Star Analyst Bert Fingerhut sentenced to prison for IPO Caper
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Ex-Star Analyst Sentenced To Prison for IPO Caper
He Took Big Liberties
With Peter Lynch Idea
Involving Mutual Banks
By PETER LATTMAN
August 6, 2007; Page A1
In his day, Bert Fingerhut was a Wall Street player. A top-ranked securities
analyst for eight straight years, making calls that moved markets, Mr.
Fingerhut rose to director of research at Oppenheimer & Co. in 1980. Three
years later, he retired to Aspen, Colo. He was 40 years old.
In the Rockies, Mr. Fingerhut became as passionate about conservation as he
once was about stocks. He joined the boards of a string of environmental
organizations. So devoted was he to the wilderness that he got married in
Wyoming's Grand Teton National Park.
But he couldn't get Wall Street out of his system. In the 1990s he picked up
a copy of Peter Lynch's "Beating the Street," in which the former star
manager of the Fidelity Magellan Fund wrote of a "can't-lose proposition
(almost)" called bank-conversion investing.
When mutual, depositor-owned banks convert to public companies, Mr. Lynch
noted, they must let depositors buy stock at the initial-public-offering
price. The new shares are often priced at a discount. So "the next time you
pass a mutual savings bank or an S&L that's still cooperatively owned," Mr.
Lynch suggested, "think about stopping in and establishing an account."
Mr. Fingerhut took the advice to heart, and then some. Starting in 1995, he
opened accounts at more than 400 banks across the country, from Wellsburg,
W.Va., to Covina, Calif. He eventually got in on public offerings at many of
them, and flipped their shares for quick profits. Over a decade, he made $11
million from the strategy.
There was one problem: The way he did it, he was breaking the law.
In May, Mr. Fingerhut pleaded guilty to conspiring to defraud banks and
their depositors by secretly using other people as fronts to open accounts
for him, thus increasing the number of IPO shares he could buy. He forfeited
all the money he earned from the strategy. On Friday, a federal judge in
Newark, N.J., sentenced the onetime star stock analyst to two years in
prison.
Mr. Fingerhut's scheme essentially boiled down to a new twist on an age-old
investment technique: using leverage to pump returns. With friends and
family, he boosted the number of accounts at mutual banks that might someday
yield bargain-priced shares. Then he got a local Colorado bank to lend him
money against the money deposited in those mutuals -- loans he used to help
buy more shares of more IPOs. By 2007, his lines of credit totaled $15
million, according to the Securities and Exchange Commission, which brought
parallel civil charges.
The case "is by far the largest and most sophisticated bank-conversion
scheme ever uncovered," said Daniel Zelenko, an SEC lawyer. The Justice
Department had brought criminal charges in just one such scheme before, in a
case in Connecticut, in which one of the defendants recently drew a prison
sentence of a year and a day. Today, a small group of federal prosecutors
and SEC lawyers is investigating this little-known pocket of Wall Street,
and has more cases in the pipeline.
Since 1975, some 1,874 mutual banks have converted to stockholder ownership,
collectively raising approximately $47 billion, according to investment firm
Sterne, Agee & Leach Inc. As some bank IPOs recorded big first-day gains, a
subculture of professional depositors developed, who began making small
deposits at many mutual banks, a perfectly legal technique so long as they
follow the rules. People who track the industry say Mr. Lynch's book did a
lot to popularize the strategy. Fidelity, where Mr. Lynch still has an
office, didn't make him available to talk about it.
Roughly 650 mutual banks remain in the U.S., according to Keefe, Bruyette &
Woods Inc., which follows them. Better hurry if you want in, was the recent
message in a promotion for a list of conversion candidates put out by
research firm SNL Financial LC. "It is more important than ever to open
accounts with these institutions as soon as possible," it said.
Mutual banks that go public give their depositors the right to subscribe for
IPO shares, and then allocate those shares depending on various factors,
including how long a customer has had an account and how large that account
is. In any case there's a maximum number of shares available to each
depositor. And it can't legally be circumvented by having friends open
accounts, because federal rules say depositors can't transfer their IPO
subscription rights to anybody else.
Prosecutors say that in skirting these rules, Mr. Fingerhut, 63, took
investment opportunities meant to benefit bank customers. "Fingerhut is a
sophisticated and smart former highflying Wall Street executive who used his
insider's knowledge to defraud innocent depositors who sought to invest in
their local community banks," said Karl Buch, a federal prosecutor in
Newark.
