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Taking Stock FOR TWO years investors in Cleburne watched as First City Proper ties stocks continued to climb. Though some might have suspected that the stock was ‘being manipulated, the relatively small number of players in the town made it seem unlikely that through their trading, Cleburne investors could keep the stock steadily moving up. When the Securities and Exchange Commission _filed a complaint against the “Cleburne Group” in February of 1985, it became obvious that what was involved was -considerably more than buying large blocks in order to inflate the price. Allegations in SEC court documents reveal the magnitude of a scheme that involved Rind, the Cleburne investors, and almost a dozen brokerage houses in four states. A broker who looked at the SEC findings said that they revealed no particular pattern, only an attempt to create an illusion of constant activity on the stock, ‘Several of the alleged transactions, as presented in SEC court complaint, illustrate the magnitude of the dealings: On December 31, 1984, defendant Rogers opened a cash account with Smith Barney in New York City. Defendant Rogers ordered 80,000 shares of FCP on December 31, 1984 at a price of more than $1,460,000, excluding commissions. On January 4, 1985 defendant Rogers purchased a total of 27,400 shares of FCP at a price of $486,350, excluding commissions. On January 7, 1985, defendant Rogers purchased another 5,100 shares and on January 11; 1984 he purchased 13,000 more shares at total prices of $94,350 and $234,000, respectively, excluding commissions, for a total combined debit of $2,274,700. Settlement dates for the first of these transactions was January 8, 1985. From that date until present [February 15, 1985], defendant Rogers has failed to tender payment. [Rogers, after negotiations with a Smith Barney attorney, agreed in late January to cover the firm’s $107,000 loss on the transaction. And, according to the SEC complaint, he unsuccessfully tried to extract a promise from the attorney that Smith Barney would not inform any regulatory* agency of the status of his account.] In or about December of 1984, defendant Rind opened or caused to be opened a margin account for B&M at the [Prudential] Bache office of 4315 Lani Road, Encino, California . . . On or about January 15, 1985, defendant Rind ordered 50,000 shares of FCP stock in the account of defendant B&M, at a total cost of approximately $931;250, excluding commissions. This was the first transaction in the account, at the time of the purchase, there were no securities of funds in the account. [The document continues to explain that Rind delivered to Bache a $50,000 check, drawn on First National Bank of Cleburne, in partial payment of r the Jan. 15, purchase. Bache discovered that there were not sufficient funds to cover the check. Sufficient funds to cover the check were never deposited in a form that alloWed them to be applied to the account.] From on or about January, 4, 1984, defendant Reid entered or caused to be entered in his account, orders for the purchase of 80,000 shares of FCP common stock costing approximately $1,100,000. Settlement was due on these transactions beginning on January 11, 1984. Defendant Reid ordered that the stock be delivered to the First State Bank where Bear Stearns was to receive payment on behalf or its introducing firm. [On January 12, after discovering that funds were not available at First .State Bank, Rooney Pace began liquidating Reid’s FCP stock. The SEC alleged the transaction ultimately cost the office $100,000]. L:D. Jon Webber, seemed to possess an uncanny skill to maintain an open line of credit at the Dallas bank. Webber, according to the Los Angeles Times, told bank investigators that -Torn had such an incredible appetite for borrOwirm that yOu’have no idea.” And While Reid incurred debt, he also cultivated the favor of the bank by bringing in brokered furids large institutional deposits associated with fast-growth banks. But these large blocks of deposits create a false sense of prosperity for banks because they are often quickly withdrawn when institutional depositors perceive any uncertainty or when large loan brbkers persuade iristitutions to move funds elsewhere. At one time $13 million of Energy Bank’s $24 million in total deposits was brokered money. All the while the SEC was closing in on the Cleburne investors. Arid ‘in February of .1985, the game was over. “It all fell out of bed on February 11, 1985 at 11:56 and I lost a little more than a million dollars that day, one FCP investor said, citing the how l when the stock began to drop after a Los Angeles brokerage house liquidated $4 million in FCP stock held as collateral on loans made by the Energy Bank. On the same day, in an action unrelated to the $4 million liquidation, the SEC moved against Rogers, Reid, Rind, and two other collaborators in a New York Federal District Court, charging them with “free riding”, and handing th’erh injunctions not unlike ‘those filed against Reid and Rind in the past. On the following day Rogers held a Cleburne press conference and tried to do some damage control. But FCP stock began a precipitous decline that was fueled by investors scrambling to get what they could for it. Energy Bank, with almost 30 percent of its loans out to Cleburne investors, according to internal bank documents cited in an LA Times story, found many of those loans uncollectable. And even where borrowers had remaining assets, Energy Bankers discovered that the same stocks had often been pledged as collateral on loans made by other institutions. By May, Energy Bank, aswarm with federal paper chasers tryihg to make some sense of what remained was closed by the FDIC. The bank’s remaining assets were transferred to other institutions, its losses underwritten by the federal government. And in Cleburne, the town of 18,000 that represented 70 to 80 percent of the FCP market, bankers began to call in loans’ and investors scrambled to remain solvent. , How much money was lost in Cleburne, a farm and ranch community that had in the past derived much of its wealth from the rolling hills of Johnson County? Rogers argues that many of the figures circulated in the town are exaggerated. “That $20 million is a figure that somebody pulled out of the air,’ Rogers said. But when’ 15 investors met in the office of ‘a Dallas plaintiff’s attorney to discuss liability in the FCP trading scheme, losses among those attending were set at about $25 million, according to a source from Cleburne who attended the meeting. Ten of the fifteen men present were from Johnson County. Where did the money go? Some of it, according to Jay Ethington, the Dallas defense attorney who now represents Mike Rogers, was lost in Las Vegas. Reid had a reputation for gambling large sums of money a reputation that even extended beyond his stock trading. In 1985 the Los Angeles Times reported that the Boardwalk Regency Co. had tried in 1982 to collect $130,240 from Reid to cover interest and $110,000 that he owed them in 1982. And several sources in Cleburne described frequent junkets to Las Vegas. Ethington, a former U.S. attorney, argues that the government is violating one of the fundamental rules of white-collar-crime prosecution: follow the money. “Trace the money, the converted funds. . . In this case all the evidence shows that the bank president, Webber, and the lawyer, Rogers, lost money.” THE TEXAS OBSERVER 17 .0000.78111. rila.Pl afaraWlaVatk ‘:.*rea 3’