Banksters Behaving Badly

7 Aug

Andy Defrancesco Secret Deals-Promoter Payoffs, Verano Shares pledged : $APHA $SOLCF $VRNO

This story has been updated with news on Sol Global’s Verano IPO shares

Cannabis company Sol Global Investments ($SOL.cn $SOLCF) posted positive net income in their year end financials but failed to discloses key details about one of their most valuable assets which is their shares of Verano. The Toronto based company is run by controversial investor Andy Defrancesco in the role of Chairman and Chief Investment Officer and his side kick a former Florida lobbyist, Brady Cobb, who serves as CEO.

On July 8th Sol Global announced it had received a $37.5 million U.S. dollars private placement investment made as a senior secured loan with 6% interest and a two year pay back. At the time of the announcement the stock was trading at $1.55. Over the past six months the stock has been on a decline after a one day high of $3.02 on March 21st. Sol Global said in filing with the Canadian Stock Exchange that the transaction was arms length, which means Andy and insiders of the company didn’t personally loan the money to company. There was a lot of market speculation on who would give a fledgling cannabis company who was short on cash that much money. According to a person familiar with the company who had direct knowledge of the investment the money came with a catch. Defrancesco had to pledge the Verano shares as secured collateral if Sol Global can’t payback the loan in two years. The firm lending the money is suspected to be a Canada based firm and there is market chatter that MM Capital is the lender.

On October 23 2018 Sol Global made a $88 million investment in Verano, a private cannabis company, in deal that was intended for Verano to buy Sol Global’s Florida medical cannabis farm called 3 Boys Farms. According to the Florida office of Medical Marijuana, 3 Boys Farm had not even secured its full license to sell and distribute the cannabis at the time of the announcement. That deal fell apart after Defrancesco was hit with negative press coverage in December challenging his business ethics and undisclosed insider dealings. Then on March 11, 2019, Harvest Health & Recreation Inc.(CSE: HARV) announced its intention to acquire Verano in an all share transaction for a purchase price approximating USD$850,000,000 which was based on a Harvest share price of CAD$8.79 per share. Sol Global’s class B private shares in Verano have a good chance of becoming very valuable once the Harvest deal closed. The company told investors they thought the book value per share of their Verano investment was $4 CAD.

In a series of text messages I obtained between Andy and an investor in Verano/Harvest Andy was worried the men running Harvest and Verano were going to try to cut him out of the merger shares. The texts show Andy was asked to stop tweeting that he had a role in the Harvest/Verano deal. In fact the Harvest/Verano leadership wasn’t communicating with him and wouldn’t let him issue a press release clarifying for investors that 3 Boys Farm couldn’t be sold to Verano now; because Florida’s medical marijuana rules only allow a company to own one cannabis farm license and Harvest already owned one. Eventually the investor helped Andy get permission to communicate how Sol Global was effected by the deal.

Sol Global’s year end 2018 income was negative $19,343,230 million. For the year ending March 31, 2019 Sol Global reported a positive net income of $71,245,897 million U.S. dollars, which was a significant improvement.The largest bucket of revenue came from Sol’s gain on the sale of the LatAM assets to Aphria with a whopping earn out of $150,616,833 million U.S. Dollars.

Defrancesco was caught up in controversy this winter when a short seller report detailed how he made undisclosed millions off leading the sale of LatAM cannabis licenses to Aphria ($APHA) for inflated values. He is being personally sued for securities fraud in the Southern District of New York in a class action lawsuit filed by main street shareholders of Aphria. Court filings show Andy has been avoiding service of the Aphria lawsuit at his Miami home and Florida office. Defrancesco is currently working in the U.S. off a green card and hasn’t traveled outside the US recently over concerns he would not be let back in. Sol Global’s year end financials also failed to disclose it’s chairman and chief investing officer is subject to a lawsuit that alleges he used his influence of Sol Global to make the questionable deal where Aphria paid around $200 million for the LatAM cannabis assets. A few months after the short seller report came out Aphria wrote down one of the assets in the report by $50 million. The stock tumbled on the news.

The Short Seller report written by Nate Anderson of Hindenburg Research and Gabe Grego Quintessential Capital Management caused Defrancesco to start personal attacks on the fund managers. Grego’s website was even hit was a DDOS attack causing it to crash. Defrancesco decided he need a black ops Public Relationship group to go to work drumming up counter press reports. That firm is called AWM Group. In their recent year end financials Sol Global admits it spent $3.6 million CAD on PR and consulting to “counter fraudulent short seller reports”. There were no lawsuits filed accusing the short sellers of fraud by the company and Aphria did not offer a point by point rebuttal to the report as publicly promised. Additionally, Defrancesco was working behind the scenes to get a cannabis analyst and a cannabis twitter stock jockey to write favorable coverage of Aphria and negative coverage on individuals who negatively reported on Defrancesco or companies he is involved in.

Twitter stock trader, that goes by the name Johnny Lambo, met with Defrancesco on King street in Toronto. According to how Lambo tells it Defrancesco wined and dinned him and offered to give him early insight into the company if he tweeted favorable news on Andy’s investment. When Lambo was out one night with another Bay street market player, interviewed by this reporter, Lambo said “Defrancesco also has this guy at Grizzle do coverage his way.” Lambo’s statement about Grizzle was made in justification of why he’s backing Defrancesco. His twitter handle is @lambojohnny and his real name is John Mastromattei. Lambo also told the Bay street market player he was given direction to tweet disparaging or fake news about this reporter.

Grizzle is a Canada based research firm that publishes reports on Tech and Cannabis with the mantra of “The language of new money”. The head of research is a man named Scott Willis who claims he is a certified financial analyst. Willis ran reports naming Aphria’s Vic Neufeld as the most trusted CEO. He published a multi-page report on November 1st 2018 giving Aphria a $200 price target and an individualized review of the LatAM assets with harvest production estimates and construction cost per gram. Grizzle immediately called the Hindenburg report a hit piece and tried to justify the Aphria share price the day after the short seller report became public.

The Grizzle stock price estimate helped prop up Aphria stock while Sol Global was selling their Aphria shares received from the LatAm sale. Sol Global booked profits in the triple digit millions off Aphria stock sales. The management review of Aphria’s CEO Vic Neufeld as a trusted public company executive was designed to counter a previous negative report about Neufeld’s role in a company Aphria was going to buy called Nuuvera. Nuuvera was another Defrancesco insider deal. A footnote to the report states Grizzle employees own Aphria shares. But no where in the Grizzle reports does it state Scott Willis was getting paid by Defrancesco or one of his many companies he controls to write the reports. Vic Neufeld was eventually removed from Aphria.

Andy Defrancesco celebrating with Vic Neufeld December 2017

Grizzle had also agreed to center their coverage on Aphria and turned down at least one other public cannabis company, according to an email sent by Scott Willis and seen by this reporter. Willis met the CEO of the company during a marijuana investor conference. When the CEO had a one on one sit down with Willis asking him if Grizzle could also cover his company the CEO was surprised by Scott’s demand that he get 50,000 shares of the company, according to an interview with this reporter. The 50,000 shares to pay for research was also written in an email between Willis and the CEO and seen by this reporter. Shortly after the meeting Willis wrote the CEO back saying he was going to have to pass on covering his company.

Willis wrote in August 2018, “I talked with my partner about your firm after our meeting and he agrees you guys have some great things going, but we will have to circle back with you in a month or two. We are currently working on a mandate for one of the big 3 producers..” The big 3 producer is believed to Aphria according to people familiar with the arrangement. The CEO says he never heard from Willis after that email and Grizzle never covered his company.

Companies can pay for research as long as the payment is disclosed by the company. In the U.S. SEC rules say a person writing and publishing a stock research report would have to disclose they were paid to write the report as a promoter. Grizzle adds a disclaimer to their website, that can be seen around the world, that their reports are only intended for Canada residents. It’s unclear if Scott Willis is a U.S. or Canadian resident.

Request for comment about the alleged Grizzle kickback sent to Andy’s Quinn Emanuel attorney was not returned for comment.

Yesterday David Milstead at the Globe & Mail was first to report that Defrancesco has hired a white collar criminal lawyer from big law Quinn Emanuel. He is a 36-year old Harvard grad named Alex Spiro who formerly worked in the Manhattan prosecutors office. Spiro admitted in the Globe & Mail story that he is working with the SEC on behalf of Defrancesco to respond to a recent subpoena in another non-cannabis company, Cool Holdings ($AWSM), that was an alleged pump and dump run by Barry Honig with the help of Defrancesco. I previous reported on how Defrancesco and Honig worked with broker dealer Laidlaw to allegedly off load $AWSM shares to Laidlaw’s main street clients.

I asked attorney Spiro today if he will also be representing Defrancesco in the Aphria lawsuit and he responded yes so it looks like Andy has finally stopped running from service.

