By the time he graduated in 1985, Tony Altavilla ranked third in career touchdown receptions at Wabash College in Crawfordsville, an all-male institution that likens itself to the best conservative liberal arts colleges of New England.
His star rose again recently, when the member of Carmel’s Crooked Stick Country Club led a committee that helped the Pete Dye-designed course score the 2009 U.S. Senior Open Championship.
But the Wabash man and golfing buddy of the affluent now finds himself in the spotlight for unflattering reasons. A local family charges Altavilla and his Carmel-based Summit Financial Partners illegally brokered and promoted penny stocks that later collapsed in value, resulting in $7.4 million in losses.
Plaintiffs in the Hamilton Circuit Court case filed this spring include local hedge fund manager Richard F. Thompson, his family members and their private investment funds, including Parabolic Investment Fund LP.
In a phone interview and in court filings, Altavilla denied doing anything improper. His attorney says the Thompsons failed to conduct due diligence befitting their duties as fund managers and, to cover their own losses, went to court to shake Altavilla by the ankles for cash.
Regardless of how the case plays out, it provides a rare glimpse into the life of a stock promoter-those who make money in a little-regulated corner of the investment world, pitching stocks of speculative, emerging companies in return for a fee.
That fee is usually paid in shares of the stock being promoted. The shares typically trade over the counter, rather than on an established exchange. It’s perhaps the ultimate compensation for a skilled promoter: The higher the stock rises, the higher the compensation.
Some securities lawyers say promoters can serve a valuable purpose. Few brokerages are willing to do offerings under $25 million these days. That’s led to the establishment “of what I would call an informal market,” said Hugh H. Makens, Michigan’s former securities commissioner and now a partner in Grand Rapids, Mich., law firm Warner Norcross & Judd.
Trouble is, far more upstart companies flop than flourish. Court and regulatory records show some of the companies Altavilla pitched flamed out in spectacular fashion, leaving investors with shares worth little or nothing.
And because promoters can make a lot of money if a stock spikes higher-even if the gains are temporary-observers say fraud is commonplace. Promoters might issue press releases to hype new product lines or new marketing agreements, driving shares higher. But when they quit hyping, shares tank.
“You’ve got to say, ‘Why is this person sending me this tip?’ Good fairies just don’t come and give you stock tips,” said Henry Domash, publisher of Winning Investing, a California-based newsletter and Web site.
Touting lucrative, firms risky
Altavilla spent part of the 1990s promoting stocks for California-based Liviakis Financial Communications, where he was a senior vice president. From 1991 to 1998, he worked as manager of the institutional equity sales desk and syndicate department at Ohio-based NatCity Investments. He founded Summit Financial four years ago.
Big companies typically don’t hire promoters like Altavilla. But young firms with stock trading for less than $5 a share are often desperate to raise capital by selling additional equity.
They hire Altavilla to write press releases, with his name often appearing as the investor-relations contact. He also works his contacts to drum up new investors, in return for a finder’s fee.
For example, Fort Lauderdale-based Relationserve Media Inc., which provides online marketing, said it paid Altavilla a finder’s fee of 7 percent for “introductions [he made] to investors not already having a pre-existing relationship with the company.”
Under a 2005 consulting agreement with Relationserve, Altavilla received 787,500 company shares, Securities and Exchange Commission records show. By late 2005, he held 3.2 million shares, or 7.9 percent of the company, then worth $9.6 million.
Late last month, with company shares tumbling, Altavilla planned to sell 420,000 shares for estimated proceeds of $512,000, according to SEC records.
In a March SEC filing, he said he intended to sell 87,000 of his shares of New Jerseybased U.S. Medsys Corp., another ex-client, generating estimated proceeds of $18,270.
Last year, he r e p o r t e d s e l l i n g 129,500 of his shares of another client, Multiband Corp., a Minnesota voice and data systems firm, generating proceeds of $207,200.
But many of the stocks Altavilla has promoted have proved volatile for investors.
For instance, in 2000 he signed a consulting agreement with California-based BioPulse International Inc., which was in the business of treating cancer and other diseases by insulin-induced sleep therapy.
But the supposed cutting-edge treatments some patients paid $70,000 to obtain wound up under scrutiny. Stories popped up in California and on national TV about patients who declined radiation treatment to try the BioPulse procedures and soon died.
In 2001, the Federal Trade Commission began investigating BioPulse’s claims. Mexican authorities temporarily shut its Tijuana clinic. BioPulse stock, which hit $12 in late 2000, imploded to about a penny in 2002.
In July 2002, the principals of BioPulse reached a settlement with the FTC permanently barring them from misrepresenting the safety of treatments.
Altavilla’s employer at the time, Liviakis Financial, received 1 million restricted shares of company stock plus a $100,000 finder’s fee for introducing lenders and equity investors, according to SEC records. Altavilla received 104,250 restricted shares.
The investing site StockLemon.comblasted Liviakis and Altavilla as “notorious for masterminding the fraud cancer cure clinic.”
After founding Summit in Carmel, Altavilla helped promote U.S. Medsys Corp., a development-stage firm formed to provide medical technology and support services to the health care industry.
Starting in early 2004, the company sold 2.1 million shares of stock at $1.75 a share to 45 investors, raising nearly $3.8 million. Among the investors were the Thompsons, who allege they’ve subsequently lost $1.3 million on the stock.
