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19 Aug

Retail Broker John Carris Investments Accused of Massive Fraud by Regulators

A New York City based retail broker is accused of running his firm rampant with stock manipulation and fraud. I reported today for Growth Capitalist that FINRA wants to shut down and impose hefty fines on George Carris, founder of John Carris Investments, along with executives with in his broker-dealer for a bucket list of nearly everything illegal a broker-deal could do to cheat main street investors and his staff.

John Carris Investments made headlines last year after former New Jersey Governor and failed MF Global CEO, John Corzine, was seen looking for office space to sublet in the firm’s office in the downtown Trump building. Corzine’s connection to the firm began when his investment manager in his family office, Nancy Dunlap, got involved in a private placement deal for an electric car. Dunlap was on the board of directors of AMP Holdings who hired George Carris’ firm to raise funds through a debt security called a PIPE. It’s unclear how much money was ever raised on the deal.

Carris stands accused of selling PIPE deals to mom and pop retail investors who are not accredited. If true, it’s a blatant violation of securities laws to sell debt instruments like this to non-sophisticated investors. On top that, his top lieutenants used the firm’s retail clients to make large buy orders in penny stocks in an effort to prop up the stock even though the clients had not ordered the stock buys.

Former staff says there were days they couldn’t trade because net capital limits were violated and bills were overdue with their clearing agent. Meanwhile, Carris would spend thousands on personal entertainment with the firm’s cash, according to the regulator’s complaint.

When retail brokers were fighting to keep their jobs after the financial crisis Carris got some bucks from his Dad to start the broker dealer firm in 2009 promising big bonuses and robust salaries to retail brokers who could bring in clients. When George decided the firm needed more cash, instead of natural revenue growth, they set up Invictus Capital and sold investor subscriptions into the fund through their retail brokers promising annual dividends off the revenue of John Carris Investments. Millions were raised but the first dividend payments were from new clients investing in Invictus. John Carris Investments was operating at millions in loss that year so it would have been impossible to pay real dividends as the offering documents said they would.

Growth Capitalist wrote, “In 2011, John Carris Investments operated at a net loss of $3,090,148 yet $39,342 of dividends were paid out during that year.” FINRA called those moves a Ponzi scheme.

Carris plans to fight the FINRA suit and is still running his firm at 40 Wall St. He would not comment about the litigation. It’s unclear how much capital is left within the broker dealer. The regulator said he also choose not to pay payroll taxes for his staff and owes the IRS around $600k.

FINRA quotes from mounds of internal firm documents it gathered and clearly did their home work building the complaint but this is not the first time Carris or others at the firm have had FINRA violations. Which begs to question how affective FINRA sanctions can be to protect retail clients. If all the evidence in their case is true I’d expect the justice department to come knocking on George Carris’ door sometime real soon.

8 Comments
1 Jul

Baker Capital’s Wine.com Investment Failed- URL Up For Sale

This story has been updated.

One of the most expensive URL’s has been put up for sale by Venture Capital firm Baker Capital after nearly a decade of failed attempts to turn a decent profit selling wine nationally online. I reported today for finance trade publication Growth Capitalist that Baker signed an exclusive deal to sell the Wine.com business with a bulge bank but insiders say the URL is the only asset worth buying. Meaning so far offers are not exactly coming in and Baker is expected to take a huge loss on the investment.

Matt Marshall, founder of Venture Beat, first covered the legal saga of Baker Capital using unique voting rights to squash a sell to Liberty Media back in 2005. A sale that wine.com founder Chris Kitze and CEO George Garrick said would have made their investors $30 million.

Growth Capitalist writes today:

In 2004 CEO Garrick convinced Baker Capital to put in $17 million in an initial round which gave the venture firm 35% ownership, two board seats, and co-liquidation veto rights with Kitze. The right for a VC firm with a non-controlling stock interest to veto any sale of the company was rare but Garrick believed Baker partner Joe Saviano when he said they’d never use it. A mistake in vetting a VC firm’s character that Garrick said later in court filings he regretted.

