Wall Street Crime And Punishment: The Mafia, Micro-Cap Market And The 'Largest Securities Fraud Takedown In History'

Does crime pay?

Wall Street Crime and Punishment is a weekly series by Benzinga's Phil Hall chronicling the bankers, brokers and financial ne’er-do-wells whose ambition and greed take them in the wrong direction.

For many years, the Mafia experienced a public relations problem. Admittedly, much of this situation was self-inflicted. After all, when your traditional business enterprises consist of bootlegging, racketeering, extortion, narcotics, unlicensed gambling and prostitution, the chances of winning awards for corporate social responsibility are rather slim.

But that’s not to say the Mafia is completely evil. Indeed, this family-run operation has been actively involved in a wide variety of highly respectable industries including hospitality, entertainment, logistics and construction. And some mob leaders were highly active in civic engagement — most notably Chicago’s Sam Giancana, who coordinated a distinctive get-out-the-vote effort in the 1960s that has been cited by several historians as helping to bring John F. Kennedy to the presidency.

Indeed, there have been some people who viewed the Mafia as a holistic corporate entity. For example, entertainer Debbie Reynolds, who encountered several members of this organization during her years of Las Vegas residency, once commended the Mafia on how it handled human resources issues by observing, “No one got killed who wasn’t supposed to be.”

Of course, whacking recalcitrant business owners who unwisely declined bribery requests can certainly be a colorful way to make the living, but the Mafia also had a serious side, especially in regard to its desire to be an active participant in the financial services industry.

Alas, a few regrettable bad habits seeped into its efforts blend within the Wall Street environment, which pinged the radars at both the Federal Bureau of Investigation and the U.S. Securities and Exchange Commission, resulting in Operation Uptick, which made the antics of Jordan “Wolf of Wall Street” Belfort look like Snoopy in comparison.

Leave The Stocks, Take The Cannoli: On the morning of June 14, 2000, 600 FBI agents and police officers rounded up 120 individuals in 13 states on charges related to such mayhem as racketeering, securities fraud, pension fund fraud, bribery of brokers and union officials, extortion, money laundering, witness tampering and solicitation to commit murder.

Those who found themselves in handcuffs that morning included 57 stockbrokers — both the licensed and unlicensed variety — along with 12 stock promoters, two accountants, an attorney, an investment advisor, a hedge fund manager and the treasurer of New York City’s police detectives pension fund.

Eleven of the arrested were simply identified as being “alleged members of Mafia crime families.” This endeavor was unusual in that it united each of the five major independently-focused Mafia families in its coordination.

The arrests were the end-product of a 10-month investigation dubbed Operation Uptick, which was informally known within the FBI and SEC as “The Mob on Wall Street.” This was one of the largest arrest sweeps in a criminal case in the history of American law enforcement.

We’re Bigger Than U.S. Steel: The Mafia’s presence on Wall Street was initially subtle with perhaps the earliest known acknowledgment of its presence occurring in November 1970 with a Mafia-involved securities fraud lawsuit filed by the U.S. Attorney for New York's Southern District in conjunction with the SEC.

But the Mafia did not get more involved until the mid-1990s when federal law enforcement agencies curtailed the mobsters’ successful garbage-hauling cartels and evicted them from lower Manhattan’s Fulton Fish Market. Suddenly facing a loss in the hundreds of millions, the Mafia shifted gears.

The mobsters integrated themselves into the micro-cap market, which was easier to control than the more regulated mainstream securities market. But the Mafia’s full-throttle arrival on Wall Street was easily the financial services industry’s worst-kept secret — a 1996 Business Week investigation and a 1997 New York Times probe spelled out what was happening.

The exact details of how the Operation Uptick shenanigans came about remain sketchy, but it is known that in 1995 a brokerage called DMN Capital Investments was set up as the front for this endeavor. This company was operated by Robert A. Lino and Salvatore Piazza, allegedly of the Bonnano crime family, and James S. Labate and Frank A. Persisco, allegedly of the Bonnano and Colombo family. The other three organized-crime families — the Gambinos, Lucheses and Genoveses — also had a stake in DMN.

