ON that Christmas day in 1998, life could hardly have seemed better for the Gordon brothers, David and Greg. They brought their wives to celebrate the holiday amid the festive décor of their parents' home in Conroe, Tex., a onetime oil boom town north of Houston. As family members relaxed, the brothers eagerly compared notes about their triumphs of the last year.
The stock market bubble was still expanding. For David Gordon, a corporate lawyer from Tulsa, that translated into a flourishing business helping companies go public or make acquisitions. For Greg Gordon, who ran a successful wholesale jewelry business with his wife, Lisa, the flood of market wealth had created a heated demand for the luxury items he sold.
Then, as they sat near the Christmas tree, David broached a thought. Why not combine their talents, linking some of the highflying businessmen he knew with Greg's thriving company, Con-Tex Silver Imports? It seemed the perfect path to even greater wealth and achievement for all the Gordons.
Instead, it ripped the family apart. Within years, Con-Tex was destroyed - the victim, according to a court-appointed examiner, of mismanagement and potential criminality. David and Greg, once so close, stopped speaking to each other as they battled in court. Their parents, too, were dragged into the dust-up, testifying on behalf of one son's interests - and against the other's.
How could it happen? How could a small company be wrecked so quickly amid myriad accusations of financial wrongdoing that went undetected until the whole place came tumbling down?
The answer is, it happens every day. The Con-Tex story is not just the tale of the downfall of one company or one family. It is a microcosm, a look at an underbelly of the investing and corporate worlds where hokey deals and mysterious webs of linked investors are part of the workaday business.
In the last few years, in the wake of the high-profile collapses of Enron, WorldCom and other onetime giants, steady attention has been focused on cleaning up the practices of companies at the top of the corporate pyramid. But the companies at the bottom - which make up the vast majority of corporate entities - still exist under the radar of public scrutiny, despite too often playing fast and loose with the rules.
"These companies have all kinds of vulnerabilities, from incompetence to fraud," Linda C. Thomsen, head of enforcement for the Securities and Exchange Commission, said of thinly traded companies that go public without directly selling new shares, as Con-Tex did. "People who invest in these tend to have less disposable cash, so their losses are probably more dramatic for them. They can afford to lose less and they probably invested more."
The Con-Tex story involves a range of potential securities violations, according to lawyers and court records. But primarily, legal experts say, it is an example of the abuses that are possible in the sale of unregistered securities under what is known as Rule 504 of federal securities laws.
"This is the shadowy world of 504 offerings - which are, as often as not, associated with a certain amount of fraud or incompetence," John C. Coffee Jr., a law professor at Columbia University, said about the Con-Tex case after reviewing a bankruptcy examiner's report. "In this case, it doesn't look like the 504 offerings done here were done in compliance with the rules."
The potential violations at Con-Tex went beyond that, according to court records. The company issued misleading press releases, mistakenly took over the wrong company and allowed audits to be signed by an accountant who was unlicensed in Texas - and who may have never visited the company.
"As a corporate lawyer, it goes against the grain to see professional work done this badly," said Robert E. Crawford Jr., a Dallas lawyer who was the bankruptcy examiner. "At one level, it is horrifying, and at the other end, it is just an example of the Wild West frontier that can exist in this world, despite the regulatory effort. There are just too many companies out there."
For Greg Gordon, what happened is obvious: the brother he once trusted, he has argued in court filings, transformed Con-Tex into a public company solely to profit by manipulating the share price - and ultimately tried to take away more than 60 million shares he owned. "I had a real belief in my brother, but I was stupid," Greg said in an interview. "He's a crook."
For David Gordon, who has not been charged with any wrongdoing and denies having done anything improper, the real culprit is Greg. "You try to help your brother build a business, you think your brother is honest, has integrity, and then you find out he doesn't," he said in an interview. "I have watched my brother completely tear the family apart. This is a deal where he blew through $3 million and wanted to blame someone else."
Amid the flurry of litigation, both brothers can point to court victories. A fraud lawsuit filed by Greg Gordon was recently tossed out by a judge in Montgomery County, Tex. But this month, a federal bankruptcy judge held that Greg was entitled to 75 million shares in Con-Tex's parent company, rejecting David's argument that he was not.
Friendship and Rivalry
The Gordon family had always been competitive. The men - George David Gordon Sr., a prominent lawyer in Conroe; George Jr., who went by David; and James Gregory Gordon, or Greg - had been accomplished athletes. Family ski trips always included races, and the two brothers, both successful tennis players in college, could often be found battling it out on the courts.