Baker is basically the evil VC firm in this saga who got too greedy trying to push out the original investors but when they got control of wine.com they couldn’t turn it into anything worth selling for a profit or make a viable IPO. Court records show Baker invested at least $26 million into wine.com but it’s likely more millions were spent keeping it going for the last 6 years that they had control ownership. Amazon could be a likely buyer for the URL, a name that according to valuate.com is now worth $5.4 million, but so far they don’t appear interested in buying it.

Baker also appears unable to admit their collapse in assets under management. The firm’s marketing material says they have $1.5 billion of AUM. But a check of their SEC records for registered investment advisors from December 2012 shows only around $500,000 of AUM. They also haven’t been able to close out and start a new fund since 2000 according to Capital IQ.

The wine.com deal highlighted a rich investor/tech company founder spending millions and 3.5 yrs of litigation in California State court to show the world that Baker Capital cheated them out of millions–only to watch the Judge rule in total favor of Baker because of how the transaction was set up under Delaware law. Gibson Dunn were Baker Capital’s lawyers on the deal and now tout the case as a win-win legal strategy for VC investors who hold significant stakes in companies and act in their own interest. Meaning it’s a legal strategy for how to screw over growth company founders.

This one is a buyer beware scare story for all you new tech or Bitcoin company CEO’s looking to the VC capital markets to grow your company. Chris Kitze the famed former founder of wine.com who has a history of successful start-ups told Growth Capitalist he’d never use a VC again. He’s since built two new tech and media companies–one about to launch out of beta that has some supper secret James Bond like two-way communication platform that even NSA and the FBI can’t get into. Kitze, who can’t comment on wine.com because of confidentiality agreements, is likely licking his chops and smiling at Baker loosing all their investors money on this deal.

There are ton of great details about the decade long history of the players involved in this company along with reasons why online retail wine sells will likely never be profitable so go read it at www.growthcapitalist.com.

UPDATE 7-2-13: Venture Beat has followed my reporting and add their own news that a whopping $75mn of VC and Angle money went into wine.com in the last decade. They also confirmed the revenue numbers that my sources have been told by the bankers selling this dog but the wine.com CEO leaves out the fact he is still at zero EBITDA.

UPDATE 7-3-13: The Wine.com CEO who was placed in the job by Baker Capital has gone into spin mode. We stand by our news report at Growth Capitalist. Berqsund, the CEO, is likely worried about employees jumping ship off the news. The CEO, Rich Bergsund, doesn’t get to deiced when the company is up for sale…that Baker Captial’s lucky job.

Update 7–10-13: Apparently Baker Capital now has their wine.com CEO promoting company numbers that relate to cash flow two years ago (and one EBITDA number from 2010) without admitting what their net profits are for the last three years. Rob Manning, one of the few remaining people at Baker Capital, told the SF Business Journal his VC firm likes companies that generate cash flow. Rob also knows that M&A bankers like continued positive EBITDA (Earning before Interest, Taxes, Depreciation, and Amortization) and investors want to see a company can actually make money after a VC firm has spent 9 years pumping their cash into it.
Former public auditor and consultant Francine McKenna told this reporter, “Cash flow is very subjective and doesn’t equal positive EBITDA, positive EBITDA doesn’t equal a net profit. Tech companies that are getting ready for an IPO or sale love to taunt revenue or sales numbers but that’s not a picture of profitability.”
You see taxes and interest eat up a lot of cash flow. If a company tells you they have positive cash flow for one year they could just be delaying paying suppliers, sold an asset that year (like one of their on ground wine shops) or simply be paying their bills late. So when I see CEO’s responding to a news report with half baked numbers (that might not even been audited) I know they are in full spin mode.
Baker Capital also doesn’t deny they hired a big bank to sell wine.com. I thought this story was newsworthy for Growth Capitalist subscribers because it showed a retail frontier that VC’s have pumped mega millions into but have been unable to nail down how to make the online business model really profitable for national wine sales. It also was a tale of how company founders can get screwed over by VC’s when they give up to much control for fresh capital.

