Subject:
Terror Probe catches stock shorter in its periphery
Date: Fri, 24 May 2002 12:20:14 -0400
From the WSJ
Heard On The Street
Terror Probe's Long Tendrils Reach Into Wall Street's Fringe
By MICHAEL SCHROEDER, GARY FIELDS, IANTHE JEANNE DUGAN and AARON ELSTEIN
Staff Reporters of THE WALL STREET JOURNAL
The investigation that led to charges against five people, including a current and a former FBI agent, with using confidential government data to manipulate stock prices was an almost accidental result of probes into the Sept. 11 terror attacks and to some degree convicted spy Robert Hanssen.
Authorities began looking into the activities of Anthony Elgindy, an Egyptian-born investor who was among those indicted, as part of the wide-ranging net cast by investigators looking for potential financiers of Muslim groups with links to terrorism last fall, according to a Federal Bureau of Investigation official.
That inquiry found nothing connecting Mr. Elgindy with terrorist groups or their financing, but eventually led authorities to believe he was getting information from FBI insiders, who clued him into confidential data about public companies facing criminal problems or investigations. So close was Mr. Elgindy to Jeffrey Royer, the former FBI agent charged in the case, that Mr. Royer wrote a letter identifying himself as an FBI agent vouching for Mr. Elgindy's help "in combating fraudulent activities via the stock market and Internet."
The indictment, which alleges that he used the information from two rogue federal agents to target stocks and to extort free or cheap stock from companies, puts the spotlight on investors and companies operating on the fringes of Wall Street.
Mr. Elgindy, a widely followed but controversial stock trader and commentator on the Internet, was known for mostly taking aim at very small companies with little revenue or earnings. Many get no attention from analysts at big investment firms, and don't even trade on a stock exchange, but rather are quoted on the OTC Bulletin Board, a quotation service for tiny stocks. As a result, they often are thinly traded -- with relatively few shares bought and sold each day -- and thus are easier to manipulate than bigger stocks.
The origins of the FBI's terror-related interest in Mr. Elgindy are unclear. But it might have stemmed from a tip that was provided by angry executives from small companies who banded together to fight him for wreaking havoc on their stock by short-selling -- selling borrowed shares in hopes of turning a profit if the stock falls.
After Sept. 11, these executives approached the FBI with a tip about Mr. Elgindy's possible short-selling of key industry stocks ahead of the terrorist attacks, the executives involved said. His adversaries also pointed out that Mr. Elgindy is a Muslim whose brother, Khaled Elgindy, is active in Islamic advocacy groups in Washington. Khaled Elgindy delivered humanitarian aid to Iraqis in May 1998 with a U.S. group called the International Relief Association, according to news accounts at the time.
A person with knowledge of the probe said the Securities and Exchange Commission also looked into whether Mr. Elgindy profited from the attacks, but found nothing untoward. Neither did a Justice Department inquiry, an official said.
At some point last year, however, the FBI's interest into Mr. Elgindy morphed into a securities-fraud investigation of his trading patterns. Last fall, the FBI got in touch with the SEC for help in analyzing his trading records. Piquing the investigators' interest was the quality of the information he was putting out over the Internet about companies he focused on. Some of it seemed to make references to criminal histories that could have come from the FBI's National Crime Information Center database, while other tidbits seemed to come from the FBI computerized case-file system.
"A lot of that information would be considered insider information and could impact companies and stock prices," said the FBI official. "It didn't take much to figure this information is coming out of our confidential files."
Once authorities realized that, they began focusing the investigation internally by tracing who inside the FBI was accessing the databases. FBI agents are given individual passwords and logons to use the systems, and there are electronic trails every time they access the databases. In the aftermath of the Hanssen spy case, the agency has become much more diligent in tracking who accesses what internal computer files and why.
"Computers are a dangerous thing," noted another FBI agent familiar with the case. "You can tell who is looking at what cases. And in this case, it raised the question: Why in the hell would somebody in Albuquerque be looking at some of these cases?"