More often than not, David was the victor. But Greg thought himself the better player. "He was my damned big brother," he said. "He was always playing mind games on me."
After college, David quickly seemed the one headed on to big things. He earned a law degree from the University of Tulsa, joined a law firm where he cut his teeth on securities work, and eventually hung out his own shingle.
Greg's career possibilities seemed more limited. After graduating from the University of Arkansas with a degree in physical education, he attended some junior college classes, learning gemology. He sold jewelry door to door, then found some success in handling jewelry road shows for the Sam's Club division of Wal-Mart, but soon he was looking for his next step. He found it at home.
In 1994, his wife, Lisa, and his mother, Darla, created a company called Con-Tex - named for Conroe, Texas - which sold beaded jewelry. Greg joined on and helped build up Con-Tex as a wholesale jeweler, traveling to Mexico several times a year to buy handmade products for American retailers.
By 1998, the company was a success. Con-Tex, Greg said, showed $80,000 in annual profits, not including compensation to the Gordons of about $160,000 a year. Things were looking good. "We were very happy with what we were doing," he said.
The Christmas discussions with David proved a turning point. Both brothers agree that David first mentioned connecting Con-Tex with some businessmen he knew who might want to buy some jewelry. The entreaties soon went further, with David suggesting a more radical idea: using his business connections to take Con-Tex public. Greg's parents were hesitant, but Greg and Lisa decided that the offer was too good to pass up.
Still, problems that David faced at that moment might have served as warning signs. Struthers Industries, a holding company based in Tulsa where David once served as president had fallen into bankruptcy and, in 1998, sued him and several others. While David Gordon was far from the primary target of litigation in the Struthers bankruptcy, the lawsuit against him, which was ultimately settled, asserted that he and the other defendants had engaged in sham transactions involving shell entities, aimed at pulling assets away from the company.
In an interview, David Gordon said he had done nothing wrong in the Struthers case and had personally assisted the company in recovering assets from its management. But the court-appointed bankruptcy examiners in both the Struthers and Con-Tex cases said Struthers did appear to be something of a precursor for what happened at Greg Gordon's company.
"If you focus on David Gordon, you find an incredible web of interrelated parties," said Mr. Crawford, the Con-Tex examiner. "A similar network of people show up again and again and again in these deals, most of which seem to end up in bankruptcy."
How the Deals Took Shape
At its most basic, the selling of a company's initial public shares is a little like hawking hot dogs at the ballpark. Someone discloses what's for sale - all beef, pork, kosher, whatever - and potential buyers decide if they want in.
But there is another way to go public, one that offers fewer protections to investors and more opportunities for mischief. Taking this route, a shell company - the corporate equivalent of an empty bun - is sold to the public. It never has much, if any, meat: no revenue, no earnings, no assets.
Once the shares in these shells are distributed, lawyers, accountants and financiers can come along and load them up with whatever they want by merging private companies into the public shells. But when the meat is added after the buns are sold, the quality is rarely top-notch.
To bring Con-Tex public, David Gordon recommended the second approach - merging it into a public shell. But the idea was not simple; instead, an array of empty businesses were bought, sold and swapped in an assortment of deals that would have done Rube Goldberg proud.
Step 1 was finding the public shell company to serve as the bun. The one chosen was Transun International Airways - which, despite its name, had no airplanes, no routes and nothing to do with the airline business. What it did have, however, was a history: Transun had once been used by the Genovese crime family as part of a multimillion-dollar fraud known as a "pump and dump," in which a company's shares are acquired at minimal cost and artificially inflated by aggressive promotion before insiders unload their stock.
With a shell at the ready, Step 2 involved putting together the meat - or, more accurately, a blend of meat and filler. For the filler, David Gordon turned to two investors in Boca Raton, Fla., he had known for more than a decade. Those investors owned a thinly traded entity called International Internet, which in turn held a private company called Goldonline.com - an entity with no tangible assets and no revenue, whose sole asset was a rudimentary Web site. But International Internet agreed to sell Goldonline.com in exchange for 10 million shares in the merged company.
Then, Step 3: adding some meat with actual value. Greg Gordon agreed to sell his company, Con-Tex, to Transun in exchange for 75 million shares in the new company.
When the paperwork was signed, Transun, Goldonline.com and Con-Tex were all part of the same public company, with Greg Gordon owning a supermajority of shares and David Gordon's associates in Boca Raton also holding a hefty stake.
