Dadante says Ferris failed to rein him

The Baltimore Sun

CLEVELAND -- David A. Dadante says he didn't set out to steal anybody's money, much less tarnish Ferris, Baker Watts Inc. - one of Baltimore's oldest and most respected brokerages.

He launched an investment fund, hoping to make himself and others rich by steering their money into risky stocks and initial public offerings. But to sell the plan, the former casino host admits he told about 100 wealthy individuals an elaborate lie backed up by phony account statements crafted on his home computer.

For a time, it worked. With $47 million of investors' money flowing into his fund, Dadante says, he made a profit of more than $5 million in 2003 on legitimate stock trades through accounts at Ferris and other firms. He soon broke ground on a $2 million house in a wooded suburb of Cleveland and leased himself a Lexus 430 to look the part of a big-time fund manager.

But all along, he was borrowing millions from Ferris to finance an illegal stock manipulation scheme that would land him in prison and put the Baltimore brokerage in the middle of a federal investigation. Fallout from the probe contributed to the firm's decision last month to sell itself to a division of Royal Bank of Canada. The sale is pending.

"I know I'm the one that caused it all," Dadante told The Sun just before beginning a 13-year prison term for securities fraud last month. "But it was not with the intent that [federal authorities] charged me with."

Dadante, 54, pleaded guilty in August and is serving his sentence in a low-security prison in Ashland, Ky. He admits to placing illegal trades that artificially inflated the shares of a small Georgia technology company called Innotrac Corp. But he claims he was an unsophisticated investor who was emboldened by Ferris' compliant trading desk, which processed most of his trades.

He told federal investigators that employees at Ferris knew of his unusual trading but did not intervene until his debt to the firm began to worry top executives. Federal officials say at least $28 million is missing from the fund.

Seated in a corner booth at a McDonald's restaurant, Dadante laughed easily and didn't appear anxious that he would be in prison in less than 48 hours.

"The trading desk knows exactly what I'm doing every day, because I'm calling the orders in to them," said Dadante, who is 6 feet 2 inches tall with graying brown hair and brown eyes. "If it's wrong and I'm not allowed to do that, then you tell me I can't do it. They never did."

A Ferris spokeswoman declined to comment on Dadante's remarks, saying the matter remains part of an open Securities and Exchange Commission investigation. A lawyer for one of the traders involved said the desk had concerns about Dadante's trades and informed superiors. Ferris has portrayed the scandal as the work of a rogue broker and his client.

Three former Ferris executives resigned or retired after the firm conducted an internal investigation last year, including its general counsel, Ted Urban, and vice chairman, Lou Akers. Dadante's former broker, Stephen J. Glantz, pleaded guilty to aiding the fraud and is serving a nearly three-year prison term.

"Mr. Dadante's guilty plea makes it clear that he deceived many people, including Ferris and its personnel," said John Sturc, an attorney for Urban, who said his client worked to help Ferris, its employees and clients comply with the law. "So he's not a credible person."

Other than Glantz, no Ferris employee has been accused of wrongdoing, and there's no indication in court records or public statements from federal investigators that anyone at the firm knew Dadante was using illegal tactics to manipulate stock.

Dadante, who is described by former investors as charismatic and engaging, called his investment fund IPOF - short for IPO fund. It was described by federal investigators as a Ponzi scheme, in which money from new investors is used to pay phony "returns" to others.

Federal investigators say Dadante looted the fund to finance his luxury home and gambling junkets to Las Vegas, during which he lost more than $255,000 over the course of about six years. But Dadante says he lived a mostly normal life, spending most of his time in front of his computer and placing scores of trades daily.

"I didn't try to run away," he said. "At one time, I had $20 million or $30 million. If I wanted to leave, I could have gone for a long time, and they would have had a hard time finding me - but that was never my intention."

He borrowed millions of dollars from Ferris and other firms using what's called "margin" debt. Brokerages routinely allow clients to purchase stock on credit, using the shares as collateral.

In August 2002, his pursuit of high returns led him to buy Innotrac, a thinly traded stock he says was recommended by Glantz. At that time, Glantz was a broker for Advest in Ohio.

When Ferris recruited Glantz in January 2003, Dadante's account - containing 570,000 shares of Innotrac - came with him. Dadante said he immediately began amassing millions more shares, believing the stock would rise.

"I thought, 'I'm going to make a killing to the point where everybody has all their money and I'm going to make 5 or 6 million dollars legitimately,'" he said.

Dadante began trading in a way that investigators say served no purpose other than to inflate Innotrac's shares. He says he did it initially to increase the value of his holdings - his collateral - so Ferris would continue lending him money. The stock climbed from $2.68 per share about the time Dadante opened his account at Ferris to a high of approximately $12 per share by March 2004.

Court records indicate Dadante was phoning his orders in directly to Ferris' trading desk - often calling numerous times throughout the day. It wasn't long before his unusual orders raised alarms on the trading desk and within the firm's compliance department, which is charged with ensuring that brokers and their clients obey securities laws.

Two traders - Mark LaVerghetta and John Belgrade - were placed on leave during Ferris' internal probe of the matter. But both were later invited back to work and remain with the firm.

Belgrade's attorney said his client spoke to his superiors about Dadante.

"He [Belgrade] expressed concerns to Ferris' upper management regarding the methods as well as the position that Dadante was taking," said Ira L. Oring, an attorney with Fedder and Garten in Baltimore.

Steven Allen, LaVerghetta's lawyer, said his client "conducted himself properly at all times and had no knowledge at any time that Dadante was engaged in any illegal conduct."

At about the same time, Ferris' compliance department began probing Dadante's account. The internal investigation culminated in a May 2003 memo to the firm's chief executive and other top executives in which compliance officials said they believed Dadante's trading had caused Innotrac's share price to increase.

Dadante says he paid millions in interest to the firm on his margin debt. But the relationship soured as the size of the debt grew to $18.4 million and the firm realized how much of it was linked to a stock that would be tough to sell if Dadante defaulted. Innotrac's stock had few other buyers.

One day, Dadante said, he received a call from Glantz, saying some of the firm's top executives wanted to meet him. Ferris flew the fund manager to Baltimore and put him up in a downtown hotel. That night, Dadante said, Akers, the firm's vice chairman and former chief executive, took him to Ruth's Chris for steaks and cigars.

Dadante said the conversation focused on his large Innotrac holdings and the firm's concern about his debt. They also wanted to know what his exit strategy was for the stock, he said. Akers declined to comment on the meeting.

As the months passed, Ferris made it increasingly difficult for Dadante to borrow. In February 2004, Roger Calvert, the firm's chief executive, issued a memo instructing that Dadante could buy Innotrac shares only if he paid cash.

"They were making all that money with me, and now all the sudden they don't want it," he said. "They helped create it [the problem], yet they wanted me to get them out of it."

Dadante says he opened accounts at several other firms so that he could keep buying Innotrac and other stocks. But most of those firms balked at taking some of the millions of Innotrac shares sitting in his Ferris account.

Ferris still held nearly 3 million Innotrac shares on Nov. 15, 2005, when IPOF investors uncovered Dadante's fraud and his assets were turned over to a court-appointed receiver. Ferris agreed in January to turn the shares over to the receiver and pay investors $7.2 million in cash to settle any claims against the firm for its handling of the matter. A federal judge in Cleveland is expected to rule shortly on whether to accept the settlement. Shares of Innotrac currently trade at $3.34.

"I thought I could make it work- I did," Dadante said of his IPOF fund. "I might have been foolish in believing that, and now it shows that I was."

paul.adams@baltsun.com

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