Menu
18 Dec

Something’s Rotten in the state of Sweden’s SBB

by Teri Buhl

Sweden’s largest publicly traded real estate company’s stock traded up today (22%) with a view that it has beaten a group of sophisticated dissenting hedge fund creditors at their own game—at least in the short term.

Samhällsbyggnadsbolaget i Norden AB (known as SBB) orchestrated its own debt exchange without engaging with any creditor groups that formed over the last two years, according to bondholders and advisors involved in the situation. Today the company announced that 95% of its creditors qualified to participate in the debt exchange agreed to its terms resulting in the exchange of €2.8 billion ($2.94 billion) of debt. Creditors I spoke to on Tuesday had told me they expected a large percentage of bondholders to take the deal, while equity holders were watching to see if SBB could get over a 90% participation rate. SBB ended up beating the expectations of nearly everyone I spoke with, but there are still some important unknowns when looking at the company’s liquidity risk.

Around SEK 1.6bn of SBB’s longer-dated bonds featuring the original terms still exist, according to Danske Bank credit analyst Louis Landeman. Landeman thinks there are around SEK 5bn of bonds maturing in 2025 issued with the same terms –including the interest coverage ratio covenant the company is being sued over. Fir Tree alleges a breach of this covenant and has filed a lawsuit before the English courts, which is due to be heard in January. If Fir Tree wins its lawsuit, creditors in about SEK 6.6bn of bonds could use the judgement to demand their bonds are paid off also. On the face of it this is a much lower payout than all the debt (about SEK 30bn) being able to accelerate. Which is why you are seeing headlines today in the Swedish press giving a rah rah that SBB has avoided a near term in-court bankruptcy.

But having reported on SBB for over two years, in my opinion, I have watched the company: restate financials without telling anyone, likely commit accounting manipulation to avoid a covenant breach, leave out material explanations in its publicly filed financials that leads to possible inflated asset values, and allowing its ousted CEO to still direct financial decisions makes me think there is more risk under the surface.

SBB had been touting a view all year that its liquidity position would improve with support of the recent IPO of Sveafastigheter and some other asset sales. But that hasn’t really happened. At the end of September I was told a story about the CEO of SBB, Leiv Synnes, hosting a dinner with SBB’s founder and board member Ilija Batljan, people on the Castlelake asset buying team, advisors on what is now called ‘the Svea IPO’ and some of SBB’s bankers. The gathering was somewhat of a celebration that this crew was about to pull off a new spin-off IPO on its residential assets that some market participants viewed as having inflated net asset values. The dinner was centered around what is called in Sweden a “fermented fish party” (a traditional northern Swedish dish – the smell is terrible). According to a person familiar with the dinner there was drinking and the group talked about the Svea IPO expectations of being at least a 30% discount to NAV, which anyone familiar with SBB’s financials would know is not enough to cover SBB’s January 2025 maturities.

It’s this kind of clubby, nearly incestuous, relationship between Swedish companies and their bankers, advisors, and local asset managers that makes it hard for investors outside of Sweden to make financial estimates and assumptions. I recall one of my former 9fin analyst in shock when they saw how SBB kept buying back its hybrid bonds instead of preserving cash for its more senior secured bonds held by the likes of Elliot and other large distressed UK debt funds.

Richard Brase, a former Dagens Industri opinion/analyst writer was really the only one in the Swedish press who knew enough, and had the balls, to try and hold the SBB executives accountable to the financials they spit out to their less sophisticated stock investors. In one of Brase’s last stories at DI he literally tanked the stock by double digits by explaining why stockholders should “Sell Now–before it’s too late”. Brase pointed out, on November 2nd, that SBB’s latest year-end report said the company expected to generate SEK2.5bn in cash flow in 2024; but half way through the year SBB had a negative SEK 13mn cash flow. He also explained the unrealistic loan to values SBB held on its books and why it could blow up bond covenants by writing them down to realistic market values, which was also highlighted by Viceroy Research in 2022.

All of the above is a long winded way of explaining why investors still need to watch out for what is called a cross default. This is when one credit security – like SBB’s 2028 euro bonds – goes into acceleration because the company broke one of its covenants, which could then lead Nordic bankers holding SBB’s smaller term loans to call them in because there is a ‘rule’ in the banker’s deal that, if they are forced to pay off another creditor’s debt, first SBB has to pay off the bank loan debt.

First off, SBB’s debt exchange has now moved a ton of decent assets out of Holdco into a new llc and the new bonds don’t have the same maintenance covenant. This makes it much easier for SBB to not worry about the whole interest coverage ratio issue that allows bondholders to force an early payoff in these new bonds. But in speaking with lawyers and bondholders familiar with SBB’s debt, there is a concern about how SBB’s bank debt is tied to SBB’s operating company. Should there be a cross default or covenant breach, it could give SBB’s bankers reason to call in their loans. Every analyst I spoke with doesn’t have enough information to form a view on how bad the current blackhole could be.