Since Sol Global’s positive year end results have come out the stock has not traded above $2. The company will hold an earnings call on August 8th at 4pm to answer investor questions. The dial in number is: U.S. Toll-Free Number: (888) 390 0546

Update 2.17.21: Andy Defrancesco’s Sol Global Investment is set to clear millions off the sale of shares in Verano who went public today and closed three times its opening valuation at $30. Except a tough guy Canadian hedge fund called MMCap, who lent Sol Global $50 million CAD in the summer of 2019, says they now own 65% of those valuable Verano shares. The shares pledged as collateral for the loan was first reported by this publication two years ago. But Sol Global’s former CEO Brady Cobb and its current interim CEO Andy Defrancesco have been cagey about mentioning the pledged shares when discussing Sol Global’s valuation with investors. On February 7th Sol Global sued MMCap in an effort to stop the hedge fund from claiming the Verano shares. The lawsuit is filed in New York state court.

Update 2.27.21: I am reporting for Cannabis Law Report on new litigation that shines a light on possible stock fraud by Andy Defrancesco for making false and misleading statements about the ownership of the Verano shares in social media and in public financials with the CSE.

9 Comments

31 Jul

Cannabis ETF Executives Questioned on MSO investing Workaround: $YOLO

Cannabis Exchange Traded Funds are finally getting the green-light from U.S. regulators after Big Law has stepped up to shelter the registration process with the Securities and Exchange Commission. Cannabis Law Report, a publication covering legal challenges and rule making for the cannabis industry, asked me to report on the first two marijuana ETFs who slugged through the SEC’s rigorous process to become effective. I analysed Innovation Shares Cannabis ETF $THCX and Advisorshares Pure Cannabis ETF $YOLO. What stood out was the fund manger and their lawyers view on investing in multi-state operators – one took a tone of caution the other a brazen work around around to skirt intended rules.

Matt Markiewicz runs $THCX and Dan Ahrens runs $YOLO. Both mangers have experience in ETFs and wanted to create an ETF focused only on the cannabis business. YOLO got a head start on grabbing investors money when it beat THCX to market nearly three months with a mid-April launch date. Its current AUM is $57.9 million. THCX, which launched July 8th, has $13.3 million in assets under management. THCX is a passively managed fund that follows an index which can make changes to its holdings monthly. YOLO acts more like a hedge fund with the ability to change holdings daily. It is the only ETF that uses derivatives
(called swaps) to invest in MSOs. Both funds list on the NYSE; an exchange that doesn’t allow multi state operators to trade.

My story at CLR dives into concerns from market players, like derivatives expert Jon Najarian and Matt Karens of Greenwave Advisors, on YOLO’s use of MSO/SWAPs. While researching the story last week I saw Lara Crigger, a seasoned jouranlist for ETF.com, report that the SEC and the NYSE have their legal counsel reviewing YOLO’s move to get MSOs into the fund via swaps. Crigger reported she heard that Dan Ahrens didn’t list the swap positions when he showed the NYSE what their holdings were before launch. Nate Geraci, an investment advisor who host a popular ETF podcast, also brought up the use of swaps in an interview with Ahrens that took place on Tuesday July 23rd and aired latter.

On Monday July 29th, after investors started to tweet out my story and other publications picked up the news Noah Hamman, CEO of Advisorshares (YOLO’s parent), went on a heavy defense on twitter.

Another journalist and an investment pro had taken public note of the MSO/SWAP thing one of Hamman’s funds was doing but Hamman appeared surprised I would question Ahrens answers in our interview. Hamman apparently wasn’t use to seeing a jouranlist covering the cannabis industry do more than rewrite a press release. I wanted Ahrens to explain why he didn’t tell the NYSE about the swaps. His response in our interview was almost verbatim to what he said in the podcast that aired Monday.

“This is just silly,” YOLO’s Ahrens told Nate Geraci. Ahrens said everyone one who worked with them on the offering was very aware of the structure of the holdings in YOLO.

Now I don’t think investors find it ‘silly’ that the fund’s exchange and the SEC are questioning the funds structure. Neither the SEC or NYSE would comment on the record about YOLO.

I also asked his custodial bank, US Bancorp, to go on the record saying they think YOLO’s offering docs following the letter of the law and they wouldn’t do it. I explained in my story Advisorshares scored a huge win when it was first to get a custodial bank to agree to work with its cannabis fund.

I also noticed that the big law firm YOLO used to file their offering with the SEC, Morgan Lewis, wouldn’t sign the needed third party opinion letter an ETF now needs to become effective and made available for trading. YOLO went and got Fox Rothchild, ranked as a 2nd tier law firm, to write the opinion letter. This was in contrast to THCX whose offering and opinion letter was done by big law firm Greenberg Traurig.

Ahrens keeps saying they got an opinion letter from an expert in cannabis law. Fox Rothcild had written one other opinion letter which I don’t think makes them an expert. While we are seeing some big law firms, like Duane Morris and Greenberg Traurig, build out a cannabis business via private M&A transactions I don’t think any US law firm is an expert yet. Given the lack of cannabis companies that have IPO’d with US regulators or done an ETF, compared to the number of cannabis companies listing on Canada exchanges, how could they be?

Because of YOLO’s reaction to a profile story on new ETFs, that I didn’t think would grab a ton of readers like my blockbuster investigative reports do, turned into driving even more attention to a new cannabis publication.

The reaction to my reporting highlights one of the problems with media coverage on the cannabis market. Lots of journalist are jumping into to cover the hot sector but few are asking tough questions, know how to read a balance sheet, or fact check executives statements in filings with regulators and press releases. Sean Hocking, the editor and publisher of Cannabis Law Report, hired me after he’d seen my original reporting on the abuse and alleged fraud by Andy DeFrancesco in cannabis stocks Aphria ($APHA) and Sol Global Investments ($SOLCF).

If you are an insider or whistleblower working in the Cannabis industry and see something you don’t think is right reach out. I’ve proven over and over I will protect confidential sources and investors need better warning than most reporting is offering now.

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3 Jul

Hedgies Bruce Bernstein, Brian Daly & Richard Abbe accused of stock manipulation in XpresSpa: $XSPA

Richard Abbe of Iroquois Capital and Bruce Bernstein of Rockmore Capital are back in the hot seat. In a new lawsuit filed this week the hedge fund duo stand accused of recently manipulating the stock of an airport spa business called XpresSpa. Last week $XSPA caught the attention of day traders when it had a wild run up of near 160% percent closing on Wednesday at an all time high for the year. Then it dropped of a cliff the next morning and is still trading down. There are also accusation of certain stock holders getting non-public material information ahead of the public. If a trade to sell stock was executed on the non-public information that would be the basis for an insider trading charge. Bernstein is currently the chairman of the board at XpresSpa and Abbe was a former director of the board and owns stock in the company.

The alleged motives of Abbe and Bernstein to move the stock price up for one day stems from the need for the hedgies to get rid of a group of institutional investors who were senior in the debt structure of the company via a $4 million PIPE sold in May 2018. Abbe, Bernstein, and another Rockmore partner, Brian Daly, hold interest in a prior $6.5 million debt, call the Rockmore note, that could force the company into bankruptcy and take the most valuable asset the company has, which is a large group of commercial leases at airports around the world.

Bernstein’s long time investing partner at Rockmore, Brian Daly, is also named in the suit. The shareholder derivative suit filed in the southern district of New York, on June 30th, was brought by investors Moreton and Marisol Binn. The Binns are founders of XpresSpa but are no longer involved in operations of the company. This is the second lawsuit they have brought against Abbe and Bernstein for accusation of securities fraud. The first case, which was exclusively reported by this publication last year, is currently at the appellate court. The former CEO of the company, Andrew Perlman, and other interested directors were also named in the new lawsuit.

Since Team Bernstein took over XpresSpa, the Binns say capital raising that dilutes past shareholders has been on the forefront of the board’s plan. There is always a verbal promise of using the funds the pay off the Rockmore Note or grow the spa business at the 56 lease locations but it never happens. Instead the company entered into death spiral financing sold to funds who get favorable interest and warrant terms, at the expense of main street investors, in the company. Last year Bernstein and his board used Michael Hartstein of Palladium Capital to sell a PIPE investment. Palladium has been the main investment bank and placement agent for pump and dump bad actor Barry Honig. (Honig was sued in September 2018 for a massive pump and dump scheme in multiple stocks by the SEC and has recently agreed to be banned from penny stocks in a settlement with the securities regulator.) According to a fund that invested in the PIPE, half of the $4.4 million raised in the PIPE offering was sold to Honig’s investing partner and co-defendant in the SEC case Alpha Capital Anstalt–a fund who hides its investors names and operates out of Lietchenstein. Hartstein pitched the other investors in the fund they only needed to put up $500k to get in the deal, according to an investor in the deal.