Baker Capital (wine.com’s owner) and their attorneys were called for comment days before my news report ran at Growth Capitalist. All chose not to respond to the facts and comments we were planning to report.

2 Comments
23 May

NY State Court Halts Judge Shopping in RMBS Putback Cases

UPDATE 4pm: The NY Courts have now issued an official policy about their ‘One Judge’ for RMBS cases. Ironically on the same day I started asking questions about these private decision they are now public!

Orignal Text
Banks looking to judge shop in RMBS putback cases filed in New York State court are going to get shut out of the process. Apparently there are so many cases to litigate against banks, like JP Morgan and Credit Suisse selling billions of garbage mortgage securities to investors, that administrative judge Sherry Heitler has decreed all RMBS cases as of March 2013 now go to one judge. Roberta McClinton, Heitler’s law clerk, confirmed this today explaining that similar cases need to go to one judge now because it’s for ‘judicial economy’.

This news just came to light after I saw a non-public letter from Judge Heitler to JP Morgan’s outside counsel ,Andrew Cereseney and Robert Sacks, stating she appreciated JPM’s letter about their desire to have the NY AG’s civil fraud case against JP Morgan assigned to Judge Ramos but the court’s new policy is all commercial RMBS cases are now going to Judge Friedman. The problem is this doesn’t totally makes sense. The court is telling me on the record it’s for ‘judicial economy’ that like-cases go to one judge, and Judge Ramos already has the bulk of rmbs cases against JP Morgan, so why in March did the court suddenly choose to divert rmbs cases to new a judge? A judge who hasn’t seen a boat load of evidence about the ‘dogs’ and ‘sack of shit’ loans these bankers admitted, in their own emails, they were selling as safe investments to pension funds. Judge Friedman is known as a liberal ‘for the people’ judge. Judge Ramos has made comments in open court that these fraud claims by the monolines against JP Morgan are not something he is in favor of litigating.

Attorney Cereseney apparently grew a conscious after the NY AG’s case was assigned to Judge Friedman because in April he up and quit his lucrative job as partner for DeBevosie & Plimpton and joined the Securities and Exchange Commission as it’s co-head of enforcement. Robert Sacks has remained leading the dirty defense ligation of JP Morgan at banksters favorite law firm Sullivan and Cromwell.

Now here is where this gets even odder. Apparently JP Morgan’s lawyers starting circulating Judge Heitler’s letter around to other law firms that represented the banks. Judge Heitler’s PR man David Bookstaver confirmed today this letter was private and doesn’t have to be filed in the case records because it’s from an administrative judge to the lawyers involved and not from the judge on the case. Lawyers for DLJ Mortgage, a division of Credit Suisse who is also being sued for civil fraud by the NY AG, got a copy of Heitler’s letter and used it in a motion to file for judicial intervention last week. Richard Jacobson of law firm Orrick, was begging the court to give them Judge Kornreich in a billion rmbs suit filed by a trustee for aggrieved investors against Credit Suisse. The rmbs in this case is called Home Equity Asset Trust 2007-1 and was packaged by the traders at Credit Suisse; the trust is being represented by David Abrams, of Kasowitz Benson Torrres & Friedman, who is also helping the FHFA try and recover billions in rmbs fraud. Judge Heitler’s letter being circulated feels like the big bank lawyers were trying to warn each other you’d better get your motions for favored judge in cuz this legal trick is about to get shut down.

Now that some of the early RMBS putback cases are getting decided on it’s becoming clear who favors the banks and who favors the law. That’s why we are seeing big money law firms file all these ‘I have to have this Judge’ motions this year. Judge Kornreich has been ruling in favor of banks on these cases but she has also been getting over turned in appeals court. Judge Bransten has favored the investors who lost billions in RMBS and her decisions are holding up in the appeals court. It’s the wild west of case law being made in these mortgage securities lawsuits and it’s becoming clear who has the balls to make new decisions that will likely cost the banks billions in litigation payouts.

