It took the Dept. of Justice over a year to use documents seized in the arrest of microcap financer A.J. Discala to nab his deal lawyer Darren Ofsink of Merrick, NY and the co-founder of the broker dealer, Halcyon Cabot Partners, DiScala used to allegedly execute stock manipulation in multiple emerging growth companies. In an exclusive interview with DiScala last year Ofsink’s name came up as a possible government witness against DiScala. Based on emails and deal documents in a publicly traded company called CodeSmart, seen by this reporter, it didn’t make sense that Ofsink wasn’t arrested with DiScala last summer. We now see the Brooklyn DOJ lawyers just needed to flip some of those arrested (AJ’s partner Mark Wexler) with AJ to get the necessary goods to issue a warrant for attorney Ofsink. The SEC followed the DOJ’s led on this case and also issued an enforcement action against Ofsink for stock manipulation Wednesday along with Morris and Halcyon’s co-founder Ronald Heineman.
I reported for Growth Capital Investor on Wednesday that Ofsink is accused of hiding beneficial ownership of stock for multiple people involved in the alleged pump and dump scheme. If you hold more than 5% of a company’s stock it must be publicly disclosed. Even more so if you were a financier on the reverse merger or public offering. The feds are also accusing Ofsink of helping CodeSmart create a sham consulting agreement so the company could move 750,000 shares to customers of two stock brokers arrested in this case. The shares came from deal insiders like DiScala who were initially given the stock at $.023. The idea, alleged crafted by Discala, Ofsink, and the CodeSmart CEO Ira Shapiro, was to give the aggrieved mom and pop investors deep discounted shares ($.14) so they wouldn’t complain to the Feds about the sudden drop in CodeSmart’s shares. There are also accusation that the trio wanted to create buying action in the stock during a downturn– the downturn was created by DiScala and team pump and dump. The SEC in a parallel suit is under the impression DiScala offered up his shares to aggrieved investors to make money but this doesn’t totally make sense given he could have sold them on the open market for soooo much more. Additionally there is no law against giving away shares.
The government’s case in this exchange appears to rest on proving the trio issued false sec filings about the ‘cheap shares to investors’ deal and mislead the rest of investing public. Ofsink as the deal attorney on CodeSmart should have known this was a no-no. DiScala in our interview of course said he was relying on Ofsink’s legal counsel if the transaction was ok.
A search of SEC public filing shows Ofsink, founder of New York-based law firm Ofsink LLC, has represented more than 50 public companies in financings. Bill Meagher of The Deal reported, Data from PrivateRaise shows that Ofsink represented either issuers or investors in a total of 39 transactions that raised a total of $348.1 million.
Ofsink also had a robust practice with China reverse merger deals that went public in the U.S., representing around 32 companies. Ofsink was often seen showing off photos of him eating scorpions during his China trips at microcap industry conferences. The biggest fraud he represented was $RINO, Rino International Corp, who settled with the SEC after the company executives were accused of overstating revenues and using company funds for their personal pleasures. RINO was kicked off NASDAQ in 2010.
But this wasn’t the only illegal action this crew took. The SEC has figured out Halcyon Cabot was allowing DiScala to trade his CodeSmart shares without having the money in his account to pay for it. One of the arrested Halcyon brokers, Craig Josephberg, was using money from the brokerage’s own account to fund DiScala’s trades, according to the SEC complaint. It wasn’t until the brokerage’s clearing firm said they were going to halt all of DiScala’s trading unless he paid $1.5 million due in trades completed, that the brokerage finally did their fiduciary duty and stopped DiScala trading. Apparently this whole lack of supervision by Morris and his co-founder Heineman is what got the SEC mad enough to charged the duo on Wednesday.
Ofsink and Morris, through their attorneys have made press statement that they plan to fight the DOJ charges through trial. Both pled not guilty and were released the same day on $1 million bond. The DOJ said in their complaint they plan to go after the men’s homes or any other assets they think they bought off their alleged illegal gains.
Last September I wrote a long piece called the Seedy World of Microcap Advisors. It’s been the most read story of the year on teribuhl.com. Based on my exclusive interview with DiScala and others he put me in touch with, along with a binder full of deal documents and emails, I reported there are other bad actors in this deal. Namely Joe Salvani and Ben Walsh, two microcap financing consultants who have some how escaped arrest so far. Salvani was sued by the SEC during this dot.com days but has never been arrested for his role in multiple microcap deals.
The DOJ claims the DiScala and crew fraud amounted to $300 million in illegal profits between all but that doesn’t add up and reads like a headline number Loretta Lynch needed to pump up her run for U.S. Attorney General. The DOJ and SEC often take the highest price a stock traded for and assume that’s when the pumpers sold and then just throw out the number in their press releases. When they get through discovery you often see how wrong they were and that’s why we see cases settle for so much less. Honestly if AJ Discala had even made $20 million on this deal we likely would have left the country with his smart, beautiful new wife, way before his arrest. Keep in mind AJ knows real estate from his family’s business and then managed his ex-wife actress Jamie Lynn Singer. He wasn’t even licensed in the world of micro-cap financing and based on our interviews he doesn’t believe he did anything criminal. That might be because he doesn’t how the laws work on securities financing and Ofsink was the perfect attorney to let him think this was all OK. Or he is just a really good actor and salesman and made me think he is dumber and inexperienced than he really his.
Watch for more reporting at www.growthcapitalist.com on the bucket list of illegal things broker dealer Halcyon Cabot was doing outside of the CodeSmart fraud next week. At least FINRA was finally revoked their license last month. If you were an investing client on Halcyon I would love to hear from you – firstname.lastname@example.org.
Donations are always helpful for this kind of shoe-string beat the street reporting , which other papers I’ve reported for often ignore because the firm size and players are considered too small. In my view fraud is fraud and it all needs reporting.