The investigators had additional suspicions raised when one of the accused Albuquerque-based agents, Mr. Royer, left the FBI last Dec. 21 to work for Mr. Elgindy. "That definitely raised some suspicions," the agent said. It was apparently around this time that Mr. Royer wrote the letter supporting Mr. Elgindy's effort to be released early from a three-year probation sentence for mail fraud in an unrelated matter, saying that Mr. Elgindy "has gone above and beyond to assist law enforcement and civil regulatory agencies." The letter adds, "His insight and technical abilities have been directly responsible for providing valuable information resulting in eight major investigations."
The letter, which isn't dated but bears a fax stamp dated Dec. 27, 2001, was included as an exhibit to a civil suit in San Diego County Superior Court between Mr. Elgindy and his former lawyer, Matthew Tyson. (Mr. Elgindy's motion to be released from probation early was denied on Jan. 31, according to the clerk's office in the federal court in Fort Worth, Texas.) A lawyer for Mr. Royer declined to comment on his client's indictment or on the letter.
After Mr. Royer left the FBI, the agency watched him, while also keeping an eye on information that was being accessed, which later led to a second FBI agent in Albuquerque, Lynn Wingate, who also was charged in the case, the agent added.
In December, Nuclear Solutions Inc., based in Meridian, Idaho, one of the companies targeted by Mr. Elgindy, complained to the FBI about his activity, according to a person familiar with the matter. Mr. Elgindy, using information passed on to him by a former FBI agent, told subscribers to his Web site that an executive at the company was a "convicted felon."
Nuclear Solutions, which had zero revenue last year and a net loss of $1.3 million, according to its annual report, was typical of the companies that Mr. Elgindy targeted. Its stock was traded for about $3.30 a share in mid-December on the OTC Bulletin Board when its shares began being shorted around Dec. 19. The stock currently fetches $1.08, and the company's total market value is about $11 million. Officials at the company didn't return calls seeking comment.
Nuclear Solutions was the only company named in the indictment as one in which Mr. Elgindy used confidential government information to try to knock down the shares. But the indictment alleges that Mr. Elgindy used confidential information on five other companies.
In addition, Mr. Elgindy had many other short-selling targets in the past. One was SeaView Video Technology Inc., a St. Petersburg, Fla., maker of underwater video cameras. SeaView had $732,000 of revenue last year and a net loss of $2.8 million. Its stock trades for 35 cents on the OTC Bulletin Board, and the company's market value is about $11 million.
SeaView said that Mr. Elgindy once called saying that he was a reporter seeking information about the company, but didn't connect him with short-selling in its stock. No evidence has been released that Mr. Elgindy's short-selling resulted from an FBI probe into the company.
Mr. Elgindy has never been one to mince words about stocks he doesn't like. On April 3, he posted a message on Silicon Investor, a popular Web site for discussing stocks, calling Golden Star Resources Ltd., a Littleton, Colo., mining company, "a complete and utter turd." It isn't clear if he sold the stock short.
The stock traded for $1.42 on the OTC Bulletin Board at the time Mr. Elgindy posted his comment, and now fetches $1.96 amid a broad rally in mining and gold-related stocks. Golden Star Resources Chief Executive Peter Bradford says he doesn't believe he has ever spoken with Mr. Elgindy, although he said it is possible the two talked by telephone. "I get calls from brokers all the time and I hang up on them," he said.
On occasion, Mr. Elgindy would target somewhat larger stocks. In late March, he told readers on Silicon Investor that Aksys Ltd. was "overvalued" and two days later he posted a report on his Web site, Insidetruth.com, about the Lincolnshire, Ill., maker of dialysis equipment. Aksys shares traded for $8.78 on the Nasdaq Stock Market at the time Mr. Elgindy made his remarks. They currently fetch $5.81, giving the company a market cap of about $147 million. Aksys Chief Executive Bill Dow says he never spoke with Mr. Elgindy and adds the report published by the trader contained inaccuracies and quoted him out of context.