TSX member Global's client Cleveland pleads guilty
Street Wire
July 18, 2002
 
The first of the Elgindy Five, a San Diego-based shortselling ring which traded through Vancouver brokerage Global Securities and allegedly used information from corrupt FBI agents, has cut a deal and pled guilty. In a brief allocution appearance in United States District Court for the Eastern District of New York on Wednesday, Derrick Cleveland, 36, of Oklahoma City, Okla., pled guilty before Judge Joan Azrack to a single count of racketeering conspiracy, the most serious of six counts he faced under a grand jury indictment unsealed in late May.

Mr. Cleveland was the No. 2 man in the ring, which was led by controversial high-profile short Amr Ibrahim (Anthony) Elgindy, 34, of Encinitas, Calif., who has been denied bail since his arrest May 22. The pair's co-accused include former FBI Special Agent Jeffrey Royer, 39, of Encinitas, who left the FBI last December to work with Mr. Elgindy at Pacific Equity Investigations, Special Agent Lynn Wingate, 34, of Albuquerque, N.M., and Elgindy associate Troy M. Peters, 40, of Carlsbad, Calif. All except Mr. Elgindy are free on bail.

"The activities in which I was involved as part of the criminal enterprise included the passing of information as well as the seeking of information and trading of stock," Mr. Cleveland told the court in his allocution statement. His lawyer, Robert A. Manchester III, of Oklahoma City, could not be reached for immediate comment as he was en route back from New York.

The Cleveland plea is a major win for Assistant United States Attorney Ken Breen, as Mr. Cleveland has agreed to provide full and truthful co-operation in the continuing prosecution and investigation of the Elgindy Five. Although Mr. Cleveland's sentencing is scheduled for Dec. 6, this date will almost certainly be rolled back into next year, as the prosecution of Mr. Elgindy, Mr. Royer, Ms. Wingate and Mr. Peters must conclude first. Mr. Cleveland is expected to be the star federal witness, unless the remaining four defendants opt to cut their own deals and plead guilty before trial.

The grand jury indictment claims Mr. Elgindy, through Mr. Cleveland, an associate of Mr. Royer, paid the FBI agent $30,000 for sensitive FBI and grand jury information from two federal law enforcement databases, Ms. Wingate stepped in to keep the illegal flow of information open after Mr. Royer left the force, Mr. Elgindy spread this damaging information on targeted public companies, and he, Mr. Cleveland and Mr. Peters then sold short the shares of these targeted promotions. (All figures are in U.S. dollars.) Messrs. Elgindy, Cleveland, Royer and Peters also allegedly extorted stock payments to quit bashing and trashing their short candidates.

While Mr. Cleveland has pled guilty, his two corporate accounts at Howe Street brokerage Global Securities: Brezido Partners LP and Diversified Performance Funds Inc., both of Oklahoma, remain frozen by the British Columbia Securities Commission.

The Vancouver brokerage was a key conduit for trading and funds movement by the Elgindy ring, with Mr. Elgindy serviced by Art Smolensky, the founder and chairman of the brokerage. As a key part of his argument to deny Mr. Elgindy bail, Mr. Breen presented evidence that the California short made several large wires, primarily from Global, to Lebanon, and purchased a residential property in the offshore haven, which constituted a serious flight risk.
Mr. Cleveland's plea and co-operation is horrible news for Mr. Elgindy, whose fondness for Howe Street brokerages extended to Pacific International Securities, which serviced the controversial short before he switched to Global. Pacific International is now fighting a prosecution by the BCSC, which claims it serviced far more than its Howe Street share of dubious clients, including Mr. Elgindy. (Besides regulatory troubles with the National Association of Securities Dealers, Mr. Elgindy also spent four months in jail in mid-2000 after pleading guilty to mail fraud.) The BCSC's landmark Pacific International hearing is set to start Sept. 23 and run to Jan. 24, 2003.

Mr. Elgindy has complained vigorously to Stockwatch about its unflattering coverage of him, especially regarding his Pacific International trading. "You truly slapped me in the face and I have done nothing wrong and no one has ever said I'm suspected of doing anything wrong," Mr. Elgindy told Stockwatch last year, referring to his regulatory history. "My account was so clean bubbles popped out when anyone looked at them and I have always claimed the existence of the account on my taxes." (The short was never asked about his taxes or how clean his P.I. account was.)

Mr. Elgindy initially denied being a P.I. client, then said he never had an account under the name "Anthony Elgindy," then repeatedly proclaimed his account was squeaky clean, and has since downplayed his dealings at the besieged Vancouver brokerage. "My account was never involved in anything improper and I never did anything wrong, ever while at P.I. I just bought and sold stocks like anyone else, I never bought any penny stocks and my account was never involved in any stock deals or investment banking relationships," protests the customer, who prides himself on being a fraud-buster who works for the U.S. Securities and Exchange Commission.

While Mr. Elgindy did not volunteer details of his criminal record, he likes to portray himself as a fine upstanding citizen, a white knight ferreting out stock frauds as a hero of the small investor. Indeed, he was featured as such a penny-stock hero by Wired magazine, Barbara Walters on 20/20 and the Wall Street Journal. Mr. Elgindy has been credited with helping expose a number of penny-stock scams.

There are no criminal allegations against Global, Pacific International, or any other Howe Street parties in the current U.S. prosecution of Mr. Elgindy.