Bank Fraud

21 Feb

Ernest Health: Redefining a ‘quality’ MPT hospital operator – $MPW

by Teri Buhl

Medical Properties Trust ($MPW) secured over $2 billion in new debt funding last month by putting up what it called ‘quality hospital operators’ leases as collateral and a few concentrated funds who held long positions in the company bought into it at only an 8.5% coupon. The deal out maneuvered and shocked credit funds short MPT’s near term maturities for the first half of 2026 when MPT announced it would use the new money to pay off two of the 2026 bonds. But according to internal MPT documents Ernest Health, a US health care operator, financial health doesn’t appear to show a financially stable company with high credit quality.

The real estate REIT told investors in January in a private presentation reviewed by this reporter that Ernest, among its top 3 secured assets in the deal, has a gross book value (GBV) of $656.7 million. This is behind Priory Group’s $1.362 billion GBV and Lifepoint Behavioral’s $867 million GBV. The GBV of an asset represents the gross investment by the landlord before depreciation and amortization.

If MPT was unable to pay off its newest debt creditors could come after those properties, but there is a common underbelly of doubt among long and short investors on how good those secured assets are if the hospital income isn’t enough to support the rent- without financial support from MPT.

Ernest became a MPT tenant in 2012. MPT invested $100.8 million to develop two new California care centers for Ernest, according to MPT’s 2023 10-k. The money was supposed to go towards building the new properties on land inherited from Vibra. But according to financials filed with the state of California, actual spending on the Stockton project was $38.396 million compared to the $53.408 million MPT said it spent from 2022-2023. A 50-bed acute rehab center in Bakersfield, Ca. total cost was $33.043 million, according to California state records; MPT said it spent $47.43 million. That leaves a mysterious $30 million dollar delta. According to sources familiar with MPT, this was just one way the company could get cash into the hands of its tenants to pay MPT’s high priced rent enabling the company to not have to take an impairment on its books.

Additionally, in the first quarter 2023 MPT made a cash disbursement to Ernest in the amount of about $4.6 million and then eight days later Ernest turned around and made a cash payment to MPT for around $4.5 million leaving the hospital operator with only about $35k for actual capex according to private internal cash flow accounts reviewed by this reporter.

Consolidated financials for Ernest (under its parent company name EPOCH Acquisition Inc) in 2023 show its cash and cash equivalents decreased by half from $17.5 million in 2022 to $9.7 million in 2023. Its income from operations went from a gain of $6.5 million in 2022 to a loss of $4.3 million the following year. Ernest Health Holdings didn’t appear able to support its basic operating expenses on a continued basis while MPT’s biggest tenant Steward Health Care had just hired bankruptcy lawyers and advisors in December 2023. Moreover, it appears that Ernest would have run out of cash in 2023 without an additional equity injection from its owners.

A review of internal documents from 2018 shows when MPT sold the OpCo to One Equity Partners and Vibra, one of MPT’s first tenants, they rejiggered the lease deal from 2012. For the Ernest master lease the board approved a $5 million reduction in rent. The rent reduction was in contradiction to the management statements, was undisclosed and at odds with their “counter-attack video” from the end of 2023 when its stock was under pressure from short seller reports. Insiders and analysts interviewed by this reporter see the non-disclosure as a move to not impair or obfuscate any reduction in the carrying value of the Ernest assets, at the time the transaction occurred.

According to a credit analyst, any impairment to leases that affect book value could impact incurrence and maintenance covenants in both the new secured bonds and remaining unsecured notes. MPT has shown over and over how it does everything it can to not take impairments and consistently tells credit funds it thinks their assets are investment grade. Impairments are important to watch and one of the reasons is highlighted in the newest bond issuance documents.

Section 4.09 ‘Limitation on Indebtedness’.

(a) The Issuers will not, and will not permit any of the Restricted Subsidiaries, to Incur any Indebtedness (including Acquired Indebtedness) if, immediately after giving effect to the Incurrence of such additional Indebtedness and the receipt and application of the proceeds therefrom, the aggregate principal amount of all outstanding Indebtedness of the Issuers and the Restricted Subsidiaries on a consolidated basis would be greater than 60% of consolidated Adjusted Total Assets of the Issuers and the Restricted Subsidiaries

This is a possible issue because it implies MPT would not have the ability to fully draw $1.28 billion of its revolving credit facility. Keep in mind the bond docs have covenants that affect whole company indebtedness not just secured bond indebtedness. I am told MPT plans to pay off the RCF with new money from the Senior Secured Notes and then redraw to pay off the two 2026 notes that mature in the first half of the year. And Goldman told investors during the sales process for the new issue, privately, MPT has no more secured debt capacity.

Here is an example: Say MPT had to take $1bn of impairments and they did it over the next 4 quarters cuz as we have seen they like to delay. If they had $16,660 billion of total gross assets it then becomes $15,660 billion. $15,660b x 60% = $9,400b allowable debt – $9,100b funded debt today would equity only $300mn borrowing capacity. Not $1.28 billion!

On February 19th, S&P issued another negative rating note for MPT saying its senior unsecured notes are still considered junk. Basically, the new notes (rated B) primed everyone and the rest of the bonds they don’t trust to get paid over the long term because of MPT’s high cost of capital and covenant constraints. The rater also thinks some of the unsecured bonds could be bought back at below par. MPT’s notes due in 2031 currently trade around 61.

But based on MPT’s internal financials and documents I reviewed, allegedly paying their tenants’ rents is just one questionable use of cash.

Ed Aldag Jr. enjoys the reputation of a philanthropist in his home state of Alabama and appears to have used MPT’s balance sheet to build that reputation without regard to fiscal controls, according to people familiar with company executives. Cash payments in the 5-figure thousands were made to: a college fraternity, Quarterbacking Children’s Health Foundation, the Birmingham Zoo, Crimson Tide Foundation, and tons of local charities appear to be regular payments made by the company according to cash flow statements reviewed by this reporter.

In audited financials from the end of 2023, reviewed by this reporter, there was a disclosure that two of Ernest facilities were under DOJ investigation, by the southern district of Texas, for violations of the False Claims Act. The entities are Laredo Specialty Hospital and its rehab center. According to one DOJ source, it’s a civil investigation for Medicare fraud. The company said in its disclosure it was cooperating with investigators. The impact could be high-dollar fines. The alleged health care fraud is like what Steward Health Care has been investigated for.

The DOJ’s investigation into Steward Health Care, MPT, and company executives is ongoing with a grand jury sitting in Boston and new witnesses interviewed by the FBI this month, according to people familiar with the investigation. Possible charges include wire fraud, money laundering, harassment of witnesses on top of making false or misleading financial statements.

MPT did not respond for comment.

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24 Jan

Bankers calling the shots; While MPT still thinks its Investment Grade – $MPW

The relationship between MPT and its long bondholders has been a game of one-up-manship for nearly a year now. Creditor groups have formed, advisors hired and fired (Evercore & Paul Weiss), and money wasted trying to get the company to engage in refi talks but MPT refused to bend. GoldenTree even tried their own one off priming offer over the last year but failed because MPT’s leadership keeps with the line that their bonds are ‘investment grade’. But now with a rush to convince new and existing bondholders to buy into a secured new issue, at what many consider too low of a coupon, a few of the most aggressive funds in the global distressed debt market, who are long MPT bonds, have gotten together to finally try and force MPT into restructuring talks that could prime other bondholders.

A point of resistances in refi talks comes from MPT’s bank lenders who I previously reported had been asking for more cash sweeps and secured assets. A source familiar with the talks said any refi suggestions that include the investors in the RCF not being paid first is a roadblock because the bank lenders know they can call in a covenant default via the Unsecured Leverage Ratio or their Tangible Net Worth covenant after impairments are made; so why give up the terms they have now that make them structurally senior to everyone else.

In the meantime since Tuesday, Goldman Sachs and MPT have been running their own private calls with investors and held a non-deal roadshow that some called a waste of time because of the lack of transparency and future revenue predictions MPT keeps spinning with its creditors without explaining capex loans or expenses. MPT won’t even disclose what assets they would put up as collateral, according to sources who spoke with the company.

All of this frantic rush to get capital is to starve off a liquidity crisis after MPT drew down around $1.1 billion from their RCF, according to sources, to pay off a term loan this month. Now MPT has to pony up around another $500mn in March for a unsecured bond maturity and appear to resist expensive financing counteroffers with coupons over 10% and creditor demands that the company doesn’t keep paying a stock dividend.

None of the funds/companies involved in this story gave me anything worth reporting as a comment.

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27 Nov

SBB creditors invited to join Fir Tree bond acceleration campaign

by Teri Buhl

This story has been updated.

