US authorities late Thursday charged Saudi financier Adnan Khashoggi and four others with scheming to defraud brokers out of $130 million by artificially boosting the stock of now-defunct telemarketer GenesisIntermedia Inc.
The US Securities and Exchange Commission said the scheme operated between September 1999 and September 2001 and led to the collapse of several broker-dealers and the largest bailout in the history of the Securities Investor Protection Corp, which helps investors hit by fraud.
The SEC's civil lawsuit names Khashoggi, and his firm Ultimate Holdings Ltd; Ramy El-Batrawi, the former chief executive of GenesisIntermedia, and Douglas Jacobson, who was chief financial officer at the Van Nuys, Calif.-based company.
Also named for their roles in the scheme were Wayne Breedon, who was suspended in 2002 as head of the stock loan department at Deutsche Bank Securities Ltd in Toronto, and Richard Evangelista, who was head of the stock loan department at Native Nations Securities brokerage firm.
The SEC alleged in the suit that Ultimate Holdings, an off-shore entity controlled by El-Batrawi and Khashoggi, loaned about 15 million GenesisIntermedia shares to more than a dozen brokerage firms who paid for the shares with the belief that they were borrowing shares from reputable brokerage firms.
As part of the scheme, Ultimate Holdings would receive payments when the stock price rose and was obligated to return cash to the brokers when the stock price dropped.
"By lending the shares in this manner, El-Batrawi and Khashoggi raised approximately $130 million without giving up control of the stock or depressing the market price for the stock," the SEC said in a statement about its suit filed in a federal court in Los Angeles.
The case led SEC investigators to examine the role of financial commentator, Courtney Smith, whom the SEC said touted GenesisIntermedia stock on financial television programs while being secretly compensated $95,000 in payments and about $1 million in stock.
In February 2005, the SEC sued Smith saying he was compensated through payments made to his girlfriend and her vitamin business. That case is still pending.