When I first saw the NY AG’s case assigned to Friedman after it was initially slotted to Ramos I thought Ramos had a conflict of interest with one of the lawyers on the case but that idea wasn’t proven. And while we now have some kind of answer from the court about the new judge assigning policy, the timing of the whole judge thing still just seems a little off.

What has become clear is now NO ONE can judge shop any RMBS cases not assigned yet. And you bet big law is about to learn everything they can about one lucky judge Marcy S. Friedman.

Judge Heitler Letter NYAG v. JPM

4 Comments
23 Apr

Fannie Mae Keeps Asking for Billions of Mortgage Putbacks from Suntrust: SEC Silent on Investigation

The SEC investigation into SunTrust Banks alleged gaming of Fannie Mae by the bank’s wholesale mortgage division is back in the news. Gretchen Morgenson, New York Times columnist and reporter, has picked up on my exclusive news reported in November for finance trade publication Growth Capitalist. Morgenson has a habit of journalism shoplifting by writing about other reporters original investigative news without crediting them. But it’s at least refreshing to see the New York Times try to hold the SEC accountable for not moving faster on the Suntrust case. A case that Barry Ritholtz headlined this week could be the “biggest fraud in mortgage history”.

I reported in November for Growth Capitalist, the Atlanta office of the S.E.C. started interviewing people involved in the case almost a year ago and the worry is if the last action of alleged misconduct by Suntrust was in 2008 then the regulator could be near its statute of limitations.

Filed with the S.E.C. more than a year ago by a former SunTrust employee, it appears to be languishing even though time’s a-wasting, writes Morgenson.

The whistleblowers got Morgenson to write about the lawsuit the SEC is looking at in hopes of putting pressure on the securities regulator to act and the Dept of Justice to get off their rears and charge Suntrust for a crime that was very similar to what they charged Countrywide for in ‘The Hustle’ program.

Ritholtz, an asset manager who runs a well read financial blog called The Big Picture, published this view by housing analyst Mark Hanson yesterday:

Bottom line: Agency “Shortcut” loan programs, exclusively originated by SunTrust, made loan underwriters impotent in their due-diligence; these Alt-A loans that should have carried higher interest rates and been originated using more stringent guidelines; were sold to Fannie Mae as premium full-documented loans, and have resulted in abnormally high default and loss rates relative to true “fully documented” loans.

Suntrust is one of many banks on which Hanson has focused for years, warning hedge funds, of problems pertaining to high-risk legacy loan originations and fraud that has led to large rep and warranty liability and bank loan losses. He has also spoken with the Suntrust whistleblower named in the SEC suit about the alleged pattern of behavior to wholesale billions of Alt-A loans to Fannie Mae disguised as Prime loans.

The impact to Suntrust net profit, because of mortgage repurchase demands, is hardly visible yet because the bank sold near two billion dollars of Coke stock last year to pay for a $375 million mortgage putback charge. You see Fannie Mae knows prime loans they’d bought from Suntrust from 06-08 were really Alt-A low doc loans so they keep going back to the bank and telling them it’s time to honor your contract and buy these defunct loans back. On Suntrust Q1 earnings report, released Friday, they admitted another $491 million worth of loans had been submitted as putbacks. Over the last five quarters the average quarterly putback demand from the GSEs has been around $400 million. That’s a lot of faulty loans they sold the taxpayer funded Fannie Mae.

In September 2012 when Suntrust sold the Coke stock the bank also issued a press release that this should be the last of their legacy putback request from the GSEs. And now we see how silly that statement is because 2013 Q1’s mortgage putback request of $491 million is actually the highest over the last five quarters. Suntrust investor relations team even came up with an excuse that the GSE has ‘accelerated their work pace of auditing the vintage loans’ bought from Suntrust and that’s why they still have high mortgage repurchase demands. Suntrust doesn’t actually buy all those repurchase demands back right away from the GSE. They stall and claim they have to do their own audit and then slowly take charges of the faulty loans sold to the GSE on their income statement.

