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TORONTO STAR: Inside a stock fraud
January 13, 2008
Tony Van Alphen
The future didn't look bright for serial swindler and parolee Michael Lee Mitton when RCMP officers frisked him at Vancouver International Airport on a cloudy June day in 2004.
Inside his suitcase, they found diagrams and calculations on deals involving companies with names like Pender International, IMM Investments Inc., Kamposse Financial Corp. and Firestar Capital Management Corp.
There was a fax from a financial adviser named Michael Ciavarella, a technical report on a gold mining project and documents relating to Bahamian investment firms.
Police discovered blank fax sheets containing the letterhead of "Tree Valley Garden Centre," a handwritten note with the words "to be done Neil," and contact information for Cosimo Commisso, whom police claim to be the head of an organized crime family in Toronto, as well as Johnny and Raymond Commisso.
Mitton was carrying four cellphones, and had cheques worth more than $13,000 in his wallet.
For years, he had prospered on the then-Vancouver Stock Exchange, a noted playpen for stock hustlers, of which Mitton was one of the most notorious. By the end of 2000, he had already piled up 103 convictions in Canada, primarily related to his specialty – stock fraud.
Last March, Mitton pleaded guilty to fraud and money laundering, and received a seven-year prison sentence plus a $2.6-million restitution order payable to HSBC Bank. In an agreed statement of facts filed in court, Mitton confessed to being the "architect" of an elaborate stock fraud involving several companies.
In piecing together the tale of Mitton's fraud scheme, the Star has relied on Mitton's agreed statement of facts when he pleaded guilty, and on more than 1,000 pages of RCMP affidavits filed with the court in support of search warrants. These contain allegations that have not been proven in court.
The Star further relied on transcripts of wiretaps and interviews conducted by the RCMP, which are also filed in court, National Parole Board reports and documents filed with the Ontario Securities Commission and U.S. Securities and Exchange Commission. In addition, the Star interviewed people involved in or familiar with RCMP operations.
Police have also charged Michael Ciavarella with fraud, conspiracy, money laundering, possession of the proceeds of crime and two counts of extortion. The allegations have yet to be proved in court. Ciavarella's lawyer did not return calls seeking comment.
Also charged – with fraud, conspiracy, robbery, assault and two cases of extortion – is Anneillo (Neil) Peluso, whom the RCMP describe in court affidavits as being "a high-ranking member of Cosimo Commisso's organized crime group." The allegations have not been proved in court.
Peluso, who has no criminal record, owns Tree Valley Garden Centre in Richmond Hill. A quiet businessman, he also sponsored and managed minor hockey teams in the area.
Alan Gold, Peluso's lawyer, has said that allegations about his client's ties to Commisso are groundless. "They're not worth the search warrant paper they're written on."
Gold said he would not comment on the charges because the case is still before the courts.
ON THE DAY he was picked up at Vancouver's airport, Michael Lee Mitton was scarcely an unknown figure to the RCMP. A career criminal, the diminutive man with hazel eyes and curly hair had strong connections to the Montreal, Toronto and Vancouver underworlds.
He routinely ignored trading bans, fines and restitution orders. Prison was a temporary inconvenience. Sometimes he didn't wait to finish a sentence. While on parole, he would work on details of his next fraud.
His signature moves involved purchasing public shell companies and manipulating their shares in what the industry calls a "pump and dump" operation. The scheme, one of the oldest forms of stock market fraud, is a favourite of con artists.
In Mitton's version, he would find a shell company, set up a personal network of buyers and sellers, release "news" and then direct the network's trading in company shares. The idea was to artificially create investor interest and trigger a jump in the company's stock price.
Network players would unload any shares they held and pocket the profits before regulators, brokerages and average investors realized anybody had duped them. In the aftermath, Mitton usually left a trail of misery for victims who suffered everything from financial ruin to family breakups and humiliation.
But Mitton, a man of many aliases, also had another unusual calling card – sometime undercover RCMP agent. His second stint as an agent – while on parole for an earlier stock fraud – had just ended a few weeks before his airport encounter with the RCMP. He had pulled out of a Mountie money-laundering sting, claiming police had put his life in danger.
According to police affidavits, one of the targets of that sting operation had been Cosimo Commisso and his group, although no charges were ever laid.
After going through Mitton's luggage at the Vancouver airport, the RCMP arrested him on suspicion of criminal activity.
At the time, police had a tip that Mitton might have skimmed cash during his earlier role as a phony, money-laundering salesman for the RCMP sting operation. What police didn't know then, was that earlier in the week, Mitton had been setting up an integral piece of his newest venture back in Ontario.
At the RBC Dominion Securities branch in Richmond Hill, representatives of Kamposse Financial Corp. – another name from Mitton's suitcase – had opened an account. Among the representatives was someone calling himself "Michael Douglas," a name he just happened to share with the actor who portrayed corporate raider Gordon Gekko in the movie Wall Street. The representative's real name: Michael Lee Mitton.