The paperwork to document all these transactions was, to put it mildly, a mess, according to court records. The stock certificates of Goldonline.com and the corporate records of that entity were never delivered to the merged company, court documents show. The sales agreement between Transun and Con-Tex describes the purchase price as just 500 shares of Transun, rather than the 75 million shares that everyone in the case agrees were supposed to have been issued. And the full stake was not issued until September - a crucial point in the subsequent battles.
Then, in July, more deals: the sale of unregistered securities in the merged company, now named Goldonline International, supposedly under Rule 504. Based on a letter signed by Greg Gordon, 200,000 units - each including four shares and a warrant to buy eight shares at 50 cents each - were offered for $1 each, with many of the buyers having close professional relationships with David Gordon. Whether some people listed as buyers actually chose to buy units is unclear. For example, George Gordon - father of Greg and David - testified that he had no memory of making such a purchase and had not authorized anyone to sign his name on the agreement subscribing to the offering. In testimony, David Gordon acknowledged that he had signed the required agreement for his father and put up the money for the investment as a gift.
In an interview, David Gordon said there was nothing unusual about signing on his parents' behalf. "I think it is common practice for someone who is acting as counsel for someone," he said. "I think it is legal."
Regardless, the supposed 504 sale was anything but proper, according to the bankruptcy examiner's report. Necessary documents were not filed or signed. Exemptions were not obtained. "There does not appear to be any basis for a claim that the shares issued in this transaction were issued in compliance with the requirements," the report says.
All the transactions had one important result: millions of shares in what was then called Goldonline International were distributed to clients and associates of David Gordon. If the stock price went up, they stood to make some big returns.
Buying the Wrong Company
By David Gordon's reckoning, it was a phone call from the Federal Bureau of Investigation in the summer of 1999 that set the next crucial deal in motion. In that call, he later testified, an agent told him about an investigation of trading in the Transun shell. Although David Gordon did not testify about the nature of the inquiry, it could not have had anything to do with the Genovese crime family - the indictments charging the Transun manipulation had already been handed up the previous year.
But, according to David Gordon's testimony, he decided that he had to act. The purchasers in the supposed 504 deal could demand their money back for not having been told of potential legal problems, he said, so something had to be done to mollify them. The decision was reached to enter into a reverse stock split, a move that would bolster the value of each individual share. Every six shares would be transformed into one.
Well, not really every six shares. The 10 million shares committed for the purchase of Goldonline.com from the longtime associates of David Gordon had not been issued yet; they were distributed without a reverse split, according to court records. And when all the shares were issued for the purchasers in the so-called 504 offering, no reverse split affected their stake, either. In other words, the four shares they had bought in their unit deal just weeks before now had the equivalent value of 24 presplit shares, and with the price being pushed up by the maneuver, their right to buy eight post-split shares for 50 cents each was now much more valuable.
For Mr. Crawford, the bankruptcy examiner, David Gordon's explanation for the reverse stock split didn't hold water. And neither did several other rationales. "There are three or four different explanations for why there was a reverse stock split and none of them make a lick of sense," he said. The transaction, he said, "took value from some shareholders, gave it to other shareholders and didn't do it in accordance with corporate requirements."
As far as anyone could tell, the reverse split had no effect on the 75 million shares paid to Greg Gordon for Con-Tex. Corporate filings listed Greg's full investment - minus a 7.5-million-share "finder's fee" that David was to get for the Transun deal. And George Gordon testified that his son David had told him repeatedly that the reverse split "did not affect Greg's shares" - a statement that David denies having made.
As all the paper-shuffling involving the company's capital structure took place, other problems emerged inside Goldonline. Officers and associates, including Greg and David Gordon, failed to file required documents with the S.E.C. about their stock transactions and holdings.
And the company's independent auditor, who lived in New York, was not licensed to practice in Texas. Court records suggest that he may have relied for the physical audit on an accountant who worked with David Gordon and owned a stake in the company. That accountant, Jim Ross, was sanctioned in 1998 by the S.E.C. for engaging in improper stock transactions in the course of what the agency deemed a corporate "fund-raising scheme"; his lawyer in that case was David Gordon.
Then, in early 2000, David Gordon informed his brother that the company needed to register its stock under Section 12 of the federal securities laws. But rather than simply paying to register the securities - an action that court records said would have cost $20,000 to $75,000 - David recommended issuing 1.2 million shares to acquire and merge into an entity called Benton Ventures, which had no operations and only $500 cash in assets, but whose shares were registered. The stock presumably would have gone to the man listed as Benton's owner, Ross Silvey.
