Novatek scalded unwary Misinformation: Getting in was easy. Inaccurate announcements and hard-sell tactics lured many to buy stock in Novatek. Getting out was another matter.

February 16, 1997|By Mark Guidera | Mark Guidera,SUN STAFF Clara Germani, Moscow correspondent for The Sun, contributed to this story.

In hindsight, Peter Toth, a young police officer, says he should have known better than to bet $175,000 on what sounded like a sure thing.

But in January 1996 the Smithtown, N.Y., resident bought 70,000 shares of a little-known stock that a broker at Jos. Roberts & Co., a Pompano Beach, Fla., stock brokerage, assured him was on the verge of explosive growth and a rapid run-up in its share price.

The company: Columbia-based Novatek International Inc., a seemingly high-flying technology company aggressively marketing medical diagnostic test kits overseas.

Today, Toth's $175,000 investment is virtually worthless; shares that hit nearly $13 in September trade for pennies. And Novatek, which is in bankruptcy proceedings, is the focus of a federal investigation into what could be one of the nation's largest, and more complicated, cases of stock fraud involving a small, publicly traded company, according to securities experts.

"The game these people had going was incredible. It was a hoax from the very beginning," concludes Toth, 35, now that the Securities and Exchange Commission has launched a fraud investigation and Novatek has been booted off the Nasdaq small-cap market.

Investigators are trying to determine whether unsuspecting investors, such as Toth, bought the stock based on misleading and inaccurate information.

"We are very concerned about what was going on and the information being disseminated to investors. We are examining it closely," said Paul Huey-Burns, an investigator with the SEC.

At the center of the Novatek investigation, according to the SEC, are William P. Trainor, a flamboyant New Englander with a long history of fraud, including at least two convictions and a two-year stint in a federal penitentiary; Vincent D. Celentano, a wealthy and prominent Florida businessman and a neighbor of Trainor in the exclusive, beachfront community of Hillsboro Beach, Fla.; and Jos. Roberts and its two principals, Joseph DeSanto, 27, and Robert DiMarco, 31, who have run afoul of securities regulators before.

No one has been charged with wrongdoing, and SEC investigators don't yet have a tally of investors' losses. Estimates of individual losses range as high as $1 million.

Also on the hook are Wood Gundy London Ltd., a British unit of one of Canada's leading stock brokerages, and Bermuda-based Cameron Capital Management Ltd. Together they lent Novatek $7.5 million last year.

The Novatek case highlights just how easily holes in the regulatory system can be exploited for potentially huge financial gain, say securities experts.

That concern has become acute as the number of public companies has proliferated, flooding the SEC with 12 million pages of documents a year; in addition, the number of Americans invested in stocks has mushroomed.

At the same time, scandals involving companies trading on the same exchange as Novatek, the Nasdaq small-cap market, prompted the National Association of Security Dealers to tighten listing requirements.

A three-month investigation of Novatek by The Sun has found that there was, at the very least, a well-orchestrated plan to hawk highly speculative stock as a sound growth investment strategy to unwary investors.

The Sun investigation included a review of SEC documents and court records and more than 60 interviews with former Novatek and Jos. Roberts employees, securities and civil litigation lawyers, SEC investigators, shareholders and others.

In November, The Sun showed that Novatek's stock price had shot up 75 percent largely on the company's announcements of five multimillion-dollar contracts it said it had landed in Latin America. But four of those contracts did not exist at all, and the fifth, a deal in Chile, had been seriously misrepresented.

The foundation for the venture was a complicated merger that, on paper, transformed Novatek from a money-losing steel building system manufacturer into a high-technology venture.

Novatek moved to Columbia from Boynton Beach, Fla., last summer to be near Universal Healthwatch Inc., a privately held sister company developing the test kits. Shorn of its construction business, Novatek's headquarters became a small office within Universal's in a Columbia office building. Its new president worked largely out of his Rockville home.

The merger created nearly 17 million unregistered shares of Novatek stock, most of which were distributed to shell companies and family trusts controlled by Celentano and Trainor, as well as to Jos. Roberts & Co.

Some unregistered shares, records and interviews show, were sold to American investors. Investigators are attempting to determine under what circumstances the unregistered shares were sold.

Securities law has long required companies to register stock with the SEC if it is to be sold to the public. An expensive and time-consuming process, registration is meant to ensure that important financial and operational information about a company and its management is made public. It also subjects a security offering to SEC scrutiny.

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