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Shoe magnate Steve Madden was indicted on securities fraud charges by federal prosecutors in Manhattan and Brooklyn for his allegedly prominent role in the manipulation of approximately two dozen initial public offerings, including one in 1993 for his own company. Madden, the chairman and chief executive officer of Steven Madden Ltd., a Long Island City, New York based company that sells clunky yet trendy shoes to young and teen-age women, was charged with multiple counts of conspiracy, securities fraud and money laundering in two separate indictments. The Securities and Exchange Commission also charged him in a related civil complaint filed in Brooklyn federal court. The SEC seeks to bar him from heading a public company, among other sanctions. All the charges arise from IPOs underwritten by two notorious and now defunct “boiler room” broker-dealers, Stratton Oakmont Inc., of Lake Success, N.Y. and Monroe Parker Securities, Inc., of Purchase, N.Y. The SEC alleges in its lawsuit that Madden’s role in the Stratton and Monroe manipulations took two forms. In most deals, he allegedly acted as a “flipper.” In secret agreements, he allegedly received substantial numbers of shares in the IPOs. Shortly after trading in the aftermarket began, he sold back the shares to Stratton or Monroe at pre-arranged prices usually a little higher than his purchase prices. These secret deals earned him illicit profits and helped Stratton and Monroe control the “float,” or the outstanding stock of the IPO companies, the SEC said. Then, the two companies would artificially inflate the stocks’ prices before selling them to the public. In addition, in several other IPOs, Madden received “bridge units” as part of his compensation for making bridge loans to issuers. As part of those deals he signed lock-up agreements, which authorities say were shams. Although he was prohibited from selling those shares in those issuers for about 13 months, he was released from the lock-up agreements in order to sell his shares back to Stratton and Monroe as soon as trading began in the aftermarket. Once again, Madden allegedly profited while allowing the brokerages to control the float, authorities say. Madden was allegedly drawn into the schemes in 1991 by his boyhood buddy, Daniel Porush, Stratton’s president and chief executive officer until regulators shut the company down in 1996. Porush was permanently barred from the securities industry. Madden’s first role as a flipper involved Ropak Laboratories, a Stratton IPO, in which he bought 2,000 packages of shares and warrants. He made the purchase with money loaned to him by Porush, the SEC alleges. Over the next four years, he had acted as a flipper in at least 15 Stratton manipulations, the SEC further alleges. But in 1993, when Madden decided to take his shoe company public, he sought Porush’s help. Stratton underwrote the Madden IPO. But, there was one hurdle set up by the NASD, which refused to approve an IPO if any of the Stratton principals owned more than 4.9 percent of the outstanding stock. The Brooklyn indictment alleges that Madden and his confederates deceived regulators by falsely representing that the Stratton principals had sold about 1.2 million shares that they originally held to a company known as BOCAP Corp., prosecutors allege. The sale was a sham, prosecutors contend, because Madden had secretly agreed the Madden stock held by BOCAP would continue to be beneficially owned by the Stratton principals. BOCAP held that stock as a nominee until Jordan Belfort, Stratton’s founder and chairman, demanded it back. That resulted in a lawsuit between Belfort and Madden that was eventually settled with Madden agreeing to pay him $4.1 million and to help Belfort sell his warrants in the Madden company. Madden is also charged with opening several accounts at Monroe Parker and then using those accounts to buy and sell securities as an undisclosed nominee for Monroe’s founders Bryan Herman and Alan Lipsky. Both men are former Stratton brokers. In order to hide his having shared profits with Herman and Lipsky, Madden delivered large cash payments to Herman and then the two men entered into prearranged “losing trades,” federal prosecutors in Manhattan allege. He also entered into a secret agreement to provide bridge financing for the IPO of Big City Bagels and then sell 100,000 “bridge units” when Herman told him to do so. Madden also entered into a phony lock-up agreement and later sold all of his bridge units within hours of the IPO becoming effective, prosecutors allege. Madden, 42, of Manhattan, surrendered voluntarily to authorities. In court Tuesday, his lawyer, Joel Winograd, said his client “vigorously denies the charges” and plans to “fight” all of the allegations. “The witnesses for the government are scoundrels who have their own problems to solve. They’re using him as a passport to freedom.” In a prepared statement, Madden’s company said that the management and board of directors “are closely monitoring the situation. The company’s business remains strong and it plans to continue to execute its long-term strategies.” However, the company’s shares were halted from Nasdaq trading just before 11 a.m. at $11.19, down $1.94. A spokesman for Madden Ltd. refused to comment on the halt in trading or whether Madden will remain in control of the company. The charges came as no surprise to Madden, Winograd said. In fact, Herman testified in both state securities fraud trials involving Monroe Parker. In one trial, Herman testified that Madden was a knowing participant in the IPO fraud scheme involving Monroe Parker. Nevertheless, both trials ended in acquittals. Moreover, Belfort and Porush, who both pleaded guilty last year to securities fraud and other charges in connection with the IPOs, have cooperation agreements with prosecutors. The two men have also agreed to forfeit at least $16 million in cash and property as part of that plea deal. Lipsky could Lipsky could also testify against Madden. He and Herman each pleaded guilty last year to securities fraud and other charges in connection with the activities at Monroe Parker. Madden was released by federal magistrates after his lawyer and prosecutors in Manhattan and Brooklyn agreed to that he put up a $750,000 bond secured by real estate. He also agreed to restrict his travel to the continental U.S. and to surrender his passport. He faces up to 10 years in prison and $1 million in fines on each of the securities fraud; up to 25 years and $500,000 in fines on each of the money laundering counts and up to five years and at least $250,000 in fines on each of the conspiracy counts. Copyright 2000 TDD, LLC. All rights reserved.

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