http://www.911truth.org/dossier/dossier0.html
Wednesday, September 01, 2004
A Saudi Financier's Squeeze Play
http://www.businessweek.com/magazine/content/03_19/b3832095_mz020.htm
A Saudi Financier's Squeeze Play
How a Minnesota brokerage firm fell prey to a complex stock-loan deal
For Eldon C. Miller, Sept. 24, 2001, should have been a banner day. Although the rest of the financial world was still in shock over September 11 and the resulting market turmoil, things had rarely looked better for MJK Clearing Corp Inc., a major unit of his Minneapolis securities firm, Stockwalk Group Inc. MJK, which is engaged in the humdrum but vital task of handling trades for other brokerage firms, had just enjoyed its best week ever, buoyed by a surge in trading that followed the terrorist attacks. But Miller's rejoicing was short-lived.
When the amiable Minnesotan, now 62, returned to his office after a celebratory lunch with friends, he was faced with staggering news: The firm he had spent 20 years building into a regional powerhouse -- which handled $12 billion in assets for its 175,000 customers -- was flat broke. He felt helpless, out of control. It was all over. Within a day, the NASD prodded him to shut MJK's doors. And two days later, MJK and its affiliates were in bankruptcy court, being liquidated by the Securities Investor Protection Corp. (SIPC), which shields investor money when brokerage houses go bust.
The price tag for MJK alone: more than $335 million.
The dizzying turn of events left Miller and his son, MJK Chief Operating Officer Todd W. Miller, in the grip of despair. But what came next -- and what has preoccupied the Millers ever since -- was even more disturbing. They had been victims of a complex scheme, described in three lawsuits as a vast fraud, in which Adnan Khashoggi, a storied Saudi financier and shadowy former arms dealer, was a key figure.
MJK, it turns out, was far from the only casualty. As detailed in a small mountain of court papers, others include E*Trade Securities as well as A.G. Edwards, Wedbush Morgan Securities, Robert W. Baird & Co., Pax Clearing, and Ferris, Baker Watts. The alleged perpetrators range from an executive at Deutsche Bank Securities in Toronto to stock promoter Rafi Khan and a motley pair of New Jersey brokers, one a convicted felon.
As spelled out in the lawsuits, the scheme centered around the shares of a California-based company, controlled by Khashoggi, called GenesisIntermedia Inc. The company was involved in making infomercials and running Internet kiosks. Khashoggi allegedly cashed out his shares in this company at inflated prices -- but not by dumping them on the public in the tried-and-true method of pump-and-dump schemes. Instead, the victims were brokerages.
Suits filed by MJK trustee James P. Stephenson and the firms allege that Khashoggi and a colleague loaned out the stock to the brokerages -- and in return received cash collateral that they never intended to pay back. To maximize the amount of cash squeezed out of the stock-lending process, the stock price had to rise and, according to lawsuits, that was done by extensive hyping of the stock. When Genesis shares collapsed in the wake of September 11, Khashoggi and a close ally, Genesis CEO Ramy El-Batrawi walked away with millions of dollars in cash -- the exact amount is unknown -- leaving the brokerages that had borrowed shares holding the bag. The most hard-hit victim was MJK. The whole mess is only now being sorted out, and has spawned investigations by the U.S. Attorney's office in Los Angeles and the Securities & Exchange Commission.
Court documents and interviews reveal that an arcane, usually risk-free corner of the securities business was exploited for the illegal benefit of a few. It is a tale that raises some troubling questions about the continued ability of stock scamsters, and others working on the fringes of Wall Street, to turn illicit profits despite close scrutiny by regulators. Now, as investigators pore over details of the scheme, the Millers' misfortune -- though partly caused by their lack of adequate financial controls -- is forcing brokerage firms to rethink routine practices that up until now have seemed virtually risk-free.
Most of the accused parties would not comment for this article. Khashoggi, a fugitive in a Thai criminal case who is believed to be living in Cannes, France, was served with the suits in April. He has not yet responded to any of the lawsuits and could not be reached for comment.
