Iroquois Capital’s Richard Abbe Sued For Fraudulent Takeover Scheme of XpresSPA

A co-founder of Iroquois Capital, Richard K. Abbe, is being accused of a fraudulent scheme to trick the founders of an airport spa business, XpresSpa, into a merger with a public Microcap company that resulted in a massive loss of their business investment. On August 6, a federal judge in New York allowed a securities fraud case to go forward against Abbe and other company executives. The lawsuit, which was filed in November 2017, has claims of undo influence, deception, and kickbacks used to effect a merger takeover by Form Holdings. Two claims of Securities violations consisting of 10(b)5 and Section 20 survived the defendants motion to dismiss.

Moreton and Marisol Binn, the XpresSpa founders, alleged two members of their board, Andrew Heyer of Mistral Equity Partners & Bruce Bernstein of Rockmore Capital Group, hid their financial ties and personal relationships to Form Holdings board member Richard Abbe and Salvatore Giardina along with its CEO Andrew Perlman before the 2016 merger. The complaint alleges by covering up their cozy relationship it allowed the XpresSpa directors to mislead the Binns on how much they would earn if the merger completed. And in turn the vote to approve the merger was a coordinated and premeditated effort by Bernstein, Abbe, Perlman and Giardina to deceive the Binns and other minority shareholders to take an all-stock, no cash, sale price to enrich themselves at the Plaintiffs’ expense.

The fraud claims surviving the motion to dismiss is a rare event in securities ligation for Microcap companies. That’s because most companies, including XpresSpa, sign joinder agreements that release all the parties from this type of litigation. Additionally, the investment funds like Iroquois or Barry Honig’s team of investing affiliates have typically bled dry the small company CEO’s stock barrel of cash by the time they have figured out they’d been deceived and can’t afford to file a lawsuit. But the Binn’s aren’t the kind of men to lay down to alleged market manipulators. With their ability to afford seasoned securities litigators like Rosanne Felicello and Michael Maloney of CKR Law LLP, it appears a compelling legal argument was made to blow through the general release of ligation and convince Judge Stanton to move the case forward. The defendants lawyers at Mintz Levin even tried intimidating tactics to scare the Binns into dropping the case by filing motions for sanctions against their attorneys for bringing the lawsuit in the first place. Attorney Francis Earley, of Mintz Levin, sent multiple letters to Attorney Felicello basically warning it doesn’t matter what you think happen the joinder agreement release doesn’t allow you to sue the defendants. But this month Judge Stanton said the defendants lawyers were wrong and the Binns could sue. The Judge wouldn’t even grant an oral argument to hear their motion to dismiss or sanction claims. Instead the judge ruled on the detailed information about the alleged fraud that was laid out in the briefs. Net Net I bet Richard Abbe, who I have previously reported on for his funds role in some questionable financing with MGT Capital, is starting to get a little worried about what is going to coming out in discovery.

The trouble started for the Binns when XpresSpa took a high interest senior secured loan from Rockmore Capital which is owned by the company’s director Bruce Bernstein. Besides securing anything in the company that had value against the loan there were also stringent covenants put in place that allowed Rockmore to force a default on the loan. Such as when a full audit didn’t arrive on the date Rockmore asked for it a default event occured that allowed Rockmore to add $500k of interest to the loan and scared off previous lenders, like BofA, from offering a credit facility at lower market rates. Putting the loan into default also put Bernstein in a control position over the company enabling him to significantly influence merger decisions.

Before the merger in August 2016 XpresSpa was having cash flow problems that lead to their inability to keep adding nail spas in airports and keep up with competitors. And a $6.5 million debt due in 2018 was a big thorn in their side. So when the idea of merging with a public company, that had been in the Patent troll business, and claimed to be worth $35.1 million came along it didn’t look so bad to the Binns. Especially given XpresSpa board member Bernstein made promises that once the merger was complete Form Holdings would get rid of their Rockmore debt and spend dollars on XpresSpa shops expansion into new airports, according to the lawsuit. The Binns were also led to believe the new publicly traded stock they would get was actually worth some money and would only go up in value because Form Holdings had real venture deals with companies that had valuable patents and cash flow.

But none of that happen. The complaint details how Richard Abbe, through a $12.5 convertible debt deal with Form Holdings via his investment fund Iroquois, was able to load up on equity in Form Holdings via a debt to stock conversion. Form Holdings use to be called Vringo Inc. On May 9 2016, before the merger, Abbe secured a seat on the board of Form Holdings. SEC filings for both companies claim Abbe and Bernstein were independent directors of their perspective companies. Yet both men had chock holds on XpresSpa and Form Holdings because they were also their substantial creditors.