SBB creditors recently participated in a call hosted by attorneys from Cleary Gottlieb in an effort to inform and update other bondholders’ about the work they have done to hold SBB’s management accountable. These London based lawyers are currently polling other creditors interest in joining Fir Tree in making demands to accelerate their bonds over a interest coverage ratio covenant breach.

SBB is short for Samhällsbyggnadsbolaget i Norden AB. Sources say it’s too late for other parties to directly join Fir Tree’s lawsuit but the fund and its attorneys have an alternative plan.

Fir Tree, a US-based hedge fund, was the first and only creditor to litigate against SBB. It is represented by Cleary Gottlieb who filed a lawsuit in London’s commercial court last year seeking legal remedies and an accelerated bond repayment.

It holds $49 million principal across two EMTNs, Euro Medium Term Notes, namely the 0.75% €700m social bond due 14 December 2028 and the 1.125% €950m social bond due 26 November 2029 , according to the lawsuit filing.

The Contested Breach

SBB troubles began back in February 2022 when short-seller Viceroy Research issued a report alleging corporate governance issues, inflated LTV ratios and related-party transactions.

Then in June 2023 came news of the possible interest coverage ratio (ICR) breach. This was the result of changes to SBB’s accounting in its Q2 2023 earnings, which were first noticed by my former colleague Mary Pollack at CreditSights.

Moreover, I exclusively reported last year for LFI that SBB had published two sets of financials, unbeknownst to investors, in a move to present the company with financials that didn’t breach the covenant. An ICR measures a company’s ability to pay interest on its debt. It’s calculated by dividing a company’s earnings before interest and taxes (EBIT) by its interest expense.

Joining The Fray

Bondholders started considering joining Fir Tree’s campaign this month after a hearing on disclosures, held on November 9 in London. The disclosure showed that Fir Tree had obtained internal SBB emails discussing how the company was aware of the possible breach after a third party lender brought it up on another smaller loan. SBB was informed by its one time advisor SEB that it had a real problem and then internally SBB executives allegedly scrambled into cover up mode. The emails, which were disclosed in a Skeleton argument, allegedly showed SBB executives and its incoming CEO Leiv Synnes immediately began a plan to change its financials to cure the breach. Then when SBB’s own auditor saw what the company was planning they expressed their discomfort, according to court documents. But SBB moved forward anyway and allegedly changed its normal accounting practices which is now at the heart of the litigation.

According to multiple creditors who have spoken with Fir Tree’s law firm, the goal now is to set up a quasi new ad-hoc group comprised of like-minded bondholders who would agree to also make demands to the company to accelerate their bonds. If SBB agreed to settle then holders would split pro-rata funds from the settlement.

A current SBB bondholder told this reporter this week, “Right now most funds have been sitting back watching if Fir Tree will win its case because if so the company will go bust after holders call in their bonds.”

Fir Tree’s Ideal Settlement

Additionally, Fir Tree has presented SBB with a plan to refinance some of its debt. The plan involves a roll up of the existing notes at the SBB HoldCo level into loans at the operating company level along with providing new money financing. Ideally the plan would work so that the notes of any settling parties would be exchanged for new loans at the operating company. And the creditors who form this new ad-hoc group would have the chance to provide new money financing to the company. On top of that sources say longer dated noted holders could have a chance at a double-dip recovery.

How open SBB would be to the latest approach is questionable though.

According to sources SBB has been resistant to any new restructuring offers. Last year I reported at LFI multiple creditor groups formed (which included Blackrock, GoldenTree, and Anchorage) and tried a somewhat soft approach using advisors, Moelis was one, to make to make demands about creditors having a say in future asset sales but SBB held their ground and ignored the creditors leaving each group to disband. Additionally, the bond documents were not structured with a lot of restrictions given the credit was originally sold as investment grade. Since then SBB has continued to sell off good assets through joint ventures with companies like Brookfield. More recently it completed a spin-off IPO of its residential properties, the proceeds of which were earmarked to flow back to creditors. Issue is which creditors, RCF or Bondholders or affiliated insider loans, will actually get that money is unknown. It’s also working on further sale of properties in Västerås and Flen per its Q3 presentation. But will that be enough?

SBB faces a huge maturity wall over the next few years. As of Q3 24, SBB owed SEK 54.7 billion ($5bn) of debt, of which SEK 5bn ($476.25 million) falls due in Q1 2025 and further SEK 41.3.5bn ($3.783 billion) of mainly unsecured debt maturing in 2026-2029.

According to the Q3 24 report, SBB had a meager SEK 1.8bn of available liquidity. That said post balance sheet date, the company has taken steps to improve that by signing a new SEK 2.5bn credit facility with a Scandinavian bank, receiving dividends from Sveafastigheter (the IPO-ed company) and carrying out further asset sales. SBB avoided answering questions on its new cost of capital to secure the new RCF today when asked by analysts.

SBB is in dire need of new capital to address its liquidity problem but its ability to go out and raise it in the markets is currently limited, according to statements made by the company in its earnings calls this year and analyst reports. According to sources familiar with the Swedish banking community there is another issue at play here. Given the company needs cash, the most efficient and cheap way to get cash is a new share issue at Holdco ($SBB). But Ilija Batljan, the fired ex-CEO, can’t participate because I am told he is cash poor, and certainly not to the degree that he could defend his current equity stake. So if SBB did a share issue, Ilija would get wiped out. On top of that, his private holding company would get wiped out. There is also doubt among Swedish bankers I spoke with that there would be enough market interest in a $SBB share issue even at a super low price.

CEO Leiv Synnes has blamed the Fir Tree litigation for this and swore again today in its earnings call that Fir Tree’s claims are baseless and it will fight the suit through trial which begins the middle of January. On the other hand, sources close to the situation say, Fir Tree and its attorneys feel quite confident in their ability to succeed at trial even more so after witness statements and email disclosures have allegedly shown SBB’s leadership fiddle with its accounting to starve off the covenant breach.

Time’s Running Out

An additional problem is the compressed time schedule. Fir Tree case is under a short trial scheme – it is set to start in the week of January 13 2025 and guided to end in March 2025 with a decision to come within 6 weeks of the trial ending. In the event that Fir Tree wins and a court says the company did breach a covenant, then any other bondholder could call in the bonds and SBB could be forced to pay billions overnight. If that happens, sources say it’s very likely SBB would be forced to file for reconstruction in Sweden, which is similar to a U.S. chapter 11.

Attorneys for SBB and Fir Tree did not respond for comment as of press time.

UPDATE 11-28-24 12:30pm: I was right. SBB has just announced other bondholders are making acceleration demands. Now the company isn’t completely wrong when it says that today’s bondholders demands don’t have a legal effect given as I reported they can’t join the Fir Tree suit at this point in the case. But once a court decision comes in on the Fir Tree case bondholders will have all kinds of “legal effects”. According to SBB, new bondholders joining Fir Tree’s campaign are MCHA Holdings, Hudson Bay Master Fund, Prophet Mortgage Opportunities LP and TQ Master Fund LP. SBB says the new funds hold around 50 million Euros of notes maturing in 2028 and 2029.

UPDATE 12-10-24: SBB surprised creditors today by announcing a debt exchange by stripping assets at the LLC which supported the current bonds and moving around 92% of the assets to newly created company called SBB Holding. According to analyst and a few current bondholders I spoke with, SBB’s rushed liability management exercise is designed to split off the growing opposition group of bondholders led by U.S. based hedge fund Fir Tree. The group demanding acceleration of the bonds for a covenant breach currently holds around 174mn EUR. Additionally, a new fund joined the Fir Tree campaign called Corbin Capital Partners who holds around 25mn EUR of SBB notes.

Pareto Securities told clients today, “This move appears to be aimed at mitigating the risk of bondholders accelerating and demanding early repayment in the event of an unfavorable outcome in the ongoing litigation with Fir Tree. To facilitate the exchange, SBB is effectively transferring most of the company’s assets to a new entity (SBB Holding), thereby subordinating the claims of current SBB bondholders to a secondary position.”

The 2025 bondholders are expected to get paid off in cash at near par, which a lot of the market already thought SBB would find the cash to pay off. If the Dutch auction lands on 98 for the 2025s I would imagine most holders will take it instead of waiting for the actual maturity date (First one is in January then another larger sized bond in March). But the new security offered to the bonds with maturities after 2025 is the first time I have seen SBB give into any kind of creditor demands. Last year I had reported at LFI that around 3 different group of creditors had tried negotiating new debt deal terms specifically around SBB’s ability to sell off good assets without the consent of bondholders. But SBB held their ground, ignored creditors and they disbanded.

