Russian organized crime 
groups involved in street level racketeering, traditional 
racketeering acts of loan sharking, gambling and prostitution, 
we have another group of international criminals who are 
generally sitting outside the United States and penetrating the 
global financial network from afar; and that includes banking, 
as well as the securities industry.
    These are the individuals that are the greatest threat, as 
we see it. They were the most difficult--they are very 
sophisticated. They are using multinational companies. In some 
of our cases, we are talking about investigations going on 
right now in a single case involving a single group in 35 
countries. In our banking cases, it is even more because of the 
wire transfers of money around the globe.
    So these are groups that are basically attacking our 
financial institutions from afar and this is why I spoke of the 
problem that in order to fight that, we need to be able to work 
with our foreign counterparts. We have the aspect of obtaining 
investigative results and evidence from other jurisdictions 
around the globe, hoping that they have the sophistication and 
integrity to provide that information for prosecution here. But 
it just adds to the difficulty of obtaining financial records 
to present in court in the U.S. Or in that jurisdiction to 
attack them.
    Also it presents the problem--and I think this may be the 
greater problem in that when the audits occur, when the big six 
accounting firms and the other global firms are employed to 
examine their books, we have limited recourse in being able to 
go after them when they issue statements that those books are 
accurate.
    So that even if you have due diligence on the part of a 
U.S. Investor, even an amateur investor, if they do their 
homework and try to learn about a company and see that a major 
accounting firm has already examined that company and said 
their reporting is accurate, so they go ahead and make that 
investment, there will be limited recourse if, in fact, not 
only the original books of the company were fraudulent but the 
examination of those books was inaccurate or criminal itself. 
And that is what poses, I think, the greatest threat for us in 
the number of companies who are obtaining a financial interest 
in U.S companies, either a shell or an existing manufacturing 
company, just to have the opportunity to get on a stock 
exchange and trade here.
    Mr. Oxley. Mr. Walker, you mentioned in your testimony 
regarding the ``pump and dump'' schemes, that the SEC set up 
obstacles to that. Could you be more specific as to what those 
obstacles might be?
    Mr. Walker. Certainly. Every ``pump and dump'' begins with 
a manipulator acquiring cheaply a large supply of stock. One 
method in which this was done with some regularity was by 
issuing stock offshore for a low price pursuant to Regulation 
S, which is a safe harbor from the normal registration 
requirements. Within a short period of time, 40 days typically, 
the stock would come back into our markets. And this was a 
technique that we found was used very often in a number of 
cases and investigations.
    So several years ago we changed the requirement of 
Regulation S to make it more difficult for that to happen. We 
lengthened the period of time that stock had to remain offshore 
before it could filter back into the United States. We made 
sure that it was viewed as restricted stock so that there would 
be restrictions upon its resale, which again would reduce its 
attractiveness as a pool of stock to be used in the 
manipulation.
    We have also changed some of the requirements for 
unregistered offerings under Rule 504, which previously allowed 
any company to sell up to $1 million of securities without 
registering with the SEC; and we have now required that there 
can be no general solicitations under that provision.
    These are two of the areas where we, I think, have had some 
success in limiting some of the fraudulent techniques that are 
used.
    Mr. Oxley. Thank you.
    Mr. Skolnik, you had mentioned in your testimony that you 
would like to have the SEC be able to follow up on State 
enforcement actions. And I want to get Mr. Walker in on this as 
well. Would that require a change in the Federal statutes?
    Mr. Skolnik. Yes, Mr. Chairman, it would. And it is my 
understanding that there is presently pending legislation that 
has been introduced--by Senators Collins and Cleland, I 
believe--that would allow the Securities and Exchange 
Commission to utilize a State action under certain 
circumstances as a basis for a follow-up action, if you will. 
We at the State level refer to that as piggy-backing. 
Oftentimes we will piggy-back on the action that has been taken 
in another State to suspend or revoke the license of a broker 
or a firm.
    Mr. Oxley. This would not be considered double jeopardy?
    Mr. Skolnik. We are not talking a criminal type of actions. 
We are talking about utilization of administrative remedies.
    I think--I concur that there would have to be some 
assurance that due process is followed. I would propose that 
the SEC only be allowed to take this action after there was 
some assurance that there was a hearing and opportunity to be 
heard at the State level, as well as for a hearing possibly at 
the Federal level also.
    Mr. Walker. Though our agency has not taken a position on 
that particular provision, speaking as Enforcement Director, I 
am very interested in a provision that would allow us to take 
actions based on a substantial record provided by a State 
jurisdiction, if appropriate due process guarantees have been 
provided. It would be very useful to us to take the work that 
has already been done and use that as a basis for barring 
someone from participating in the industry.
    Mr. Oxley. Thank you.
    Let me ask Mr. Goldsmith how is it that these folks can 
move from brokerage to brokerage virtually unimpeded. It is 
fascinating they can do this.
    You are not alleging necessarily that these firms are not 
on the up and up? Some of these are reputable firms, are they 
not?
    Mr. Goldsmith. I think, as an example, of the two 
individuals that we heard on the tape this morning, none of 
those people were registered with a brokerage firm. One was 
connected with the issuer and the other was controlling 
operations.
    We have found that when we do put a firm out of business--
when we, for example, expelled Stratton Oakmont at the end of 
1996, it was a large firm and those firms scattered, the 
brokers scattered to other firms. We know where they are going; 
we focus our exams where they are going. If they have 
disciplinary histories or if they come from a firm that is 
expelled, our taping rule comes into place. But we really need 
to keep track of these people which we do.
    I think the point needs to be made that, particularly in 
the organized crime area, where there are promoters, there are 
people connected with issuers, there are just the mobsters, 
that these people are not registered with us. They don't go 
through our registration process.
    Mr. Oxley. Thank you.
    The Chair now recognizes the gentleman from Massachusetts 
for 5 minutes. We have a vote pending, as the gentleman from 
Massachusetts knows.
    Mr. Markey. And I thank you. I appreciate your tolerance of 
my ability to be able to ask the questions right now.
    Mr. Fuentes and Mr. Walker, if I may, in 1970 Congress 
enacted the Racketeer Influence and Corrupt Organizations Act, 
RICO, to help combat organized crime. RICO contains both civil 
and criminal enforcement provisions.
    Now, the prepared testimony being presented here today 
indicates that the Federal Government has brought several 
criminal RICO prosecutions for Mob-controlled stock frauds. 
However, in 1995, the Republican-controlled Congress passed, 
over President Clinton's veto, the so-called Private Securities 
Litigation Reform Act that all but eliminated the use of civil 
RICO in securities fraud cases. In fact, under the 1995 act, 
there may be no RICO private civil action if the alleged 
wrongdoing is actionable as a securities fraud, regardless of 
whether a securities fraud action is brought and no matter how 
outrageous the contract.
    As a result, the investors defrauded by Mob-influenced 
stock scams no longer can rely on RICO to go after criminal 
organizations for trebled damages, costs and attorneys fees.
    Don't you think that we should restore, restate the ability 
of defrauded investors to sue Mob-influenced or -controlled 
stock scams, using the RICO statute?
    Mr. Walker and Mr. Fuentes.
    Mr. Walker. Why don't I take a crack first, Congressman 
Markey. I am Richard Walker from the SEC.
    Certainly we have always believed that private civil 
actions are an important supplement to what the government can 
do. I think, as we noted a little earlier, one of the real 
tragedies of these cases is too often, once investors part with 
their money, the money cannot be recovered even through the 
best of efforts. Oftentimes what we are looking at is a no-net-
gain situation; and at the end of the day, despite the best 
efforts, criminal prosecutions, civil regulatory actions and 
private actions, the money has been spent and is gone.
    But certainly we do, generally speaking, support the role 
of private parties and private civil litigants to seek to 
exercise their rights.
    Mr. Markey. Do you agree with that, Mr. Fuentes?
    Mr. Fuentes. Yes, I would agree with that.
    Mr. Markey. Mr. Skolnik, during a debate over private 
securities litigation reform, the State securities regulators 
and State attorneys general opposed eliminating securities 
fraud as a predicate offense under RICO.
    Does NASAA continue to believe this special exception 
should be repealed?
    Mr. Skolnik. I don't know if NASAA has taken a position 
really on whether there should be any further modification or 
amendments to the civil RICO Act--to the Federal act. As I have 
indicated here today, I think if we are going to make a dent in 
fighting the Mob on Wall Street, we are going to have to 
bring--civil and administrative actions are not going to be 
sufficient. We will have to initiate more criminal actions 
because I think that is the only language that the Mob 
certainly understands.
    I don't think NASAA has taken a position at this time 
regarding any proposals to the Federal act.
    Mr. Markey. Can you, for the record, give us the position 
of NASAA, please?
    Mr. Skolnik. Pardon?
    Mr. Markey. Can you please, for the record, submit the 
position of NASAA on these issues?
    Mr. Skolnik. On the question of?
    Mr. Markey. Whether or not they support giving back this 
power to individuals.
    Mr. Skolnik. As I sit here today I cannot, but certainly we 
can follow up on that.
    Mr. Markey. That is what I am asking, for the record, 
please.
    By the way, I think more and more Americans are becoming 
aware of this, because they are watching ``The Sopranos,'' and 
they realize they are running an operation on the side, one of 
these boiler rooms. I think in their minds they can visualize 
how much people can be exploited by this.
    And, in addition, I think you underestimate the strength of 
a defrauded investor, the anger that they would have.
    Oftentimes, I actually find that prosecutors and police 
officials back away from the Mob, but an individual who feels 
aggrieved because their own family has been injured would be 
more likely to go out of their way to go after them.
    So that is my own personal experience, and I think that 
more power to individuals might, in fact, help police, help 
prosecutors to take steps which they otherwise would be shying 
away from in a public policy context.
    Mr. Chairman, I appreciate your indulgence, and I have 
other questions which I would like to submit to the witnesses 
for the record.
    Mr. Oxley. Without objection.
    The Chair would also indicate, without objection the 
opening statements of all members will be made a part of the 
record.
    Gentlemen, we thank you for your excellent testimony. This 
has been most enlightening for the committee, and we appreciate 
all of your participation.
    The subcommittee stands adjourned. Thank you.
    [Whereupon, at 12:20 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]