THE SCHEME. Stock lending rarely gets much attention. In this low-margin and usually safe operation, firms borrow hundreds of millions of dollars' worth of stock from one another every day and post constantly changing cash collateral for it. Often the borrowers loan stock to other firms, which loan them out again. These are -- almost always -- routine transactions for routine business purposes. They mainly take place because stock loans are a key part of the mechanics of short-selling. Short-sellers bet on stock price declines by first borrowing the stock and then selling it, in the hope of buying it back at lower prices. The stock is borrowed for the shorts by their brokers.
The stock at the center of the scheme, GenesisIntermedia, was a classic product of the Internet bubble. GENI, its stock symbol and nickname, once marketed videos based on John Gray's Men Are From Mars, Women Are From Venus book series and was developing a modest business installing Internet kiosks in shopping malls. The company went public in June, 1999, for about $8.50 a share. Its stock leaped to a peak of about $60 a share, before a stock split in mid-2001, powered by a tide of plugs on business-TV programs.
As sketched out in various lawsuits, most of the major components of the scheme were in place by sometime in 2000. Khashoggi and El-Batrawi, described in court papers as a longtime Khashoggi friend, owned 77.5% of the company through Ultimate Holdings, a Bermuda holding company. (El-Batrawi could not be located and has not responded to the suits. One of his attorneys declined to comment). Khashoggi allegedly began the scheme by loaning out his shares to the New Jersey brokerage Freeman Securities.
A senior manager at Freeman, Richard Evangelista, was a key link in the chain. Freeman loaned GENI shares to MJK, which then loaned them out to other retail brokerage firms. The securities unit of Deutsche Bank in Toronto, run by Wayne Breedon, a longtime stock loan executive -- and a buddy of Evangelista's -- was the ultimate borrower. Each of the borrowers paid cash collateral that they expected to receive back when they eventually returned the stock. When the price of borrowed shares increases, borrowers are expected to pay the lenders additional -- and likewise refundable -- cash collateral.
Breedon was also a central figure in the scheme, according to court papers. To his supervisors, the GENI transactions appeared to be routine. However, according to the suits, Breedon was scheming on behalf of Khashoggi and El-Batrawi, in return for a promise that he would be compensated. Breedon borrowed the stock from several firms and provided the bank's money as collateral. The cash collateral then worked its way back through the chain of borrowers including Freeman, later absorbed into a firm called Native Nations, to Khashoggi and El-Batrawi. Attorneys for Breedon, who is now on administrative leave, and Deutsche Bank deny any improprieties on their part. In a statement, a spokeswoman says the bank is "confident that Deutsche Bank Securities will be found not to have been knowingly involved in any alleged fraud or manipulation." The bank, which says it lost an undisclosed amount in the affair, is contesting the allegations in the lawsuits.
Another alleged participant, Kenneth D'Angelo, was also from New Jersey. He knew his way around the stock loan business. He pleaded guilty to conspiracy to defraud and to wire fraud in 1985 in connection with fraudulent stock-loan deals and phony purchases and sales of securities that took place from 1978 to 1982. D'Angelo knew Breedon well and talked with him often -- usually with Deutsche's tape recorders, which routinely tape such calls, tracking their blunt and sometimes foul-mouthed chats.
D'Angelo, reached in Edison, N.J., by BusinessWeek, declined to comment. Evangelista and D'Angelo have both cited their Fifth Amendment right against self-incrimination in some of the litigation. In the Minnesota court papers, Breedon, Evangelista, and D'Angelo are described as "three old friends" who "hatched and orchestrated" the scheme. Some payoffs would sometimes come in ways other than cash. According to the lawsuit filed by E*Trade Securities, D'Angelo and Breedon spoke of making sure there were "goodies and extras for the boys," which the suit alleges El-Batrawi delivered in the form of expense-paid vacations, dinners, parties, sports tickets, and, at least twice, prostitutes. Once D'Angelo was taped telling Breedon, "you're going to get money out of this thing.... It's just a case of how we're doing it." A Deutsche attorney notes there are no specific allegations of Breedon actually being compensated.