Now SBB is offering to also changing covenant terms in the new deal. The offer has similar maturities and coupon rates but new bondholders get a “supposedly better” position in the creditor waterfall and SBB will only retain equity and subordinated debt interest in SBB Holding.

Pareto noted the terms of the prospectus for the newly issued bonds will be amended, replacing the current maintenance test for covenants with an incurrence test, along with certain other modifications compared to the existing terms. But to find the devil in the details you have to actually see the the new bond documents which SBB didn’t exactly disclose to the public in today’s press release.

Luckily for my readers I got a look at Reorg/Octus legal and credit analysis of the new bond documents which noted a few important issues. 1) the new notes will have a trustee which means bondholders will have to vote as a team if they want to enforce any new covenants unlike their ability to make one off demands now like we are seeing Fir Tree do. 2) Creditors can’t accelerate the new notes because there will be no event of default and 3) by the maintenance covenant turning into an incurrence covenant it means the interest coverage ratio will be only be tested if the company incurs NEW debt or makes a distribution. As of now the ICR, which SBB is accused of manipulating, is tested on a quarterly basis.

While the new notes would have a more senior position in a creditor waterfall these covenant changes put later dated creditors in a worse position wrote CreditSights Mary Pollack this week. Pollack said with the “all around less attractive covenant package” the new bond offer is not compelling for the 2028s and 2029 notes. The hybrid note holders will actually be in a good position with the new deal and Pollack recommends exchanging at prices up to a ~ 42 cash price. She also encouraged creditors to demand more time out of SBB to vote instead of rushing to make a decision by December 17 which only benefits SBB who now admits if Fir Tree wins the law suit the company could be insolvent. Fir Tree and SBB are back in court this week in London and it’s doubtful SBB accepts Fir Tree’s newest settlement offer which had a deadline of December 12. News of the settlement deadline was first reported by Dagens Industri, Sweden’s largest business newspaper.

UPDATE 12.13.2024 – SBB is apparently listening to some creditors for the first time and made changes to its debt exchange. 1) The new bonds have to be rated and Fitch already wrote an initial review of the offer. 2) SBB has SEK 11 billion of hybird bonds and can now only exchange up to SEK 1.7 billion of the hybrids. Now keep in mind if SBB goes into a court ordered restructuring then the current hybird bonds, which SBB considers as equity, would be whipped out and valued at ZERO. Take note that even Fitch has said their ratings could change depending on how many hybrids are exchanged, which could be another motivator for SBB to change the offer.

UPDATE 12.16.94 – Chris Haffenden, who I worked with at 9fin and is now leading a team at Octus, has some of the best behind the deal insight I have seen yet. Chris as a former trader turned journalist has at least 2 decades of covering the distressed UK/Euro market. Give this a read. Current expectations from SBB creditors I spoke to is participation in the debt exchange will be high. But sources say SBB needs to get around a 90% participation in the exchange to starve off an insolvency if Fir Tree wins in court. If the company gets a high exchange % it should set them up to settle with Fir Tree and save face with their equity investors.

UPDATE 1.12.25 – Martin Rex is reporting for Sweden’s top business newspaper DI that SBB is still under investigation by its financial regulator, FI, for its accounting practices. I reported in 2023 for LFI about the investigation, which started around the time Mary Pollack at CreditSights first uncovered their questionable change to how SBB calculated its interest coverage ratio and the fact SBB submitted two sets of financials to its stock exchange. DI got a look at the back and forth emails between the company and its regulator which show the investigation is focused on the valuation of properties and accounting for acquisitions; specifically the Norwegian preschool properties and the acquisitions of Amasten and Offentliga Hus. The feedback SBB’s auditing agency and its regulator have given so far appears to be quite critical. I confirmed the existent of the ongoing FI investigation this week but its unknown if the Swedish regulator will actually do anything that impacts the financial health of the company.

Rex’s story is timely as SBB goes into the UK’s high court this week for trial with Fir Tree over a breach of its ICR covenant – the outcome could impact a smaller portion of bondholders who still hold the old debt. According to SBB, the size of Fir Tree’s position that was not exchanged or sold off is around 7.5 million EUR now – a significant reduction from the 46 million EUR position it held when the lawsuit was first filed. Assuming Fir Tree or SBB don’t give up and settle on the courthouse steps, I would be watching Octus/Reorg coverage of the trial that starts January 15th.

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30 Dec

Convicted fraudster A.J. Discala makes Hail-Mary move to stay out of Jail for 11.5 years

This story had been updated: A.J. Discala finally reported to prison on May 2, 2022 at a minimum security facility.

Oringinal Text 12-30-21
Convicted penny stock schemer A.J. Discala is making a last ditch effort to not report to prison for 11.5 years by asking the court to allow him to stay out on bail while he appeals his securities fraud case. Discala was convicted 3.5 years ago on eight felony counts of securities fraud and conspiracy, along with being accused of obstruction of justice, for his role in manipulating the stocks of multiple public penny stock companies. A.J has stated in multiple court motions and at his sentencing that he has been out of the finance business since his arrest but this reporter has learned that isn’t true. The EDNY has till January 7th to argue why he should report to jail immediately.

On December 8th, New York federal judge Eric Vitaliano issued one of the harshest sentences ever seen for a leader of a pump and dump stock ring. I was the only reporter to get a sit down interview with A.J. after his arrest in 2014. I have speculated A.J.’s delayed sentenced was likely a result of him cooperating in other cases but based on what I heard at his sentencing that doesn’t appear to be the case. Instead the justice system was just ridiculously slow to finish this case.

The EDNY prosecutor, Shannon Jones, pushed hard in a two hour hearing, attended by this reporter, for serious jail time detailing the fact that A.J. lied on the stand during his trial and has never apologized to the main street investors he and his crew cheated millions out of. Judge Vitaliano listened with a stoic face while A.J. cried during his statement begging for leniency blaming his actions on his upbringing and substance abuse additions. In the end the judge was unmoved by A.J.’s recent attempts to run charity work for disabled kids instead of working in the finance industry. AUSA Jones reminded the judge this charity work only started after he was convicted and seemed like a ploy to rehab his image for sentencing. A.J has stated in multiple court motions and at his sentencing that he has been out of the finance business since his arrest but this reporter has learned that isn’t true.

A.J’s wife, brother and sister attended the sentencing but his wealthy father and extended family were absent from the court room. None of the victims of his crimes who testified at trial showed up to make statements against him but one of the FBI agents who led the case was there. It’s the work of the FBI agents to obtain two wire taps of A.J.’s cell phone that he is challenging in his appeal saying the feds made misleading statements about the size of the stock scheme to get the wiretaps. A.J. tried this move right before trial also and the judge shrugged off his attempt and allowed the recorded conversations and text messages to be heard as evidence.

There were gasp in the court room when Judge Vitaliano said, “As far as financial schemes go this was the top of the worst I have seen and Discala was its leader.” He talked about the arrogance A.J. displayed on the wire taps, his perjury at trial, and the fact that penny stock-main street investors are the people this court is designed to help and a low market value of these companies doesn’t mean the crimes were not significant.

A.J. had his head down in his hands for most of the Judge’s speech. He called A.J.’s conduct “horrible” and “his actions predatorial and ruthless!” In all the white collar sentencing I have witnessed this was the strongest voice for reason to holding penny stock fraudsters accountable. A.J.’s long sentence will now set precedent for future white collar securities fraud cases. A.J.’s own lawyer pointed out that even one of Jordon Belfort’s co-conspirators only got ten years for the Stratton Oakmont scheme in the 90s.

AUSA Jones once again argued after the sentence was handed down that A.J. is a flight risk because his wife Dounya Discala has family in France. As a result A.J. was put back on electronic monitoring and given a curfew until his report to prison date is determined. A.J.’s co-conspirator Darren Goodrich, a So-Cal broker and market maker, was the only other person from his crew that has been sentenced yet. Goodrich, who got 41 months of jail. also appealed some of his sentencing, which was the amount of restitution he had to pay. During the appeal Goodrich still had to serve his time but eventually won the appeal and had his restitution reduced by at least $1 million.

According to A.J. it’s been Dounya, a former marketing manager for Ralph Lauren in Paris, who is the breadwinner for the family since his arrest. She now goes by her maiden name (Irrgang) on her LinkedIn profile, In 2014 after A.J.’s arrest Dounya was suddenly working on a small cap company, BevRAGE and claims to have been raising millions for the company, which is a skill set A.J. has. I told by at least two business people in 2016 that A.J. was still out there raising money for small cap companies using Dounya as a frontwomen. I asked the EDNY at the time if this was a bail violation and they wouldn’t answer.