But, according to the court records, Mr. Silvey knew nothing of Benton Ventures or the transaction with Goldonline. Instead, the shares were issued to Ashley Brooks Cosmetics - an entity incorporated by David Gordon in his capacity as a lawyer, and associated with the family of Mark White, one of the investors in the unregistered securities of Goldonline. In the fallout of the ultimate bankruptcy of Goldonline, George Gordon testified that David had told him that Ashley Brooks Cosmetics "was his company, or one of his companies." David denies ever having made the statement.
Still, why did Ashley Brooks receive shares instead of Mr. Silvey? "When asked why," the examiner's report says, "David Gordon said that he had made a mistake and the shares should have been issued to acquire a different corporation, the name of which he could not recall."
Spinning Out of Control
By early 2002, warfare was breaking out at Goldonline, whose name by then had changed to SGD Holdings. A series of financing transactions had brought in new directors, and the board often split two-to-two. Greg Gordon and another director, William E. Dark, called for a shareholder meeting, which had never been held; David Gordon, according to his father's testimony, repeatedly cautioned the board that the time was not right for such a meeting - which is supposed to be held annually.
Worse, an executive committee was running the company, seemingly usurping some board duties, according to testimony of Mr. Dark and interviews. Greg Gordon and Mr. Dark failed in attempts to disband the committee; Mr. Dark, frustrated, resigned from the board. Greg continued to make waves, questioning dealings between SGD and a company that was not paying its bills promptly. But he got nowhere. In essence, the man listed in the filings as the single largest shareholder had no control of the board and had effectively lost control of the company.
Then, in the summer of 2002, a draft copy of the company's 10-K - its annual financial report filed with the S.E.C. - was dropped off on Greg's desk. For the first time, he saw that the 67.5 million shares he had often been listed as holding had suddenly dropped to 12.5 million shares. His legal - if not actual - control of the company had been obliterated, the value of what he thought was his stake had been cut sharply, and no one had bothered to tell him about it.
"I called David and cussed him out and then went down to Dad's office," Greg said in an interview. "Dad said, 'Don't worry about it, they can't do it.' Well, it turned out they did it."
New issues began bubbling up. After hearing a presentation on the new Sarbanes-Oxley law adopted in the wake of the Enron and WorldCom debacles, George Gordon raised concerns to Greg about the weaknesses of SGD's external audit. That was the final straw.
"I told them I would not sign the 10-K," Greg Gordon said.
The board acted swiftly. In November, Greg Gordon was dismissed from SGD, and afterward from its Con-Tex subsidiary. The company sued him, accusing him of stealing $2.2 million; that lawsuit was eventually dropped. But Greg did not let the matter go. SGD was insisting that his stake was only 12.5 million shares. He refused to accept that, and took everyone to court.
"The lawsuits started, and I have been fighting them ever since," Greg said.
The battle for the now-struggling company took its toll. Con-Tex and SGD filed for bankruptcy. The brothers stopped speaking and started blaming each other as being solely responsible for the corporate disaster. Greg accused his brother of destroying the company in his web of deal making. But David blamed Greg.
"Greg is a tar baby who jeopardizes everyone who associates with him," David wrote in a letter to his mother, Darla, in August 2004. "I fear Greg will drag you into his quagmire of lies, deceit and fraud."
In an interview, David was more restrained in his statements, but repeatedly pointed to the fact that Greg Gordon had signed almost all of the documents at issue in the case.
David said he took great solace in the fact that the suit his brother filed against him had been tossed out without a trial. Greg said he found satisfaction in the decision of the bankruptcy court declaring that he was still the owner of 75 million shares in SGD, now bankrupt. That ruling declared David to be "a sophisticated businessperson" while Greg was described as someone not "skilled in legal matters."
The unseen victims, though, are not just investors, but workers who saw their jobs evaporate. "I had 32 employees that, through no fault of their own, David cost them their life," Greg said. "One of them lost their home, their car." David, of course, blames Greg for that outcome.
But still, part of Greg can't let go of the brother he once loved. "Do I miss him?" he asked. "Yeah, in a weird way."
These days, he says, he spends a fair amount of time thinking about their childhood together, about their competitions, about their friendship. "I cherish those moments now more than I ever did," Greg said, "Because now they're gone forever."