On May 15, 2018, the $XSPA Directors (that includes Abbe and Bernstein) caused the Company to close on the PIPE offerings for the sale of up to an aggregate principal of $4,428,000 with 5% interest payment on secured convertible notes due on November 16, 2019. If the PIPE wasn’t paid it could be converted to common stock at a price of $12.40. PIPE stands for private investment in a public entity. Recent SEC filings disclosed the other investors in the PIPE were, Anson Investments Master Funds, Brio Capital Master Fund, The Hewlett Fund, IntraCostal Capital, L1 Capital Global Opportunities Master Fund, and Palladium Capital Advisers. Richard Abbe’s Iroquois has been a friendly investor with Alpha Capital Anstalt. Both funds were named in an SEC Subpoena asking questions about their trading as an undisclosed affiliate in MGT Capital. Alpha Capital Anstalt paid a near $1 million penalty to the SEC for their role in that deal and is currently under orders not violate further SEC rules. IntraCostal is also another friend to Honig and Abbe. It’s believed to be run behind the scenes by Mitchel Kopin formerly of Cranshire Capital.

Through out the last year XpresSpa has paid the interest on the PIPE deal and the funds have converted some of the debt to stock. Then around mid May of this year Hartstein reached out to the PIPE investors saying the company wants to restructure the price of the common stock conversion but no details were ever follow up on. According to an investor in the fund they didn’t hear back from Hartstein until the day of the stock run. After the market closed on Wednesday, June 26 the PIPE investors were offered what they thought was a sweetheart deal. The stock had just closed at $4.71. So when Hartstein called to say the company would go as low as $2.48 if everyone converted their debt to common stock and got out of the company they jumped on it. (The PIPE investors actually still hold warrants in XpresSpa.)

There could be questions now on if the company should have put out an 8-k that night announcing the material change, which would add near a million shares to the market with the conversion. The 8-K likely would have had main street shareholders dumping stock Wednesday night in after market trading. Instead main-street investors didn’t hear about it till an 8-K was filed with the SEC around 9am. I reached out to investors in the PIPE deal and no one responded for comment on the record. One fund said they sold after the 8-K was filed and didn’t make money on the conversion.

I emailed one of Bernstein’s attorneys asking if they told the PIPE investors when they would put out the 8-K. Bernstein was also informed I knew about the timing of the restructured PIPE deal. His attorney has refused answer or comment on this as of press time. If the new lawsuit makes it to the stage of discovery I would expect there to be subpoenas of trading records to see if there was trading on non-public information by any of the pipe investors or directors of the company, or former directors like Abbe, ahead of the dump on Thursday.

Bernstein’s Temporary Restraining Order
On Monday there was a hearing in the first case the Binns brought in front of Judge Stanton. I attended it. Bernstein sent four lawyers from two different law firms who sat across from the Binns one attorney Michael Maloney. Michael has a co-counsel Rosanne Felicello who was out of town. The hearing was to determine if the temporary restraining order issued on April 28th against Bernstein and the Rockmore Note was going to be lifted. You can read the backstory on the TRO drama here. An attorney, who only does deal transactions and is not a trail lawyer, showed up as one of Bernstein’s four lawyers. Attorney Brian Haskel had not put in an appearance with the court. He said he was there representing Bernstein personally and is with the firm Sills Cummins & Gross. Bernstein’s other lawyers told the Judge Stanton that Haskel was there because he knows the most about the Rockmore Note. In the middle of the hearing attorney Haskel blurted out to Judge Stanton that the company has “Gotten rid of an aggressive lender” and called Alpha Capital Anstalt a bad fund. Haskel was trying to convince the judge that by converting the remaining $2.4 million of the PIPE deal it would help the company with its going concern auditors opinion. The judge was asking about the Rockmore Note though and had to scold attorney Haskel twice. Once for making a scowl at him and the other for talking as a sidebar when he was asking questions. When I reached Haskel by phone the next day to clarify if he was also at the hearing speaking for another corporate entity he said no he was only there to represent Bernstein personally.

Haskel’s answer is odd because a review of SEC filings made last year shows Haskel is named as the deal attorney to send communication to for Rockmore and was the lawyer on the original Rockmore note sold to XpresSpa. Bernstein had to remove himself as having any management control of the fund(it’s called B3D) he moved the Rockmore note into. B3D was owned by Bernstein and Daly. Bernstein even signed an affidavit submitted to the court saying he is not in control of management decisions for the note that could cause XpresSpa to file bankruptcy. He did this in hopes of Judge Stanton lifting the TRO because Stanton had previously said Bernstein would be breaching his fiduciary duty as chairman of XpresSpa if he was also acting as the decision maker calling in the Rockmore Note that would bankrupt the company. In a series of emails back and forth with attorney Haskel I tried to get a straight answer out of him regarding why Bernstein’s personal attorney was there to speak as an expert about the Rockmore note if Bernstein wasn’t really in charge of the Rockmore note anymore. I didn’t get a straight answer.

Attorney Haskel did want me to print this statement from him though.”There appears to be a misunderstanding of a statement I made at the hearing yesterday. In responding to Judge Stanton’s inquiry, I conveyed that Alpha was an aggressive lender, i.e. a lender that would extend credit to a business in XpresSpa’s position, and in that context made the point that permitting Alpha to convert its debt to equity improved XpresSpa’s capital structure.” The transcript will show he didn’t actually explain any of that context to Judge Stanton though. And if his client, Bernstein, really thinks this then why did they sell the PIPE deal to Alpha Capital Anstalt in the first place.

Judge Stanton kept the TRO in place and said he will lift it if the fund that is in charge of the Rockmore note now finishes a deal to extend the maturity date of the note to 2021 as the company alluded will happen in their last 8-k. He basically wasn’t going to let Team Bernstein run free until they actually did what they said in the 8-k. The hearing was considered a temporary win for the Binns and main street shareholders but they still have an uphill battle to get rid of the alleged bad actors running the company. Judge Stanton also told Andrew Perlman’s lawyer from Boise Schiller that he will not dismiss the case in it entirety until the TRO decision is done and all the defendants will be dismissed at one time. The XpresSpa defendants put out a PR statement saying the first Binns case is dismissed but that’s not true and anyone can see this if they review the court docket. The defendants did win a summary judgement decision to throw out the securities fraud claims for the reverse takeover merger that I previously reported. But given that decision in now with an federal appeals court it’s not accurate for the company or the directors to say the case is over.

The Short Squeeze
XpresSpa’s one day stock run last week baffled day traders who started speculating on Stocktwits and other stock messaging boards that XpresSpa was going to be in the Bitcoin business. That’s not true though because the company sold it’s bitcoin/blockchain assets to a company that was heavily invested in by Barry Honig called Marathon Patent Group ($MARA) back in January 2018. Instead the stock run is alleged to have happen by something much more nefarious.

The Company’s stock has consistently traded below $3.00 since March 2019. On June 25, 2019, the price of the Company’s stock closed at $1.82. Between June 25, 2019 and open of the market on the morning June 26, 2019, however, the volume of short interest in the Company’s stock spiked from 1,180 to 2,877,376. The magnitude of short interest created a short squeeze causing the price of the stock to skyrocket on June 26, 2019 to as high as 158% from the prior close. That day, the stock closed at $4.71, representing a gain of 129% from the last close. No news concerning the Company had been reported on June 26, 2019 and the Company made no filings with the SEC on that day, wrote attorney Maloney for the Binns to the court on Monday July 1st.

According to the lawsuit, by artificially driving down the company’s value below the balance of the $6.5 million Rockmore note, the defendants could try to “foreclose on the lease portfolio, convert the Rockmore note into stock at artificially depressed prices, or simply purchase stock for themselves as artificially depressed prices.”

The Rockmore note investors’s plan alleged in the lawsuit is on track, between January 4, 2017 and June 28 2019, the stock price of XpresSpa dropped by more than 95 percent, falling from $42.79 to $1.94 per share, according to the lawsuit. Michael Maloney of CRK Law, the Binn’s attorney, wrote they think the value of the airport lease portfolio is between $19 million and $39 million, but the directors of the company did not disclose this in filings with the Securities and Exchange Commission. Instead because of a one time goodwill impairment charge last year of around $19 million the company claims its worth only around $3.6 million.

There has been some creative accounting and planing surrounding the value of the Airport Leases. For any accounting geeks out there what the XpresSpa directors did is pretty interesting leverage of a pending accounting rule change. It hinges on two things: The true net value of the leases analysis and the cost of carry and payoff of the note and how that impacts a going concern. Some might call it ingenious planing and accounting but whether it is fraud/manipulation depends on the actual numbers.

The new shareholder derivative lawsuit is going to need discovery and a forensic accounting if it plans to get past summary judgement this time.