          North American Securities Administrators 
                                  Association, Inc.
                                             Washington, DC
                                                   October 20, 2000
The Honorable Steve Largent
426 Cannon HOB
Washington, DC 20515
    Dear Congressman Largent: During my appearance before the Finance 
and Hazardous Materials Subcommittee on September 13, 2000, you 
inquired about a breakdown of criminal convictions for securities 
violations on a state-by-state basis. I appreciate the opportunity to 
respond in writing.
    Attached is a state-by-state chart of the securities criminal 
convictions for 1999. The total number of convictions for the 52 
jurisdictions that responded is 307. Many of these convictions were 
obtained as a result of investigations launched by state securities 
regulators. I feel strongly that state securities regulators must work 
with their local prosecutors and pursue more criminal convictions so 
those who prey on innocent investors are put in jail.
    We remain committed to working closely with prosecutors, law 
enforcement agencies, and regulators at both the federal and state 
level to protect investors from fraud and other types of securities 
laws violations.
    Please don't hesitate to contact me at 317-232-6695 or Deborah 
Fischione, NASAA's Director of Policy at 202-737-0900 if you require 
further information.
            Sincerely,
                                     Bradley W. Skolnik    
                                           NASAA Past-President    
                                    Indiana Securities Commissioner
Enclosure