One of the people who interacted with A.J. in 2016 was Jay Harkins a consultant in the beverage industry. He told me in May 2016 that at first he didn’t realize A.J. Discala was the architect of the deal. Harkins said, “Dounya ( his wife) incorporated a business called ‘MB2’ in November 2015 and is now the CEO of a company called BevRage, which has Michael Loeb and a handful of others invested in it. A.J. is all over it.” When asked what A.J. was actually doing on the transaction Harkins said, “One of the clients that my old company, Blackheath Beverage Group, LLC, has is Eastside Distilling – their symbol is $ESDI. Lots of solid proof that he is negotiating stock vs cash with them for compensation to Blackheath.”

This month I reached out to Harkins again and shared A.J.’s verdict. He told me, “My experience with AJ was with a private company that he squirmed into by claiming he would be able to fund it if I was removed as CEO. It got shutdown 4 months later. His shenanigans cost me my business, almost 30 people their jobs, and quite a few years of depression for me. For the first time in my life, I now understand what it feels like to see some justice served.”

A.J. and Dounya Discala would not respond to comment about Harkins statements. Discala’s attorneys also would not respond to questions about his bail restrictions.

I emailed AUSA Shannon Jones after I heard from Harkins asking the EDNY to once again clarify A.J.’s bail restrictions. She refused to answer what should be public knowledge. The press man for EDNY, John Marzulli, was also aloof sending me a hearing transcript from 2014 where the government prosecutors argued for A.J. to not work in the securities business and have to check in with probation anytime he wanted to take a meeting. I reached the AUSA who made this argument who his now with the South Florida DOJ and he said he couldn’t remember what A.J.’s final bail restrictions were. The judge’s order filed in PACER only says there were modifications, one of which I know was the removal of the ankle bracelet, but then the order doesn’t explain what the final outcome was.

The EDNY now has one last argument to win which is how much A.J. will be forced to pay in what is called restitution. They are asking for at least $16 million even though the trial evidence showed A.J. only made a few million in profits off the stocks he was charged with. There are multiple other stock schemes A.J. executed according to the FBI wire tape warrant report but they don’t count for restitution because they did not end up as part of the EDNY charging documents. If the judge orders double digit millions in restitution it would go directly back to the victims of the companies at the heart of A.J’s trial which are mainly investors in a company called CodeSmart.

The EDNY final argument is over about a million dollars raised for a company called Cubed as a private placement before the stock was trading. After A.J.’s arrest the Banking Commission for Connecticut jumped on his case and brought an enforcement action for his role in the private placement because he was soliciting funds as an unregistered investment advisor and never actually gave the investors any stock certificates. The CT banking commission said Dounya Discala was involved in collecting those payments but did not bring the action against her. They also talked about how A.J. would use Dounya’s name on bank accounts to hold investors money or trade in. The FBI wire tapes and search warrant detailed A.J. talking to Dounya about taking money out of their bank accounts for reasons Dounya “wasn’t going to like”. The FBI says that money was used to pay kickbacks to some of the brokers A.J. used to help with the stock manipulation scheme.

It’s unclear how A.J. would be able to pay $16.346 million in restitution after over a decade in jail (A.J. would be over 60 when he gets out) if he is not working in a high paying opportunity field like Wall St. Well that is unless Dounya Discala is working as a nominee for him. A.J. was previously married to Sopranos actress, Jamie-Lynn Sigler, and acted as her manager for a time. Like the Wolf of Wall St, Jordon Belfort, he could always try to sell some kind of movie rights to his story. But on the face of things a long jail sentence is likely the only justice his victims are going see.

UPDATE January 25 2022: The EDNY has filed a motion asking for NO bail while A.J. litigates his appeal. Their logic is AJ could still be a flight risk since Dounya has told pre-trial services if A.J. is in jail she will have to go back to France to live with her family because she can’t afford to support herself and their two daughters. Additionally, the EDNY points out that while AJ’s financial affidavit shows he hardly has any money left they question how he can keep hiring high priced lawyers included paying the most recent one at Patterson Belknap to go through an appeal of his sentence.

As of today A.J. is required to report to federal prison on February 7, 2022 and currently wears an ankle bracelet. But yesterday his attorney is now trying another hail-mary move by asking the judge to delay that date by 30 days because the bureau of prison hasn’t told him which prison he is going to report to.

UPDATE 2.9.22: Judge Vitaliano finally ruled that private placement investors in Cubed can get restitution. That means $1.249 million in losses will be added to the total restitution calculation that the judge still has to decided on. At Discala’s sentencing the DOJ was asking for around $16 million in restitution. Additionally AJ’s report to prison date has been delayed as the judge decides if he can stay out on bond during his appeal.

UPDATE 3.8.22: AJ was set to report to prison tomorrow but the BOP cant’ get their bureaucratic act together and tell AJ Discala what prison he has to report to! The judge granted him another 30 days of partial freedom (he wears an ankle monitor and has a curfew). His new surrender date is April 8 2022.

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29 Jan

Judge Rules SEC can’t sue MGT CEO for whatever they want in Honig Pump & Dump case: $MGTI

A New York federal judge threw out the Securities and Exchange Commission’s additional claims of MGT’s CEO, Robert Ladd, using his father’s stock trading account to benefit himself unbeknownst to MGT Capital Investment shareholders. But it’s not all rosy for the Bitcoin CEO because Judge Ramos ruled on January 27th that the SEC’s claims of fraud against Ladd for allegedly knowing Barry Honig and his associates traded as an undisclosed group of affiliates to manipulate the stock price can go forward to trial. The government’s claim that Ladd knowingly issued a press release that was a false material event about his business partner John McAfee was also allowed to stay in the SEC’s enforcement case.

Ladd is the only remaining defendant in the multi-million pump and dump case that the SEC says was orchestrated by Barry C. Honig in over 40 stocks. Since the case was first brought in September 2018 all of the individuals charged that worked with Honig have made plea deals with the SEC. The SEC has tried, with three versions of the complaint, to nail Ladd on something that would force him into a settlement but Ladd’s not folding.

“Judge Ramos’ decision effectively dismissing the new allegations filed in the Amended Complaint is a great first step towards Mr. Ladd’s full vindication. The entire case against my client is ill-conceived and should be abandoned,” said Ladd’s attorney Adam Ford of New York-based Ford O’Brien LLP.

Attorney Ford is Ladd’s second lawyer in his three year battle with the SEC. Ford is known on Wall Street for beating the SEC and DOJ by getting serial stock promoter Guy Gentile off and most recently for a not guilty verdict in the criminal case for the CFO of Mark Nordlicht’s billion dollar investment fund called Platinum Partners.

Earlier this month Nancy Brown, the lead litigator in the SEC’s case, asked Judge Ramos if they could move right to summary judgement on the non-fraud claims of the case. Attorney Brown claimed it would streamline a trial and be efficient for the judge to rule on because with these kind of claims, that tie to when Ladd disclosed selling his MGT stock via a From 4, the government doesn’t have to prove Ladd’s intent to do any thing wrong. Brown’s move was bold and confident because it came while Judge Ramos still hadn’t decided on the motion to dismiss of the second amended complaint. According to people familiar with the case the discovery period is over which included the SEC taking defendants depositions. Ladd plans to fight the case so he can remain a public company CEO and won’t be settling any fraud charges, which the SEC is well aware of.

But at a hearing held today to argue if the SEC can even ask for summary judgement on those claims, Nancy Brown appeared to back down. This reporter, who attended the hearing, saw there was no argument made about summary judgment; instead Brown asked the judge for more time to decided how the SEC is going to move forward. In the judge’s motion to dismiss ruling this week he gave the SEC leeway to file another, this would be the third, amended complaint against Ladd. Attorney Brown said she has think it over for two weeks.

Here is where the SEC’s trial strategy is showing some cracks. Since the SEC didn’t finish discovery with Team Honig and went to an easy plea deal that banded some of Honig’s associates while still allowing Honig to trade in $PTE PolarityTE, they haven’t actually gotten any of his crew to admit they all traded as an undisclosed group of affiliates. The SEC settlements Team Honig made all only say the defendants don’t confirm or deny the charges. And given how all of team Honig appears to have plead the fifth in their SEC depositions it’s unclear how the SEC can prove Ladd knew they were acting as a group of affiliates and didn’t tell his shareholders about it. Now if the SEC had acted like real prosecutors and taken Barry Honig or John O’Rourke to trial and gotten guilty pleas or even forced them to admit guilt in the SEC settlement they’d be in a different boat. But that didn’t happen. So it will be interesting to watch if the SEC has some kind of surprise witness in their pursuit of Ladd. Ladd’s former business partner and tech legend, John McAfee, was recently arrested in Spain for tax evasion by the DOJ in case unrelated to this one.