In all, the scheme's participants dumped at least 7.2 million shares of GENI stock into the stock-lending chain between 1999 and 2001. As its price rose, the value of their shares rose commensurately, soaring to more than $130 million. And the collateral, which theoretically had to be paid back someday, continued to flow from borrowers to lenders -- ultimately Khashoggi and his associates, according to the suits.
THE HYPE AND THE SQUEEZE. The climb in GENI's price was no accident. Even while the company's dubious prospects should have sent the stock sliding, its valuation was lifted by the relentless hype of promoters who allegedly had been paid off by the company, according to the E*Trade complaint and a class action pending in California. According to the lawsuits, the hype, which helped boost the collateral paid out, was an essential part of the conspiracy. But that is hotly denied by the promoters. One GENI booster, independent money manager and financial commentator Courtney Smith, endorsed the stock 18 times in various appearances on CNBC, CNN, and other media outlets. GENI paid him in company stock, the suits charge. Smith, who says he sold a Web-site business to Genesis for company stock, denies playing any role in a "pump-and-dump" scheme, adding that he lost money when GENI's shares plunged.
Another GENI advocate, a former stockbroker named Rafi Khan who was barred from the securities industry by regulators, recommended buying the GENI shares. In a May, 2001, analyst report, Khan forecasted a "short squeeze" that would ratchet up GENI's price. According to court documents, he was right.
Short-sellers get squeezed when the stock they've borrowed rises sharply. Alternatively, it can happen when the lender demands his stock back or when brokerages conduct an involuntary "buy-in." Either way, the shorts can lose substantial amounts of money when they cover their positions. That is precisely what happened after Khan met with GENI officials, according to the class action. Khan denies engaging in any short squeeze or indeed that there was one. He told BusinessWeek he has cooperated with SEC investigators looking into the matter.
The squeeze pushed up share prices -- and, yet again, the amount of cash collateral paid to lenders of GENI stock, including Khashoggi. The trustee's suit quotes the transcript of a conversation in early January, 2001, in which Breedon and D'Angelo discussed how they were making life miserable for the short-sellers. Breedon: "Well, yeah, I mean there's no bloody stock out there." D'Angelo: "There's none. We got 5 million and change and there's only 6.4 million shares outstanding." Breedon: "Just buy the suckers in." D'Angelo: "Yep." Breedon: "Keep buying them in, buying them in."
THE FINAL PAYOFF. Initially at least, MJK had little reason for suspicion. Sure, GENI was a speculative stock, but in the stock-loan and short-selling business, most are, says Eldon Miller. Still, Breedon's supervisors in New York became nervous. In a March, 2001, conversation, Breedon's superiors were clearly uncomfortable that the bank appeared to be hoarding the stock and aiding a short squeeze. The trustee's suit says Breedon's managers in the end "simply walked away from the problem once Deutsche had been protected from the loss."
Deutsche Bank, the trustee says, insulated itself by dealing with well-capitalized firms that paid up when the bank demanded its collateral back. For their part, attorneys for the bank say the bank's actions amounted to nothing more than prudent risk management. MJK, which was dealing with Native Nations, turned out to be not so lucky.
When GENI's stock plunged after the September 11 attacks, almost all of Deutsche's cash collateral was returned. Then came a problem: MJK did not have enough money to pay back all that it owed other firms. It refunded about $65 million in cash collateral but still owed more. However, MJK was owed the cash collateral it had paid to the firm it borrowed the shares from, Native Nations.
Only one problem: Native Nations wasn't paying. In fact, it wasn't in business by then. Native Nations had closed its doors because it didn't have enough cash, either. According to the trustee, it was owed money by Khashoggi and his cohorts, and they weren't paying. Native Nations collapsed, leaving MJK $40 million in the hole -- short that much in capital with which to operate.
By the time the miserable news hit the Millers like a blackjack on Sept. 24, the damage had been done and was irreversible. The turnabout was especially painful for Todd, now 39, because he oversaw MJK's stock-loan department and had hired its executives. Todd had started working at his father's firm at 18 and earned both his certified public accounting license and MBA degree in Minnesota while working there. He was the one who had to tell his father they faced a fatal crisis. "I was just sick to my stomach," he recalls. The Millers and other partners rapidly called officials at the Federal Reserve Bank of Minneapolis and the NASD in Kansas City, Mo. They were prodded to cease operations and the liquidation was begun.
