Controversial Los Angeles stock promoter Rafi M. Khan allegedly manipulated the shares of two companies--Future Communications and L.L. Knickerbocker--in schemes dating to 1993 that included unauthorized trading and parking stock in phony accounts, according to a civil complaint filed Thursday by the Securities and Exchange Commission.
This is the first time that Khan--a flamboyant stockbroker who once courted media attention and waged a bitter 10-month battle in 1993 to take control of Costa Mesa-based drug firm ICN Pharmaceuticals--has been charged with wrongdoing by a federal agency, the SEC said.
Using "manipulative practices," Khan, 47, allegedly orchestrated stock price run-ups in Future Communications, a now-defunct cable television firm based in Dallas, and L.L. Knickerbocker, a Lake Forest marketer of collectible dolls and teddy bears, according to the complaint.
Neither Khan nor his attorney returned phone calls Thursday seeking comment.
In its complaint, filed in the U.S. District Court in Los Angeles, the SEC is seeking restitution for Kahn's alleged illegal trading gains of $552,200 and civil penalties of unspecified amounts.
"This was an aggressive, well-orchestrated scheme that pretty much repeats itself in both companies," said Ronald E. Wood, assistant regional director for the SEC in Los Angeles. "Anyone who bought the stock after he got involved or based on his promotional language lost everything."
Not only were individual investors harmed, said Wood, but some mutual fund managers also bought shares in both companies and lost money, he said.
Besides Kahn, the SEC alleges that Los Angeles-area stockbroker Timothy J. Tyrrell, 37, also committed fraud by participating in the Future Communications manipulation. While he was a broker for now-defunct Reynolds Kendrick Stratton, where he worked in Beverly Hills with Kahn, Tyrrell was a "market maker" in Future Communications stock and made $224,850 in improper profit, the complaint alleges.
A lawyer for Tyrrell did not return phone calls Thursday.
Specifically, the SEC claims that Khan acquired substantial control of the market for each stock, restricted the available supply of shares, purchased shares to stabilize or raise the price of each stock, executed unauthorized trades, parked stock in fictitious accounts and created demand by making misleading statements and "touting wildly exaggerated earnings projections" on the Internet and to investors.
Such tactics--which the SEC says Khan undertook with Future Communications shares in 1993 and with Knickerbocker shares in 1995--spurred huge gains in the stocks of both companies, the SEC alleges.
From June 30 to Aug. 30, 1993, shares of Future Communications more than quadrupled, rising from $6.50 to $27.25 a share. Two months later, the stock plummeted and the company sought bankruptcy protection.
From July 3 to Aug. 11, 1995, Knickerbocker's stock rose from $6 to $52 a share--only to plunge 46% by Aug. 25, the suit says. (Those figures are unadjusted for a subsequent 5-for-1 split in Knickerbocker shares.)
Knickerbocker's stock rose again in 1996, but it has since plunged, closing Thursday at $3 a share on Nasdaq.
Knickerbocker officials said Thursday they had no comment on the SEC's action. Knickerbocker, which had 1997 sales of $68.3 million and a loss of $4.4 million, currently has six offices and about 600 employees.
Khan allegedly operated the Knickerbocker scheme through his one-person Southern California office of Media, Pa.-based Shamrock Partners, which he ran from his home in La Canada,the SEC said.
In the case of both Knickerbocker and Future Communications, the SEC said, Khan promoted what is called a "short squeeze," which effectively involves forcing certain traders to buy up a stock, thus pushing its price higher.
In a short sale, a trader who believes a stock is overpriced and primed to fall borrows the shares, usually from a brokerage's inventory, and sells them on the open market. The trader is betting that by the time the shares must be returned to the lender, the stock price will have declined, allowing the trader to buy replacement shares at a lower price.
But if a shorted stock soars instead of declines, nervous short sellers can be panicked into closing out their losing bets by entering the market to buy replacement shares--thus driving the price even higher. That is a short squeeze.
Although never officially charged with securities fraud until now, Kahn has long been a controversial figure.
The son of a Pakistani diplomat, Khan grew up in London, then moved to the United States in the mid-1980s. In 1988, Khan moved to Los Angeles with his wife and children and eventually joined the Beverly Hills brokerage firm Reynolds Kendrick, where he specialized in thinly traded small stocks.
Khan resigned from Reynolds in October 1993 amid several legal disputes involving his trading activity and the companies whose shares he pitched.
During his 1993 bid to take over ICN, Khan's cousin and a Scotland Yard detective testified in U.S. District Court in Manhattan, where ICN had sued Khan, that Khan had been involved in a stock fraud against the British government in 1986.
That cousin, Tahir Khan, alleged that Khan and others created false applications to illegally purchase many shares of British Gas in 1986, when the company was privatized. Tahir Khan eventually pleaded guilty to nine counts of falsifying stock applications and was fined.
Rafi Khan was never charged in that case.
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Rise and Fall
How shares of L.L. Knickerbocker have surged, then plunged, since 1994 (quarterly closes and latest, on Nasdaq):
Source: Bloomberg News