Hartley T. Bernstein spends his days exploring the piranha-infested shoals of the penny-stock market, where cheap, thinly traded stocks can be rigged to generate enormous profits for insiders.
In a spare bedroom of his eight-room Georgian-style apartment on Park Avenue in Manhattan, he searches the Internet for clusters of seemingly unrelated companies that use the same obscure accountants, lawyers and underwriters, and share the same mysterious offshore investors. He looks for flaws, fibs and fantasies in corporate documents -- like one company's plan to sell stock and use it to take over AOL Time Warner, AT&T, General Electric and, for good measure, General Motors. Then Bernstein posts his conclusions on StockPatrol.com, his Web site, to warn investors away.
Some of his most faithful readers are market regulators. Following his road maps, federal investigators have found and shut down frauds they might have missed. Occasionally, he tips regulators in advance, before his targets realize that he is on their trail. One prosecutor called his assistance "singular."
His cooperation has helped the government build criminal cases against at least 34 people.
Bernstein is so good at what he calls "connecting the dots" of complicated penny-stock frauds for one good reason: five years ago, he was a formidable dot himself.
Through his law firm, Bernstein & Wasserman, he worked for some of the most notorious penny-stock manipulators of the past two decades: Stratton Oakmont, Biltmore Securities and Sterling Foster. He also worked for a host of forgettable little companies whose stocks those firms manipulated.
But in reality, he worked for Randolph Pace -- a wily Wall Street veteran who, with Meyer Blinder and Robert E. Brennan, made up what one lawyer has called "the three tenors of the penny-stock world."
(Blinder was jailed for securities fraud in 1992, after the collapse of his firm, Blinder, Robinson & Co. Brennan, the smiling force behind the equally infamous First Jersey Securities, is serving a nine-year prison term after being convicted of fraud in 2001.)
What makes Bernstein's apparent turnaround remarkable is its rarity. Recidivism is so common in the penny-stock world that some law enforcement experts are instinctively skeptical of anyone who claims to have left its temptations behind.
But several prosecutors and regulators have been persuaded by Bernstein, a small, dark, boyish-looking man of 51 who began to cooperate with the government in the fall of 1998. He spent hundreds of hours coaching investigators on how to decipher Pace's complex deals. He confirmed information from other sources and "gave the government sufficient confidence" to seek an indictment against Pace in November 1998, one prosecutor said.
The government later expanded its case to include two additional penny-stock firms and several new defendants. Bernstein also provided background information about Stratton Oakmont's deals with the shoe designer Steve Madden, who pleaded guilty to fraud and money laundering in 2001 and was sentenced last spring to 41 months in prison.
In May 1999, Bernstein, too, pleaded guilty to securities fraud, conspiracy and perjury and agreed to forfeit US$850,000 in illegal profits. He prepared to testify when Pace came to trial on charges of secretly controlling Sterling Foster and prospering from its roughly US$200 million in fraudulent business. That did not become necessary. Pace pleaded guilty in 2000 and last April and was ordered to pay nearly US$135 million in restitution to investors and was sentenced to eight years and four months in prison.
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