It allegedly worked this way:
A struggling publicly traded U.S. company with few shares outstanding issues millions of new shares to acquire a foreign company with little operating history and no reported profits. The U.S. company's shares rise as press releases promote the acquired company's technological prowess. If the technology companies succeed, all will make money. But even if the shares subsequently fall to $2 or $3, company insiders could reap millions because of the huge blocks of cheap shares they own.
Also part of the schemes are large amounts of stock purchased by religious charities, including Chabad and Aish HaTorah, used to artificially bid up the stock price. In some cases, the stock may be 'gifted' to the charity by an insider who 'buys it' in the charity's name. Then, when the time is right, the insiders – and the charities – dump their stock. Soon after, the shares drop dramatically in value, leaving many non-inside investors with huge losses.
Among those company insiders are alleged to be these people:
- David Bodner and Murray Huberfeld of Broad Capital, a New York City investment firm. Both have histories of investment fraud, and each has a conviction for possessing a false ID' with the intent to defraud. They went on to get in trouble with Charles Kushner. Download norcrown_trust_federal_reserve_board_agreement_bodner_huberfeld_kushner.pdf
- Their wives, Naomi Bodner and Laura Huberfeld.
- David Rubner, the former head of Israel's ECI Telecom.
- Rabbi Irwin Katsof and Aish HaTorah's Jerusalem Development Fund.
- Herman Jacobs, Satmar hasid and owner of Allou Healthcare. He later pleaded guilty to corporate fraud in an unrelated scheme.
- Rabbi Sholom Duchman the head of Colel Chabad, Chabad's major social service organization in Israel (although it is based in Brooklyn). Colel Chabad was started by the first Chabad rebbe, Schneur Zalman of Liady.
- Rabbi Joseph Gutnick, the late Chabad-Lubavitcher Rebbe's 'special emissary' to Israel and the head of what may be the biggest affinity scheme of them all – Gutnick's mines.
- The late Lubavitcher Rebbe himself:
…Lubavitcher organizations such as Colel Chabad and Chabad of the Marina, meanwhile, have turned up as significant traders in Gutnick stocks, say Australian securities regulators. Indeed, according to trading records obtained by these regulators, Colel Chabad one year traded upwards of $8 million in shares of Gutnick promoted stocks, while Chabad of the Marina traded about $4 million in Gutnick shares. The Australian authorities wonder if that trading was intended to push up the price of Gutnick shares in a classic stock scam, where outsiders are lured into a stock at rising prices, allowing those in the know to cash out before the price collapses.
Rabbi Shalom Duchman, the leader of Colel Chabad, did not respond to Barron's questions about his organization's stock trading.
Rabbi Shmulik Napartstek [sic], who heads Chabad of the Marina, in Marina Del Rey, California, [he was fired years later by Rabbi Boruch Shlomo Cunin for other reasons] told Barron's that his organization has held "one or two" Gutnick stocks. "We got them donated to us. They set up an account for us," Napartstek explains. "We don't really trade it. We're just waiting for the right time that we're going to be told to sell it."
And who will tell them when to sell? "Hopefully, Mr. Gutnick will tell us," Napartstek said. And was Gutnick the original donor? "I can't really give you all of the information," said the rabbi, "because I don't know if he wants the world to know."
After that interview, Barron's learned from Australian authorities about the extent of the stock trading being done by Chabad of the Marina. We called Rabbi Napartstek back several times for further comment. He did not return our calls.…
And, of course, who helped artificially inflate Gutnick stock value the most? The late Rebbe, who publicly promised Gutnick would find diamonds.
Here's what Aish HaTorah has to say about Bodner and Huberfeld:
When it comes to cultivating religious charities, and drawing them into stock deals involving tiny companies, Murray A. Huberfeld and David B. Bodner seem to be without peer. "Mssrs. Huberfeld and Bodner are among the top philanthropists in the Jewish world," says Rabbi Irwin G. Katsof, executive vice president of the Jerusalem Fund of Aish HaTorah in New York City. "There are organizations waiting in line to see them."