cc: Chairman Mike Oxley
   Congressman Ed Towns

                  1999 SECURITIES CRIMINAL CONVICTIONS
------------------------------------------------------------------------
 
------------------------------------------------------------------------
ALABAMA....................................................       13
ALASKA.....................................................        0
ARIZONA....................................................       10
ARKANSAS...................................................        1
CALIFORNIA.................................................       25
COLORADO...................................................        6
CONNECTICUT................................................        2
DELAWARE...................................................        0
DISTRICT OF COLUMBIA.......................................        0
FLORIDA....................................................        4
GEORGIA....................................................       12
HAWAII.....................................................        1
IDAHO......................................................        3
ILLINOIS...................................................        6
INDIANA....................................................        6
IOWA.......................................................        3
KANSAS.....................................................       31
KENTUCKY...................................................        4
LOUISIANA..................................................        2
MAINE......................................................       10
MARYLAND...................................................        1
MASSACHUSETTS..............................................        1
MICHIGAN...................................................        3
MINNESOTA..................................................        9
MISSISSIPPI................................................        2
MISSOURI...................................................        7
MONTANA....................................................        1
NEBRASKA...................................................        2
NEVADA.....................................................        7
NEW HAMPSHIRE..............................................        1
NEW JERSEY.................................................       15
NEW MEXICO.................................................        0
NEW YORK...................................................        7
NORTH CAROLINA.............................................        6
NORTH DAKOTA...............................................        0
OHIO.......................................................        6
OKLAHOMA...................................................        4
OREGON.....................................................        5
PENNSYLVANIA...............................................       14
PUERTO RICO................................................        0
RHODE ISLAND...............................................        0
SOUTH CAROLINA.............................................        0
SOUTH DAKOTA...............................................        2
TENNESSEE..................................................        2
TEXAS......................................................       37
UTAH.......................................................       16
VERMONT....................................................        0
VIRGINIA...................................................        1
WASHINGTON.................................................       11
WEST VIRGINIA..............................................        0
WISCONSIN..................................................        7
WYOMING....................................................        1
  TOTAL....................................................      307
------------------------------------------------------------------------

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