Just look at what came out in SBB’s internal email obtained by Fir Tree’s lawyers, Cleary Gottlieb. Last month we learned according to court documents that SBB’s IR person, Helena, got a call from SEB, warning her that their client (I believe its First Commercial) thinks you breached the maintenance covenant on what I think is called a floating rate schuldschein loan, also known as a Schuldscheindarlehen (SSD). Then we see from internal SBB emails disclosed in court that Leiv is allegedly called in to come up with a fix because SBB has realized ‘OH SHIT’ this could also breach billions in bonds. And then concerns of a real life cross-default begins to fester at the senior levels of management.

Now the changes to covenants in the new bonds can also take away other cross default concerns, such as what is called a EoD (event of default). This is designed so that if SBB bonds that Fir Tree and friends hold blow up it won’t affect the new bonds that just had exchanged with creditors today. Here is what CreditSights said on the EoD last week. “We believe that this change implies that if there is a default at the legacy issuers then the New Securities may not also face a cross default. We suspect this could mean, if Fir Tree was to win the trial for example, this would contain a potential restructuring to the Holdco levels above The New Issuer. We also wonder if this could influence SBB’s ability today, or be a stepping stone for its structure in the future, that allows it to raise or refinance bank debt, as it creates greater separation between the group’s assets and the legacy bonds.”

Net net the two men actually running SBB have just used market sentiment and the credit trading system to beat naysayers at their own game, in the short term. And while some creditors and equity short sellers would yell “Not Fair” it’s all pretty much legal in the sophisticated world of distressed investing.

SBB did not respond for comment.

No Comments
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.

No Comments
5 Nov

Laidlaw & Co. Lawyer Warned of Sanctions in Black Stockbroker Employment Retaliation lawsuit

An attorney for Laidlaw & Co was warned he could be sanctioned by SDNY’s Judge Woods today in an employment relationation lawsuit involving an African American stockbroker, George Calhoun, who sued the New York-based broker dealer for racial discrimination and having to work in a hostile environment. The attorney, Christopher Milazzo, of CMP LLP, and his partner Ross Carmel both represent Laidlaw and were former lawyers at Sichenzia Ross Ference. Milazzo was trying to argue to throw out the retaliation claim before a December court ordered mediation hearing because the lawsuit says the retaliation happen after Calhoun was an employee at Laidlaw. But after Judge Woods heard Milazzo argue the incorrect legal standard of employment retaliation vs. discrimination, according to New York state and NYC law, he spanked attorney Milazzo with a strong verbal warning that he would have no problem using Rule 11 and issue sanctions for filing a brief with a frivolous argument not based on any actual legal foundation or case law. This is the second time Judge Woods has questioned Milazzo on arguments for Laidlaw where he could not site a single case to support what appears to be his clients version of mickey mouse law.

Calhoun initially went through pre-lawsuit litigation against Laidlaw last year, via mediation, which was not public that detailed horrendous racial comments, acts and behavior by multiple Laidlaw executives which include the President’s brother, according to people familiar with the event. Laidlaw folded and settled after their insurance heard what had happen to Calhoun, according to people familiar with the situation. Laidlaw agreed to give a whopping $650,000, with at least a third going to his lawyers at New York-based Nesenoff & Miltenberg llp, for alleged employment discrimination at Laidlaw. One of the actions previously reported by this journalist involved stockbroker manager Todd Cirella sending a text of a black man being hanged in a text conversation about Calhoun, this text was mentioned as coming out in discovery in a public hearing held last month for this case, according to a transcript obtained by this journalist.

Laidlaw’s president, Matt Eitner, has been front and center in the discrimination claims by Laidlaw staff and has been accused of not supervising or taking appropriate management actions when he became aware of the racist behavior and complaints of his staff. Eitner is also currently being investigated by FINRA for supervising securities fraud at Laidlaw, according to FINRA records, which was first reported by this journalist. According to multiple people who have spoken with Eitner after the discrimination claims became public he is deeply offended that he could be called or considered a racist for allowing the alleged behavior at his firm continue for years. Eitner is not a named defendant in the retaliation case. Retaliation claims are filed usually against a company.

After the discrimination claims settled Laidlaw went and withheld $125,000 from Calhoun’s settlement check after they had told Calhoun’s counsel they wouldn’t do that, according to the new lawsuit for retaliation and breach of contract filed in New York federal court this summer. Laidlaw claimed the $125k was taken out for a settlement with a customer who complained about being sold unsuitable investments but at a court hearing last month attorney Milazzo admitted no such settlement has even taken place yet. Additionally, there is no customer complaint filed with FINRA yet against Calhoun as is the customary practice, according to Broker Check. It’s these actions that Judge Woods grilled Milazzo on in justifying where in New York case law is this legal to withhold money from a settlement, especially after you said you wouldn’t do that.

The court transcript reads like Judge Woods sees the clear breach of contract by withholding the money and warned attorney Milazzo that discovery could be justified to show how these actions by Laidlaw aren’t retaliation for George Calhoun complaining about racism in the workplace.

Malizzo’s current law firm, where he is a named partner with former SRF LLP lawyers, braggs about the firm being ‘aggressive’ lawyers for securities litigation and business disputes. But in Calhoun’s new lawsuit it appears Judge Woods isn’t having any of their legal tactics or will allow their client to make stuff up.

Additionally, Malizzo and Carmel’s former law partner Peter DiChiara was charged by the SEC in September for assisting in a microcap stock scheme. DiChaira settled the charges with the SEC.

SRF llp, where attorney Malizzo worked for a decade, is the law firm that was sued for malpractice in the Barry Honig pump and dump scheme and recently paid out a settlement to one of the SEC’s victim companies for alleged bad legal practices by its former partner Harvey Kesner. SRF also reps Laidlaw in FINRA complaints and advises the broker dealer on securities law.

Today’s hearing ended with Judge Woods again encouraging Laidlaw to settle with Calhoun and not waste legal fees on this dispute. He specially said he likes to see money go to the aggrieved instead of the lawyers. That’s likely because Calhoun’s lawyers have a broad legal standard in their case because of New York City Human Rights law. All they have to do to prove the retaliation claim is show Laidlaw engaged in conduct that is reasonably likely to deter a person from making a discrimination claim.

Calhoun’s attornies, Nicolas Lewis and Gabrielle Vinci, wrote in a response letter to Judge Woods about Laidlaw trying to throw out the retaliation claim, “A reasonable jury could certainly find that the unilateral withholding of a substantial sum of money from an agreed upon settlement payout for reasons proven false by Defendant’s own statements would persuade a reasonable employee from engaging in the protected conduct that led Plaintiff to this point, i.e. would deter a reasonable employee from making a claim of discrimination.”

NYC and NY state law will also allow Calhoun to get a bigger payout if the retaliation claim survives. There have been some cases where an extra six figures was awarded for employment retaliation which means Laidlaw could be faced with paying Calhoun double what they withheld.

Editors Note: Below is a copy of a court transcript which shows Judge Woods grilling Laidlaw’s lawyers on their lack of court cases to support their legal arguments and also mentions what documented evidence of racial discrimination is likely to come out if this case moves to discovery. It’s a fun read for legal nerds.

Attornies Milazzo and Carmel did not respond for comment. Matt Eitner at Laidlaw did not respond to an email with questions about the ethics and legal issues in the Calhoun case.

Calhoun Letter to Court 11.1.20 Laidlaw Retaliation Case by Teri Buhl on Scribd

No Comments
22 Oct

Barry Honig allegedly set up Undisclosed promotion in Majesco to influence Stock price: $PTE

In September 2015 Barry Honig arranged for a stock list promotor to write favorable analysis on a company called Majesco ($COOL) and distribute it to thousands of main street investors, according to people interviewed by this reporter and familiar with the transaction. To allegedly get around SEC disclosure rules Honig promised to pay the promoter on their next deal if the person did this one for free and on September 15 2015 that’s exactly what happen, according to a person involved in the transaction. This was just two weeks before Barry C. Honig and and his young protegee John Stetson became CEO and CFO of the company. The promoter was eventually paid by Honig in other deals which included Honig making a phone call to explain how a third party would be making the payment, according to two people familiar with the transactions.

At the time of the undisclosed promotion in Majesco Honig and his associates which included Stetson, Michael Brauser, Philip Frost and others held cheap shares and warrants in the company via an investment called a private placement. This same group as been accused of trading as an undisclosed group of affiliates by the Securities and Exchange Commission in other stocks and the predecessor of $COOL, PolarityTE $PTE, disclosed the SEC had began an investigation into the company in March 2019.

Honig is notoriously fearful of people he works with wearing a wire according to three people who have worked with him because he says the FBI has been trying to catch him for years. He often communicates on the phone but preferable in person or he sends messages through others like John Stetson. But in September 2015 he apparently got sloppy.