And there's more:
Another firm that has repeatedly involved Jewish charities in its penny-stock dealings is Patterson Travis, a New York-based outfit run by Judah Wernick. In most cases, Wernick's stocks ran up in price and then collapsed. Indeed, in 1999, federal prosecutors charged Wernick with stock manipulation in connection with one of these stocks, ML Direct, a marketing firm whose shares showed just such a rise and fall. The trial is scheduled for November. Wernick has denied any wrongdoing. Letters to the court from Wernick's lawyers indicate that he has tried to strike a deal with prosecutors.
Among the dozen or so stock deals underwritten by Wernick was a fledgling alternative energy company called SCNV Acquisition -- a firm that was backed and controlled by Gutnick. This 1998 deal, which collapsed in price almost immediately, has been the only U.S. offering to date  of a Gutnick-controlled company. Most of his other stocks were issued in Australia and then traded in the U.S. in the form of ADRs.
Among the investors in other Wernick deals was a Lubavitch seminary called Yeshiva Tomchei Tmimim, which paid $145,000 for 45% of a preferred stock offering by Medjet, a fledgling medicalequipment company. Yeshiva Tomchei also made $208,000 in bridge loans to another company Wernick was promoting, a rickety chain of pancake houses called Royal Canadian Foods. Then there is Mosdos Chinuch, a Brooklyn religious organization that bought the second-largest portion of a preferred-stock offering from Red Hot Concepts -- a Wernick stock at the heart of a manipulation case that New Jersey regulators brought against another broker. Mosdos Chinuch also paid $30,000 for 9% of the Medjet preferred offering mentioned above.
All the above quotes come from a series of investigative reports done by Bill Alpert of Barron's. Even though Barron's is a US paper, Rabbi Joseph Gutnick sued Barron's for libel in Austrailia under a bizarre (and very old) law that is perhaps the most draconian restraint on free speech and the Fourth Estate in the free world.
Gutnick did not dispute the meat of Barron's reports or the allegations of affinity fraud. What did the "Rebbe's emissary" sue over? This:
Gutnick interpreted one brief section as accusing him of money-laundering or tax avoidance in Victoria, even though we didn't intend to make such allegations. Indeed, we stated in the article that Gutnick hadn't been charged with or convicted of any crime. His lawsuit never challenged or even mentioned the remainder of the article, including the portions about the securities transactions involving U.S.-based charities.
The 53 nations of the British Commonwealth have libel laws that, by U.S. standards, are archaic and onerous. In a defamation suit in those lands, the publisher is considered guilty until proven innocent and the evidence that it can present is severely circumscribed.
Victoria, however, goes a step farther. Its laws retain a pernicious 19th-century twist: The plaintiff can select an inference that he contends arises from a small passage in the story and sue on that, even if the writer didn't intend to make any such inference. The publisher cannot defend the story on the ground that whatever the reporter did intend to say was true, or that every other criticism of the plaintiff in the story was true, or that the passage meant something else and that was true.
In the end, Barron's settled. It did not admit guilt. It paid Rabbi Joseph Gutnick a $150,000 – a fraction of Gutnick's actual court costs.
So why is this alleged affinity fraud a big deal?
It matters because investors not on the inside lost bundles of money. Many of those investors were little people. (See the comments on this CrownHeights.info post for examples. Also archived below as a pdf file.)
It has been alleged that the Rebbe knew about Chabad leader Schnejur Zalman "Jimmy" Gurary's fraud for years and that the Rebbe benefited from that fraud – including through the special cardiac intensive care unit that was set up in 770 in 1978 after the Rebbe's massive heart attack was paid for out of that stolen money. It is also alleged that many of the dollars the Rebbe gave out over the years came from that stolen money, as well.
Rabbi Noach Weinberg, the Rosh Yeshiva of Aish HaTorah (who is ill, I hear, and could use a prayer or some psalm-saying, if you can) may very well have used money made in one of these affinity schemes to fund the Third Way, a short lived Israeli political party whose creation I'm told was secretly funded by Rabbi Weinberg in 1994.
And, of course, Joe Gutnick spent millions of dollars to influence an Israeli election, perhaps with the very money that allegedly came through affinity fraud.
And I could go on.
Hasidim, haredim – these are your rabbis. Are you not ashamed?
Read all of the Barron's investigative reports in pdf:
Other articles mentioned in this post: