Shareholders in a bitcoin company called RIOT Blockchain scored a win last week when New Jersey judge, Zahid Quraishi, ruled Barry Honig & his cohorts can be added back as named defendants in the securities fraud suit filed in New Jersey federal court. Previously the federal court had dismissed without prejudice defendant Honig, Andy Defrancesco’s wife Catherine, John Stetson, and Mark Groussman because the shareholder lawsuit didn’t plead what is called scienter (intent) to hold the investor group liable for fraud.
But that changed on December 23rd when Judge Quraishi detailed in an opinion how the fact pattern presented in a second amended complaint allegedly showed the Honig group mislead investors in their SEC filings regarding how much stock they owned and how they worked as a group with company management to allegedly commit fraud. Additionally, the judge allowed a section 20(a) claim to go through which relates to individuals buying or selling stock while they have material non public information. Honig’s right hand guy John O’Rourke, who was placed by Honig as CEO the company, is also allowed to be sued, along with Riot the company, and its former CEO Michael Beeghley. The case is being lead by powerhouse class action attorneys at South Carolina-based Motley Rice LLP who came to fame after taking down big tobacco.
The judge’s ruling is some of the strongest language any court has written against Honig and friends. Barry Honig is currently fighting a Securities and Exchange Commision pump and dump case where he has partially settled for a penny stock bar but is still litigating how much in penalties and fines he will pay for being what the SEC calls the leader of a decade long securities fraud ring. The SEC says Honig executed his scheme in over 70 stocks but did not name Riot Blockchain as a victim company in their enforcement action. As a result it’s been up to shareholders to hold the former Honig investors and executives accountable for millions in losses based on false press release about the company’s health and misleading main street investors in SEC filings about owning more than 10 percent of the stock. Individuals who own more than 9.99% of a stock have different restrictions about how and when they can blindly free trade a stock.
Riot’s first line of a defense was to say they had no idea that their undisclosed large shareholders like Honig and Defrancesco were acting as a group. But the class action lawyers showed the judge how John O’Roarke, the CEO, was using the same Florida office as Barry Honig and how the Honig investors were using the same fax number to send corporate communications.
Judge Quraishi wrote, “The Court finds that these allegations are sufficient for a rational trier of fact to find that the Riot Defendants knew Honig, DeFrancesco, Groussman, and Stetson acted as a group.”
The judge goes on to note that RIOT could have violated securities laws because they did not disclose Barry Honig by name as a related party. Honig had an ownership in one of the companies RIOT bought which gave him cheap stock. The fact that the SEC’s detailed enforcement action showed how this group made parrell investments together and didn’t disclose it was also taken into consideration.
Judge Quraishi wrote, “In the broader allegations Plaintiff has made, that the Riot Defendants knew of the alleged group and purposely did not report the group under Item 403 to facilitate the group’s alleged fraud to manipulate Riot’s stock price, the Court finds, for the purposes of this Motion, that Plaintiff has alleged a strong inference of scienter.”
Meaning RIOT could have acted with intent to allow this group to manipulate the stock and it’s worth going to trial to prove it.
Catherine Defrancesco, who is believed to have invested at the direction of her then husband Andy Defrancesco, is not named in the SEC complaint. Still the RIOT shareholder’s attorney at Motley Rice had enough to convince the judge that her investment of over 10% (hidden in six different llcs set up by the Defrancescos) was tied to Honig as an alleged undisclosed investor group and that she should be sued for securities fraud. Cathy Defrancesco, a mother of four, runs a south florida yoga studio and has no prior experience with public companies. This reporter has previously reported on Andy Defrancesco’s alleged role in stock manipulation and self dealing in
cannabis stocks.
Defrancesco Family
Honig, Defrancesco, Groussman, and Stetson’s likely fault was they didn’t properly file or update what is called a 13d filling which lets all shareholders know how much stock they own. There is also issues about when they did or didn’t file what is called a Form 4 which would have informed the public when large blocks of stock was sold by this investor group. Honig’s name was already in the news for being suspected as being under SEC investigation, which was first reported by this reporter. So to not spook off main street investors into the hot cryto currency market Honig would have an advantage by not disclosing he was in a stock or that he had gotten cheap shares from private investing in the company or through consulting agreements. Once it came out he was in the stock it tanked, which is one of the allegations in the amended RIOT complaint.
Judge Quraishi wrote, “The Court finds that Plaintiff has sufficiently alleged that Honig made a material misrepresentation and/or omission by, at the very least, not filing a Schedule 13(d) or 13A throughout 2017 and promptly disclosing his material acquisitions or dispositions of Riot stock.”
The class action amended complaint points out Honig’s long time deal attorney, Harvey Kesner, was his lawyer during this time who would have helped with these SEC disclosure filings. Additionally. the complaint says Kesner also acquired stock in $RIOT via a personal investment llc he created called Paradox Capital. Harvey Kesner and his former law firm SRF llp recently settled a malpractice lawsuit filed by one of the viticum companies in the SEC pump and dump case called MabVax. According to court filing that settlement payout to Mabvax was seven figures.
“Furthermore, the Court finds Honig’s failure to promptly disclose, when taken together with Plaintiff’s allegations that Honig knew of his obligation to promptly file a Schedule 13(d), 13A, and 13G as evidenced by his 2016 practice and his apparent motives to profit, gives rise to a strong inference that Honig acted with scienter,” wrote Judge Quraishi.
It’s this action of knowing you did something wrong that affected a stock price, called Scinter in legal terms, that the Dept. of Justice could latch on to in building their criminal case against team Honig. The lead lawyer for the SEC case against Honig has admitted in open court that a parallel criminal investigation is happening with Team Honig and part of his team has admitted to signing tolling agreements with the DOJ. I have also interviewed multiple informants and witnesses in the government’s case. What we don’t know is which members of this team will be charged and when or if new names will come to light in a criminal case.
The lawyers at Motley Rice started doing some of the leg work for the DOJ though. They list at least a dozen other entities or individuals who also bought $RIOT stock and have ties to Honig, Defrancesco, Groussman or Stetson. This is important because according to two individuals, who have worked with Honig, been interviewed by the government, and spoke with me on condition of confidentiality because they fear retribution, say Mark Groussman and Barry Honig worked actively within their South Florida community and friend network to encourage other individuals to take sizable investments in companies like $RIOT and $PTE with the intent to control what is called ‘the float’.
The float of stock can be somewhat hard to figure out if you don’t have proper SEC disclosures and main street doesn’t know how many shares are actually issued by a company and free trading. The float also affects the number of shares outstanding which in turn determines how many shares are available to borrow when an individual wants to short a stock. If there are not a lot of shares to borrow then the cost of shorting a stock goes up. On Wall St the move Honig and Groussman were allegedly making is called a ‘short squeeze’. And after jouranlist, like Michelle Caruso-Cabrera, at CNBC showed on TV that RIOT likely wasn’t telling the truth about who was really running the company, a Honig led short squeeze would have helped his team retain profits.
Additionally, if Honig and Groussman are able to get their buddies into a stock, who think they have some kind of inside info like what is alleged in the RIOT complaint, then this is what helps create the pump of a stock and allows team Honig to sell off their shares before the rest of the market realizes the company isn’t as financially sound as its executives are trying to make it appear.
The Defrancescos and Groussman didn’t respond for comment. Barry Honig never responds back personally for comment.
Barry Honig with RIOT CEO
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