Three days after the promotion ran on September 18, 2015 Honig sent a private electronic communication, reviewed by this reporter, that referenced to the price of $COOL jumping up and stated it was a short the other day. This reporter has previously reported how Honig worked with his cousin Hunter Adams of StreetSweeper.com to short the stock of companies he was also invested in via private placements unbeknownst to the companies that counted on his financial support.

The hint of undisclosed promotions that influenced the price of Majesco stock was first reported by journalist Chris Carey at Sharesleuth.com in 2018.

With Honig and Stetson running the company Majesco made a bold face move in January 2016 to issue a $10 million cash dividend to all shareholders as of January 14, 2016 while the company was struggling to be profitable. Around January 20th Honig Michael Brauser and others now had big money checks in their hands basically paying them back for their early private placement with a huge gain and they weren’t quite with their peers about the size of profit they had just made, according to people who spoke with this reporter.

Seven months after the Honig led promotion in April 2016, attorney Harvey Kesner wrote a letter to the SEC on behalf of the company stating while Honig and Stetson had made early investments in the company that were going to be converted to free trading stock the company viewed them as independent when they made the investments. Because the company was NASDAQ listed independence rules are important to keeping the company in compliance with a NASDAQ listing. There are also issues of undisclosed affiliation which the SEC was looking it.

At the time of the letter Kesner was a partner at New York law firm Sichenzia Ross Friedman Ference LLP. This is the same firm that allegedly asked Kesner to leave two years latter around the same time Barry Honig was charged for securities fraud by the SEC in 2018. Kesner and the law firm recently settled a malpractice suit for their alleged role with one of the victim companies in the SEC securities fraud suit filed against Kesner’s clients. The amount of the settlement was sealed but recent court filings in the Mabvax bankruptcy show the settlement was for seven figures.

Majesco eventually did a merger and switched to being a biopharma company called PolarityTE who claimed to have a FDA registered product called SkinTE. Those claims have been refuted by short sellers and are subject to currently civil litigation by shareholders.

It was John Stetson a graduate of the University of Penn who brought Ed Swanson of PolarityTE, another U Penn guy who went school with Stetson, to the attention of Barry Honig with an alleged plan to effect a merger with a group of executives willing to allegedly put forward false and misleading information about the company which influenced its stock price, according to people who spoke to this reporter and are familiar with team Honig and the transaction. The friendly CEO became a Dr. named Denver Lough.

Honig also had an affiliate of his, Edward Karr on the board. Karr has been an executives or board member in at least six public companies Honig invested in which included: Pershing Gold, Dataram, Levon Resources, PositiveID Corp, Majesco, California Gold, Exactus. Ed Karr has been the chairman and CEO of U.S. Gold this year another alleged Honig pump and dump. According to a person who gave testimony to the FBI in the Team Honig case Karr is a person of interest in the DOJ investigation.

Similar allegations of Team Honig influence and control of PolarityTE are currently in front of a Utah federal judge in the shareholder class action lawsuit ,which is waiting on the judge to rule on the motion to dismiss and allow discovery to move forward. Honig is not a named defendant in the lawsuit; instead shareholders are trying to hold his right hand guy John Stetson liable and the company’s last CEO Denver Lough.

Honig, Stetson and the rest of his crew have all settled with the SEC and everyone but Philip Frost got penny stock bans. A lawyer for Frost pointed out in a court hearing this month, attended by the reporter, the SEC case defendants who accepted penny stock bans implies scienter, which means they executed the illegal acts and securities violations with intent. But the in the SEC settlements the regulator allowed Honig, Bruaser, Grossman to keep their $PTE stock. Additionally, in 2020 the company made an announcement that the SEC sent them communication that their investigation is over. This statement is somewhat misleading as the SEC communication typically says there is a rule they have to inform you we are not going to charge you now but we could in the future.

Additionally, as previously reported by this reporter and confirmed by the SEC’s Nancy Brown, the San Francisco DOJ has an ongoing investigation into Team Honig. According to discovery in the SEC case against Honig it appears Honig is now working with the DOJ to cooperate and Michael Brauser’s lawyer has admitted at a court hearing to tolling agreements signed by some of Honig’s crew. The SEC also told Judge Ramos they are investing another securities fraud scheme by this group that was executed after Honig’s crew was charged by the SEC. Honig is still going to have to litigate how much he will pay in fines and restitution along with an llc that John Stetson controlled on paper but Honig was the major investor in.

According to a people who have reviewed the amount of money Honig holds in his bank accounts he is a triple digit millionaire.

Barry Honig did not respond to emails sent for comment to this story. One of his many lawyers did write a letter threatening litigation today if I reported he paid for a promotion but did not deny the statements. Honig has previously sued this reporter for being first to disclose he was under SEC investigation based on documented evidence. Honig eventually dropped that litigation with prejudice and the SEC charged him for what I reported he was doing the same year. Honig’s father Alan Honig now has stock positions he previously held in his name.

John Stetson is currently working on a Pizza franchise he invested in with Mark Groussman called Stoner’s Pizza.

1 Comment
24 Sep

Barry Honig’s law firm SRF llp pays out in Malpractice Settlement : $MBVX

Attorney Harvey Kesner and his former law firm Sichenzia Ross Ference LLP have agreed to payoff MabVax Therapeutics for Kesner’s alleged role in committing malpractice tied to a securities fraud pump and dump scheme led by his client Barry C. Honig. MabVax’s bankruptcy judge approved the settlement on September 15 because it was an amount that benefited Mabvax debtors, according to court filings. As part of the lawsuit settlement the amount of the payout to MabVax is sealed and it’s unclear how much attorney Kesner had to pay out of pocket or how much was paid by the law firm’s malpractice insurance. Kesner fought the case in Southern California District Court for more than a year but after mediation this summer his old firm appears to have finally folded. Since the case didn’t go to trial no one admitted guilt.

So far Kesner has retained his law license in New York regardless of his role representing the Honig cartel who have mainly settled securities fraud charges with the SEC. While Kesner’s name often appears in SEC subpoenas the SEC has not charged him in the Honig case although an ongoing criminal investigation is continuing led by the Northern California DOJ.

MabVax is a victim company in the Securities and Exchange Commission ongoing enforcement case against Honig and a group of men who helped execute pump and dump schemes and traded as a group of undisclosed affiliates to control the price of stocks for over a decade. Ten days after Kesner singed his malpractice settlement with MabVax the company filed an amended complaint against Honig and others who worked with him, in California State court, with even more details of how attorney Kesner allegedly assisted in Honig’s scheme.

Mabvax lawyers at Baker Botts wrote, “Defendants (Team Honig), Sichenzia, and Kesner, actively concealed their group status from MabVax.” And in a motion to dismiss hearing for Honig this summer Mabvax attorney Tania Rice, of Baker Botts, told the court Harvey Kesner in his role as attorney was “part of the fraudulent scheme”. Baker Botts has also stated in legal documents that they found through an internal investigation that in 2016 that Kesner advised MabVax to give misleading information to a regulator who came questioning about trades and investments in MabVax. Additionally, Kesner had stock in MabVax via his obscure private llcs Paradox Capital and Darwin, unbeknownst to MabVax. MabVax has accused Kesner of using those llcs to trade as an undisclosed affiliate with Honig. The group allegedly secretly owned a total of 53.95% of Mabvax by 2018.

To retaliate against MabVax for testifying for the SEC and the DOJ, Honig has personally sued the MabVax executives, David Hansen and Greg Hanson, in July in the Southern District of New York with a claim that he was falsely induced to invest. Honig says he wouldn’t have continued to invest in MabVax in 2018 if Hanson and Hansen had told Honig the SEC was investigated him. The problem is Honig leaves out of his lawsuit a fact pattern that could show it would be near impossible for him not to know what the SEC was focusing on in their investigation because his own attorney, Harvey Kesner, was the same person who was initially working for MabVax to answer the SEC investigative questions. The assumption could be of course Kesner told Honig what the SEC was asking MabVax about his investments which would be a conflict of interest for Kesner to disclose. Additionally, according to two people involved in the SEC case who worked directly with Honig, he would often accuses people of wearing a wire when they met with him and pat them down, because Honig knew the government has been after him for years.

Hansen and Henson said in their motion to dismiss, filed September 11, that Honig’s absurd legal logic shows this case is really just a public move to show others if you testify against him he will spend big dollars filing frivolous lawsuits against you to hurt your wallet.

Kesner has tried to make a similar move by suing Baker Botts, MabVax’s attorney, for allegedly trying to extort money from him ,in the form of a malpractice settlement, after they found Kesner’s alleged malpractice misconduct in their internal investigation of MabVax. That case was thrown out of the Southern District of New York and Kesner was sanctioned $1,000. It was moved to Southern California district court where Baker Botts is waiting on a judge’s decision to force Kesner to pay all their legal cost because via California anti-slaap laws they say he filed a bully lawsuit.

SRF LLP partner Marc Ross did not respond for comment about the malpractice settlement and would not expand on why Kesner’s LinkedIn profile still says he works at the firm after they removed his name as a named partner in September 2018. Language in the malpractice settlement says MabVax nor its attorney can speak to the media about the settlement or help any additional third parties who also might want to sue Kesner or his former law firm.