According to a government witness in an other DOJ case tangentially tied to Honig the SEC has been trying to nail Honig for over a decade. The theme of charging them with trading as a group of undisclosed affiliates to manipulate stocks and allegedly commit fraud is actually something new the SEC finally figured out. Given the DOJ still hasn’t’ brought any charges against Barry Honig and his crew, which include Michael Brauser, Mark Groussman, Philip Frost, John Stetson, and John O’Rourke it doesn’t appear the government has made much of an impact on stopping these alleged securities fraud bad actors.

$MGTI currently trades on the OTC Markets for $0.11 cents.

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11 Mar

NY Journalist wins lawsuit to unseal court docs tied to Bruce Bernstein Securities Fraud Case: $XSPA

UPDATE 4.2.19: After I won a lawsuit to unseal documents that showed Bruce Bernstein and Richard Abbe mislead investors and the Securities Exchange Commission in public filings another original investor in XpresSpa has filed a similar lawsuit against the $XSPA board and its executives. Swiss resident Roman Kainz filed his securities fraud suit on March 20, 2019 and added a defendant who is William Phoenix of Mistral Equity Partners LLC. The case has been deemed related by the Southern District of New York federal court to the Binns case but the defendants will have extra legal cost litigating another case. Richard Abbe of Iroquois Capital was served with the new suit at his home at 7 Kinsington Rd, Scarsdale NY 10583. Additionally, the unsealed court filings shows that Alan Schwartz, the former CEO of Bear Stearns, was involved with the original investors in XpresSpa along side Kainz and the Binns. It’s unclear if Alan was invested in the deal personally or through Guggenheim Partners the asset management firm where he is a managing director.

Original Text
Two hedge fund mangers that invest in small cap stocks have been working together to hide documents discovered in a securities fraud lawsuit from public shareholders and regulators. Last week one of the key pieces of evidence was unsealed after I won a court case brought by Bruce Bernstein of Rockmore Capital in an attempt to force me to reveal a confidential source used in my previous reporting on his alleged fraud.

The document involves private communication between Bernstein and his ex-wife who had accused him of hiding assets during their divorce. The dispute lasted only a month but forced Bernstein to turn over balance sheet records of the fund he manages called Rockmore Capital. In the divorce communication Bernstein swears he doesn’t actually have any of his own money in a $6 million debt security issued by his fund to an airport spa business called XpresSpa.

Bernstein’s statement to his ex-wife is a complete turnaround to what he told the founders of XpresSpa when he convinced them to take on debt issued by his hedge fund. That’s because the spa founders say Bernstein led them to believe it was him lending the money. Allegedly, a similar lie was repeated in public filings with the SEC when another public company Bernstein invested in, Form Holdings, wanted to merge with XpresSpa. Securities laws require Bernstein to disclose any affiliated or related parties when a proxy statement is filed with the SEC asking investors to vote on a merger with a public company. Since the days of Enron fraud laws were even expanded to tie criminal liability if you lie in proxy statements used to inform investors about who controls or has ownership in companies that are merging.

In the case of XpresSpa, investors were completely left in the dark about the role Bernstein’s buddy Richard Abbe, of American Capital Management, was playing behind the scenes to control the debt of the Rockmore note and force XpresSpa into what became the loss of millions in a disastrous merger.

While I was reporting on the XpresSpa fraud case in federal court I was sent an anonymous email with a filing I thought was currently redacted in court records. A lot of the federal case has sealed documents and redacted motions making it hard to figure out who did what. The court filing I got explained Bernstein’s ex-wife roll in sending what’s been called the ‘Sloan Letter’ (because that’s the last name of the lawyer his ex-wife used) to show her husband likely lied to regulators and shareholders. So I reported another story explaining that.

After the story ran, it appears Abbe and others encouraged Bernstein to sue me to reveal who sent me that document. They thought I had also been leaked private divorce communications and they accused the law firm suing them on behalf of the XpresSpa founders, CKR Law, or the Ex-Wife and her law firm, of leaking them to me. On top that Bernstein chose to file, on November 28 2018, what’s called a motion for pre-action discovery in NY state court, instead of filing a motion in the federal case, and demanded his name and what he was asking for be sealed. He also included a copy of the Sloan letter and said his fund had already lost one client because of my reporting on his alleged fraud. Ironically it was now Bernstein who had given me the hidden document detailing his own alleged fraud by included it in his lawsuit against me! But for four months NY state court said I couldn’t report that!

In an unusual move a state court judge agreed to seal the entire record without any of the defendant being sued having a say. I was served the lawsuit in early December and told I had to wait months to argue that the case should be unsealed. Meanwhile I am still reporting on what’s going with Abbe and Bernstein in the XpresSpa federal lawsuit. Sealing of the case meant NY state court had inflicted prior restraint against me and I couldn’t tell anyone the subjects of my reporting are trying to intimated me with litigation cost and effectively issue a subpoena on me to turn over a source identity. There was no way I was going let that happen.

Luckily once I notified the Reporters Committee for Freedom of the Press about the nature of the lawsuit, Sarah Matthews, got on the case and found me a Big Law media lawyer. Then David Bralow and Kay Murray, attorneys on the board of the Press Freedom Defense Fund started by First Look Media, worked to secure funds to help offset litigation cost and make sure I had one of the best first amendment lawyers representing me. First Look Media owns The Intercept. Getting that call from attorney Mark Bailen of Baker Hostetler and his associate Peter Shaperio, to represent me was a great sense of relief. But I knew we still had a battle. Then the case got the attention of Yale Law professor, David Schultz, who has decades of experience in litigating for the rights of journalist to bring in almost every New York major publication ( NY Times, NY Daily News, Hearst, AP, Gannett, NY Post etc..) to file what’s called an AMICUS brief. Another giant in media law, attorney Robert Balin, of Davis Wright Tremaine, also came on the AMICUS brief team and they made a fling to join my case in support our argument that as a freelance journalist I should be granted reporters privilege and not forced to reveal a source. They wrote a strong argument for the public’s right to an open judicial system demanding the whole case must be unsealed. Attorneys Robert Balin, David Bralow and David Schultz even showed up at my hearing giving me a bench of five top media lawyers to face the judge. I had a powerhouse behind me who clearly cared about the first amendment.

Bernstein and Abbe’s plan use the courts to intimidate and tie me up financially didn’t work. Instead I got a war room of litigation help and won!

Abbe, who is also the co-founder of Iroquois Capital, has been working with Bernstein for over a decade as an alleged group of undisclosed affiliates in multiple stocks with the intent to control company boards, management, and assets for the benefit of their hedge funds. In an interview with a trade publication a few years ago Bernstein boasted his funds average return was 9 Percent. Once in control, the hedge funds allegedly manipulate the stock price while gutting company cash and then discard the carcass of the company turning it into a useless shell corporation with a stock price in the pennies. The XpresSpa litigation details similar fraudulent takeover schemes in a company called Neurotrope and TapImmune.

For years, Abbe’s fund has also partnered with Barry Honig who is currently accused by regulators of running pump and dump schemes in over 70 public companies. I have previously reported Abbe’s Iroquois Capital was also named in the SEC subpoena sent to MGT Capital asking for communications from the group of Honig related affiliates. In the new amended complaint field March 8th by the SEC the regulator mentions there are other unnamed parties that helped manipulate the stock of MGT Capital during the time Iroquois co-founder Josh Silverman was on the board. It’s unclear why the SEC didn’t name Iroquois as a new defendant for their likely role in the MGT Capital pump and dump.

After I won the Bernstein lawsuit and his name became public I received a new tip from a person familiar with the situation that Bernstein and Rockmore had been through their own SEC investigation surrounding accusation that they shorted the same stocks they were doing PIPE investment with. The New York bucket shop lawyer Bernstein had hired to sue me, Peter Cane, started threatening me on Thursday after I asked if the past SEC investigation was true. Eventually attorney Cane admitted on behalf of Bernstein that the SEC had investigated but no charges were brought and the investigation ended in the summer of 2008. Cane called the investigation routine.

In my decade of reporting on securities fraud I have never seen a ‘routine’ SEC investigation. This kind of bully tactic by Cane was not a surprise. Once we got to court on March 5th, my attorneys saw what I had said from day one. This is case is about trying to discredit and intimidate me and less about trying to find out who leaked divorce documents. You can see in the court transcript below that attorney Cane began by trying to argue I was not working as a journalist when I first reported on Abbe and Bernstein but instead was being paid by Short Sellers to discredit the company. This is absolute not true and is never true in any of the reporting I have ever done here or any of the major media companies I have reported for. In the case of XpresSpa that short seller argument doesn’t even make sense. As of Friday I checked on how many shares could actually be borrowed to start a short trade on XpresSpa. The answer was only 20,000 shares. The interest to borrow those shares was as low as 9 percent. Joe Spiegel of Dalek Capital who runs a short selling fund told me, “there isn’t much demand to short XpresSpa. Sometimes borrow fees can get to 100%-200% or higher, like for Tilray. 9% shows no cares about shorting XpresSpa.”