AFTER HIS ARREST in Vancouver, Mitton languished in jail for two months. At a subsequent hearing, Mitton's parole supervisor recommended that the parole board revoke his release because what police had found in Mitton's suitcase was "consistent with past fraudulent behavior."
But the board released Mitton, saying police had not provided enough information to support their suspicions.
Mitton was back on the street and, despite parole restrictions, he turned his attention to a company called Pender International.
Incorporated in Delaware in the 1990s, Pender had moved to Markham in early 2004. Pender was listed on the over-the-counter market of the U.S.-based National Association of Securities Dealers, but the firm was dormant, with no real assets and its shares traded at less than a dime each.
That would soon change dramatically, with a series of announcements and transactions during Mitton's summer sojourn in jail. In a news release, Pender said it was abandoning its previous business of importing furniture to become a merchant bank for small firms.
Mitton and others had paid about $900,000 to buy most of the shares in Pender, according to regulatory filings with the U.S. Securities and Exchange Commission. It turned out to be just part of a complicated series of transactions.
The money to buy Pender had come from another company – Armistice Resources Ltd. – which had raised more than $2 million from investors in a private placement. Armistice owned a non-working gold mine near Kirkland Lake in Northern Ontario.
Pender then bought IMM Investments, which in turn held a minority stake in Armistice. Among IMM's key executives were Kalano Jang and his son, Kalson Jang. According to filings with the SEC, a Kalano Jang holding company received roughly one third of Pender's shares as part of the sale of IMM.
Kalson Jang, who is chief operating officer at Trillion Financial Corp., also became Pender's chairman. Kalano Jang is Trillion's president.
In an affidavit filed with the court, the RCMP say Elisa and Patrick Perl of Toronto invested $235,000 in Armistice after meeting with their advisers at Trillion. The Perls were instructed to make their cheque payable to Firestar Capital Management, a company controlled by Ciavarella. The Perls say in the affidavit that they never received any money back.
The Jangs did not respond to requests for an interview. No charges have been laid against any Trillion officials.
As a result of the deals involving Armistice and IMM, Pender was transformed. It now had an indirect interest in a mining company, Armistice. It also gained new management when Ciavarella became Pender's chief executive officer in July.
By then, however, Pender was already coming under RCMP scrutiny. According to affidavits filed with the court, the police say they were by then tapping the phones of Pender insiders. In one affidavit, the RCMP alleges that Ciavarella told Peluso that so-called market makers – who facilitate the buying and selling of stock – needed to agree to trade Pender shares at $5 apiece, much higher than the pennies at which the stock then traded.
In one call, police say, Ciavarella recommended changing Pender's name, but then decided the process would take too long. Ciavarella, according to the RCMP transcript, then tells Peluso: "We'll just trade it among ourselves for five bucks and then we'll put news out."
DESPITE THE SHAKEUP and changes at Pender, the stock price languished at 6.5 cents (U.S.) with no trading on the over-the-counter market until almost mid-October, a few weeks after Mitton had popped out of jail.
Without warning or a single news development, Pender took off on Oct. 14 to 30 cents. The stock price doubled to 60 cents a day later and broke through the $1 mark for the first time on Oct. 20. It surged past $2.50 on Oct. 26.
About a dozen investment accounts were actively involved in trading Pender shares, according to police, including the Kamposse account at RBC that Mitton had set up posing as Michael Douglas. Also trading actively in Pender stock were accounts held by Ciavarella and two of his companies, Firestar Capital and Firestar Investment Management, according to RCMP affidavits citing OSC trading records.
In a four-week period in October and November, Kamposse sold 376,000 Pender shares for proceeds of $2.74 million, far more than the $475,000 Kamposse had originally paid for them. Meanwhile, Firestar Capital's account bought 392,000 shares in November alone for $3.55 million.
In his agreed statement of facts, Mitton admits to employing numerous techniques to bolster Pender's stock price, including "wash trading," in which Pender's shares were simultaneously bought and sold through different brokers to create the impression of market action.
Mitton also orchestrated so-called "high closings" – bidding up the price of Pender stock at the very end of a day's trading.
In late October, Pender put out a news release about its investment in Armistice that showed a certain kind of resourcefulness. Normally, firms such as Armistice announce estimates of the gold content in their mines and the cost of extracting it. But the mine owned by Armistice, a company with $29.6 million (Cdn.) of debt, also contained something else: water. Lots of it.
So Pender announced that Armistice had hired a firm to pump the water out of the mine and reactivate it. In a news release, Pender CEO Ciavarella promised the job would be completed within four months and "production" at the "flagship acquisition" would start in early 2005.
Within a few days, Pender stock hit $5.75 (U.S.). By Remembrance Day, it had topped $10 before hitting a peak of $11.35 on Nov. 18.
In the span of just 35 days, the number of Pender shares traded had reached 2.1 million, and their value had shot up by 3,783 per cent. For some investors, it was a lucrative run.