Honig is still waiting to settle how much of a monetary fine and disgorgement he will pay in the SEC securities fraud lawsuit. While he agreed to a penny stock ban some of his prior stock positions are now being traded in his wife, Rene, and father Alan Honig name. Court documents show he also has met with the FBI and given a proffer statement and is cooperating with DOJ against others in the scheme.

No Comments
25 Jun

Attorney Harvey Kesner sanctioned in Frivolous Lawsuit relating to MabVax: $MBVX

UPDATE July 17,2020: Harvey Kesner has dismissed his $35 million lawsuit against law firm Baker Botts and attorney Johnathan Shapiro for allegedly getting him fired when they told his former law partners that among other things they found attorney Kesner had assisted in a coverup for MabVax in a regulator investigation. Kesner’s attorney is Steven S. Biss who is known for his Rep. Devin Nunes lawsuits against Twitter and a parody Nunes Cow account. Attorney Biss didn’t bother to file an answer to Baker Botts motion to strike, which demanded attorney fees be paid for filing a frivolous lawsuit and retaliating against Baker Botts for their representation against Kesner in another related lawsuit. Instead two days after the missed deadline of July 13 he just filed a dismissal but without prejudice. This mean Kesner could try and file the complaint in another court–a move we have seen attorney Biss try over and over.

Additionally, Baker Botts told the California federal judge that Kesner’s dismissal isn’t going to stop them from asking for attorney fees under the anti-slaap laws in California. The next step is a hearing that was scheduled for July 27 where we could see if the Judge makes Kesner pay for his frivolous lawsuit.

Harvey Kesner is the long time securities lawyer for pump dump fraudster Barry C. Honig who was banned by the SEC last year and is allegedly still under criminal investigation. Attorney Kesner is currently battling a malpractice lawsuit filed by biopharma company MabVax. Baker Botts represents MabVax Therapeutics.

Original Story June 25, 2020
Penny stock lawyer Harvey Kesner has been sanctioned and fined after his lawyer, Steven S. Biss, disobeyed a New York federal judge’s order and tried to file a frivolous amended complaint accusing a big law lawyer of extortion and threats. The Judge lobed a one two punch and also granted the defendants, Baker Botts, motion to move the lawsuit filed in the Southern District of New York to Southern California where strong anti-slapp laws exist. Kesner is the long time lawyer for Barry C. Honig, who the SEC says mastermind a pump and dump stock fraud ring in over 40 stocks. Anti-Slapp laws will allow the defendants Kesner sued to ask the court to force him to pay their legal fees and impose penalties because the suit was allegedly filed as retaliation for Kesner being sued for fraud and malpractice.

Kesner’s main target of the litigation is Jonathan Shapiro, a lead litigation partner of Baker Botts. The lawsuit filed earlier this year for $35 million claims attorney Shapiro hatched a plan with a former client of Kesner’s, MabVax Therapeutics, to give evidence from an independent legal review of the investments made in the biotech company and subsequent disclosure in SEC corporate filings, to the Securities and Exchange Commission and the Dept of Justice that could lead to charges against attorney Kesner. The theme of Kesner’s lawsuit is that Kesner’s law firm was told they would have to pay Mabvax $9.6 million for Kesner’s alleged malpractice actions or the feds get the evidence. Evidence that includes Kesner allegedly advising Mabvax how to mislead a regulator in 2016 when they began questioning MabVax’s public filings and trading in the stock. Kesner was a named partner at New York based securities law firm Sichenzia Ross Ference. I was first to report Kesner was leaving the law firm, in the fall of 2018, on questionable grounds just weeks before his client, Barry Honig, was charged for securities fraud by the SEC.

A draft copy of the malpractice complaint, written by attorney Shapiro, obtained by this reporter, shows partners at SRF likely learned about Kesner’s alleged role in the Honig scheme just a month before the SEC filed their case against Honig. The suit was never filed in court. Instead a Boston-based law firm, Block & Leviton, filed a similar malpractice suit for MabVax a few weeks after Shapiro approached Kesner’s law firm for a settlement. And Baker Botts ended up suing all of Team Honig and others for their role in manipulating the stock price of MabVax and for trading as a group of undisclosed affiliates.

Baker Botts response to the complaint was swift, filing a motion to dismiss detailing how Kesner wasn’t telling the whole truth, after a trade publication for the legal profession, Law360, reported on the lawsuit glamorizing Kesner’s idea of being a victim of a RICO plot. Court filings show Kesner’s lawyer, Steven Biss, has a practice of saying outrageous things in lawsuit with the hope that the media will repeat them because his clients can’t be sued for libel or defamation for something their lawyers write in a lawsuit.