Editors Note: This story has been updated 7-4-19.
A trade publication covering commercial real estate, called The Real Deal, has also figured out the XpresSpa directors shenanigans make for interesting news and ran a story on the new lawsuit that you can read here. After the story ran XpresSpa finally deiced to make a statement on the record. North Carolina resident Brian Daly is obviously upset that he was named in a lawsuit about XpresSpa stock manipulation and got the company to make a glowing statement about him being a ‘respected’ lender. Brian his wife Helen also have their own holistic spa business recently opened in Charlotte, North Carolina called The Invigory. If the Binns get discovery in the new lawsuit it will be really interesting to see if there is evidence that it’s always been Brian Daly working behind the scenes directing Bruce Bernstein to execute the alleged takeover plan.

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18 Jun

SEC Pump & Dump Case leads to Barry Honig Banned from Penny Stocks

Microcap investor and promoter Barry C. Honig has agreed to be banned from the business of investing in and financing publicly traded small cap companies. On Monday June 17, 2019 the Securities and Exchange Commission asked U.S. District court Judge Ramos to approve a settlement with Honig and his investment fund GRQ Consultants. In September 2018 the regulator brought an enforcement lawsuit in the Southern District of New York against Honig for his role as the leader of a pump and dump securities fraud ring dating back to 2013 that involved at least nine other individuals. Honig agreed to restrictions on his behavior relating to the stock market but not to the amount of a financial penalty. The disgorgement and penalty phase of the settlement will be litigated down the road. News of Honig being under SEC investigation was first reported by me in 2016 at trade publication Growth Capitalist when I learned about an SEC subpoena naming Honig and others charged in the SEC case.

The lack of a determined financial penalty at settlement is not unique, even as we have seen Honig’s other co-defendants like billionaire Philip Frost agree to pay $5.52 million when he announced his SEC settlement. Honig’s long time investing partner Mark Groussman agreed to pay $1.38 when he settled with the SEC in February. However, two other co-defendants agreed to similar terms that calculate monetary damages at a latter date.

SEC settlements are filled with confusing legal language that can be unclear to anyone who isn’t a lawyer and the regulator is usually not keen to explain them further. I asked a former SEC enforcement lawyer, who is now experienced in litigating against the SEC as a white-collar defense lawyer, to review the settlement. The lawyer told this reporter, “This is an interesting injunction because the SEC uses conduct-based injunctions or bars. It is also a bifurcated settlement. That just means that the settlement only pertains to the liability and not the monetary side (disgorgement and civil penalties). You typically bifurcate when it is a slam dunk on the liability so it saves money to only fight about the money side of things. I suspect they are asking for an outrageous amount of money.”

The SEC claimed Team Honig executed a $27 million scheme. The most the SEC has ever gotten an individual defendant to pay is $20 million in the Elon Musk case. It’s unclear how much it would take for a SEC fine to make a dent in Honig’s personal finances. He currently lives in an $8.9 million water front home in Boca Raton Florida, sends his children to an expensive private school and travels on private planes.

The SEC settlement also bars Honig from promoting penny stocks or trying to control the actions of a director or officer of a public company.

The settlement doesn’t mean Honig cannot try to continue making money from prior investments. One of those investments, PolarityTE, is precluded from the settlement, and is considered by many observers to be a current pump and dump.

Journalist Chris Carey of Sharesleuth.com pointed out to his twitter followers yesterday that the penny stock bar Honig agreed to does not effect his stock ownership of PolarityTE ($PTE) and Americas Silver Corp ($USA.TO). Carey said, Honig’s last disclosed ownership in both stocks is higher than 5% so Honig would have had to sell stock in those companies to comply with the settlement and there is no public record of him doing that.

Carey has been warning main street investors about Honig by reporting on problems with Honig’s public disclosure of actual share ownership. In March 2018 he wrote a detailed story, with journalist Jim McNair, showing Honig’s team used promoters with fake names who did not disclose they had been paid to promote stocks Honig and his associates invested in.

The Sharesleuth.com reporting has now shown up in a civil malpractice suit against Honig’s deal lawyer Harvey Kesner and was detailed in the SEC’s amended complaint against Honig filed this year. The amended complaint added paragraphs with more extensive detail about how Team Honig used the undisclosed promotional stories, by John Ford, John O’Rourke (as Wall Street Adviser) and “Writer E’” who appears to be Peter Epstein. Epstein’s activities were exclusively reported by Carey last year before the SEC filed their lawsuit.

Last month I reported SEC attorney Nancy Brown admitted at a hearing over discovery that the Northern California DOJ is running a parallel investigation to the Honig SEC case. An attorney for Honig’s co-defendant, John O’Rourke, even said one of the defendants in the SEC case is currently acting as a whistleblower for the DOJ and they expected the DOJ to bring an indictment soon. The Street is now left guessing who will be charged by the DOJ and who is making a deal. The SEC settlement has a paragraph that says Honig can’t deny the SEC’s allegations but he also doesn’t admit to them, which could shield him from instant criminal liability. That means the DOJ has to build a case with charges they think a jury can convict beyond reasonable doubt.

“Everything else is subject to the qualification in the first paragraph of the settlement “without admitting or denying the allegations” — It can’t be used as the basis for a criminal case because it is not an admission. However, the SEC can give the DOJ all of the information they have which would likely be enough for the DOJ to bring a criminal case,” according to a former SEC enforcement attorney who reviewed the settlement.

The San Francisco DOJ has been building a case against Honig and people who worked with him since at least 2014. I was first to report on two criminal plea deals obtained by the SF DOJ that named Barry Honig for his role in the pump and dump scheme of YesDTC. The company’s CEO, Joe Noel, pled guilty to the scheme but Noel’s court records have been sealed so we do not know whether he has been sentenced or is still working with the FBI.

A L.A. man named Imran Husain was also arrested in the case and named Honig in his plea agreement. I first reported on Husain for trade publication Growth Capitalist in May 2016 when his partner in the scheme was charged by the SEC. That partner was a well-known microcap deal lawyer named Gregg Jaclin. Jaclin was later arrested in 2017 by the SF DOJ adding criminal charges to the actions detailed in the SEC case. Attorney Jaclin said he would fight the case to trial but with new filings sealed, the status of the case is unclear. With recent documents in the Husain and Jaclin case sealed by the DOJ, the question is whether both men could be viable witnesses for the DOJ in a case against Honig. On June 7th the DOJ finally filled a request to set a sentencing date for Husain in October. The motion filed in federal court said Husain had been cooperating on another case, on which the DOJ was working that involved Gregg Jaclin. Since it was alleged that Jaclin sold shell companies to Honig( in order for Honig to get restricted stock unrestricted to aid in the pump part of the YesDTC scheme), flipping Jaclin could be key to the DOJ’s case against Honig and his associates.

4 Comments

30 May

Andy Defrancesco sued for Securities Fraud for role in Aphria: $APHA

This story had been updated with the MTD decision

Original Text
Cannabis financier and Sol Global chairman Andrew Defrancesco is front and center of a 90-page securities fraud lawsuit filed in New York federal court this week. Defrancesco, a resident of South Florida has been publicly fighting recent press reports and a short sale research paper both questioning the legality of his investments in multiple publicly traded cannabis companies. The current lawsuit is being ligated by Adam Apton of Levi & Korsinsky LLP on behalf of shareholders who lost millions in Canadian cannabis company Aphria. Aphria trades on U.S. and Canadian stock exchanges ($APHA).

Apton was recently named lead lawyer in the lawsuit after multiple law firms fought to sue the alleged masterminds of the Aphria fraud. Defendants now include Aphria executives Cole Cacciavillani and John Cervini, in addition to Defrancesco and publicly traded Scythian BioSciences (since renamed Sol Global Investments $SOLCF $SOL.cn). Victor Neufeld Aphria’s ex-CEO, remains a defendant from the original complaint.

John, Andy, Cole $APHA accused fraudsters

The amended complaint was filed May 28th along with summons issued to the new defendants. Defrancesco might try to hide from service of this lawsuit, similar to how he did in a defamation suit filed this year by a cannabis research firm. The address used for service in both lawsuits, 2300 E. Las Olas Blvd., 5th Floor Fort Lauderdale, is Andy’s work address for multiple LLC’s he owns. As first reported by this publication, Defrancesco sold his Fort Lauderdale home at, 811 SE 26th Avenue Fort Lauderdale, in July 2018 to one of Barry Honig’s right hand guys, John Stetson. Real estate records show Stetson bought the home for an inflated value of $5.2 million in cash while the home was assessed at $3.6 million. A few months after the home sale Stetson was named as a defendant in the pump and dump enforcement action by the Securities and Exchange Commission. Since then, there is no paper trail showing where Andy lives or if he is still lives with his recently divorced wife Catherine Defrancesco.