Judge Franc Perry who presided over my case put Attorney Cane in his place pretty fast when he started the argument that I am not a journalist. Judge Perry said ‘Ms Buhl is conducting news gathering”. Judge Perry also said Cane had shown no evidence to support any other conclusion. Page 19 of the court transcript says in the eyes of New York Supreme court “the Court has not seen any evidence to show that your client is not a journalist, and for the purpose of the Court, in reading this, the Court understands that your client is a journalist, is a newsperson, under the law.” This was a strong on the record statement to the testament of my reporting work because these days you never know how judges are going to view freelance journalist who report online, especially ones running their own publications.

Judge Perry also grilled down on if the Sloan letter was even a confidential document. In the federal court case, Judge Stanton has said it will be sealed because it was part of a divorce proceeding, unless anyone can prove other wise. A notion CKR Law lawyers Rosanne Felicello and Michael Maloney have sought challenge in court documents for their clients the co-founders of XpresSpa. Given Bernstein also sued his ex-wife and the law firm she hired to see if he was hiding martial asset; they hired lawyers who showed up at my hearing. Both told the judge this letter was written after the divorce was finalized and as a result neither of them considered the letter confidential nor did they agree in writing to make it confidential. So once again Bernstein’s attorney Peter Cane had now brought forward a reason for a state court court to rule the docs a federal court judge thought should be seal shouldn’t!

If attorney Cane had never brought this action against me the documents Bernstein and Richard Abbe have worked so hard to keep hidden likely wouldn’t be front and center of a news story and available to the public for free.

XpresSpa isn’t a stock with a lot of trading volume these days. It trades on the low end tier of the NASDAQ under $XSPA. But if this group wants to start another pump and dump on the stock they have the control to do it. More importantly it’s Bernstein and Abbe’s history of hiding ownership of debt notes or even stock ownership that makes their actions newsworthy. There are so few journalist covering small cap stocks these days which is why I pick stories like these to report on with the intent to inform the investing public because history shows the SEC isn’t going to move fast to protect investors in real time.

EDITORS NOTE: I want to first thank my attorneys Mark Bailen and Peter Shaperio. They wrote incredible legal arguments and provided a zealous defense. I also want to thank New York Daily News journalist Stephen Rex Brown for reporting on my case twice and showing up for the two hour hearing. The Reporters Committee for Press Freedom and the Press Freedom Defense Fund really stepped up to help a freelance journalist and as a result we now have case law in New York that recognizes reporters privilege for freelancers and rules on how important it is to have a court system with open records. Additionally, readers who donated additional funds needed to cover reporting cost were critically to getting this story out.

Editor’s Note: This story has been updated.

Unsealed Court Document in XpresSpa fraud lawsuit:

Unsealed Bruce Bernstein Di… by on Scribd

New York Supreme Court case #655887/2018 Transcript Bernstein vs. Journalist Teri Buhl:

Bruce Bernstein vs. Journal… by on Scribd

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4 Feb

Team Honig’s Mark Groussman settles with SEC

Mark E. Groussman, long time investment partner of microcap fraudster Barry Honig has given up his fight with the Securities and Exchange Commission who accused Groussman of being part of an long running pump and dump scheme. On Feb 1st the SEC notified federal district court Judge Ramos that Groussman has agreed to a five year-ban on investing in penny stocks. Once the settlement is approved by the judge, he has 2 weeks to fork over $1,381,914 million for disgorgement of his illegal stock sales and fines. Groussman’s investment company, Melechdavid Inc, has also agreed to a five year penny stock ban and not to do all the illegal stock manipulation its done in the past.

Unfortunately Groussman doesn’t have to admit guilt and his civil penalty was only $160,000. The settlement comes just days before SEC is going to file an amended complaint that could name new individuals and public companies involved in the scheme. That complaint is due February 8. Groussman settlement could also signal he has flipped as a witness for the SEC whose main target in this litigation is Barry Honig. Groussman lives in Miami Beach with his wife Erica Groussman who is a real estate agent with Sotheby’s International. Mark Groussman is also on the board of a non-profit founded by Arnold Schwarzengger called After School All Stars.

On September 7, 2018 the SEC brought their initial enforcement action against this group of bad actors in the Southern District of New York accusing the group of making $27 million, between three stocks, off illegal trading gains. According to the SEC’s complaint, from 2013 to 2018, a group of prolific South Florida-based microcap fraudsters led by Barry Honig manipulated the share price of the stock of three companies in classic pump-and-dump schemes. Ten individuals and their related investment companies where named in the complaint. Team Honig allegedly orchestrated the acquisition of large quantities of the issuer’s stock at steep discounts, and after securing a substantial ownership interest in the companies, Team Honig engaged in illegal promotional activity and manipulative trading to artificially boost each issuer’s stock price and to give the stock the appearance of active trading volume. According to the SEC’s complaint, Honig and his associates then dumped their shares into the inflated market, reaping millions of dollars at the expense of unsuspecting investors. The stocks in the SEC complaint are: MGT Capital, MabVex, and BioZone.

I was the first journalist to report in the fall of 2016 that team Honig was under SEC investigation for their role in trading as a group of undisclosed affiliates and stock manipulation. Honig sued me for defamation for reporting this news and I was able to get him to drop his case with prejudiced. We know now while Honig was suing me the SEC was actively investigating companies he invested in. Honig faces millions of fines and a possible life time ban from investing in penny stock if the SEC is successful in their enforcement case. I have also previously reported the Dept of Justice is investigating Honig. Any of the individuals settling with the SEC could be a witness in the DOJ case if they bring criminal charges.

A foreign investment company called Alpha Capital Anstalt, which is located in Lichtenstein, also settled with the the SEC. A man named Konrad Ackerman signed the settlement on January 17, 2019 and is listed as the fund managing director but it is unknown who is actually invested in the company. Ackerman was not named personally in the SEC lawsuit. Alpha Capital agreed to pay $908,258.51 for disgorgement of illegal gains but did not have to admit quilt. Only $50,000 of the total fine is for a civil penalty. There is also NO penny stock ban lobed against the fund but they did agree to not due all the illegal stuff they are accused of again. Alpha’s name is seen investing alongside Honig in a lot of stocks over the years. Their SEC settlement shows they got off light.

At the end of 2018, Miami Billionaire Philip Frost, who was also a defended in this case announced he had settled with the SEC. On January 10 Judge Ramos approved the settlement. Frost’s fine was only around $5.5 million. One former owner of a broker dealer who know Frost told me, “that’s less than Frost spills in the bar in a year”. Additionally, the SEC failed to ban Frost from being an officer and director of a public company. Frost runs OPKO Health and while the SEC put some new restrictions on how he can invest in penny stocks he can still buy and sell companies for OPKP Health. Given how light this SEC settlement is, there is speculation among people involved in the case that Frost singed it in return for evidence against Honig and a deferred non prosecution agreement by the DOJ. OPKO Health is still facing multiple class action civil lawsuits for investor fraud by company shareholders.

UPDATE: The SEC delayed filing their amended complaint to March 8th because another one of Honig’s top guys, John Stetson, wrote the judge asking for more time to discuss the case with the SEC. This means settlement talks for Stetson.

Mark E. Groussman SEC Judge… by on Scribd

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31 Oct

Honig Deals lead to FINRA Investigation of Laidlaw & Co.

Federal regulators are ramping up their investigation into small-cap broker dealer Laidlaw & Company for their role in executing stock manipulation schemes that left main street retail investors with millions in losses.

The Financial Industry Regulatory Authority (FINRA), who is leading the investigation, is currently examining the role of top Laidlaw executives in stock manipulation, lack of transparency and parking stock. Some of the stock offerings under investigation were securities sold by Laidlaw brokers at the behest of known microcap investor Barry Honig.

In September, the Securities and Exchange Commission (SEC) brought an enforcement action against Honig and his associates (Team Honig) for orchestrating pump and dump schemes as a group of undisclosed affiliates.

Barry Honig, a former lightweight New York boxer, is known for his dedication to ‘responsible investing’; however, a deal with him has been conversely referred to as “a deal with the devil” according to sources from Microcap and other industry players. For years, public filings have shown Honig as a passive investor. However his investments have been seen to ride up in share price, stir up investor interest, then skyrocket down after the ‘window dressing’ comes off.