SDNY judge Hellerstein wrote in his decision to fine Kesner and move the case:

“After careful review of Defendants’ moving papers and Kesner’s Complaint, I hold that this case should be transferred to California. Without cataloguing what appear to be a number of glaring factual inaccuracies in the Complaint, or reviewing each and every one of
Defendants’ arguments for dismissal, I focus here solely on the need to transfer this case.”

Judge Hellerstein goes on to explain that Kesner repeatedly said in his complaint that Baker Botts sent a letter threatening to file a malpractice lawsuit without any intent of ever filing the suit but this just wasn’t true given a malpractice suit, that also accuses Kesner of fraud, was filed by another law firm a few weeks latter. As a result the judge order Kesner to pay at least a $1,000 fine for filing a frivolous motion and denied attorney Biss request to file an amended complaint.

A federal judge acknowledging that an untrue set of facts was written by attorney Steven Biss on behalf of his client, could be helpful for other defendants subject to attorney Biss’s pattern of vexatious litigation. Biss is currently suing multiple top media outlets like CNN, Washington Post, Hearst, McClatchy News for their coverage of U.S. Congressman Devin Nunes. Yesterday a federal judge ruled in Virginia that Nunes, through attorney Biss, can’t sue Twitter to reveal the identity of a parody account called Devin Nunes Cow that writes satire critical of the California congressman and others. Kate Irby was first to report on the outcome of the Twitter case. Additionally, other federal judges have warned attorney Biss that he could sanctioned. Sanctions for lawyers usually mean they will have to pay a fine but it can also mean suspension of a law license for not following their code of ethical practice.

Baker Botts wrote in their anti-slapp motion yesterday filed in Southern California that Kesner hasn’t even paid his court ordered fine yet.

Additionally, Biss is suing this reporter and Bill Alpert a senior reporter at Barron’s on behalf of Harvey Kesner. Alpert and I have never reported together. Like the Baker Botts case Kesner is trying to blame the journalist for ruining his career by reporting on litigation against him and his clients. The case was originally filed in South Florida where Kesner says he now lives. I have been representing myself Pro Se and worked with the Barron’s lawyer to get the case moved to SDNY. A judge ruled Florida was an improper venue for Kesner/Biss to file the case. Biss is joined in this litigation by a Florida lawyer Robert Buschel who says he is second chair. The duo are the same legal team that sued Baker Botts.

Attorney Buschel was also reprimanded by a the New York judge in my case when he tried to represent a wrong timeline for when Kesner left his law firm and how it related to the timing of the Barron’s article on his client.

Kesner’s goal in his litigation against me appears to try and use the courts to force me to reveal confidential government witnesses I interviewed in my reporting on his alleged role in the scheme tied to Barry Honig’s securities fraud. I stand by my reporting and have no intention of revealing sources even if it means I would be held in contempt. I am currently raising fund from readers to pay for my legal defense of this frivolous and harassing lawsuit. Remember Barry Honig also tried to sue me for reporting he was under SEC investigation in the fall of 2016 and then withdrew the lawsuit with prejudice in January 2018. That same year he was charged by the SEC for exactly what I reported he was doing. Evidence that has come out in the Honig ring investigation appears to show that while Honig was suing me he and Kesner knew Honig was under SEC investigation.

Additionally, the SEC has now come out and made public a transcript from one of their enforcement interviews in the investigation of the Honig securities fraud ring. As far back as 2014, the SEC was questioning another attorney Kesner worked with, Gregg Jaclin, about why Kesner was getting stock in a reverse merger deal involving PR Complete / YesDTC via an llc he owns called Paradox Capital. Jaclin was a partner in a securities law firm known for doing reverse merger deals called Anslow + Jaclin. Gregg Jaclin was sued for running a dirty shell company scheme by the SEC along with being charged with a felony in 2017 by the San Francisco DOJ for obstruction of justice in an SEC investigation. YesDTC and its CEO Joel Noel where charged criminally for running a pump and dump scheme. Jaclin has since made a plea deal in the criminal case and it’s unclear how much cooperation he is giving the DOJ in their case against Barry Honig and associates because his case is now sealed.

EDITOR’s NOTE: If you want to contribute to my defense fund in the frivolous lawsuit filed by Harvey Kesner please do so here.

The funds will go directly to the lo-bono attorney I will hire.

1 Comment
2 Jun

Aegis $5.1 million overnight raise for Digital Ally in Question: $DGLY

A small cap company that supplies bodycams to law enforcement, Digital Ally, saw its stock jump over 100% on Monday after protest riots in the U.S. extended over the weekend. The newly minted company gains got the attention of New York-based broker Aegis Capital Corp who convinced Digital Ally’s CEO, Stan Ross, to use its already filed shelf offering to sell an overnight discounted stock purchase agreement to retail investors. Aegis clients were rejoicing last night when their brokers, working under Anthony Lapadula, offered them the stock at only $1.65 after it had traded at a high of $2.53 on Monday. But people familiar with the transaction say there could be problems with an accurate account of the company’s stock float, which mean Aegis could have some problems with regulators in how the offering was sold.

