SEC target Kott agrees to plead guilty


2004-05-07 21:06 ET - Street Wire

by Brent Mudry

American authorities have finally bagged legendary Canadian penny stock figure Irving Kott, stemming from his secret ownership stake a decade ago in Reynolds Kendrick Stratton, a controversial former Beverly Hills, Calif., brokerage which later became JB Oxford.

Mr. Kott, 73, a long-time resident of Montreal, was charged this week with two felony counts of concealing material facts from the U.S. Securities and Exchange Commission, and has agreed to plead guilty. His plea agreement includes a $1-million fine and five years of probation, but no jail time, based on his and his wife's ailing health and the difficulties of extradition. (All figures are in U.S. dollars.)

The Kott charges and settlement come more than four years after JB Oxford agreed to pay $2-million to settle its part of the criminal securities fraud case. The February, 2000, settlement also required JB Oxford to cut all ties to Mr. Kott.

Although not noted in the current court filings, the SEC's investigation was based on the suspicion Mr. Kott secretly financed his 1993 acquisition RKS through the manipulation and sale of shares of Synergy Renewable Resources, which had been held in the office safe of a Vancouver lawyer in the former Vancouver Stock Exchange tower.

The latest U.S. move comes as Canadian authorities are beefing up their white-collar enforcement teams, in part to counter concerns that Canada is a haven, host and prep school for assorted stock market rogues.


U.S. authorities have been probing Mr. Kott's alleged relationship with RKS for years, and capped their case with a first superseding criminal information and plea agreement, both filed Tuesday in U.S. District Court for the Central District of California in Los Angeles. Mr. Kott, who was a consultant to RKS, renamed JB Oxford & Co., has agreed to plead guilty to concealing his financial relationship to the brokerage's publicly traded parent, JB Oxford Holdings Inc.

The office of Debra Yang, U.S. Attorney for the Central District of California, now confirms Mr. Kott's key role in RKS. According to authorities, in early 1993, the president of cash-strapped company RKS, later renamed JB Oxford, asked Mr. Kott if he could help raise additional capital for the company, and Mr. Kott helped form an investor group to raise money for RKS.

Mr. Kott's downfall stems from forgetting to disclose that he loaned the funds for, and was a beneficial owner of, 322,000 shares of RKS, a greater-than-5-per-cent holding, purchased in 1993 by one of the brokerage's new investors. Mr. Kott also forgot to disclose he was the source of 75-per-cent of $6.5-million of loans made to JB Oxford Holdings by a secretive Swiss company in 1994 and 1995.


In the criminal information, filed May 4, the Department of Justice notes Mr. Kott travelled to and from California at various times between June, 1993, and about August, 1997. The information also mentions, without charge, several other parties: Peter Schlegel, a German citizen living in Switzerland, Oeri Finance Inc., a Swiss financial institution and trust company headed by Felix A. Oeri, and Turret Consultants Inc., a Quebec-based company which allegedly employed Mr. Kott and several of his associates.

The information notes Mr. Kott stepped in to save RKS and its parent RKS Group, which were in a poor financial state in early 1993. "To avoid going out of business, the president of RKS contacted defendant KOTT, and asked if defendant KOTT could help raise additional capital for RKS. In or about the spring of 1993, with assistance from defendant KOTT, an investor group was formed to invest in RKS Group and provide the additional capital necessary to keep RKS and RKS Group from going out of business," states the court filing.

A special meeting of RKS Group's board subsequently agreed on June 11, 1993, to hire Turret Consultants to assist in the development or disposition of brokerage Mountain Financial Inc., later renamed JB Oxford, and RKS Group's brokerage business. The deal called for Turret to be paid $15,000 a month, raised Aug. 27, 1993, to $20,000 a month plus monthly expenses of up to $5,000.

According to authorities, June 11, 1993, was a busy day, not just for the board. Mr. Schlegel, associated with the Kott investor group, purchased 300,000 shares of RKS Group this day, and picked up 32,000 more shares on June 28, 1993.