The big hit to earnings that Suntrust could face is if the DOJ grows a pair of balls and charges the bank for billions of fraud like they did Countrywide last fall. Of course the other issue is the new chiefs at the SEC and DOJ financial crime unit could just gloss over all the evidence turned in by the Suntrust whistleblower and then as Ritholtz says we’ve seen:

” willful purposeful fraud for profit resulting in taxpayer obligations for many billions of dollars.But whatever you do, you cannot prosecute any banks for this — we don’t want to disrupt the global economy! ”

3 Comments
16 Mar

SEC Fines SAC’s Steve Cohen Millions but is Afraid to Say his Name

SAC Capital run by Greenwich hedge fund manager Stevie Cohen agreed to settle insider trading violations with the Securities and Exchange Commission yesterday for $614 million. The regulator amended its complaint from November 2012 when it sued a SAC trader Matthew Martoma for making triple digit millions off inside info on two drug stocks. Martoma who worked at a division of SAC Capital called CR Intrinsic was as arrested by the Justice Dept and faces years in jail. I talked about the new information in the SEC complaint with RT’s most popular TV host Max Keiser yesterday on a radio program. It’s a short fun 3 minute listen that you see here.

What I found most appalling about this settlement is the SEC lays out dates, times, and conversations that Stevie Cohen has with his employee about the inside information and then he trades on it to avoid millions in losses. Except the SEC won’t even directly name him in the lawsuit. Yep- they just call him portfolio manager A and add in one line at the beginning of the complaint that portfolio manager A is the founder and owner of SAC Capital. Who we all know is Steve Cohen of Greenwich, Conn.

Stevie laughing with wife Alex at the SEC

Stevie laughing with wife Alex at the SEC

The settlement has a ton of penalty fees in it and the SEC is flying their press flag touting it’s their largest insider trading settlement ever. But what kind of impact does this have on other participants in the market if they think you can just pay your way out of insider trading. Unlike Diamondback and Level Global, funds seeded by Stevie Cohen, who had to shut down from the stain of guilty inside traders at their firms; SAC Capital is business as usual. Cohen didn’t loose his securities license and he can afford the fine considering is net worth is now up to $9-10bn. His firm also doesn’t admit any GUILT.

It’s one of the biggest slaps in main street’s face because it shows if you’re the world’s most famous trader, and have enough money, you can just pay the government to allow you to inside trade.

Now the Justice Department has a bulls eye on Stevie Cohen and has tried to build a case to arrest him since 2006 and could still make an arrest. I mean the SEC’s case only flat out tells them how Stevie did the inside trade. But with the statute of limitations in these cases they only have till June this year to make a charge. Right now it’s looking like Stevie just bought himself a get-out-of-jail pass and he’ll be collecting more millions as he rounds GO.

4 Comments
4 Jan

DealFlow Reporting Warned Early on Life Partners Possible Fraud

UPDATE 3-14-14: Life Partners is on a media campaign writing financial journalist boasting news that a Texas federal judge reversed a jury verdict of one court of fraud against Brian Pardo and his life settlements company. In February the SEC won on 4 of the 12 counts they brought against Pardo and Life Partners for fraud and miss representing material information in their publicly filed financial statements. But then defense counsel scored a surprise win and beat the SEC on the fraud claim because the judge basically said the jury didn’t have enough evidence to come up with the fraud verdict. The judge did allow three violations of Section 13 of the Securities Act to stand against Pardo. This means the court ruled that when he signed and filed SEC filings he miss-represented a market trend that could affect revenue, miss-represented or omitted information that would have a material affect on the company and miss represented revenue recognition.