The time since has been just as trying. For a while, the Millers and their partners were under a cloud. Todd Miller and several colleagues were accused of negligence by the SIPC trustee, who faulted them for "inadequate" controls. The trustee charged that "no system of supervision existed, not even a minimal one," blasting MJK for a "complete failure" to provide for limits on the stock-loan deals. The beef with the Millers has been settled as part of a $15 million global settlement by insurers and others involved, and the trustee is certain MJK was not part of the scheme. Still, some longtime customers and ex-colleagues have been cool to the Millers, and Eldon was even ridiculed in the Minneapolis Star Tribune at Thanksgiving, 2001, as one of the "turkeys" of the year.
Today, Eldon Miller is working as a bond salesman at Miller Johnson Steichen Kinnard, salvaged from the wreckage of the old firm. His son is a vice-president. The failure has cost Eldon his personal fortune of $7 million and Todd about $1 million. Says Todd Miller: "The cumulative result of 19 years of work were just gone in a day." What's more, while MJK's customers were almost entirely made whole by the SIPC, the firm still owes creditors some $50 million, which Todd Miller says he's working to pay off over 10 years.
Most of the lawsuits are unresolved. E*Trade and Ferris, Baker Watts, for instance, filed suit accusing Nomura Securities of being involved in the alleged scheme, through a former stock-loan executive at Nomura in Toronto. Nomura denied any such culpability and sued E*Trade in federal court in New York, demanding $9.9 million it says E*Trade owes it.
For the proud Midwesterners who used to own MJK, the litigation could bring ultimate vindication. But they have a more immediate concern: repairing the damage to their good names. That "has been the hardest thing of all," says Todd Miller. To him, the business "is my whole life." Just as they built the firm to begin with, both Millers are determined to rebuild. The schemers, they vow, will not win.
By Joseph Weber
With Gary Weiss in New York
A Saudi Financier's Squeeze Play
How a Minnesota brokerage firm fell prey to a complex stock-loan deal
For Eldon C. Miller, Sept. 24, 2001, should have been a banner day. Although the rest of the financial world was still in shock over September 11 and the resulting market turmoil, things had rarely looked better for MJK Clearing Corp Inc., a major unit of his Minneapolis securities firm, Stockwalk Group Inc. MJK, which is engaged in the humdrum but vital task of handling trades for other brokerage firms, had just enjoyed its best week ever, buoyed by a surge in trading that followed the terrorist attacks. But Miller's rejoicing was short-lived.
When the amiable Minnesotan, now 62, returned to his office after a celebratory lunch with friends, he was faced with staggering news: The firm he had spent 20 years building into a regional powerhouse -- which handled $12 billion in assets for its 175,000 customers -- was flat broke. He felt helpless, out of control. It was all over. Within a day, the NASD prodded him to shut MJK's doors. And two days later, MJK and its affiliates were in bankruptcy court, being liquidated by the Securities Investor Protection Corp. (SIPC), which shields investor money when brokerage houses go bust.
The price tag for MJK alone: more than $335 million.
The dizzying turn of events left Miller and his son, MJK Chief Operating Officer Todd W. Miller, in the grip of despair. But what came next -- and what has preoccupied the Millers ever since -- was even more disturbing. They had been victims of a complex scheme, described in three lawsuits as a vast fraud, in which Adnan Khashoggi, a storied Saudi financier and shadowy former arms dealer, was a key figure.
MJK, it turns out, was far from the only casualty. As detailed in a small mountain of court papers, others include E*Trade Securities as well as A.G. Edwards, Wedbush Morgan Securities, Robert W. Baird & Co., Pax Clearing, and Ferris, Baker Watts. The alleged perpetrators range from an executive at Deutsche Bank Securities in Toronto to stock promoter Rafi Khan and a motley pair of New Jersey brokers, one a convicted felon.
