NEW YORK -- State and city authorities said yesterday that they have busted an elaborate stock swindle in the over-the-counter market in which thousands of "suckers" lost more than $10 million buying stock from unethical brokers.
Three brokerage houses and 21 brokers were indicted under a 3-year-old New York state law designed to prosecute organized crime. It was the first time the law had been used in connection with the financial markets.
Manhattan District Attorney Robert M. Morgenthau said the defendants had manipulated the stock prices of six technology companies whose shares were traded over the counter. When (( the inflated stocks collapsed, several thousand shareholders were wiped out.
"You had young married couples . . . firemen, teachers . . . There were a lot of small investors who were wiped out," Mr. Morgenthau said at a news conference.
The brokers put phony stock quotes into a computer system to artificially inflate the share prices, authorities said.
The scheme appeared to highlight the vulnerability of the National Association of Securities Dealers Automated Quotation (NASDAQ) system, through which many over-the-counter stocks are traded.
The brokerage houses charged were fairly obscure -- Wakefield Financial Corp., Kelly Trading Co. and G. K. Scott & Co. Wakefield and Kellyhave since gone out of business, making it unlikely that the investors will be able to recoup any of their
losses, authorities said.
The brokers "were getting suckers to buy the stock. . . . They were 'crossing' the stock -- buying it from one and selling it to another at artificially high prices," Mr. Morgenthau said. "Eventually, the pyramid collapsed."
The alleged fraud occurred from 1987 to 1990. It started falling apart in March 1989, when Wakefield went out of business. Without the brokerage to prop up the stocks, prices crashed, authorities said.
The fall came so fast that investors in Topologix Inc., a now-defunct technology company, and ComponentGuard Inc., a company that sells warranties, lost $6 million in one week. Other companies named were Weaver Arms Corp., R W Technology Inc., Phoenix Advanced Technology Inc. and Media Products Inc.