This week I obtained new records that show Andy could be loading up on Florida real estate possibly in an attempt to keep assets out of reach of lawsuits or the government. The most recent purchase is a 7-bedroom, 11-bath, 9,500 square foot custom-built home with a dock and water front view in the Flamingo Bay area of Miami Beach, FLA. State records show 4395 Pine Tree, Miami Beach, Fl. sold for $19.9 million in July 2018 to a new LLC named ONJ Holdings. Florida is a homestead state, which means it is harder to attach a person’s main residence in case of judgments or liens.

4395 Pine Tree

Florida corporate records show that ONJ Holdings LLC was established on 7/26/2018 and the Pine Tree property was purchased 5 days later on 7/31/2018. The state records also show that none other than Andy Defrancesco buddy Michael Galloro is the manager of ONJ Holdings. Galloro is, or was, the COO of Delavaco Capital. He was also the interim CEO of Liberty Health Sciences, and the principal of ALOE Finance, a company that operates out of Delavaco’s offices and has offered CFO services to Scythian BioSciences/SOL Global. Andy Defrancesco is the founder of Delavaco, the corporate entity to which Aphria was paying high consulting fees for buying cannabis related assets, according to the lawsuit.

The consulting fees earned by Defrancesco’s company are highlighted in the new amended class action shareholder lawsuit against Aphria and Andy Defrancesco. On top of the consulting fees Defrancesco and Sol Global are accused of selling cannabis farm licences to Aphria in an overseas area called LatAM for allegedly inflated prices with the help of Aphria executives John Cervini, Cole Cacciavillani and Aphria president Vic Neufeld. The lawsuit states these actions were designed to benefit insiders at the expense of public shareholders, and the Aphria executives aided Andy to hide his role in the alleged scheme.

Andy Defrancesco Chairman of Sol Global

This is the first complaint in which Andy Defrancesco is a named defendant tied to securities fraud. There are currently two other potentially damaging lawsuits playing out in federal court. One is a defamation suit in South Florida filed by a cannabis research firm New Frontier Data, and a second lawsuit names his recently divorced wife, Catherine Defrancesco, in an amended shareholder fraud suit, filed in New Jersey, against RIOT Blockchain. Andy has admitted in press reports to Bill Alpert at Barron’s that he runs the deals in Catherine’s name.

Brady Cobb, the president of Sol Global told me in an email two weeks ago that the New Frontier defamation lawsuit was settled and signed, and the parties would be making a joint statement on the settlement. But a check of the court docket still shows the lawsuit is active and there have been no joint statements made. Repeated request to Cobb to understand why he made potentially misleading statements about this lawsuit settlement went unanswered this week. Further, Sol Global has also not updated filings with the CSE mentioning the New Frontier Lawsuit against its chairman.

Andy appears to be leasing the $20 million waterfront mansion in what could be a move to hide his current address. Andy does live there according to a person I interviewed in the Defrancesco’s circle but would not go on the record for fear of retribution. Additionally, a records check in WestLaw found that a utility bill for 4395 Pine Tree was transferred into Andrew Anthony Defrancesco name in March 2019.

The home also just happens to be down the road from his mega-millionaire friends, the Schottensteins. Property records show 4555 Pine Tree is owned by Joseph Schottenstein and is a six minute walk from where Andy is believed to be living. The Schottensteins and Defrancesco (and Barry Honig) applied for and were granted a cannabis store license in Ohio. Schottenstein was also the lead architect behind the trumped-up hostile takeover for Aphria this year after two short sellers published a report in December highlighting the self-dealing and possible fraud at Aphria and Defrancesco’s role in it. The stock price tanked after the report, which is why there is class action lawsuit against Aphria executives and Defrancesco.

In February, Green Growth Brands aided Aphria in its PR damage control campaign by offering what Aphria called a low bid for their assets so Aphria could try and show the company was more valuable, at the same time that the press and stockholders were seriously questioning the accuracy of their public statements and financials. Then on April 15th, Green Growth withdrew the bid. The same week Aphria admits that its LatAM assets had to be written down by $50 million Canadian dollars (a decrease of 35%) after the Ontario Securities Commission said the company was required to perform an asset impairment test.

This asset write-down, is what helped lawyers in the class action lawsuit add Defrancesco and Sol Global to the securities fraud lawsuit. In the U.S. discovery is not allowed until the class action survives a motion to dismiss, so it will be important to watch if the aggrieved Aphria shareholders can keep Defrancesco’s name in the suit. If so, it could be a gold mine of much needed hidden info for shareholders in other companies in which Defrancesco invested. Defrancesco has consistently been able to claim he is an independent shareholder and didn’t direct the actions of Aphria’s executives in buying the LatAM assets. The investors in the private companies he sells for alledgley inflated prices are also hidden because of recent shareholder privacy rules by the Canadian Stock Exchange (the CSE). Andy has said in press reports to the Globe & Mail and Bloomberg Canada that he is proud of the price he got for the assets. Defrancesco likes to brag in his twitter feed about beating market players and crushing them. His boasting about how much money his deals made, while structured in the names of others or hidden LLC’s he owns, could now set him up for trouble with lawsuits and regulators. Andy’s own statements are now used throughout the amended Aphria shareholder suit to allege misconduct and self-dealing.

The amended complaint reads like a rewrite of the Hindenburg Research short seller report written by Nate Anderson and Gabriel Grego of QCM. But it does include new photos from May showing the alleged worthlessness of the cannabis farms and offices. It also talks about a significant problem with the Columbia cannabis deal, ColCanna, that Vic Neufeld said would be Aphria’s best growth asset after the short seller report came out. The lawsuit says, “According to the Colombian Agriculture Institute, ColCanna was not granted authorization as a ‘selected seed producer for psychoactive cannabis and hemp’ until October 30, 2018.” You need 4 levels of a licenses in Columbia to make a go as a profit making cannabis company. Following that a company must receive ‘quota approval’ from the government to determine the quantity it is allowed to produce.
According to emails from the Colombian Justice Ministry and the Health Ministry in December 2018,seen by this reporter, the ministries confirmed ColCanna had NOT applied, nor been granted, a regular quota for 2019, nor had they applied for a supplemental production quota in 2018.

The lawsuit states that the, ColCanna quota is currently ZERO. That is because the company missed the mandatory April 30, 2019 deadline that dictated how much it could grow in the next year, according to the lawsuit. The lawsuit also shows photos of just five people working in an office listed for ColCanna.

Corporate filings for Aphria and Scythian/Sol Global show the land in Columbia was valued at $120,000 yet photos showed no cannabis was grown on it at the time the valuation was reported. Notwithstanding ColCanna’s apparent lack of operations, Aphria paid C$84 million to Scythian for a controlling stake in the entity, according to the lawsuit. Defrancesco and affiliates acquired the assets at an undisclosed price, then sold them to Scythian/Sol Global, which in turn marked up the assets when selling to Aphria.

At press time I did not hear back from the Colombian government to confirm the 2020 status of the ColCanna quota as detailed in the lawsuit.

Vic Neufeld, Defrancesco’s friend, is no longer CEO of Aphria, after suddenly resigning in January 2019. Neufeld was replaced by Irwin Simon, who was in charge when the company recognized the write-down of the assets at the heart of the lawsuit.

Andy Defrancesco did not respond to an email requesting comment about being named in the amended Aphria lawsuit. Brady Cobb, CEO of Sol Global, responded “no comment” to the lawsuit.

Update 7pm: This story has been updated with emails from the Colombian government regarding ColCanna’s quota

Update 9-30-20: A SDNY judge ruled the class action lawsuit can move forward against Aphria, Vic Neufeld its former CEO, and Carl Merton the former CFO. The judge ruled there was enough evidence to question if Vic Neufeld made misleading statements in press releases and SEC filings about the value of the LATam assets the company bought from Sol Global who bought them from Andy Defrancesco and that plaintiff showed a strong inference of scienter. Scienter is important to prove that Neufeld and Merton had intent to defraud investors and can lead to a jury award of triple damages if a jury rules in favor of the shareholders.

Andy Defrancesco was able to get out of the lawsuit as the judge ruled the plaintiff wasn’t able to show he was a control person of Aphria or its executives. Basically the suit, which was not allowed discovery in the motion to dismiss phase, wasn’t able to pierce the corporate veil that Defrancesco designed to allegedly hide his involvement in the shady deal. Defrancesco’s hidden role was first exposed by two short seller funds that work to expose corporate fraud. The stock lost over 50% of its value after the report came out in December 2018. Additional reporting exposed Michael Serruya’s alleged role in the questionable deal and promotion of the stock. Serruya has not been sued for his role with Aphria which he was a board member.

John Cervini and Cole Cacciavillani were also dismissed from the class action lawsuit. The plaintiffs can now move forward with discovery and it will be up to Aphria’s new CEO Irwin Simon if he settles the case or moves forward to fight it with a jury trial. Discovery could expose how other Aphria board members were involved in the misstatements and alleged fraud.