According to SEC records, Summit Financial received a finder’s fee equal to 7 percent of the gross proceeds of the private placement, or $263,718. It’s not clear if the fee was paid in cash or stock.
In 2003, Medsys issued Altavilla’s firm 500,000 shares of common stock in exchange for its consulting services.
By late 2005, Medsys was in trouble. Its accounting firm issued a letter raising “substantial doubts about its ability to continue as a going concern.”
The company hangs on, but its shares trade at a fraction of a cent.
Who’s responsible for losses?
For experienced financial managers to invest in such speculative companies, then claim they were duped, may be a hard argument to make in court.
According to SEC records, Richard F. Thompson worked 18 years for Solomon Smith Barney Inc., until 2002. Since then, he has operated Carmel-based R.F. Thompson Investment Advisors Ltd.
Thompson also is known in community circles. For example, he’s served as a board member of the Eiteljorg Museum of American Indians and Western Art.
His Carmel firm manages eight accounts worth $8 million of mostly “high-net-worth individuals,” according to the company’s filing with the SEC. The firm is registered as an investment adviser with the Indiana Securities Division.
Thompson’s Parabolic Investment Fund LP, a hedge fund, requires a minimum investment of $25,000 and has an asset value of $2.9 million, according to the SEC report.
So why, asks Altavilla attorney Thomas Satrom, of Locke Reynolds LLP, did licensed and experienced fund managers like the Thompsons rely on his client, who wasn’t registered as a broker dealer with state regulators?
Satrom said Thompson may have had more day-to-day contact with executives of the firms he invested in than did Altavilla.
“To me, that’s the irony of this whole thing,” Satrom said.
Thompson attorney Richard Bell, of Cohen & Malad, said even sophisticated investors do not have to accept “fraud.”
“It is unequivocal that Mr. Altavilla is not a registered broker dealer or agent. That’s a violation of Indiana state law,” Bell added.
The Thompson suit raises a bigger question of whether Altavilla and countless other stock promoters should be licensed by the states.
The Indiana Securities Division confirmed Altavilla is not registered with the agency, which Altavilla readily acknowledges. He says he doesn’t have to register since he doesn’t handle actual transactions.
His Carmel firm, Summit, is “an investment relations firm. We don’t sell securities,” Altavilla said flatly.
More regulation needed?
The distinction between promoter and broker isn’t always clear to others, however, including regulators and securities attorneys.
“This vast and pervasive ‘gray market’ of brokerage activity creates continuing problems for the unlicensed brokers, the businesses [that] rely upon them for funding” and other professional-service providers involved in selling stock, the American Bar Association’s Task Force on Private Placement Broker-Dealers said in a report issued last year.
“It is the position of the Securities and Exchange Commission and most state securities law administrators that a person who accepts a fee for introduction of capital more than once is probably engaged in the business of selling securities for compensation and required to be registered,” the task force wrote.
As a practical matter, though, enforcement can be difficult. For example, Indiana securities law has no specific definition of “finder,” said Brad Skolnik, who was Indiana securities commissioner until 2002 and now is an attorney at Indianapolis law firm Stewart & Irwin.
“Frankly, there are a lot of promoters out there that fly under the radar screens,” Skolnik said.
Because the difference between broker and promoter can be gray, and cases are often fact-intensive, regulators tend to focus limited resources on other cases. Plus, “there are some very reputable finders out there who make every effort to comply with the law,” Skolnik said.
Another defendant in the Thompson suit has come to Altavilla’s defense.
New York-based private investment firm Barron Partners LP, which sold the Thompsons 1 million shares of the now-defunct World Health Alternatives Inc. in 2004, denies that Summit or Altavilla served as broker in the sale.
Pittsburgh-based World Health, which arranged medical staffing for health care firms, constituted the bulk of the Thompson stock losses.
The Thompson suit alleges Altavilla “facilitated” the purchase and “execution and exchange of the appropriate stock purchase agreements and wire transfers of funds between the parties.”
In court papers, Barron denies that.
The Thompson complaint also alleges Altavilla never mentioned the stock couldn’t be sold for two years. While that condition is in the stock-purchase agreement, Thompson attorney Bell said Thompson did not receive and sign the document until after he’d paid.
The suit also charges that World Health shares weren’t registered with the Securities Division, but should have been, and that Altavilla failed to tell investors about the company’s deteriorating financial condition.
Altavilla wrote press releases for World Health and at one time held 3 million shares, or 6 percent of the stock.
According to the suit, Altivilla urged the Thompsons to keep their stock, with the purpose of maintaining an artificially high price. Around the same time, the suit says, Altivilla sold 2 million of his shares, and other investors also were selling.
In late 2004, Altavilla brought World Health executives Richard McDonald and John Sercu to Richard Thompson’s home to discuss buying additional shares, according to the suit. The Thompson family then bought another 500,000 shares.
Last August, World Health said it found numerous financial discrepancies. Its stock fell more than 85 percent over three days.
The news appeared to surprise Richard Thompson, whose holdings in one day fell in value from $5.1 million to $1.3 million, according to the Pittsburgh Tribune-Review.
“I think there is a big panic right now, people are overreacting. It’s my understanding the company is doing great,” Thompson told the newspaper.
The newspaper quoted Altavilla as being surprised about the resignation days earlier of World Health’s CEO McDonald.
The report said Summit attracted $7.5 million in investment into World Health.
“I’m sick to my stomach,” Altavilla told the newspaper.