Pardo’s internal counsel wrote me today trying to spin these charges calling them “booking, reporting, and certification violations by the CEO, Pardo, on the companies financial statements.” His counsel is also under the impression the court thinks this means Pardo did not ‘recklessly mislead’ shareholders.

In my book if you are found guilty on three counts of miss representing or omitting important info in financial statements that main street investors rely on to buy or sell the stock that doesn’t sound like a very good thing for shareholders. On the other hand this case also show that the SEC needs to hire some better lawyers because reading the judge’s decision it looks like they really blew the legal strategy at trial in this case. Reuters has a great round up of the SEC’s recent failure to get meaningful convictions against Wall Street bad boys at trial.

The SEC still needs to tell Judge James Nowlin what they want for monetary penalties on the three counts they won and said they could ask the judge to reconsider his opinion – but it’s doubtful they are willing to continue this fight.

Nowlin was appointed to the Federal bench by President Reagan. Press reports have previously identified Pardo as having strong political ties the Bush family and other Texas politicians. Pardo is likely still a millionaire facing fines he can afford to pay.

Life Partners stock went up about $.40 cents on the lawsuit news this week closing just below $3 Friday—a far cry from its $16 high.

Original Text
Three Life Partners executives were finally sued by the Securities and Exchange Commission yesterday for insider trading and accounting fraud. On December 16th 2010, Donna Horowitz senior reporter for DealFlow Media was first to report a Life Settlements trade group had sent a letter to the SEC warning about inflated prices the publicly traded company was booking for its life settlement assets. The trade group’s letter combined with Horowitz reporting on the alleged fraud by Brian Pardo CEO of Life Partners have clearly laid the ground work for this massive SEC suit against one of Texas Gov. Rick Perry’s big donors.

Today we see nearly every other finance publication playing catch up to the yearlong investigation of Dealflow Media, which included freedom of information request and in-depth sourcing from insiders victimized or involved in the alleged scheme. The Wall Street Journal today has tried to boast about a page one story they ran in late December 2010 on Life Partners, a story they basically re-jiggered after Horowitz originally broke the news.

Horowitz’s December 16th 2010 story, called Life Partners LEs Too Short?, warned investors about problems one Dallas investment club had found:

Jerry Kingston, who started the Dallas investment club, said the club was shut down because the group that hosts the web portal did not understand the life settlement asset class. He knows of no similar life settlement investment clubs.

“My goal would be to set up an [investment] club locally but I have not been able to find 5 friends to plop $10k each into an investment nobody clearly understands or does not have a moral objection to,” he said in a July email to The Life Settlements Report. “It’s really sad too given the investment environment. LPHI [Life Partners Holdings Inc.] raised over 400 new investors last month alone and those investors plowed in $30.7 million!!!”

Kingston had pitched the club on the professional networking website LinkedIn in August 2009.

Unlike the WSJ, DealFlow and Horowitz stayed on the Life Partners story with bi-weekly reports through out 2011 of investor fraud suits, Texas judges having to excuses themselves because they were too friendly with the Life Partners CEO to rule on cases, and even threats of lawsuits by Life Partners to investors who spoke out about the alleged fraud. To read over 30 articles on how Pardo executed this scheme and has continued to bully nearly anyone who challenges him, including the SEC and its auditor, you can buy single copies of Horowitz reporting here.

Pardo told journalist yesterday he plans to vigorously fight the SEC’s suit. Sam Antar, stock fraud expert, told me after the SEC suit was made public, “Criminal fraud is harder to prove and discovery is easier in civil cases. That’s why you see the SEC sue first sometimes.”

Life Partners allegedly preyed on main street investors and novice investor clubs to promote investments into its company but if you were reading DealFlow’s reporting, for over a year, you would have at least been forewarned to what regulators now think was a revenue and stock manipulation fraud.

Life Partners closed down 17 percent in trading today closing at $5.26 and the NASDAQ listed stock had a 52-week high of $16.83.

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