The scheme took organization and patience. From Aspen, Mr. Fingerhut kept a
detailed log of his deposits at hundreds of mutual banks as he waited, often
years, for some of them to decide to go public. He had multiple brokerage
accounts for selling the stocks when he got them.
Pleading guilty along with Mr. Fingerhut was Robert Danetz, a retired New
York City schoolteacher. Mr. Danetz, known as Bobby, traveled the country
opening accounts funded by Mr. Fingerhut. He has agreed to forfeit about
$1.2 million, his cut of Mr. Fingerhut's profits. "Mr. Danetz deeply regrets
his involvement in this episode, for which he blames no one but himself,"
said his lawyer, Aitan Goelman.
Mr. Fingerhut spoke for himself in court Friday. "I had all the material
wealth I ever needed long before I ever began investing in mutual thrifts,"
he said. "Money was the means I used to satisfy my ego."
Mr. Danetz and Mr. Fingerhut are lifelong friends, whose mothers strolled
them side-by-side in Mount Vernon, N.Y., when they were babies. They grew up
together in the New York City suburb and stayed close. As Mr. Fingerhut
became rich on Wall Street, he was generous to his schoolteacher friend, who
worked in the Bronx borough of the city. At Mr. Fingerhut's expense, they
traveled to exotic hiking locales such as Nepal.
Despite their friendship, their bank scheme had a formal side. Mr. Danetz
signed an "Investment Trust Agreement" acknowledging that Mr. Fingerhut
controlled the various bank accounts and stock allocations, according to the
SEC. Mr. Danetz agreed that the accounts in his and his family members'
names were held in trust "solely for the benefit of Bert Fingerhut." The
agreement also required Mr. Danetz not to disclose their pact. It did not
provide for a set percentage of the take to go to Mr. Danetz; that was left
up to Mr. Fingerhut, according to people familiar with the case.
Mr. Danetz kept careful track of his expenses, from bridge tolls to tips he
left for maid service in motels. The two would sometimes quibble. Mr.
Fingerhut once criticized Mr. Danetz for using FedEx instead of the Postal
Service. Another time, Mr. Fingerhut suggested that he take Amtrak or drive
to a bank instead of flying there.
If mutual banks didn't allow out-of-state depositors, Mr. Danetz paid people
to add his name to their leases or utility bills, and sometimes relied on
phony identification cards, according to the SEC's complaint filed in
federal court in Newark.
Mr. Fingerhut used at least a half-dozen other people to open accounts at
mutual banks, according to people familiar with the case, including a
brother of Mr. Danetz and a nephew of Mr. Fingerhut. Both settled SEC civil
charges and agreed to disgorge their profits -- $138,000 in the case of the
brother, and $181,000 in the nephew's case -- plus pay penalties. Bert
Fingerhut and Bobby Danetz also settled SEC civil charges.
Mr. Fingerhut first began to develop his investing prowess as a New York
University undergraduate in the 1960s. While still a student, he worked at
Oppenheimer, a brokerage firm then run by two Wall Street legends, Jack Nash
and Leon Levy.
Mr. Fingerhut quickly developed a reputation as a savvy stock analyst,
specializing in airlines. He appeared in Institutional Investor magazine's
first All-America Research Team when he was just 28 and then made the list
for eight years running. "If you were going to invest in airlines, you
didn't breathe unless you talked to Bert Fingerhut," said one former
Oppenheimer colleague.
Mr. Fingerhut rose to director of research in 1980, departing after the sale
of Oppenheimer to a British bank. (The bank later resold it; the firm Mr.
Fingerhut worked for has little more than historic links to today's
OppenheimerFunds and Oppenheimer & Co., a broker-dealer.)
Once an overweight chain-smoker, Mr. Fingerhut got thin and ran marathons.
He moved to the Rockies and worked part time at Odyssey Partners, a
pioneering hedge fund and private-equity firm that Messrs. Nash and Levy
formed. But after a few years, Mr. Fingerhut left Odyssey to pursue his
passion for the environment full time. He joined the boards of Grand Canyon
Trust, the Wilderness Society and numerous others. He married for a second
time and the couple adopted a baby from China.
Mr. Fingerhut also volunteered at Mountain Rescue Aspen, and four years ago,
says the group, Mr. Fingerhut saved the life of a deaf woman who had become
violently ill in the back country.