The shareholders are represented by Adam Apton.

15 Comments

3 May

Federal Judge Halts Rockmore Capital Bruce Bernstein plan to seize XpresSpa Assets : $XSPA

UPDATE 6.27.19 – The hearing to determine if the temporary restraining order against Bruce Bernstein, Rockmore, and B3D LLC will remain is July 1st 2019 at 3pm in the Southern District of New York federal court in front of Judge Stanton.

Origninal Text

A federal judge has stopped Hedge fund manager Bruce Bernstein of Rockmore Capital from gutting the assets and cash of XpresSpa Group by issuing a temporary restraining order on Monday against Rockmore’s move to manufacture a default on a $6.5 million senior secured note against the Airport spa business. Because the asset of the public company are currently less than the amount of the note the move would have forced XpresSpa to file bankruptcy giving Bernstein a clear path to steal assets because his fund’s senior note makes it is first in line to collect. Bernstein, along with his investing partner Richard Abbe of Iroquois Capital, are currently being sued by XpresSpa founders Marisol and Morton Binn for securities fraud for their alleged role in telling lies about who owns the debt that forced a reverse merger with a public company gone bad.

U.S. District Court of New York Judge Stanton issued the order after the Binn’s attorneys, Rosanne Felicello and Michael Maloney of CKR Law, called for an emergency hearing this week. Bernstein was once again trying to argue that he is an independent director of XpresSpa, he serves as the chairman of the board, and as a result doesn’t have a conflict of interest in calling in a debt that would wipe out the XpresSpa main street investors, in which he has a fiduciary duty as chairman to protect. He even paid for another lawyer outside his current 3 corporate attorneys at Mintz Levin to represent him at the hearing in a move to try and look independent. But Judge Stanton wasn’t buying it.

Michael Maloney of CKR Law, the Binn’s lawyer, argued what Bernstein was doing is actually doing is fraudulent conveyance. That is because in the past few years Bernstein has simply extended the due date of the $6 million note so the accountants don’t declare the company has a going concern. XpresSpa actually pays the high interest Bernstein lobbed on the company at 12 percent but all of sudden in what appears to be a vengeful move he tried to call in the full debt on the note. It’s possible this is because Judge Stanton is about to decide on Summary Judgement in the securities fraud case that personally names him. His scorched earth agenda caused Judge Stanton to say Bernstein does have a fiduciary duty to XpresSpa shareholders first, over his roll as an investment professional trying to call in a debt and take the remaining $3.5 million of cash the company said it currently has on hand. This is a first for Judge Stanton who was basically saying “you don’t act or look like an independent director.”

The attorneys at Mintz Levin have till 5pm today to file an 8-K announcing the TRO as a material event for XpresSpa. SEC rules require public companies to tell shareholders about important events that affect the company’s financials within four days of the event happening. I asked Bernstein if he also paid for the new lawyer that showed up at the TRO hearing representing him as an individual. If he used XpresSpa money to pay for that lawyer it would be an unethical move by a director of the company.

This isn’t the first time Bernstein has tried to use a manufactured default of the Rockmore note to benefit himself at the disadvantage of XpresSpa shareholders. Before the forced merger with public company Form Holdings, Rockmore issued a notice of default against XpresSpa back in June 2016. Rockmore said XpresSpa hadn’t made sure Rockmore got audited financials in the time frame it required. All the interest on the loan was still getting paid but XpresSpa needed an extension on when the principal of the debt was due. As a result of the default Bernstein is accused of basically blackmailing the board to do a deal with Form Holdings. XpresSpa had interest from another business to do a merger and that business had also had been given a signed right of first refusal if other buyers came along. Bernstein blew past that and told the board of XpresSpa he’d take back the default if they did the Form Holdings deal so in July 2016 a term sheet for the merger was signed. Rockmore also got an additional $500,000 added to the $6.5 million principal due after the company agreed to merge with Form Holdings saying Rockmore deserved the additional funds because they called off the default.

XpresSpa had $51 million of revenue as of the last financials filed with the SEC and owns leases in Airports, which are considered an asset. But it’s not shown positive net income. Since Team Bernstein took over executives salaries have been up to $2 million a year in total while the company is loading up on expenses and not growing the business. The stocks trades barley above $2 on the NASDAQ under the ticker $XSPA.

Bernstein came to the temporary restraining order hearing with a plan. He told Judge Stanton that control of the Rockmore note had been moved to a North Carolina LLC called B3D. He said there is a co-owner in B3D that can make decisions also so he really is not the guy calling in the Rockmore note. Ironically in a SEC filing last year Bruce Bernstein has signed documents as the controlling director of B3D. On top of that, the other B3D guy Bernstein told the judge could control the Rockmore Note is none other than Brain Daly who is a top investment manager and has some ownership of Rockmore Capital. Daly has worked with Bruce for years.

Apparently Judge Stanton saw through that argument because the temporary restraining order is also against any successors of the Rockmore Note or persons that can control B3D. Meaning Brian Daly also got notice of the TRO.

Bernstein recently tried to secretly sue this journalist, via a sealed complaint filed in NY state court, to reveal sources in my reporting on the alleged fraud and lost the lawsuit. Bernstein thought his ex-wife was leaking information to me that they had agreed to be confidential but our hearing showed that was not the case. I didn’t get confidential information nor was she the source. Sheryl Aufrichtig, his ex, had given the Binns lawyers at CKR Law some unsolicited but critical financial information of Rockmore Capital, which Judge Stanton had agreed to be sealed from the public while they are litigating the fraud case. The hedge fund manager’s move to intimidate a professional journalist with a state court lawsuit backfired though because it unsealed documents in the federal case that could prove Bernstein and Richard Abbe lied to shareholders in SEC filings.

After I published the unsealed findings an additional high net-worth investor in XpresSpa, Roman Kainz, sued for securities fraud, which now doubles Bernstein and Abbe’s litigation cost. The new lawsuit also added a new investment professional, William ‘Bill’ Phoenix, who is believed to aid and abetted in the fraud. Richard Abbe has quit the board of XpresSpa but it’s unclear if he is still pulling Bernstein’s strings. As I previously reported the duo have a pretty cozy relationship given Abbe allegedly got Bernstein to hide his investment in Rockmore Capital and the senior secured debt that controls XpresSpa. If those action are proven as securities fraud in the federal court case it could open the door for an SEC enforcement action against the Bernstein and Abbe.

Bernstein would not return a request for comment on the temporary restraining order.

4 Comments

25 Apr

Bloomberg Journalist Subpoenaed in Platinum Partners Securities Fraud Trial

The criminal trial of Mark Nordlicht and his team of executives at hedge fund Platinum Partners is looking like it’s going to be a knock out fight between the federal prosecutors in the Eastern District of New York and Nordlicht’s celebrity attorney Jose Baez. The hedge fund defendants stand accused of operating a billion dollar Ponzi Scheme via securities fraud and conspiracy to commit securities fraud that includes inflating assets to earn more fees. Nordlicht’s threw the first punch by having his attorneys subpoena Bloomberg journalists for trial because they were allegedly tipped off to the government’s investigation before Nordlicht was arrested by the DOJ’s lead attorney who brought the case. That attorney is Winston Paes who left the EDNY in 2017, before the case got to trial, to go make more money at big law firm Debevoise Plimpton LLP. Attorney Paes was the deputy chief of the EDNY business and securities fraud group and has been accused, by Nordlicht, of leaking information known to the grand jury. According to a person familiar with the case the Bloomberg reporters being subpoenaed are microcap reporter Zeke Faux and long time Business journalist Patricia Hurtado. Christine Smythe, who is now an associated editor at trade publication The Insurance Insider, is also suppose to be subpoenaed. Smythe says she isn’t aware of any subpoena. Smythe worked with Zeke Faux when she was at Bloomberg to break news that the FBI and Postal Inspectors raided the New York office of Platinum Partners on June 22, 2016, which was nearly 6 months before the hedge funders were arrested. In a letter to the judge the DOJ has already complained about journalist being subpoenaed.

Smythe and Faux reported the raid was due to an investigation by the EDNY over problems with the hedge fund’s business. Their story described the scene in Platinum Partner’s lobby when the raid was happening so it looks like they were either tipped off to go see it or someone at the government told them what happen. The attorneys at the Eastern and Southern district of New York have a habit of tipping off their favorite reporters to raids in an attempt to get a visual perp-walk into the news before a defendant is even charged. It’s the same pattern of legal maneuvering we saw in the SDNY’s long running insider trading investigation into Stevie Cohen and friends at SAC capital. After the raid at Platinum, Zeke Fauk reported on August 11, 2016 that the EDNY investigation was focused on illiquid assets the fund held that were investments in oil fields. Faux reported the drops in the oil market and production didn’t match up with what Platinum was posting as returns on their oil investments. How Faux figured out Platinum asset valuation problems and the EDNY legal strategy to charge Nordlicht and team has been front and center of Nordlicht’s defense.

