U.S. attorneys in Cleveland say a former Ferris Baker Watts broker played a central role in a multimillion-dollar stock manipulation scheme that led to a management shake-up at the Baltimore firm this year.
Prosecutors charged Stephen J. Glantz, who left Ferris in 2005, with one count of securities fraud and one count of lying to investigators yesterday for what they say was his part in a plan to artificially raise the share price of Duluth, Ga.-based Innotrac Corp.
The fraud, which collapsed in November 2005, led to investors essentially overpaying for the stock, which is worth less than one-fifth of its value at its peak.
Among other things, Glantz is accused of making unauthorized purchases of Innotrac stock in unwitting clients' accounts to help another customer, David A. Dadante.
Investigators say Dadante operated a Ponzi scheme that stole an estimated $28 million from about 100 investors, with some of the money spent on gambling junkets in Las Vegas.
Glantz is the only person who worked at Ferris who has been criminally charged in the case involving Dadante, who pleaded guilty to securities fraud last month in Cleveland and agreed to cooperate with investigators.
Court documents filed yesterday suggest that "others" aided in the fraud but do not indicate that anyone else at Ferris is being targeted for criminal charges. The charges against Glantz were filed as a criminal information, which is typically used when the target of an investigation is cooperating.
Ferris has said that it believed investigations by the Securities and Exchange Commission and the Justice Department were focused on Glantz and Dadante, but legal experts say the firm could still face civil penalties if the SEC finds fault with its internal controls and its overall handling of the matter.
The investigation could take months, perhaps years.
"We at Ferris Baker Watts are very disappointed by the misconduct alleged in the complaint against this former employee who left the firm more than 20 months ago," said Robin Oegerle, a spokeswoman for the firm. "FBW has cooperated fully in the investigation by the government agencies and will continue to do so."
Six top executives and traders went on leave this year as Ferris investigated the fraud. Three executives have since retired or resigned, including general counsel Theodore W. Urban and former CEO Louis Akers Jr. Two traders and the firm's head of retail sales returned to work. Ferris has said that none of its clients lost money as a result of Dadante's actions.
The criminal complaint against Glantz says he violated the firm's written policies designed to prevent fraud and misled its internal watchdogs after they raised questions about his purchases of Innotrac stock on behalf of clients who had not authorized the trades.
The activity occurred despite that and other concerns raised by employees at the firm.
The Sun reported in April that Ferris' compliance department believed early on that Dadante's trading had raised the price of Innotrac stock and that he had violated securities laws. In a May 2003 memo to top executives at the firm, they also raised concerns about supervision of Dadante's account and Glantz.
In February 2004, Roger Calvert, chief executive officer of Ferris, wrote in an internal memo that Dadante could continue purchasing Innotrac shares as long as he paid for them in cash. The memo was in response to concerns about Dadante's borrowing millions of dollars from the firm to finance his trades.
Legal experts say filing a criminal information rather than an indictment likely means Glantz is cooperating with the government and working on a plea agreement.
Glantz, who once worked in Ferris' offices in Hunt Valley and Baltimore, could not be reached yesterday, and his attorney in Cleveland did not respond to a telephone message.
"It usually signals that someone has made his or her peace with the government and has agreed to acknowledge wrongdoing," said David Bohan, a Chicago attorney and former federal prosecutor, referring to the filing of a criminal information.
"I certainly wouldn't read into a two-count information against a cooperating individual that the investigation is over."
Court documents say Dadante began buying Innotrac stock in August 2002 based on Glantz' recommendation. At that time, Glantz was a broker with Advest Inc. Glantz left Advest in January 2003, taking with him Dadante's account containing 570,000 shares of Innotrac.
Dadante continued to trade through his account at Advest, however. Over the next year, he amassed nearly 4.2 million shares of Innotrac, mostly by using money borrowed from Ferris. At the time of Calvert's 2004 memo, Dadante's debt to the firm was $18.4 million.
"Margin debt" helps investors stretch their investment funds by allowing them to buy more stock without fully paying for it. If the debt grows too large, the investor can face a "margin call," which means he must deposit more cash in his account or sell securities to satisfy the debt.
The complaint says that Glantz helped Dadante boost Innotrac's share price and avoid margin calls through fraudulent tactics.
In numerous cases, he helped Dadante place trades for Innotrac shares minutes before the 4 p.m. close of markets at a price slightly higher than all previous bids, according to the complaint.
Called "marking the close," that tactic had the effect of artificially raising the closing price of the company's shares that day. It also increased the value of Dadante's margin account and freed up funds so that he could make payments to investors in his fund.
