Dadante admits stock fraud

Plea deal involves accounts at Ferris

August 17, 2007|By Paul Adams | Paul Adams,SUN REPORTER

An Ohio investment manager who used brokerage accounts at Baltimore's Ferris Baker Watts to carry out a stock manipulation scheme pleaded guilty yesterday to two counts of securities fraud and agreed to cooperate in a continuing federal probe.

The agreement, filed in U.S. District Court in Cleveland, calls for David A. Dadante to serve a minimum of 10 years in prison - more than former Enron Corp. Chief Financial Officer Andrew S. Fastow is serving for his role in that company's collapse - and make restitution to about 100 investors.

More than $28 million was lost in what started as a Ponzi scheme and grew into a market fraud that drew investigators' attention to Dadante's trading at Ferris and half a dozen other firms.

Investigators say Dadante looted his fund to finance gambling junkets to Las Vegas and a luxury home in a Cleveland suburb.

The plea agreement says Dadante was aided by others in the fraud, but provides no details of who those people are.

"I have every belief that this is not a one-time deal with my client," said Mark A. Stanton, Dadante's attorney. "I do assume they're going to continue with their investigation."

Investigators said the fund manager used some of the $47 million he collected from investors to open accounts at Ferris and make fraudulent trades in shares of Duluth, Ga.-based Innotrac Corp. in an effort to boost their value. The brokerage extended Dadante as much as $18.4 million in credit to finance purchases of the thinly traded stock even as his trading patterns were raising concerns among some Ferris employees.

On one occasion, when Dadante needed to raise funds quickly to cover debts to another brokerage, his broker at Ferris bought $600,000 worth of Dadante's Innotrac shares with money from other clients' accounts without their knowledge, investigators said.

The Securities and Exchange Commission and Justice Department continue to investigate Ferris' trades for Dadante. Legal experts say the probe could take months or years to complete.

Ferris shook up its management this spring after hiring outside counsel to conduct its own investigation. Six executives and two traders went on leave at various points; three of the executives eventually resigned or retired. They included former chief executive Louis Akers and general counsel Ted Urban.

A Ferris spokeswoman declined to comment on Dadante's plea, noting that he was a customer and not an employee of the firm.

`Substantial harm'

"Today's guilty pleas are the result of a substantial amount of work on the part of the FBI and Cleveland office and the Securities and Exchange Commission in Chicago," said Justin Roberts, the assistant U.S. attorney who handled the case. "The offenses [for] which Dadante now stands convicted caused substantial harm to the investing public and damaged the integrity of our public markets."

Legal experts said the plea agreement is a strong indication that Justice officials expect to target others. "Typically, jurisdictions don't offer individuals cooperation agreements unless they believe they're going to be able to utilize that person's information and ultimately gain their testimony [against others]," said Charles Ross, a New York criminal defense attorney and expert in securities law.

Ferris has said in financial documents that it believes investigators are focusing on Dadante's broker, who has been identified in other documents and interviews as Stephen J. Glantz. The criminal information and plea agreement in Dadante's case make numerous references to Dadante's broker at Ferris, though not by name. Glantz, who left the firm in 2005, has told The Sun he did nothing wrong.

Through a review of Ferris' trading records and interviews with traders, investigators determined Dadante used at least four illegal trading techniques to artificially increase the share price of Innotrac from $2.19 a share in October 2002 to a high of about $12 in March 2004. He accumulated 4.2 million shares of Innotrac, giving him a 34 percent stake in the company.

The Sun reported in April that the trading occurred even as Ferris' internal watchdogs were flagging problems in Dadante's account. The firm's compliance department told top executives they believed Dadante's trading had caused Innotrac's share price to increase and that he had violated securities laws by not making required regulatory filings, among other things.

Bid higher

Court documents say Dadante often bought small blocks of Innotrac shares throughout the day, incrementally raising the price with each purchase. He routinely refused help from Ferris' stock traders to seek the best price, as is customary. Instead, he requested they use his own schedule of increasingly higher bids, the documents said.

At other times, he would call Ferris' trading desk minutes before the close of markets and buy Innotrac shares at a price slightly higher than the previous bid. Called "marking the close," the tactic has the effect of raising the closing price of the shares. Investigators said the trades served no other purpose than to manipulate the market.

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