According to court filings and a person familiar with the case Nordlicht got a hold of internal DOJ emails and text messages between attorney Winston Paes and the Bloomberg reporters by forcing the DOJ to hand them over via a Freedom of Information filing. Because the emails showed attorney Paes was talking to the Bloomberg reporters and even met for drinks with Christine Smythe the night before the raid; Nordlicht has argued it was Paes and his team who leaked information from his investigation to Bloomberg. Nordlicht’s attorney Jose Beaz has been screaming that this is misconduct by the DOJ and the case should be thrown out. Attorney Beaz argues by tipping off journalist the DOJ forced Platinum’s investors to rush to redeem and forced the fund into Bankruptcy, basically crippling the defendants in the case before they were even arrested. According to a person familiar with the communications Paes would regularly reach out to female reporters Smythe and Hurtado.

Nordlicht’s lawyers said in opening arguments this week they don’t know for sure what info the government tipped off to the journalist or who did it but wants a chance to put people involved on the stand to prove their theory. The judge isn’t buying the DOJ misconduct theory though and ruled team Nordlicht couldn’t use that as a strategy before the trial started. Attorney Jose Beaz side-stepped that decision in his opening arguments on Tuesday and brought up the idea of DOJ misconduct in a move that got his theory in the juries mind and the DOJ is freaking out. Letters to the judge filed in the last few days show the DOJ is trying to get the judge to ‘punish’ Nordlicht’s lawyers. Additionally team Nordlicht has subpoenaed a lawyer at the law firm attorney Winston Paes is now working at. There is a motion to squash the subpoena and the judge has not decided on it as of press time. The Debevoise lawyer subpoenaed, Micheal Mukasey, did a due diligence review for Platinum in 2013. It was designed as a third party review to give institutional investors confidence in the returns and asset values Nordlicht was posting. Team Nordlicht would likely want to argue that Winston Paes violated some kind of DOJ conflicts policy by going to work for a law firm who previously represented Platinum but the judge has made statements it doesn’t matter because the DOJ actions don’t have anything to do with the crimes being argued. The DOJ misconduct strategy could be used if Nordlicht’s case goes to appeal.

A few months prior to the Bloomberg stories in question, Reuters investigative journalist Lawrence Delevingne was first to report how is was very curious that Platinum got bond holders in Black Elk Energy to vote to give Platinum, an equity investor, money from the sale of assets. Bond holders always get paid before equity in the capital structure. Delevingne figured out that the voters in the bond ran a fund called Beechwood and had previously worked for Platinum. When the DOJ eventually charged the Platinum executives, the questionable actions Delevingne highlighted in his reporting were front and center in the DOJ complaint.

What Delevingne didn’t report in his April 2016 story (we are going to assume because he didn’t know it), was the money Platinum got from the alleged bond rigging vote was desperately needed to keep returns up and payoff redemptions to some of Platinum’s favorite investors. At least that’s what the DOJ says happen and now they have to prove it at trial. Nordlicht and his co-conspirators have plead not guilty and said in press reports they look forward to trial so they can clear their names.

The idea that Winston Paes colored outside the lines in his work at the DOJ isn’t surprising to anyone who has covered one of his investigations. Attorney Paes showed signs of being a media whore through out his career at the DOJ. He was actively seeking to get his name in the press like the glowing profile Christine Smythe reported on his rule at the EDNY a year before Nordlicht’s arrest. Paes like to go after Wall Street indictments that would make splashes and was involved in multiple cases he never finished at the DOJ. He acted as a lead attorney at the end of the NIR Group hedge fund fraud case and then was part of the EDNY lawyers that failed to build a case to charge NIR Group’s leader Corey Ribotsky for securities fraud. (I reported for years on Ribotsky’s fraud which led to the SEC civil securities fraud charge against Ribotsky and was in the court room when the EDNY attorneys admitted they failed to build a criminal case against Ribotsky even though they had secured a conviction against Ribotsky’s right hand man Daryl Dworkin.) I reported in 2014 for the trade publication I was working for called Growth Capitalist, that the EDNY also leaked me information about their investigation strategy into Ribotsky and his fund. The government lawyers use to call me looking for witnesses they could use to build a case. If the witnesses wanted to talk I did connect them DOJ lawyers. It was how I was able to confirm a criminal investigation was going on and pass muster to report it with my editors at DealFlow media and MarketNexus Media. If the subjects of my stories had tried what Nordlicht is doing, subpoena me to reveal sources in a criminal investigation, I wouldn’t do it and would be willing to be held in contempt. But in the case of the DOJ I don’t consider them a source especially given the fact that any seasoned investigative journalist knows they are only giving you info to prejudiced a jury before they have a chance to get to court. In my NIR Group reporting I didn’t go seeking DOJ help they proactively came to me.

With the Nordlicht case it could be someone not even working for the government that was helping reporters with research, like others familiar with the fund, who were trying to warn investors to get their money out before the fund folded or they were just pissed at Nordlicht. And the stories that were not assisted by the DOJ could be the cause of the rush to redemptions and the fund’s bankruptcy. But we don’t see Nordlicht’s lawyers arguing that. I have always been uncomfortable with the way the DOJ has some magical bat line to pubs like the Wall Street Journal who get tips to show up at dawn to video a Wall Streeters arrest then report the DOJ’s side of a story while the defendant is left being forced into silence because his lawyers have warned him not to talk. But that’s not happening with Nordlicht because he is fighting back in a very public way, which is why this case is an incredible view for reporters and their readers to see how the sausage gets made at the Department of Justice. It’s a unique chance to view the dirty tactics the DOJ is allowed to execute in the name of justice regardless of if the defendants likely did what they were accused of.

John Marzulli, press guy for the EDNY, has refused comment on this story and won’t answer basic questions like how DOJ conflict rules work. Zeke Faux did not respond did not to a request for comment. We will be watching to see if the judge allows journalist to testify and Bloomberg’s legal team will likely fight the subpoena. Nordlicht’s lawyer would not comment on the case.

This story is updated

UPDATE 5.1.19: Chris Roush of Talking Biz News got a senior press woman at Bloomberg to respond to the news their journalist have been subpoenaed. She admitted it happen and said if Nordlicht doesn’t withdraw the subpoenas Bloomberg will file a motion to squash. The DOJ has about four weeks to present their case, so the Bloomberg journalist won’t be called as defense witnesses for about a month. As of now Nordlicht is not withdrawing the subpoenas so it’s in Bloomberg’s court to put an argument into the public court docket about why their Journalist shouldn’t be forced to testify and to fight for source protection. Keep in mind the sources they’d be protecting, according to Nordlicht’s court filings, are allegedly the DOJ and FBI. Bloomberg public relations was silent today when I asked them to respond for comment.

1 Comment

11 Apr

Hudson Bay Capital tied to Barry Honig Pump and Dump Ring : MabVax $MBVX

A San Diego-based Biotech company named in the Securities and Exchange Commission’s stock manipulation case against small-cap investor Barry C. Honig has come out swinging by naming another hedge fund that’s allegedly part of the Team Honig pump and dump ring. In a lawsuit filed in Superior Court of California this week, MabVax Therapeutics Holdings details how New York-based Hudson Bay Capital played a pivotal role in inducing the company to go public via a reverse merger so that Barry Honig and his crew could take control of the board and manipulate the stock. Hudson Bay is run by Sander Gerber, who manages $6.8 billion in assets under management. San Francisco attorney Jonathan Shapiro of Baker Botts LLP brought the lawsuit on behalf of MabVax. Hudson Bay also stands accused of hiding Honig’s investment in the initial money that led to MabVax going public.

The hedge fund was previously found violating regulation M, which says you can’t short a company that you have also made a PIPE investment in, by the SEC for a period of four years and ordered to pay a fine. The regulator has alluded to Hudson Bay’s role in the Barry Honig stock manipulation case but only names them as company H in the amended complaint filed last month.

MabVax is a clinical-stage biotechnology company that was working to develop treatments for pancreatic cancer, soft tissue cancer, and ovarian cancer. In early 2014 the biotech company was invited to give a presentation to a charity with the enticement that the non-profit charity wanted to give MabVax a $500,000 grant to fund childhood cancer research. MabVax founder, David Hansen, flew to New York and gave the presentation in Hudson Bay’s office. The charity was tied to a principal of the hedge fund. After the presentation, the investment managers at Hudson Bay immediately approach MabVax with the idea that they could also raise capital through a reverse merger with a public company. Unbeknownst to MabVax that public company was a shell company with no real business that Team Honig already controlled. Hudson Bay said they would be set up the merger with a PIPE investment that gave Hudson Bay discounted stock that can be converted to common stock upon the merger being completed. It also gave the PIPE investors some control over how MabVax could run the company. A PIPE is a private investment in a public entity. MabVax a private company at that time had been dependent on federal grants, private foundation funding and venture capital and wasn’t necessarily looking to go public but they kept the conversation going with Hudson Bay because they wanted the grant that had been offered by a principle of the Hedge Fund, according to the lawsuit.