His crew of alleged bad actors – Team Honig – has been chronicled for years here at TERIBUHL.com and by Chris Carey at Sharesleuth and Bill Albert at Barron’s. It consists of biotech billionaire and philanthropist Philip Frost, his fellow co-investing partners Michael Brauser/John O’Rourke/Marc Groussman, John Ford – the promoter who wrote favorable analysis on stocks, priming them for the ‘pump’ of Honig’s ‘pump and dump’ – and Harvey Kesner, a deal lawyer from SIRF LLP linked to a number of Honig ‘s investments.

News of how Laidlaw’s CEO Matt Eitner and Managing Director of Investment Banking Jimmy Ahern worked with Honig to manipulate stock prices first came to light in an investigative story by TERIBUHL.com last month.

According to former Laidlaw brokers, Eitner and Ahern are accused of running ‘the dump’ element of Team Honig’s scheme, using the firm’s retail clients to offload toxic securities. In return, they are believed to have received deeply discounted stock warrants, personal consulting fees and possibly brown bag cash kickbacks.

Many former Laidlaw staff members have been subpoenaed and summonsed for on-the-record testimony against Eitner, Ahern, and Honig, including registered brokers Rob N. Rotunno, Craig A. Bonn, John Marinaccio and Jodi Fauci.

All three brokers – Rotunno, Bonn and Fauci – worked for Laidlaw for a decade.

Jodi Fauci could be a key witness for the regulators’ investigation because, for a time, she held the role of back office manager for Laidlaw and could have seen, how Eitner and Ahern would prevent brokers from selling their clients’ shares when stocks were on high. On occasion she had to fill in for John Marinaccio the Anti-Money Laundering Director whose role was to over see trades with the clearing firm. Marinaccio is likely one of FINRA’s best witness because of his day to day view of how orders got filled. Marinaccio and Fauci confirmed they did an on-record interview with FINRA when subpoenaed. Fauci now works for a firm on Stanton Island.

Rotunno and Bonn could be key witnesses as well. Currently named in FINRA arbitration claims filed against Laidlaw by former clients, according to former colleagues, these brokers were encouraged to start what became known as ‘cross trades’ with these former clients.

As previously reported, to help Honig keep stock prices up – so his team could dump shares at a stock’s high – Laidlaw’s Eitner and Ahern bullied brokers into pushing toxic shares onto naive retail clients before restricting the share sales when Team Honig got out of the stock.

According to two sources, Eitner and Ahern would promise brokers cheap warrants – or even side deal cash – for putting Laidlaw clients into those deals. As Rotunno and Bonn were not part of Eitner and Ahern’s inner circle – the ‘Pump Pump Loose Loose’ group – when their clients demanded out of the stock at its high, Eitner and Ahern advised they open new client accounts and sell the shares their previous clients wanted out of to those new clients, even though the stock was on a downward tear.

This ‘cross trades’ process was similar to a Ponzi scheme; stock was bought and sold around the firm’s client list to make small profits for a few, so it seemed there was much liquidity in it. Whoever was stuck in the stock when Team Honig dumped, lost out.
When questioned as to the legality of this practice, Eitner and Ahern were said to have referred interested parties to Sichenzia Ross Ference LLP – a law firm with close associations to the business deals of Barry Honig.

With Honig now in the hotspot, it appears Eitner and Ahern are making moves on their own to exit stocks that were part of a planned manipulation scheme. A few years ago the Laidlaw duo tried to make a move out of Honig’s playbook in a company called Relmada but it wasn’t a clean exit like Honig’s been able to pull off for years as the lead player in the scheme. Shares in a company called Spherix ($SPEX), have been sold by Laidlaw in October with visible market moves that read like a pump and dump. And this week Laidlaw gathered it’s brokers in staff meeting to ready a push for a new biotech IPO designed as a profitable exit for Eitner and Ahern and one of Honig’s prior associates Rob Knie.

Honig’s Lackeys try being Lead Architect of Stock Schemes
The SEC detailed in court documents how Team Honig gains leadership influence over company boards and cheap stock before the pump and dump is executed. Per the SEC: Honig and his colleagues would acquire large equity positions in exchange for financing a development-stage company’s debt and when the company couldn’t repay the steep interest rates it had to allow Honig stock conversions that gave him a larger ownership percentage without spending more money. At that point Team Honig would force appointment of their own board directors and axe true independent directors. Then Laidlaw as the broker dealer would come in to do a secondary Regulation D offering to accredited investors or structure a Private Investment in a Public Company (PIPE) deal to get shares sold to outside investors and create liquidity in the market so Honig could execute a dump at the stocks high.

Take the case of a clinical stage drug trial company called Relmada Therapeutics ($RLMD). A deal Laidlaw brought Honig into that started with his investment in a company called Camp Nine, which later became Relmada through a reverse merger in May 2014. The deal gave Honig 7.75 percent ownership of Relmada. Laidlaw convinced the company to do an IPO but with a private non-deal roadshow where Laidlaw would introduce certain investors to Relmada and recommend who Relmada would allow to invest. Those private Laidlaw clients happen to be Team Honig and his associates. Eitner and Ahern were well compensated for their investment banking work by Relmada through the IPO to the tune of $4.2 million in fees and stock rose to a high of $20 soon after it went public. Laidlaw raised $48 million of new equity for Relmada. On top of the investment banking fees the Pump Pump Loose Loose and We Are Pretty Good At This, personal LLCs controlled by Eitner and Ahern were paid thousands in fees monthly. I previously reported how money from these LLCs is used to benefit the Laidlaw brokers who agreed to sell their clients the risky investments without asking to many questions on why Laidlaw was supporting the worthless stocks.

The Relmada deal was very profitable for early investors and the Laidlaw team but didn’t end well. Relmada later sued Eitner and Ahern for Laidlaw leaking private company info to investors they brought in and for their role in trying to try and take over Relmada after the investment banking fees dried up. The litigation was very public and embarrassing, exposing Jimmy Ahern as lying about earning a college degree and stopped the Laidlaw take-over campaign but the company lost over 40% of its value a year after its IPO. Relmada, who sued for racketeering and tortuous interference, even accused Eitner and Ahern of front running the Laidlaw clients they brought into invest from 2012-2014. It’s this practice of front-running that FINRA is currently investigating and a core element to how Laidlaw is believed to have helped Honig earn millions on his alleged pump and dump deals.

The Relmada deal was the first time Eitner and Ahern were trying to be leaders of a pump scheme but they were publicly exposed and didn’t complete their plan. Of course Team Honig still made millions on the post-IPO pump of Relmada without any backlash. According to a former Laidlaw broker who sold the Relmada offerings, once Eitner and Ahern got their teeth in the company they pushed Relmada’s management to hire a former bio-tech analyst named Robb Knie to ‘promote’ the stock. Knie had been acting as a consultant to many small cap public companies after the hedge fund he worked for left him without a secure job after the financial crash. Eitner and Ahern bullied Relmada’s CEO to pay Knie a cash and stock payout of $2 million and said this was the fastest way to get an IPO done and build a relationship with Honig as an investor. By 2016 Relmada had tanked down to around $1 and still trades in that range as of today.

Eitner and Ahern first met Knie in 2011 on a deal with Aspen University ($ASPU). The CEO of Aspen was the same Honig-backed CEO of Interclick, which was one Honig’s most famous and profitable deals. Robb Knie was been named in the Wizard World lawsuit which called out misconduct in the deal. He was latter dropped from that suit.

After the Relmada IPO, Eitner and Ahern rewarded themselves with million dollar water-front beach homes both purchased in the second week of October 2014. The duo was enjoying their new found wealth and had no problem showing it with firm bought new Mercedes and full time private drivers. Their vacation homes were bought in locations the mid-30 year olds had only dreamed of living in growing up with middle class incomes. Matt and his wife Katie Eitner spent $2.3 million for 1817 N, Ocean Ave, Surf City NJ, which is on Long Beach Island. Jimmy and Jillian Ahern spent $3.175 million on 58 Snow Inn Road, Harwich, MA, which is in Cape Cod. The Aherns paid cash for the Cape Cod house.

Matt Eitner has also donated his earnings from questionable Laidlaw deals to a Ramsey, New Jersey prep school called Don Bosco. The donations secured him a seat on the board and garnered naming rights for one of their athletic fields. People who worked with Eitner say his leadership role at Don Bosco is a great sense of pride for the New Jersey native who lives near by in a $1.7 million home in Mahwah, NJ. According to a recent text sent to Don Bosco alumni, some of whom worked for Laidlaw, the Securities and Exchange Commission has been poking around asking school officials about Eitner’s donated funds with the concern they were given with money earned illegally. If Eitner is charged by regulators and ordered to pay restitution the government can try to come after those donations like they did in the Bernie Madoff case. Don Bosco president Robert Fazio has been asked to comment about the SEC possibly reaching out to the school but did not return an email for comment at press time.