In other instances, the complaint says, Glantz and others assisted Dadante with "wash sales," which are essentially trades between two accounts owned by the same person.
Investigators say such trades are illegal because they can give other investors the false impression that a stock is heavily traded. Trading volume is an important factor for those choosing to buy a lightly traded stock such as Innotrac. Investigators say the trades also helped Dadante avoid margin calls at Ferris.
When Ferris placed trading restrictions on Dadante's account in August 2003, he opened a second account at the firm using Glantz as his broker. Investigators say Glantz knew that Dadante used the second account to circumvent the restrictions and later used the two accounts to engage in wash sales of Innotrac stock.
When Dadante faced a margin call on his Advest account in December 2004, Glantz arranged to buy 77,000 of the shares at a prearranged price, which the complaint says was not in the clients' best interest because he failed to seek the best price available.
Glantz later placed those shares into the accounts of other Ferris clients without their knowledge, court documents say. He initially denied knowing that Dadante faced a margin call at Advest and told investigators that he made the purchases in the "best interest" of his clients, the complaint says.
The episode was one of several in which investigators say Glantz placed Innotrac shares in unwitting clients' accounts and engaged in inappropriate trading without their knowledge.
When interviewed by investigators, Glantz denied that he and Dadante ever "marked the close" or engaged in wash sales. He also said that Dadante never sold shares of Innotrac stock, the criminal complaint said.
Charles Ross, a criminal attorney in New York with expertise in securities cases, said Ferris is unlikely to face criminal charges if federal officials determine that Glantz was a rogue employee who acted alone.
Bohan, the former prosecutor, said the activity described in the criminal complaint could lead to prison time for Glantz.
Dadante's plea agreement calls for a minimum prison term of more than 10 years.
1999: Investors start joining David A. Dadante's IPOF Fund. Aug. 12, 2002: On the advice of Advest Inc. broker Stephen J. Glantz, IPOF Fund begins buying shares of Innotrac through a brokerage account at Advest. Innotrac stock ends the day at $2.25 per share. Jan. 1, 2003: Ferris Baker Watts hires Glantz away from Advest; Dadante moves IPOF funds and 570,000 shares of Innotrac to a new account at Ferris. He keeps an account open at Advest, too. February-April 2003: Dadante, according to a criminal complaint, manipulates stock through the IPOF account at Ferris with Glantz' help. May 23, 2003: Ferris compliance officials send a memo to top executives raising concerns about Dadante's account and trading. Innotrac stock ends day at $6.04. Dadante owns more than 15 percent of the company's outstanding shares but hasn't filed required regulatory documents indicating his ownership status, according to Securities and Exchange Commission filings. June 2003: Dadante makes SEC filings disclosing his Innotrac holdings. August 2003: Ferris restricts the IPOF account. Dadante, according to a criminal complaint, opens a second account under a different name to circumvent those restrictions. Glantz is the registered broker for both accounts. February 2004: Ferris chief executive orders a trader not to let Dadante buy more shares of Innotrac unless he pays cash. March 1, 2004: Innotrac price touches a high of $12 a share. November 2005: IPOF Fund investors confront Dadante about heavy ownership of Innotrac. Criminal complaint alleges that Dadante claimed he could control the stock price, keeping it above $8. Investors file suit. A federal judge in Cleveland appoints a court receiver to oversee the fund. More than $28 million is said to be missing. The SEC and the Justice Department begin investigating. April 18, 2006: SEC files a civil lawsuit against Dadante. March 1, 2007: Ferris says that six executives and traders have resigned or taken temporary leave since federal officials and outside counsel began investigating the firm's trades for Dadante. Theodore W. Urban, the firm's general counsel and head of compliance, takes early retirement. The firm says Horace D. Usry Jr., director of institutional sales, resigned. March 13, 2007: Ferris says two traders who helped process Dadante's trades and had been on temporary leave during the investigation can return to work. A week later, the firm allows its director of retail sales to return. March 15, 2007: Dadante is arrested on federal securities fraud charges in Cleveland, later posts bond. Innotrac closes day at $2.11 per share. June 1, 2007: Ferris says Louis Akers Jr., vice chairman and former chief executive, has taken early retirement, making him the highest-ranking executive to leave the firm since the investigation began. Aug. 16, 2007: Dadante pleads guilty to two counts of securities fraud and agrees to cooperate in a continuing federal probe. Sept. 4, 2007: U.S. attorneys in Cleveland charge Glantz with securities fraud and say he helped Dadante with the stock scheme and illegally traded on behalf of unwitting clients.
[Sources: Company memos, interviews, SEC documents, federal criminal complaints and other public records]