According to OSC trading records cited in RCMP affidavits, Ciavarella personally bought 15,500 Pender shares in early November for an average price of roughly $5.80, or $91,545. Within two weeks, he had sold the shares for $161,391.
Trading records also show that Giovanni (Johnny) Commisso generated a gross profit of $125,855 in four weeks of trading in Pender shares, while Raimondo (Raymond) Commisso earned a profit of $5,890 in less than two weeks.
There were other transactions that November, the affidavits revealed. In one, Firestar Capital deposited $243,991 into the trust account of a Toronto lawyer. According to police, that money was then transferred to a bank account belonging to Mitton's wife, Janet, in British Columbia.
A few days after Pender stock reached its peak, Firestar Capital used its account at HSBC to buy $2.6 million-worth of Pender shares. Before Firestar's cheque had cleared, HSBC advanced the money to the seller of the stock – Mitton's Kamposse trading account at RBC.
After Firestar's cheque bounced, according to Mitton's agreed statement of facts, HSBC was short $2.6 million. And because HSBC had become suspicious about the transaction, under securities law it was precluded from reselling the Pender stock to recover the loss.
At the same time, RBC was expressing similar concerns about the Kamposse account. As Pender stock approached its peak, Kamposse had delivered certificates for 3.4 million Pender shares to RBC. Those certificates were by then valued at roughly $34 million, far more than the $340,000 they would have fetched a few months earlier. Kamposse asked that the certificates be cleared – and its account credited with that amount – as soon as possible.
But an RBC official noticed something odd. The telephone number and address for Pender was the same as Kamposse. RBC immediately suspended trading in the Kamposse account and alerted the Ontario Securities Commission.
Pender shares started tanking. Just two weeks after reaching their peak, Pender stock had lost half its value.
That helped spark a new RCMP probe, code-named Project Nemesis – a reference to Mitton's long criminal record. The probe included other police forces and staff from the OSC, which by mid-December had frozen more than a dozen trading accounts with alleged links to Pender.
The OSC also ordered Ciavarella, Mitton, Kamposse and the Firestar companies to cease all trading in Pender stock.
BY CHRISTMAS, 2004, Pender's stock price had stablilized in the $6 range, even though the task of pumping water out of the Armistice mine had come to a halt because the company had run out of money.
But Mitton, according to his agreed statement of facts, wasn't going to be idle. He was busy developing plans to crank up the amount of "news" emanating from Pender. Early in the new year, that included the appointment of a new CEO to replace Ciavarella, who resigned.
In a securities filing a few weeks later, a bullish Pender claimed it was similar to Onex Corp., the big Toronto conglomerate, except that Pender was looking to acquire smaller companies "in the advance stages and near profitability."
The company was still calling its only asset, the flooded mine near Kirkland Lake, "our flagship gold project."
Mitton was also transforming himself. In a webcast to discuss Pender's prospects with investors, Mitton assumed an alias, "Michael Hennesey," posing as "a Pender investor."
A few weeks later, Pender issued another news release, saying the company had switched gears and would now be considering real estate projects. Pender followed that with "news" that it had gained a $100-million equity line of credit.
A subsequent news release claimed that Pender had concluded the purchase of Montebello Development, with construction starting soon on a Mexican resort.
"We continue to evaluate some very interesting properties in Europe, as well as a 400-acre resort and casino in the Caribbean," the company gushed. "We would expect the Pender property portfolio to exceed $350 million in value by the end of the second quarter."
And yet, Pender shares continued to fall, sliding to $1.05 by early February, 2005, and to 30 cents a month later.
On April 1, Pender announced it had "cancelled negotiations" for a "final agreement" on its $100-million line of credit, only to bounce back a few days later with news of "final talks" for an even bigger credit line.
Then came an announcement that Pender's new subsidiary, Montebello, had reached a deal to buy the Sheraton Fallsview Hotel and Conference Centre in Niagara Falls, along with another news release claiming the dewatering of the Northern Ontario mine would take four to six weeks.
But there was no line of credit. No resort construction. No hotel acquisition. No work at the flagship gold mine.
Mitton himself, however, was busy. Ignoring the trading freezes, he used other companies with names like Wonderland Capital to shuffle Pender shares. According to trading records, Mitton still managed to generate a profit of nearly $1.1 million in the first quarter of 2005.
He certainly didn't show any signs of personal financial difficulty. He had a penthouse in Markham in the same building as Ciavarella, a house in Ottawa, and drove around in a Mercedes E320.
And all the while, the RCMP were tracking his movements. They would soon be executing a series of search warrants.
At Mitton's house, they seized hundreds of computer files, emails, financial data, press releases, shareholder lists.
But even this didn't appear to faze Mitton. Posing as Hennesey, now a Pender "consultant," Mitton spun a tale of more pending "good news" to a prospective investor, including the purchase of the hotel in Niagara Falls.
Like Hennesey, the investor was really someone else. He was an RCMP corporal.
The most valuable commodity I know of is information
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