As spelled out in the lawsuits, the scheme centered around the shares of a California-based company, controlled by Khashoggi, called GenesisIntermedia Inc. The company was involved in making infomercials and running Internet kiosks. Khashoggi allegedly cashed out his shares in this company at inflated prices -- but not by dumping them on the public in the tried-and-true method of pump-and-dump schemes. Instead, the victims were brokerages.
Suits filed by MJK trustee James P. Stephenson and the firms allege that Khashoggi and a colleague loaned out the stock to the brokerages -- and in return received cash collateral that they never intended to pay back. To maximize the amount of cash squeezed out of the stock-lending process, the stock price had to rise and, according to lawsuits, that was done by extensive hyping of the stock. When Genesis shares collapsed in the wake of September 11, Khashoggi and a close ally, Genesis CEO Ramy El-Batrawi walked away with millions of dollars in cash -- the exact amount is unknown -- leaving the brokerages that had borrowed shares holding the bag. The most hard-hit victim was MJK. The whole mess is only now being sorted out, and has spawned investigations by the U.S. Attorney's office in Los Angeles and the Securities & Exchange Commission.
Court documents and interviews reveal that an arcane, usually risk-free corner of the securities business was exploited for the illegal benefit of a few. It is a tale that raises some troubling questions about the continued ability of stock scamsters, and others working on the fringes of Wall Street, to turn illicit profits despite close scrutiny by regulators. Now, as investigators pore over details of the scheme, the Millers' misfortune -- though partly caused by their lack of adequate financial controls -- is forcing brokerage firms to rethink routine practices that up until now have seemed virtually risk-free.
Most of the accused parties would not comment for this article. Khashoggi, a fugitive in a Thai criminal case who is believed to be living in Cannes, France, was served with the suits in April. He has not yet responded to any of the lawsuits and could not be reached for comment.
THE SCHEME. Stock lending rarely gets much attention. In this low-margin and usually safe operation, firms borrow hundreds of millions of dollars' worth of stock from one another every day and post constantly changing cash collateral for it. Often the borrowers loan stock to other firms, which loan them out again. These are -- almost always -- routine transactions for routine business purposes. They mainly take place because stock loans are a key part of the mechanics of short-selling. Short-sellers bet on stock price declines by first borrowing the stock and then selling it, in the hope of buying it back at lower prices. The stock is borrowed for the shorts by their brokers.
The stock at the center of the scheme, GenesisIntermedia, was a classic product of the Internet bubble. GENI, its stock symbol and nickname, once marketed videos based on John Gray's Men Are From Mars, Women Are From Venus book series and was developing a modest business installing Internet kiosks in shopping malls. The company went public in June, 1999, for about $8.50 a share. Its stock leaped to a peak of about $60 a share, before a stock split in mid-2001, powered by a tide of plugs on business-TV programs.
As sketched out in various lawsuits, most of the major components of the scheme were in place by sometime in 2000. Khashoggi and El-Batrawi, described in court papers as a longtime Khashoggi friend, owned 77.5% of the company through Ultimate Holdings, a Bermuda holding company. (El-Batrawi could not be located and has not responded to the suits. One of his attorneys declined to comment). Khashoggi allegedly began the scheme by loaning out his shares to the New Jersey brokerage Freeman Securities.
A senior manager at Freeman, Richard Evangelista, was a key link in the chain. Freeman loaned GENI shares to MJK, which then loaned them out to other retail brokerage firms. The securities unit of Deutsche Bank in Toronto, run by Wayne Breedon, a longtime stock loan executive -- and a buddy of Evangelista's -- was the ultimate borrower. Each of the borrowers paid cash collateral that they expected to receive back when they eventually returned the stock. When the price of borrowed shares increases, borrowers are expected to pay the lenders additional -- and likewise refundable -- cash collateral.