Before the price hike the company had a float of around 13,000,000 shares and traded barely over a $1. But with Monday’s pop it caused institutional funds, with prior investments in the stock, to exercices their warrants, turn them into free trading stock, and cash out of their positions. This means there were more shares in the open market. Digital Ally had previously made SEC filings stating they were going to raise money with Roth Capital Partners and Lake Street. SEC rules say you can’t sell more than one third of the float off of a shelf offer in a 12 month period. And Digital Ally just sold an offering around $3 million a few months back.

Other broker dealers who had spoken with the company to raise money said they would need a ‘comfort letter’ from Digital Ally’s auditors or lawyers to confirm what the new share count is given so many warrants were exercised. That kind of proper due diligence check would take two to three days. But Stan Ross apparently found a firm, with a history of complaints against it’s broker dealer practices, to raise money off the hype. Additionally Aegis investment banking unit has made an exodus leaving it with only jr bankers. According to investors who bought the offering and insiders at Aegis, Anthony Lapadula was the lead I.B on last night’s deal. But Lapadula doesn’t have a series 79 license which is need to run an investment banking offer, according to Broker Check.

Last fall I was informed by company insiders that around half a dozen Aegis brokers had been called into their regulator, FINRA, for on the record interviews. Then in October I saw a SEC subpoena issued to a former Aegis broker who worked for Anthony Lapadula. It’s unclear which offering the SEC was focusing their questions on. A review in Broker Check shows Aegis has at least 34 regulator events. This includes complaints range from selling clients unsuitable offers to violating broker dealers rules regarding how and when they can sell an offering.

At press time Stan Ross and Anthony Lapadula did not return an email for comment. Aegis is run by Robert Eide, who goes by Bob, and founded the broker dealer in the mid-80s.

No Comments
9 Mar

SEC gets Penny Stock bans for Florida men in Honig Pump & Dump scheme

The Securities and Exchange Commission has finalized the settlement deals for three members of Barry Honig’s pump and dump securities fraud scheme. John Stetson, Michael Brauser, and John O’Rourke III all agreed to penny stock bans at varying degrees and to not hold more than 4.99% in a penny stock. The SEC settlement is seen as forgiving because the monetary fines and disgorgement amount to just over one million dollars for each defendant. Their co-defendant, billionaire Philip Frost was ordered a $5 million fine and the SEC still has to finalize the amount the ring leader, Barry C. Honig, will pay. The settlements were presented to New York federal Judge Ramos on March 6, 2020 who approved them.

O’Rourke will pay a total of $1.153,326 of which $765,128 is for disgorgement of illegal profits from stock fraud. O’Rourke agreed to a lifetime penny stock ban

Brauser will pay a total of $1,175,768 of which $844,914.32 is for disgorgement. Brauser agreed to a lifetime ban but keeps to keep his position above 4.99% in Polarity TE ($PTE).

Stetson will pay a total of $1,154,149.28 of which $837,509.98 is for disgorgement. Stetson, who is believed to have began cooperating with the SEC last year, got only a ten year penny stock ban. Stetson’s agreement to settle with the regulator was signed October 29, 2019.

One of the funds that was run by Stetson but secretly held Barry Honig’s investment, HS Contrarian Investment, has agreed to pay injunctive relief but the dollar amount is not settled yet. As a result the SEC ask that the fund remain a defendant in the case.

The SEC settlement says the defendants have to sell positions in stocks they hold at least 5%. The penny stock ban means they can’t help raise money for stocks that trades below $5, market/promote the company, or serve on the board and consult for a penny stock. That means Michael Brauser’s monthly consulting gig at Red Violet ($RDVT) should end along with any stock position he has over 5%.

Only three stock were listed in the SEC case but the SEC said in their amended complaint some of the defendants, which included Brauser, executed the scheme in over 40 stocks. One of the stocks not named in the compliant was Riot Blockchain ($RIOT) who recently announced the SEC has told them the investigation into the company has been dropped.

I previously reported the SEC lost some of their claims against the remaining defendant, Rob Ladd, who is CEO of MGT Capital ($MGTI). His case is moving forward to trial.

There are no details disclosed about the status of the ongoing criminal case by the DOJ into Team Honig.

Final SEC Judgment as to Defendant Michael Brauser 3.6.20 by Teri Buhl on Scribd

1 Comment
Next Page »