A former Ferris Baker Watts broker faces prison time after admitting his role in a multimillion-dollar stock manipulation scheme that remains the focus of a federal investigation involving the firm.
Stephen J. Glantz, who left Ferris in 2005, pleaded guilty Wednesday to one count of securities fraud and one count of lying to investigators while helping an Ohio client, David A. Dadante, artificially raise the share price of Duluth, Ga.-based Innotrac Corp.
The plea deal calls for Glantz, 54, to serve 27 to 33 months in prison and cooperate with investigators in their continuing probe. A judge set bail at $25,000 and scheduled sentencing for Dec. 13. An attorney for Glantz, who investigators said lived in Chagrin Falls, Ohio, and Phoenix, Md., did not return telephone calls yesterday.
U.S. attorneys in Cleveland would not comment on whether further criminal charges are expected in the case. The Cleveland division of the FBI and the Securities and Exchange Commission's Chicago regional office have worked together in the investigation.
Court documents and interviews indicate that federal officials have questioned numerous Ferris executives and employees. That includes two traders who carried out Dadante's transactions and described to investigators the unusual manner in which he sometimes placed his orders, according to a criminal complaint.
"These charges demonstrate that we will continue to police the integrity of the securities markets and that we expect nothing short of the truth during the course of our investigations," said Justin Roberts, the assistant U.S. attorney prosecuting the case, referring to Glantz. "This investigation is ongoing."
Investigators say Glantz, who joined Ferris in 2003 and brought Dadante's business with him from another brokerage, repeatedly made unauthorized purchases of Innotrac stock in unwitting clients' accounts. They say Glantz helped Dadante make illegal trades designed to increase the value of Innotrac shares. Court documents say Glantz misled Ferris employees when they questioned him about the trades.
The century-old Baltimore brokerage has said that it is cooperating with the SEC and the Justice Department in the investigation. A spokeswoman declined to comment on Glantz's plea yesterday. Glantz is the only Ferris employee to be criminally charged in the fraud, which spawned an internal investigation and a management shake-up at the firm this year.
In a February financial statement posted on its Web site, Ferris said it believes the investigation is "focused on" Dadante's and Glantz's trading and other activities, and that the firm does not expect the outcome of the probe to have a material affect on its business.
Glantz had worked in the firm's Baltimore and Hunt Valley offices, as well as in its Beachwood, Ohio, branch.
Investigators say Dadante collected $46 million from about 100 investors in a fund that turned out to be a Ponzi scheme. They say he used some of the money to buy a luxury home and pay for gambling junkets to Las Vegas, while much of the rest went toward purchasing 4.2 million shares of Innotrac on Glantz's recommendation. Investors in his fund lost about $28 million.
Dadante pleaded guilty to securities fraud last month and likely faces 10 to 12 years in prison. Court records show he maintained brokerage accounts at several firms besides Ferris. The documents suggest that others aided in the fraud, but do not indicate that anyone else at Ferris is being targeted.
Legal experts say the firm faces a potentially years-long SEC investigation that could result in civil penalties and other sanctions if regulators find fault with its internal controls designed to prevent fraud. Brokerages are required by law to police the actions of employees and clients to ensure fairness in securities markets.
Kirby Behr, a securities litigation expert in Washington, said so-called "failure to supervise" sanctions are not uncommon within the industry. Most large firms face such cases at some point, usually arising from rogue brokers or employees who circumvent company policies. Regulators often impose fines or require the firm to strengthen fraud surveillance as part of a civil settlement, he said.
Six top executives and traders took temporary leave after Ferris launched an internal investigation this year. Three have since resigned or retired, including the firm's general counsel, Theodore W. Urban, and former Chief Executive Officer Louis Akers Jr. Two traders and the firm's head of retail sales have returned to work.
Dadante began buying Innotrac stock in August 2002, when Glantz was a broker with Advest Inc. Glantz transferred to Ferris the following January. By then, Dadante had accumulated 570,000 shares of the lightly traded stock.
Within months, Ferris' internal watchdogs began to question Glantz about Dadante's heavy trading in the stock. The Sun reported in April that the firm's compliance department believed in May 2003 that Dadante's trading had raised the price of Innotrac stock, and that he had not made required regulatory filings. They also questioned the supervision of Dadante's account and of Glantz. Compliance staff put their concerns in a memo to top executives, but Dadante continued to trade with Glantz as his broker.
During the next year, Dadante amassed 4.2 million shares of Innotrac, mostly using money he borrowed from Ferris on margin. Margin debt enables investors to buy stock without fully paying for it, using the securities as collateral. If the debt becomes too large, the investor can face a "margin call," which means he must deposit more cash in the account or sell securities to satisfy the debt. By February 2004, court records indicate, Dadante owed the firm $18.4 million.
Court records say Glantz used fraudulent methods to help Dadante manipulate Innotrac's stock and avoid margin calls when the firm became concerned about his borrowing. From October 2002 to March 2004, the price of Innotrac rose from $2.19 a share to a high of about $12.
On several occasions, Glantz helped Dadante make Innotrac trades just before the 4 p.m. close of markets, court documents say. He would request that traders place the order at a price higher than previous bids instead of obtaining the best price available. Called "marking the close," the tactic artificially raised the closing price of the shares, a criminal complaint said. It also increased the value of Dadante's margin account and freed up funds so that he could make payments to investors in his IPOF fund.
In other cases, the complaint said, Glantz helped Dadante execute "wash sales," trades between two accounts owned by the same person. Investigators say such trades serve no purpose other than to generate broker commissions or give other investors the false impression that a stock is heavily traded. When Dadante faced a margin call on an account at another brokerage in December 2004, Glantz arranged to buy 77,000 shares - about $600,000 worth - of Innotrac at a prearranged price, investigators said. He later placed those shares in the accounts of other Ferris clients without their knowledge.