May 23, 2002

Five, Including F.B.I. Agents, Are Named in a Conspiracy


Five people, including a current and a former F.B.I. agent, were charged by federal prosecutors yesterday with using confidential government information to manipulate stock prices and extort money from companies.

The conspiracy was led by Amr Ibrahim Elgindy, a stock adviser who has clashed with regulators and is well known among traders in small stocks for his aggressive attacks on companies he considers overvalued, according to an indictment unsealed yesterday in Brooklyn. Prosecutors said that he obtained government information about publicly traded companies and then used that information to predict which stocks would fall and to persuade companies to pay for his silence. Hundreds of investors have paid up to $7,000 a year for stock recommendations from Mr. Elgindy, known as Tony Elgindy and Anthony Pacific.

On Tuesday afternoon, F.B.I. agents arrested Mr. Elgindy and four others in California, New Mexico and Oklahoma. Derrick W. Cleveland, Troy Peters, Jeffrey A. Royer and Lynn Wingate were arraigned in federal courts; a hearing for Mr. Elgindy in San Diego was postponed until tomorrow, a Justice Department spokesman said. Prosecutors hope to consolidate the case in Brooklyn next week, but some of the defendants may oppose the move. Lawyers for four of the five could not be reached for comment or declined to comment. Stephen McCue, Ms. Wingate's lawyer, said she would fight the case and denied any wrongdoing.

The 33-page indictment is another blow to the F.B.I., which already faces complaints from lawmakers about its response to warnings of potential terrorist attacks before Sept. 11. An F.B.I. spokesman said the bureau was distressed by the indictment. The charges include obstruction of justice, racketeering, extortion and insider trading.

According to the complaint, the charges arose from the work of a Justice Department task force formed one week after the Sept. 11 terrorist attacks. Mr. Elgindy has supported Muslim refugees in Kosovo. But the indictment does not mention any connection to terrorism by Mr. Elgindy, or by anyone else it names.

Mr. Royer, who worked at the F.B.I. from 1996 until December 2001, gave Mr. Elgindy and Mr. Cleveland information from confidential government databases about criminal histories and continuing criminal investigations of companies, the complaint said. In return, Mr. Royer received more than $30,000 from Mr. Cleveland, the indictment says.

Mr. Elgindy, who operates two Web sites and and an e-mail stock tip service, then gave the information to his subscribers, hoping to cause the stocks of the companies to fall, the indictment contends. Mr. Elgindy is a short seller, an investor who borrows shares and then sells them, hoping to buy them back later at a lower price, pocketing the difference.

After Mr. Royer left the bureau to join Mr. Elgindy's firm, Pacific Equity Investigations, Ms. Wingate, another F.B.I. agent, began to pass along information to Mr. Elgindy, according to the indictment. In addition, Mr. Royer and Ms. Wingate used their access to F.B.I. databases to monitor the progress of the criminal investigation against Mr. Elgindy and the other conspirators, the indictment says.

Besides publicizing bad news on companies whose stocks they sold short, the conspirators threatened other companies that they would make negative information public if the companies did not give them free stock, the indictment says.

The suspected extortion and manipulation was apparently confined mainly to smaller companies. The indictment does not identify most of the companies that Mr. Elgindy is suspected of threatening, but it indicates that several traded on the over-the-counter bulletin board market, which contains mostly very small companies with relatively few shares. The only company mentioned by name in the indictment, Nuclear Solutions, has a market value of only $2.5 million.

The indictment offers a public peek into the knotty relationship between short sellers like Mr. Elgindy, who profit when companies' stocks fall, and regulators and prosecutors.

Short sellers often detect accounting fraud before government agencies and take the information they have discovered to the F.B.I. and the Securities and Exchange Commission, hoping to prompt investigations. In general, the agencies will listen, especially if the tips come from short sellers with a history of ferreting out troubled companies.

The relationship between Pacific Equity and Mr. Royer began just that way, according to the indictment. In 1999, Mr. Cleveland began giving Mr. Royer tips "concerning individuals and companies that Cleveland claimed were engaged in securities fraud," the indictment said. Some of the tips led to criminal investigations by the F.B.I.

But within a few months, the relationship shifted, and Mr. Royer began offering Pacific Equity information from confidential F.B.I. databases. On Nov. 28, 2000, Mr. Cleveland wired $8,500 to Mr. Royer, and more payments followed, totaling $30,425. The indictment does not contend that Ms. Wingate received any payments for the tips she gave.

At a hearing in Albuquerque yesterday, prosecutors asked that Magistrate Judge Lorenzo F. Garcia order Mr. Royer detained as a flight risk. But they declined to present evidence in open court to support their assertion, and Mr. Royer was released after agreeing to wear a monitoring device, according to his lawyer, Douglas Couleur. Ms. Wingate was released on her own recognizance, Mr. McCue said.

In San Diego, Mr. Elgindy was detained pending a hearing tomorrow, and Mr. Peters was ordered released on $100,000 bond, according to the Justice Department. But Mr. Peters has not yet posted the bond and remains in custody.

The indictment is a strange new turn in the career of Mr. Elgindy, who has already served four months in federal prison for collecting disability benefits while he was still working. Despite his criminal record and the fact that the National Association of Securities Dealers has revoked his broker's license, Mr. Elgindy has a loyal following of small investors and traders who pay up to $600 a month for his stock advice.

During the heights of the Internet bubble, Mr. Elgindy loudly warned his followers, and anyone else who would listen, against buying Internet and small biotechnology stocks. Many of the stocks he took aim at are now bankrupt or have fallen 90 percent or more from their highs.

Those losses, and the fees from his service, have meant big profits for Mr. Elgindy. According to the indictment, he owns several luxury vehicles, including a Bentley and a Hummer, and a home worth $2.2 million.