MabVax never got the grant from the charity. But Hudson Bay did manage to convince MabVax to do a reverse merger with a shell company called Telik. MabVax later learned that a $500,000 grant wouldn’t have been viable because according to public records the charity had less than $450,000 and the largest grant given in the past was round $100,000.

Hudson Bay first proposed a $6 million investment in MabVax, to be made in two tranches of $3 million. The first tranche would be made up-front because MabVax desperately needed financing, with a second tranche of $3 million to come several months later only if MabVax became a public company, according to the lawsuit. MabVax says there was no room to negotiate if they wanted the money they had to go public and Hudson Bay would lead the way in finding the company to do it with.

The biotech company also learned after the merger that Barry Honig had $1 million invested in the original $6 million investment executed by Hudson Bay. The lawsuit says Hudson Bay hid this affiliated party from MabVax and thus it was not disclosed in the public filings asking for shareholders to vote on the merger. If a company is caught lying or misleading investors about affiliated parties in a stock merger it is a clear violation of securities fraud, according the SEC. An example of this kind of self dealing and lying to investors is currently being litigated in Federal court against another hedge fund Hudson Bay and Barry Honig regularly invested with called American Capital Management which is owned by the co-founder of Iroquois Capital Richard Abbe. The lawsuit involves a stock called XpresSpa ($XSPA) has been reported on multiple times by this publication.

It was after the merger that Honig became known to MabVax through making investments in the company via his investment fund GRQ Consultants, Southern Biotech and the Barry and Rene Honig Charitable Foundation. Miami billionaire Philip Frost was also brought in to invest with Honig through his company OPKO Health ($OPKO). Michael Brauser made investments through Grander. Honig’s associate John Stetson made investments through HS Contrarian Investments LLC. Last month the SEC disclosed in their amended complaint that Honig actually owned over 80% of HS Contrarian Investments and said John Stetson was just a front-man for Honig so public companies and the regulator wouldn’t know his true size of stock ownership. The MabVax lawsuit says, in March 2015 Honig assured Philip Frost, Michael Brauser, and John Stetson that MabVax was a “really good opportunity,” and that the group would “make $35 million conservatively in 4 months and our money out [in] 4 weeks.”

Team Honig stands accused on working to get control of the MabVax board and then executing a pump and dump scheme while using the companies cash to pay off other involved in their ring.

All of these men and their related investment companies were charged in the SEC lawsuit and in the recent civil fraud lawsuit by MabVax. There is also a new name, not seen in the SEC lawsuit, tied to John O’Rourke called Airy Properties that MabVax says is part of the Team Honig stock manipulation ring.

Additional stock promoters tied to Honig’s stock manipulation ring
MabVax made a one-two punch with this newest lawsuit because the company also showed evidence of Barry Honig working behind the scenes to force a public company to hire investor relations firms with known questionable tactics among the microcap community. Both firms are Southern California-based. IRTH is run by the Haag brothers, Robert and Andrew, from Santa Monica, California. MabVax says they passed on working with IRTH when Honig first suggested them because they didn’t have a good feeling about them when they met. But when the company needed more money in 2016 and had to go back to Team Honig hiring IRTH was an absolute condition of the financing. Honig said they would have to pay them $300,000.

MabVax remained skeptical of IRTH, and grudgingly acceded to Team Honig’s demands to hire the Haag Brothers, provided they comply with strict rules and were accountable to Company management and not Honig and his associates. The lawsuit says, “As MabVax’s CEO explained in a July 31, 2016 email to IRTH, MabVax wanted “control over . . . what materials are disseminated on our behalf . . . and what is said by those we have hired to represent us.” In particular, MabVax wanted to ensure that IRTH did not leak any non-public information.”

A few months into working with MabVax, IRTH sends a bill for $570,979.13 and MabVax pays it.

Then in December 2016, MabVax received a request for information by the SEC that said there was a non-public investigation and the Company believed the SEC was concerned about conduct by IRTH. So MabVax told IRTH to suspend all work for the Company. Almost immediately thereafter, MabVax says it received loud and vulgar requests by Honig that the Company resume using IRTH. But MabVax revolted against Honig and wouldn’t do it. By February 2017 MabVax officially fired IRTH. The lawsuit says MabVax doesn’t think it got nearly anywhere near $600,000 of services from IRTH for investor relations and public relations work. The company speculates that the money paid to IRTH was actually a back door way for Honig’s to get other people to pay for the work of Honig’s favorite undisclosed promoter John Ford. Ford is Honig’s co-defendant in the SEC lawsuit and has settled with the SEC. The SEC accused Ford of writing false articles on stock websites, like Seeking Alpha, to help Team Honig execute their pump and dump scheme. Ford has been banned from the industry and has to pay a fine and disgorgement for his wrong doings.

IRTH, Robert Haag, and Andrew Haag are all named in MabVax’s recent lawsuit, which has claims of market manipulation, fraud, tortuous interference, and unfair business practices. But the SEC has not come out and directly named IRTH in their complaint against Team Honig.

IRTH is also known for its role in the alleged pump and dump of another Honig led stock scheme called U.S. Gold Corp.

Another familiar name seen in microcap financing deals is Robert Prag. He runs Del Mar Consulting Group that is known as DMCG. MabVax has named Prag as a defendant in their lawsuit for his role in working with Barry Honig. The lawsuit says MabVax was required by Team Honig to give DMCG 500,000 shares of stock for a 2 year contract for investors relations work. Once again this demand was contingent on Honig giving the company more money. At that time the stock would be worth $1 million. DMCG never disclosed in public filings that it was working with Honig, which made it part of a group of affiliates that owned MabVax’s stock. Trading as a group of undisclosed affiliates (called a 13D group because that’s the name of the filing the SEC requires) is an SEC violation at the core of the regulator’s lawsuit against Team Honig. It’s also exactly what this reporter first reported that Team Honig was under investigation for, at trade publication Growth Capitalist, years prior to the SEC bringing an enforcement action.

MabVax claims they issued $22 million in stock to Team Honig and wouldn’t have done it if they knew they were working as a group of undisclosed affiliates. Additionally the original financing had something called blockers in it that didn’t allow one investor to control say over 5 or 10% of the stock. This 13D group consisted of: Barry Honig, John Stetson, Marc Groussman, Robert Prag, Micheal Brauser, John O’Rourke, and Honig’s long time securities deal lawyer Harvey Kesner.

This publication was the first to report that attorney Kesner was removed from the New York Law firm that bore his name Sichenzia, Ross, Ference, Kesner LLP just days before the SEC brought their case against Team Honig.

Kesner and Prag are not named defendants in the SEC lawsuit, although Kesner’s actions are detailed in the complaint as an unnamed lawyer. Kesner has disappeared from the microcap stock scene since the SEC brought their enforcement action but has not been bared as an attorney. It’s unclear if he is a confidential informant for the government or if charges will be brought against him in the future. MabVax also has another lawsuit against Kesner and his old law firm for malpractice for Kesner’s alleged role in helping Honig hide his true disclosure as a group of affiliates trading together to control a stock. Kesner is also accused of providing Honig with advance information of the SEC investigation when he served as MabVax’s counsel. That suit was filed in September 2018 just days after the SEC brought their case. It is being litigated for MabVax by attorney Joel Fleming of Block Leviton LLP. Bill Alpert of Barron’s wrote a well read and detailed story about the lawsuit called “The Lawyer at the Center of the SEC Pump and Dump Case“.

MabVax recently filed for bankruptcy claiming it was the actions of Team Honig that led it to financial ruin. MabVax’s CEO, David Hansen, was not named as a defendant in the SEC enforcement case.

Editors Note: The MabVax lawsuit brought by Baker Botts called Hudson Bay Entity H in the lawsuit and the charity tied to it Charity H. I was able to confirm through a public filing on May 23 2014, the proxy statement, that entity H is Hudson Bay. I also confirmed this through a person familiar with MabVax. The charity name I was not able to determine. This is the first publication to show evidence of Hudson Bay’s alleged role in working with Barry Honig in the MabVax pump and dump scheme. MabVax has since been delisted. Its ticker is $MBVX. Hudson Bay is not a defendant in the SEC lawsuit or the MabVax lawsuit but Yova Roth of Hudson Bay was recently named in a SEC subpoena sent to Michael Brauser’s sons. Yova runs the microcap deals at Hudson Bay.

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