Breedon was also a central figure in the scheme, according to court papers. To his supervisors, the GENI transactions appeared to be routine. However, according to the suits, Breedon was scheming on behalf of Khashoggi and El-Batrawi, in return for a promise that he would be compensated. Breedon borrowed the stock from several firms and provided the bank's money as collateral. The cash collateral then worked its way back through the chain of borrowers including Freeman, later absorbed into a firm called Native Nations, to Khashoggi and El-Batrawi. Attorneys for Breedon, who is now on administrative leave, and Deutsche Bank deny any improprieties on their part. In a statement, a spokeswoman says the bank is "confident that Deutsche Bank Securities will be found not to have been knowingly involved in any alleged fraud or manipulation." The bank, which says it lost an undisclosed amount in the affair, is contesting the allegations in the lawsuits.
Another alleged participant, Kenneth D'Angelo, was also from New Jersey. He knew his way around the stock loan business. He pleaded guilty to conspiracy to defraud and to wire fraud in 1985 in connection with fraudulent stock-loan deals and phony purchases and sales of securities that took place from 1978 to 1982. D'Angelo knew Breedon well and talked with him often -- usually with Deutsche's tape recorders, which routinely tape such calls, tracking their blunt and sometimes foul-mouthed chats.
D'Angelo, reached in Edison, N.J., by BusinessWeek, declined to comment. Evangelista and D'Angelo have both cited their Fifth Amendment right against self-incrimination in some of the litigation. In the Minnesota court papers, Breedon, Evangelista, and D'Angelo are described as "three old friends" who "hatched and orchestrated" the scheme. Some payoffs would sometimes come in ways other than cash. According to the lawsuit filed by E*Trade Securities, D'Angelo and Breedon spoke of making sure there were "goodies and extras for the boys," which the suit alleges El-Batrawi delivered in the form of expense-paid vacations, dinners, parties, sports tickets, and, at least twice, prostitutes. Once D'Angelo was taped telling Breedon, "you're going to get money out of this thing.... It's just a case of how we're doing it." A Deutsche attorney notes there are no specific allegations of Breedon actually being compensated.
In all, the scheme's participants dumped at least 7.2 million shares of GENI stock into the stock-lending chain between 1999 and 2001. As its price rose, the value of their shares rose commensurately, soaring to more than $130 million. And the collateral, which theoretically had to be paid back someday, continued to flow from borrowers to lenders -- ultimately Khashoggi and his associates, according to the suits.
THE HYPE AND THE SQUEEZE. The climb in GENI's price was no accident. Even while the company's dubious prospects should have sent the stock sliding, its valuation was lifted by the relentless hype of promoters who allegedly had been paid off by the company, according to the E*Trade complaint and a class action pending in California. According to the lawsuits, the hype, which helped boost the collateral paid out, was an essential part of the conspiracy. But that is hotly denied by the promoters. One GENI booster, independent money manager and financial commentator Courtney Smith, endorsed the stock 18 times in various appearances on CNBC, CNN, and other media outlets. GENI paid him in company stock, the suits charge. Smith, who says he sold a Web-site business to Genesis for company stock, denies playing any role in a "pump-and-dump" scheme, adding that he lost money when GENI's shares plunged.
Another GENI advocate, a former stockbroker named Rafi Khan who was barred from the securities industry by regulators, recommended buying the GENI shares. In a May, 2001, analyst report, Khan forecasted a "short squeeze" that would ratchet up GENI's price. According to court documents, he was right.
Short-sellers get squeezed when the stock they've borrowed rises sharply. Alternatively, it can happen when the lender demands his stock back or when brokerages conduct an involuntary "buy-in." Either way, the shorts can lose substantial amounts of money when they cover their positions. That is precisely what happened after Khan met with GENI officials, according to the class action. Khan denies engaging in any short squeeze or indeed that there was one. He told BusinessWeek he has cooperated with SEC investigators looking into the matter.
The squeeze pushed up share prices -- and, yet again, the amount of cash collateral paid to lenders of GENI stock, including Khashoggi. The trustee's suit quotes the transcript of a conversation in early January, 2001, in which Breedon and D'Angelo discussed how they were making life miserable for the short-sellers. Breedon: "Well, yeah, I mean there's no bloody stock out there." D'Angelo: "There's none. We got 5 million and change and there's only 6.4 million shares outstanding." Breedon: "Just buy the suckers in." D'Angelo: "Yep." Breedon: "Keep buying them in, buying them in."
