U.S.

Internet Fraud, Mafia-Style

By CBSNews.com staff CBSNews.com staff

June 14, 2000 / 12:48 PM EDT / CBS

Federal prosecutors have uncovered a cross-country securities fraud scheme in which the Mafia used the Internet to muscle its way into the stock market.

In what federal prosecutors said was the largest securities fraud crackdown in U.S. history, 120 people were charged Wednesday, including members of all five New York City organized crime families.

In an interview with CBS News Early Show anchor Bryant Gumbel, Securities and Exchange Commission director of enforcement Richard Walker said the government does not believe the brokers involved in the swindle were innocent victims. "We believe that they knew (the real value of the stocks) and were receiving payments. They knew what they were doing. Many were arrested."

The far-reaching fraud stretched over five years. Never before have so many people been charged at once in such a case, U.S. Attorney Mary Jo White said.

"The greed and reach of the racket enterprise knew no bounds. No kind of market professional, or kind of offering or company or type of victim was excluded," said White.

Barry W. Mawn, FBI assistant director in charge of the New York office, said the investigation had "uncovered once again La Cosa Nostra's efforts to infiltrate the securities markets."

"No matter what market the mob tries to infiltrate, from the fish market to the stock market, the methods it uses are always the same: violence and the threat of violence," he said.

What was new about this scheme was not what the Mafia did but how they did it.

As part of the overall scheme, the Internet was sometimes used to promote stocks. Companies were falsely touted as Internet or "dot-com" companies to induce investors to capitalize on the Internet boom.

But they were selling stocks that investigators say had no chance of offering returns. The schemes allegedly resulted in total losses of more than $50 million.

SEC enforcement director Walker says the arrests should serve as a warning to any other unscrupulous brokers who may be considering similar tactics. "I'm confident this sends a strong message. Law enforcement will be tough."

While costly to victims, the fraud was relatively easy to perpetrate.

"You can basically set up the Web site, direct people to it and you could really impact quite a few victims with a very small investment," explained investment expert Ed Stroz of Stroz Associates.

The participants allegedly engaged in racketeering, using bribery, extortion and even soliciting murder to further frauds that reaped millions of dollars in illegal profits.

As part of the scheme, members and associates of the Bonanno and Colombo organized crime families allegedly forged alliances with members and associates of the remaining three New York organized crime families.

They then sought to control and infiltrate broker dealers to defraud union pension plans, using traditional "boiler-room" operations and Internet tecniques to carry out their crimes, prosecutors said in a statement.

When those techniques failed, they resorted to threats, extortion, physical intimidation and the solicitation of murder to further their goals, they said.

The charges were detailed in 16 indictments and seven criminal complaints unsealed in U.S. District Court in Manhattan.

Among those charged in the mammoth scheme were 10 alleged members and associates of organized crime, a former New York police detective, a West Coast investment adviser, stock promoters, brokers, and officers, directors and other insiders of several companies.

Search warrants were executed at four locations in New York, one in Dallas and one in Salt Lake City, Utah.

Arrests occurred in New Jersey, New York, Connecticut, Pennsylvania, Maryland, Virginia, Georgia, Florida, Alabama, Texas, Illinois, Utah and California, Mawn said.

The criminal enterprise allegedly tried to manipulate eight publicly traded securities. They also attempted to defraud investors in connection with three private placements of securities—in which securities are sold directly by a company, not through a stock market—including one by Ranch 1 Inc., a company that operates fast food restaurants in the New York City area and elsewhere.

In recent years, members of organized crime families have surfaced more frequently in securities fraud investigations.

Authorities have said mobsters have tried to infiltrate Wall Street because they have been forced out of many of their more traditional rackets and because dramatic rises in the value of stocks has convinced them there is easy money to be made.

Said Stroz: "It's a lot harder to get into trouble doing that than it is for selling cocaine or heroin or engaging in loan sharking or drugs or crimes of violence."

"As the mob gets into different kinds of businesses they go wherever the money is and obviously the stock market is one of those places," said White.