After the merger completed the Binns say Form Holdings started to sell off, for very little money, the ventures tied to patents that they claimed had millions in value. One reason for this could be the patents value were really just speculation sold as a fabulous future cash flows but the Form Holdings directors knew what looks good on paper doesn’t turn into real cash.

The lawsuit also alleges “Members of the Controlling Group, acting through various investment vehicles such as
Rockmore and Iroquois, have coordinated similar changes in control or other coordinated
activities with respect to GeoResources, Inc., USA Technologies, Inc., and TapImmune, Inc. ”
[The control group consist of: Abbe, Perlman, Bernstein and Giardina.]

Now here is were things can get dicey for Abbe and Bernstein. In a brief responding to the defendants motion to dismiss we see the plaintiff allege that Abbe, directly or through another investment vehicle or another person he controls, put some of the money up for Rockmore to lend $6 million to XpresSpa. Remember Abbe doesn’t show up on this deal in public filings until there are merger talks. And the Binns will say they never heard of Richard Abbe until they were introduced to the idea of merging with Form Holdings. What has me extra curious is what kind of documents have been put under seal in this case. Is there some kind of proof the Plaintiff has discovered to prove Abbe’s involvement in RockMore?

I emailed Bruce Bernstein directly to see if he wanted to respond to this allegation but as of press time I had no response.

But that’s not all Team Abbe allegedly did in this deal.

Form Holdings CEO Perlman, already a member of the board of Form Holdings, arranges to have Bernstein also appointed to the Board of Form. Perlman and Bernstein then arrange to have Abbe appointed to the board of Form. At the same time, Bernstein used his position as a board member of XpresSpa to cause that company to enter into the onerous Rockmore Note. Bernstein, Perlman, and Abbe then offered Heyer a sweetheart deal if he would assist them to facilitate a merger of XpresSpa into Form .The lawsuit claims XpresSPA director Andrew Heyer would be given a ton of stock, valued at $2.31 per share at the time of transaction, if he voted for the merger and the Binns were never told he was going to get this stock if he approved the deal. As far as Bernstein goes, he also got the highest amount of compensation the new company bylaws would allow, was put on the audit committee, the compensation committee and made a member of the new company board. It’s this quid pro quo alleged in the complaint, which I would call a kickback, that allowed the Section 20 violations to be litigated. Claims that you’d hope the SEC would take notice of. Net-Net the Securities and Exchange Commission has laid out in previous enforcement cases that “You can’t bribe executives with stock to motive their vote and not tell other shareholders about it”.

Honestly this whole scenario reads like the Control Group’s corporate attorneys needed to go back and read the Securities and Exchange Act definition of an independent director and disclosure rules because it looks like their clients can’t really be relayed upon to tell the whole truth. And clearly the fact pattern was enough for Judge Stanton to say if this is true then that’s material information that was omitted and it’s worth going threw discovery to build a case for trial.

Recently signs of worry about what will come out in discovery appear to be showing up via the exodus of high level executives. On July 23rd attorney Felicello wrote Judge Stanton expressing serious concern that limited discovery was going to have to be allowed. This is before the decision on the motion to dismiss came down. Anastasia Nyrkovskaya, the CFO of Form Holdings who could also be a key witness to the facts underlying the lawsuit announces she is leaving the company. And so did the senior V.P. of legal and business affairs for XpresSpa Jason Charkow. The defendants lawyer wrote back the company has preserved all their communication and attorney Felicello was over reacting. But the fact of the matter is if these two bail to another country getting them to show up for a deposition subpoena might prove difficult.

Additionally the company just filed with the SEC announcing they have a $20 million goodwill write down. This is basically saying they don’t think the brand XpresSPA has held value and they might be bailing on the whole airport spa biz. Something they promised they’d grow at the time of the merger, according to the lawsuit.

The defendants have till the end of the month to answer the lawsuit. And then the interesting part begins as discovery happens and these alleged bad actors have to go through sworn depositions.

The Plaintiffs attorneys would not comment on the case. The defendants lawyer didn’t respond for comment. Some of the claims for unjust enrichment, negligent misrepresentation, and breach of fiduciary duty were thrown out of the case. But the strongest claims of Section 10(b)5 and Section 20 violations remained. The company Form Holdings is also a defendant in the case. Remember if you prove fraud (Section 10b5) you get to ask a jury for triple damages.

Form Holdings changed its ticker symbol this year so you can now find them under ticker $XSPA.

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