THE FINAL PAYOFF. Initially at least, MJK had little reason for suspicion. Sure, GENI was a speculative stock, but in the stock-loan and short-selling business, most are, says Eldon Miller. Still, Breedon's supervisors in New York became nervous. In a March, 2001, conversation, Breedon's superiors were clearly uncomfortable that the bank appeared to be hoarding the stock and aiding a short squeeze. The trustee's suit says Breedon's managers in the end "simply walked away from the problem once Deutsche had been protected from the loss."
Deutsche Bank, the trustee says, insulated itself by dealing with well-capitalized firms that paid up when the bank demanded its collateral back. For their part, attorneys for the bank say the bank's actions amounted to nothing more than prudent risk management. MJK, which was dealing with Native Nations, turned out to be not so lucky.
When GENI's stock plunged after the September 11 attacks, almost all of Deutsche's cash collateral was returned. Then came a problem: MJK did not have enough money to pay back all that it owed other firms. It refunded about $65 million in cash collateral but still owed more. However, MJK was owed the cash collateral it had paid to the firm it borrowed the shares from, Native Nations.
Only one problem: Native Nations wasn't paying. In fact, it wasn't in business by then. Native Nations had closed its doors because it didn't have enough cash, either. According to the trustee, it was owed money by Khashoggi and his cohorts, and they weren't paying. Native Nations collapsed, leaving MJK $40 million in the hole -- short that much in capital with which to operate.
By the time the miserable news hit the Millers like a blackjack on Sept. 24, the damage had been done and was irreversible. The turnabout was especially painful for Todd, now 39, because he oversaw MJK's stock-loan department and had hired its executives. Todd had started working at his father's firm at 18 and earned both his certified public accounting license and MBA degree in Minnesota while working there. He was the one who had to tell his father they faced a fatal crisis. "I was just sick to my stomach," he recalls. The Millers and other partners rapidly called officials at the Federal Reserve Bank of Minneapolis and the NASD in Kansas City, Mo. They were prodded to cease operations and the liquidation was begun.
The time since has been just as trying. For a while, the Millers and their partners were under a cloud. Todd Miller and several colleagues were accused of negligence by the SIPC trustee, who faulted them for "inadequate" controls. The trustee charged that "no system of supervision existed, not even a minimal one," blasting MJK for a "complete failure" to provide for limits on the stock-loan deals. The beef with the Millers has been settled as part of a $15 million global settlement by insurers and others involved, and the trustee is certain MJK was not part of the scheme. Still, some longtime customers and ex-colleagues have been cool to the Millers, and Eldon was even ridiculed in the Minneapolis Star Tribune at Thanksgiving, 2001, as one of the "turkeys" of the year.
Today, Eldon Miller is working as a bond salesman at Miller Johnson Steichen Kinnard, salvaged from the wreckage of the old firm. His son is a vice-president. The failure has cost Eldon his personal fortune of $7 million and Todd about $1 million. Says Todd Miller: "The cumulative result of 19 years of work were just gone in a day." What's more, while MJK's customers were almost entirely made whole by the SIPC, the firm still owes creditors some $50 million, which Todd Miller says he's working to pay off over 10 years.
Most of the lawsuits are unresolved. E*Trade and Ferris, Baker Watts, for instance, filed suit accusing Nomura Securities of being involved in the alleged scheme, through a former stock-loan executive at Nomura in Toronto. Nomura denied any such culpability and sued E*Trade in federal court in New York, demanding $9.9 million it says E*Trade owes it.
For the proud Midwesterners who used to own MJK, the litigation could bring ultimate vindication. But they have a more immediate concern: repairing the damage to their good names. That "has been the hardest thing of all," says Todd Miller. To him, the business "is my whole life." Just as they built the firm to begin with, both Millers are determined to rebuild. The schemers, they vow, will not win.
By Joseph Weber
With Gary Weiss in New York
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