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.
PHOTO: NY TIMES
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.
By the time Bernstein pleaded guilty, his career was in ruins. He had been disbarred. His law partners had walked out on him. He could not seek a new job while he faced prison, but he was desperate to keep busy.
A new leaf
In July 1999, after carefully sounding out his own lawyer and the government, he started StockPatrol, which he saw as a logical extension of the guidance he had been providing to investigators. He began by scanning hyberbolic chat groups and e-mail messages on the Internet for the latest hot penny-stock tip. Then he would scour the touted company's public paperwork, looking for red flags.
He found them -- and regulators paid swift attention. Following are a few examples:
-- On Jan. 31, 2000, he published the first of several articles questioning whether Wellness Universe, a small health services company, was really the target of a $1 billion takeover bid, as it claimed. Eleven days after the first article, regulators halted trading in the shares, and three months later, the company's founder, George Pappas, was indicted in Manhattan. In January 2001, Pappas pleaded guilty to charges that he concocted a phony takeover to drive up the stock price so he and his family could sell for a quick profit of US$2.3 million. He is awaiting sentencing.
-- On March 4, 2001, Bernstein advised regulators that he would be running an article the next day about the Ives Health Co, a little Oklahoma concern that claimed to have a new AIDS drug. On the next day, regulators halted trading and, a month later, the company and its founder, M. Keith Ives, were indicted in Manhattan on federal conspiracy and wire fraud charges. Ives denies the charges and is scheduled for trial in June.
-- In September 2002, Bernstein questioned the growth prospects claimed by the Vector Holdings Corp., whose primary business was a stuffed-potato booth at a Florida shopping mall. A month later, the Securities and Exchange Commission accused the company, its president and its transfer agent of violating securities laws -- in part for not disclosing that the president, Allen E. Weintraub, had a criminal record. Weintraub and the companies have settled the cases without admitting wrongdoing, but the penalties have yet to be determined.
When Bernstein came before Judge Loretta A. Preska in US District Court in Manhattan for sentencing in June, the many letters submitted on his behalf included one from Cameron K. Funkhouser, a vice president of the NASD's regulatory arm. Speaking only for himself, Funkhouser cited his "very positive relationship" with Bernstein, adding, "My office has opened several successful cases" based on his leads.
Richard D. Owens, the assistant US attorney who prosecuted Bernstein, also cited StockPatrol at the hearing, but added that when Bernstein first came to the government, "we, of course, raised our eyebrows a bit."
And no wonder. Owens knew that operating a "fraud detection" site is hardly an untainted concept. One effort, StockDetective.com, foundered two years ago after its parent company was found by federal prosecutors to have been the target of a stock manipulation scheme. And in May, a stock adviser, Amr Ibrahim Elgindy -- whose Web sites, insidetruth.com and anthonypacific.com, promised to expose penny-stock schemes -- was indicted in Brooklyn on federal charges of operating a stock manipulation and extortion racket. He denies the charges and is scheduled for trial in June.
But Owens told Preska that he was impressed by Bernstein's effort.
"Whatever doubts we had about his motives or his purposes or his intents have quickly fallen away," he said.
Preska added her own endorsement.
"You have used your time and your talent in a way to help investors avoid just the sorts of things that you had previously used your time and talents to impose," she said. "I applaud you for your work." She sentenced him to two years' probation.
A charming rogue
His quiet days running StockPatrol bear almost no resemblance to his life as an adviser to Pace's raucous empire. Like Blinder and Brennan, Pace was an intelligent, urbane, charming rogue. He survived many regulatory cases over the years and continued to prosper even after his firm, Rooney Pace, was expelled from the securities industry in 1988.
By then, Pace's business was thoroughly intertwined with Bernstein's law practice. After graduating from Columbia and the New York University Law School, Bernstein worked at two midsize firms in Manhattan and spent a few idealistic years on the city's special narcotics prosecution squad. But in 1982, at the age of 30 -- "just young enough not to be afraid," he said -- he set up on his own. A lawyer he knew had become general counsel for Rooney Pace and had tossed a bit of business to the eager Bernstein.
By the mid-1980s, Rooney Pace was nearly a quarter of his growing firm's business. Did Pace's reputation worry him?
"I did not really see the penny-stock world as separate from the real world," he said. "I had customers who had problems with Shearson brokers or Merrill Lynch brokers that cost them far more money than some of my cases for Rooney Pace involved."
Even after Rooney Pace closed in late 1987, Pace's friends hired Bernstein. As the 1990s opened, Bernstein & Wasserman was growing like a weed.
Those were lavish, lunatic days. Pace and his friends "lived to party," Bernstein recalled. "They had `boys' nights out' that would go on for weeks," he added.
There were binges at elegant restaurants, junkets to lush resorts, shopping sprees at Armani, recuperative weeks at some palm-studded spa.
Occasionally, Bernstein and his wife, Debra L. Cherney, were invited along. One New Year's Eve, they joined the Paces and three other couples for a Broadway show and dinner at Nobu, a top Manhattan restaurant. Another day, Bernstein was suddenly invited to join Pace's entourage for a private-jet excursion to Atlantic City, New Jersey.
The wild bunch
Through it all, Bernstein said, he still thought of himself as an ethical person who just happened to represent "a bunch of people who were scoundrels." He concedes, "My business was so completely dependent on this group of clients -- I was blinded by that."
Joel M. Cohen, a former federal prosecutor who worked on cases involving Stratton Oakmont, recalls his frustration with Bernstein's myopia. "Hartley was described by insiders as a 'player,' somebody who, in one way or another, understood the game, knew the rules and went along with them," he said. "He was living in denial; he really was."
Even when government pressure forced Sterling Foster to close in 1997, Bernstein still felt immune. "My impression, looking back, is that Randy Pace tried to keep me at arm's length from anything that was actually unlawful," he said, almost wistfully.
But closing one eye to Pace's unsavory past clearly affected Bernstein's depth perception. He invested in several fraudulent deals and lied about those deals to regulators. He had crossed the line.
One afternoon in September 1997, he learned that several of Pace's friends were striking deals with prosecutors and talking -- about him. Shocked and frightened, he hired a lawyer, Scott A. Edelman of Milbank, Tweed, Hadley & McCloy.
Looking back now, his days in the Pace empire seem to him to have occurred a lifetime ago -- one specific lifetime ago: that of his daughter, Raine. She was born on Dec. 17, 1997, shortly after her father came under investigation, and died on June 3, 2001, of what is believed to have been an asthma-related seizure.
"When all this happened with Hartley, we thought it was the end of the world," mused his wife, herself a lawyer, the family breadwinner and a loyal defender of her husband's essential decency.
"But I remember thinking that day: I thought I had problems -- I didn't know what a real problem was."
They are both active in bereavement support groups and still hope for a family. Bernstein, meanwhile, says he is exploring ways to turn StockPatrol into a profitable, but still lawful, venture -- perhaps by expanding it into a radio program or a book.
His admirers among the enemies of penny-stock fraud say they are confident that Bernstein's redemption is genuine and that he will resist future temptations. But even they cannot explain why he can see so clearly now what he could not see for so long: the dots that add up to fraud.
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