His lawyer recalled that service. "For the past 20 years, Bert was on call
around both clock and calendar to help people who had made their own
mistakes and misjudgments, often life-threatening ones in unforgiving
places," said defense lawyer Larry Mackey. "When he wasn't on the
mountaintop he was on planes and phones lobbying to preserve the wild lands
of the American West."
In 2001, when Institutional Investor marked the 30th anniversary of its
first All-America Research Team, Mr. Fingerhut told the magazine: "I'm so
far removed from Wall Street that I don't really follow it any more."
By then, he had illegally participated in 17 bank-conversion IPOs, according
to the SEC complaint. And over the next half-decade, he got in on dozens
more.
A few were duds. In the 2005 conversion of Rome Savings Bank in upstate New
York, Mr. Fingerhut lost roughly $20,000 when the stock didn't perform as
expected. But most of the deals, federal prosecutors eventually learned from
Mr. Fingerhut and his records, were winners. The biggest: Provident Bank in
Jersey City, N.J., and New Haven Savings Bank in Connecticut.
Mr. Fingerhut became a Provident depositor in 1996, according to government
filings. The mutual bank filed to go public in late 2002. The prospectus
permitted each depositor to buy up to 52,000 shares at $10 each, and said
depositors acting as a group could buy 70,000.
Mr. Danetz, Mr. Danetz's wife and Mr. Danetz's daughter had also become
depositors at Provident, according to the SEC. Mr. Fingerhut instructed them
to subscribe for 70,000 of its new shares. The deal was oversubscribed, and
the bank let them buy about 65,000. Mr. Fingerhut and his wife, who had
bigger deposits at the bank, received a full 70,000-share allocation.
The shares began trading in January 2003. Bank consolidation had made the
shares of financial institutions such as this alluring to investors, and
Provident's stock soared 55% the first day. The SEC says Mr. Danetz
transferred most of his and his family's shares to Mr. Fingerhut, who
quickly sold them, making profits of about $1.2 million all together on the
deal.
If Mr. Fingerhut was worried about getting caught, he didn't show it. Just
weeks before the IPO, he filed a lawsuit against Provident, accusing the
bank of favoring its executives and employees in allocating shares. A judge
refused to halt the offering, and the suit was later dropped.
Mr. Fingerhut and his friends also had set up numerous accounts at New Haven
Savings Bank. In September 2003 that mutual, too, said it would go public,
taking a new name (NewAlliance Bancshares Inc.) and letting each depositor
buy 70,000 shares. Thanks to his friends' and family's accounts, Mr.
Fingerhut was able to buy 420,000 shares at the $10 IPO price.
They popped 52% on the first day of trading in April 2004. Mr. Fingerhut
booked about $1.5 million in profits.
The deal was so hot it caught the eye of regulators. The SEC sent
questionnaires asking some depositors if they had paid for the shares
themselves. One questionnaire went to Mr. Danetz's daughter, according to
the SEC's complaint. The SEC asked the woman, who the agency said earned
about $25,000 a year as a speech therapist, how she came up with $700,000
for her purchase. At Mr. Fingerhut's direction, said the SEC, Mr. Danetz
filled out the form for his daughter and told the SEC he had lent her the
money. Federal authorities didn't take any action against Ms. Danetz.
Despite the close call, Mr. Fingerhut kept up his scheme for 2½ more years
and 28 more bank conversions, according to the SEC.
But in mid-2006, an Internal Revenue Service agent took an interest in a
"suspicious-activity report" from a financial institution, which showed
unusual activity between accounts held by Mr. Fingerhut and Mr. Danetz.
Federal authorities noticed that Mr. Danetz was a retired schoolteacher, yet
was investing millions of dollars in banks across the country.
On Jan. 24 of this year, the IPO shares of a New Jersey bank called Oritani
Financial Corp. spiked 60%, earning Mr. Fingerhut about $300,000. Three
weeks later, in simultaneous raids, federal agents searched both Mr.
Danetz's home in Teaneck, N.J., and Mr. Fingerhut's in Aspen, uncovering a
trove of detailed records of the bank-conversion scheme. Oritani proved the
former star stock analyst's last score.
Mr. Fingerhut summed up his escapade in court Friday: "This was purely an
act of selfishness and a crime of greed."
Write to Peter Lattman at peter....@wsj.com