Stock Fraud Case Shines Light on Bad News Bearers

NEW YORK — When federal agents Wednesday broke up an alleged securities scam that included two FBI agents, they shined a light on a murky and controversial corner of Wall Street that thrives on bad news.

Authorities indicted Internet-based stock trader Amr I. “Anthony” Elgindy and four others, charging them with a fraud that involved driving share prices lower rather than higher.

The 34-year-old Elgindy, who operates from Encinitas, has earned the respect of many small investors as an outspoken “short seller”--someone who seeks to expose companies that are more hype than substance. Short sellers bet that a stock’s price will fall, and profit if it does.

In the indictment unveiled Wednesday in Brooklyn, N.Y., the government charged Elgindy, two associates, one current and one former FBI agent with a fraud that involved using confidential government information to target companies for short selling.

The case opens a view to the ties many professional short sellers have cultivated with securities regulators, law enforcement officials, news reporters and others who have an interest in halting and preventing frauds.

Those relationships have long involved the sharing of information. Though despised by many corporate managers, short sellers frequently produce some of the hardest-hitting research on Wall Street to back up their attacks on what they view as fraudulent businesses and overpriced stocks.

Elgindy, however, developed a bond with government agents that turned criminal, authorities allege.

According to the 33-page indictment brought by the U.S. attorney’s office in Brooklyn, Elgindy and associate Derrick W. Cleveland in 1999 began a relationship with Jeffrey A. Royer, then an FBI special agent in Oklahoma City.

As the Internet-stock frenzy was building to a climax, first Cleveland and then Elgindy began giving Royer tips about companies and individuals they suspected of perpetrating stock fraud, the indictment states.

Elgindy and Troy Peters, another associate, “sometimes reported negative information about targeted companies to the U.S. Securities and Exchange Commission and the Federal Bureau of Investigation in order to initiate or hasten regulatory and law enforcement action, which they knew would cause the stock prices to fall sharply once such action became public,” the indictment says.

As a short seller, that served Elgindy’s purposes: In a short sale, a trader borrows stock (usually from a brokerage) and sells it, betting that the market price will drop.

If the bet is correct, the short seller can buy back the borrowed shares at a lower price and pocket the difference between that price and the sale price.

Short sellers can provide the useful function of puncturing over-hyped stocks and, sometimes, exposing criminal activity. In one celebrated case, ZZZZ Best Co., a phony carpet-cleaning company headed by Barry Minkow in Reseda, was exposed as a fraud by short sellers in the 1980s.

But short sellers have long been accused of being abusive, sometimes planting false rumors about companies they have shorted to drive the stocks lower.

Beginning in 2000, the government said Wednesday, Elgindy induced Royer to start a flow of information in the opposite direction: According to the indictment, Royer began tapping the FBI’s confidential computer databases and supplying his informants with dirt from ongoing federal criminal investigations of companies.

Cleveland paid Royer for the data, wiring him a total of $30,425 in four payments between Nov. 28, 2000, and May 31, 2001, the indictment says.

Elgindy allegedly put the information out over the Internet via his $600-a-month subscription service, AnthonyPacific.com, so that he and his subscribers could launch coordinated short-selling attacks on the target companies, the government alleges.

After subscribers got first crack, much of the information was later disseminated elsewhere, such as on the Silicon Investor Web site, popular with small investors.

Moreover, in a classic shakedown, Elgindy, Cleveland and Peters used the FBI information to extort payments from companies, threatening to wreck the firms’ reputations unless they agreed to pay the traders with company stock, the indictment says.

In December, Royer quit the FBI and joined Elgindy’s investment firm, Pacific Equity Investigations. Royer’s role as a funnel of confidential FBI material was soon taken over by Lynn Wingate, a special agent based in Albuquerque, the indictment states.

Former federal prosecutor Christopher J. Bebel of Houston’s Shepherd, Smith & Bebel law firm, said that FBI agents sometimes trade information with sources in order to gain their trust.

“To the extent possible, the FBI generally prefers to make it a one-way street. They know they’re dealing with untrustworthy people,” Bebel said Thursday.

He speculated that Elgindy would make his role as an FBI informant a major part of his defense. “Oftentimes, it is difficult to convict an informant. They have a history of convincing juries that they viewed their activities as being done on the government’s behalf,” Bebel said.

Elgindy remained in federal custody in San Diego on Thursday, awaiting a court hearing this morning, when a judge will weigh the government’s request that he be held without bail on grounds he’s a “flight risk,” said Shane Harrigan, an assistant U.S. attorney.

Jean Knight, a San Diego lawyer said to be representing Elgindy, did not immediately return a call seeking comment Thursday.

Elgindy has long operated with a flamboyant style, prone to blustering against his opponents on the Web and elsewhere. A former employee of the National Assn. of Securities Dealers recalls Elgindy walking into NASD’s Dallas office a couple of years ago and purposely letting his jacket flap open to reveal a holstered handgun.

Two years ago, Elgindy served nearly four months in prison for fraudulently collecting disability payments in the mid-1990s while he continued to work as a stockbroker, according to a complaint brought by the U.S. attorney’s office in Fort Worth.

On Elgindy’s Web sites he held little back, chastising companies he felt should be shorted, calling them “overvalued pigs.” Yet at times he admitted to reporters that he’d suffered from depression.

Nonetheless, he enjoyed the wealth that short selling and his advice to other investors provided him. There’s his 3.9-acre estate in the seaside town of Encinitas, in north San Diego County, valued at $2.2million, which the FBI raided Tuesday in search of evidence.

And there’s a fleet of vehicles that include a 2001 Bentley with the license plate “ZEROBID,” a nod to the short seller’s dream of watching a stock crash all the way to $0.

Message boards on the Silicon Investor Web site and elsewhere buzzed Thursday with reaction to Elgindy’s arrest.

Said one posting about Elgindy: “I guess all those threats to use his FBI contacts [to thwart his detractors] finally came back to bite him.”

But another investor said: “I read the indictment and it seems to me that the FBI and [U.S.] attorney have it in for the agent, Tony and shorters in general. Perhaps it’s the natural jealousy that civil servants have for successful people in the private sector. Perhaps it’s because Tony acted like he was a ‘deputized’ FBI agent in the fight against stock fraud. Perhaps it was Tony’s in-your-face approach to stock fraud. He really made fun of con men and took jabs at the FBI and SEC for not doing enough to prevent it.”