Undisclosed in regulatory filings are a few intriguing details. First, these share purchases were made in part with funds Mr. Schlegel borrowed from an account which held funds belonging to Mr. Kott and others. Second, Mr. Schlegel pledged the 332,000 shares as collateral. As a result of this secret pledge, Mr. Kott beneficially owned the shares, which accounted for more than 6 per cent of the company's shares.

This share purchase arrangement comprises Count One, to which Mr. Kott has agreed to plead guilty. Count Two, to which Mr. Kott has also agreed to plead guilty two, follows.

Mr. Kott also injected millions of dollars into JBO Holdings. Between September, 1994, and March, 1995, Oeri Finance purportedly loaned $6.5-million to the company. In reality, Mr. Kott arranged loans of $6.5-million, or 75 per cent of this amount, using Oeri as his front conduit. In another secret detail, when Oeri received monthly loan payments, beginning in 1994, it allocated to Turret a portion of the interest, to be used for Mr. Kott's benefit.

Mr. Kott was not a complete stranger. He attended JBO Holdings board meetings on Jan. 25, 1995, and March 10, 1995, purportedly acting as a consultant to Turret, and discussed such matters as the Oeri financing. Alas, "in discussing these matters, defendant KOTT failed to disclose the material fact that he had a substantial interest in the loans purportedly made by Oeri Finance to JBO Holdings, namely that he was to receive the interest payments made by JBO Holdings on these loans," states the information.

Mr. Kott aided and abetted this cover-up in JBO Holdings' 1994 annual 10-K filing, dated April 17, 1995, which falsely stated that only "one shareholder," namely Oeri Finance, had loaned JBO Holdings several million dollars.


In his plea agreement, Mr. Kott is given leniency, namely a downward departure from the U.S. federal sentencing grid guidelines, for several reasons. First, the U.S. government concedes Mr. Kott, who will serve no jail time, could have launched a lengthy and costly extradition battle had he fought the charges. Second, his $1-million combined fine, which includes a $250,000 criminal fine and $750,000 in donations to designated charities and institutions, far exceeds the guideline range of $3,000 to $30,000.

Third, he is now 73 and suffers from significant health problems, including serious cardiovascular problems likely to require surgery in the near future. Fourth, his wife is now legally blind and requires on him for daily assistance. Finally, Mr. Kott may be barred from entering the U.S., where a number of close family members live, including a son, a daughter and five grandchildren, one of whom is undergoing aggressive treatment for advanced Hodgkins lymphoma, a cancer of the lymph system.


Although not noted in the current court filings, Vancouver investigations proved especially fruitful to the SEC's Kott hunt.

In March, 2001, the SEC won a three-and-a-half-year battle to get numerous boxes of highly sensitive documents related to the legendary boiler-room operator, held by a prominent Vancouver securities lawyer. The B.C. portion of the Kott probe, assisted by the B.C. Securities Commission, showed the importance of Vancouver in Mr. Kott's global penny-stock empire.

The BCSC's Kott investigation order included 83 client files held by Howe Street lawyer David Anfield, against whom no allegations were ever suggested. The documents were key to the SEC's assertion that Mr. Kott secretly financed his 1993 acquisition of RKS through the manipulation and sale of shares of Synergy Renewable Resources, which had been held in the office safe of Mr. Anfield.

There was no allegation of wrongdoing by Mr. Anfield, but the lawyer was barred by Law Society of B.C. rules from handing over the extensive Kott documents until any potential solicitor-client privilege was ruled out. As a result, he was forced to foot a heavy bill in the Supreme Court of British Columbia as a judge ruled on the privilege issue.

"It should be said that Mr. Anfield's co-operation has been, with respect, exemplary," stated Vancouver lawyer Mark Skwarok, representing the BCSC and the SEC.

The Vancouver treasure trove of documents included numerous files relating to Turret, Oeri Finance and a host of other alleged Kott fronts and associates.