After Eitner and Ahern went on their spending spree Laidlaw & Co began showing visible drops in revenue. As of December 2014 gross revenue for Laidlaw was $45,726,373. Going into 2015 its asset under management was declining and FINRA was getting more customer complaints. As of 2015 revenue was down $10 million ending the year at $34,308,397 and the slump continued in 2016 ending the year at $24,171,714, according to internal Laidlaw financials seen by this reporter. By 2016 the 175-broker firm had a mass exodus of top performing brokers who were leaving the firm with a bitter taste in their mouth from Ahern and Eitner’s high pressure and verbally abusive sales practice that resulted in loosing clients’ money on the Honig Deals. As of press time Laidlaw is believed to be only a 98-broker firm.

Ahern and Eitner. Home Away from Home at The Havana Club.

Is Laidlaw now running their own P&Ds?
Spherix is a company that was an early investment for Barry Honig that billed itself as a patent troll company. Laidlaw executed about half a dozen follow on offerings in Spherix which included selling a PIPE offering to retail investors who might not be accredited investors. The stock would spike on merger or press announcements but then tumble when the announcements panned out to add no value to the company. According to ex-Laidlaw brokers their internal order system would be restricted so that brokers couldn’t choose to sell the stock on its way down. They had to go the AML director who had to get permission from Eitner to sell and by the time that process went through the value had often been lost. Meanwhile Eitner and Ahern would be front-running Laidlaw clients selling a block of shares they own. As example one text seen by this reporter showed brokers on the PPLL team would get a message saying management had sold 40,000 shares and 5,000 would go to the broker who could then choose which of their clients got in a sell order. It was designed to give clients a small taste of a profit and reward brokers who played along with Eitner and Ahern. When Laidlaw couldn’t sell clients to keep investing in Spherix the company would just change its biz model and move into a new line of business. The company as gone from patent investing, to an internet messaging company, to most recently a biotech company and is led by a man named Anthony Hayes. Spherix also had Robb Knie, age 49, as head of investor relations. At age 22 Knie was arrested for petty larceny and filing a false statement with the Board of Elections as the president of the Young Democrats of Rockland County. He plead to the false statement charge and repaid the stolen funds.

This March Laidlaw sold a Spherix offering for 2,222,222 shares with an avg cost of $1.35 to its clients. The pitch was Spherix was going to acquire 100% of a company attempting to compete with Snapchat called Datchat and they needed to raise $3 million. Unbeknownst to the Laidlaw’s brokers Matt Eitner’s wife Katie had made a founder investment in Datchat acquiring shares at $.25. Katie Eitner doesn’t have a history of start-up investing. Additionally, Jimmy Ahern made the same investment in 2015. The shares were allowed to age so that by the time a merger came along they would be free trading. But during FINRA arbitration this year, it was revealed that Ahern and Eitner hadn’t told brokers about their possible economic gain if the two companies merged. If Datchat’s founding stock turned into free trading public stock Eitner and Ahern could have their own private windfall because they’d control when Spherix investors could get out of the stock.

Then magically in August there was a press announcement calling off the Datchat merger. Instead it was announced only a million dollar investment would be made by Spherix into Datchat in exchange for equity in Datchat. Since Datchat raised money through an offering called Regulation A they are allowed limited audited reporting of financials statements. Public filings still don’t show how the $1 million was really used at Datchat and it could have been spent paying back Eitner and Ahern’s founding investment.
Calling off the merger appears to be a blatant slap in regulators face showing Eitner and Ahern know they are being investigated but are not worried about being caught.

On October 11, Spherix announced a new merger this time with a biopharma platform company called CMB Biopharma that claims to be ‘researching’ a drug to help leukemia. The stock flew from $1.01 to $1.55 in pre-trading with 5.2 million shares traded that day. The average trading volume for Spherix is around 60,000. But the Street appears to have caught on to how $SPEX trades and a short interest drove the stock down below the price of the March offering closing at $1.05 that day. Additionally, two current Laidlaw brokers said they were not able to sell on the morning of the stock run.

Spherix has also made a $675,000 equity investment in a drug development company called Hoth Therapeutics. According to internal emails and public filings Hoth was started by Matt Eitner, Jimmy Ahern, and Robb Knie each owning one-third of the company for an initial investment of $105,000 in May 2017. Robb Knie was made CEO of the company and a young female office manager, with no experience in medical research from Spherix, was made V.P. The investment was planned so that when Spherix made their investment in Hoth the trio would get paid back as a loan with interest for $150,000 but still keep their founding equity. Then Laidlaw did a Reg D offering in October 2017 for up to $5 million for .25 a share of preferred stock with a 7% interest. SEC filings say only $1 million was raised. The preferred stock is structured to convert to common upon a public offering. Eitner bought into that deal along with a few Laidlaw retail clients. It’s unclear if the clients in the private offering were told Eitner and Ahern had personal investment in Hoth when it was pitched on the phone but it is disclosed in the offering memorandum.

Robb Knie plans Hoth deal

Now Hoth is being rushed to IPO. This week Eitner and Ahern held company wide meeting pumping up its brokers to sell Hoth at a whopping price of $5.50 to $6.50. The S-1 filing says the ticker will be $HOTH with hopes to list on NASDAQ. The rush to IPO could be because Eitner and Ahern know FINRA is investigating and they’d better cash out of their investments before they are kicked out of the industry or the broker dealer is expelled. The lead lawyer on the Hoth offering is Richard Friedman from Sheppard Mullin and he is one of the founding members of Sichenzia Ross Friedman Ference LLP – the law firm involved in all of Honig’s deals.

A legal review of the offering docs for this publication showed: “There was a possibly relevant patent issued in December 2017 that relates to Hoth’s business, but other than that, it’s hard to discern any meaningful operations. The M&A transaction that Hoth entered into with Spherix in 2017 essentially gave Spherix control of Hoth, but did not appear to provide significant core technologies that are in line with Hoth’s stated business purpose. The Hoth S-1 states that Laidlaw is a “selling group” in the offering, but does not describe this any further. This is a material omission.”

Additionally the “Conflict of Interest” paragraph in the S-1 appears to have a significant error. The disclosure on page 90 of the S-1 reads “Persons associated with Laidlaw, which is expected to be a selling group member in this offering, collectively beneficially own 16.60% of our outstanding common stock”. The problem with this is that the beneficial ownership table lists Ahern’s and Eitner’s ownership percentages prior of the offering as 29.21% in the aggregate, not 16.60%. This could mean Hoth will need to file an amended S-1 offering.

“Assuming the SEC reviews this S-1, it would be interesting to see if the SEC deems disclosures among the various related parties (i.e. Hoth, Spherix, Chelexa and their respective principals) as being adequate to protect the investing public,” attorney Wesley J. Paul of the New York based Paul Law Group told this publication.

According to two current brokers at Laidlaw it was not mentioned that Eitner and Ahern have significant equity ownership of Hoth in their sales meeting this week. The brokers have to read the S-1 to learn that.

Honig and Laidlaw lawsuit
After my first story exposing Laidlaw’s role with Honig, a former longtime client has sued the Laidlaw for two million dollars with claims of common law fraud, negligence, breach of fiduciary duty for putting clients in unsuitable investments and possible parking of stock. The suit filed on Oct 4th is unique because it’s the first one tying Honig and Laidlaw together in investing schemes. It list 17 stocks believed to be part of the scheme including Spherix, Relmada, and Aspen Group. That client is Dr. Bruno Casatelli who was the father-in-law of one of Laidlaw’s top brokers. The broker is no longer with the firm. Attorney Dax White of Vero Beach The White Law Group even put out a press release looking for more Laidlaw clients to join the suit. Attorney White wouldn’t comment on the case which will be arbitrated by FINRA. Matt Eitner did not respond for comment when asked why Laidlaw has not disclosed this lawsuit.

U.K. regulator, the Financial Conduct Authority, has also opened a whistleblower claim into Laidlaw. Laidlaw is registered with the FCA, which enables them to sell to investors in that domicile. The FCA has the ability to impose unlimited fines on a broker dealer and ban them form selling to U.K. residents—they work like the Securities and Exchange Commission and don’t bring criminal charges. The case is currently being investigated by Liam Docherty of Enforcement and Market abuse.

Honig and Laidlaw did not respond for comment to this story.

Editors Note: This reporting is reader funded. As a professional journalist I do not hold positions in any stocks or trade equities. Donations are key to help keep independent journalism that makes an impact keep going. Please donate via Paypal or Venmo to my account at teribuhl@gmail.com. Thanks in advance for your support!

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