The DMN team may not have come to Wall Street with Wharton degrees, but they understood how to get results. According to the indictments brought against them, they would secretly pay brokers sales extravagant commissions with some going up to 50% of the proceeds obtained from investors for their private placements.

One of the companies that DMN was eager to promote was Ranch 1 Inc., a well-known fast-food chain, of which two of the company’s officers, Sebastian Rametta and James F. Chickara, were alleged Colombo family associates.

Another company hyped by DMN was Manhattan Soup Man, a New York City eatery that tried to borrow its personality from the Soup Nazi episode of “Seinfeld,” and E-Pawn.com, a Florida-based firm that presented itself as a cutting-edge participant of the growing dot-com frenzy.

But most of their securities placements involved obscure and sketchy ventures that flew far under the proverbial radar.

Not every broker was enchanted by DMN’s palm-greasing outreach. Where money didn’t work, fists and threats were sometimes required to seal the deal. In announcing the Operation Uptick indictments, prosecutors duly noted the use of physical intimidation and assaults against brokers who didn’t respond positively to DMN’s initial inquiries.

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An Offer They Can’t Refuse: At its peak, DMN was trading 19 micro-cap stocks. Most of the investors in these stocks were elderly people trying to generate some extra post-retirement income, but DMN also netted some impressive institutional investors including New York City-based pension funds for Production Workers Local 400, the International Union of Operating Engineers Local 137 and the Detectives' Endowment Association, which serves members of the New York Police Department.

The police involvement in this scheme came via Stephen E. Gardell, a retired New York City police detective who served as treasurer of the Detectives’ Endowment Association. In the indictment against him, Gardell was charged with taking kickbacks from DMN to make illegal investments on behalf of the detective's pension fund, with the funds from this convoluted relationship being channeled into offshore bank accounts before finding their way back into the Bonanno family coffers.

If that wasn’t bad enough, Gardell also reportedly leaked confidential law enforcement information about organized crime to his Mafia benefactors, arranged for crime figures to secure gun permits and parking permits, and helped influence the outcome of an investigation into the one of the defendants collared in Operation Uptick.

How Did Things Ever Get So Far? The majority of those arrested in Operation Uptick were convicted and many of the micro-cap stocks involved in this scheme were delisted from their exchanges and later went out of business.

All told, the Mafia’s Wall Street misadventures defrauded investors out of $50 million. Mary Jo White, U.S. attorney for the Southern District of New York, announced the Operation Uptick arrests as the “largest securities fraud takedown in history.”

White accused the Mafia of “controlling crews of corrupt brokers, sometimes entire branches of brokerage firms, bribing other brokers to sell and fraudulently inflate the price of stocks, running high-pressure boiler rooms, bribing union officials and fiduciaries to breach their duty to their members, and using violence and threats of violence to enforce and tighten the enterprise's criminal grip.”

Still, the Mafia was keeping up with the times — White added the endeavor was “enhanced by the use and abuse of the Internet” with the then-newfangled e-mail blitz strategy to “fraudulently hype stocks.”

Just When I Thought I Was Out: Did the Mafia learn its lesson about trying to muscle into the investing world? In a word, no.

In 2017, Italian Senator Lucrezia Ricchiuti warned that the Mafia was planning to use cryptocurrency to strengthen its gambling activities.

“This means we need more and more effort to refine strategies to avoid the situation when the virtual currencies could hide Italian Mafia members and help their money laundering,” she said.

And in June 2020, the Financial Times reported that global investors purchased $1.1 billion in bonds backed by front companies owned and operated by Southern Italy's ‘Ndrangheta Mafia group. Pension funds, hedge funds, retail investors and even the Vatican were suckered into these transactions.

Obviously, an Operation Uptick Part 2 should be coming up in the very near future.

Photo: Marlon Brando in "The Godfather," courtesy of Paramount Pictures.