Barry Honig and others he invested with have filed a mudslinging breach of contract suit against the security company John McAfee is working with called MGT Capital. The lawsuit, filed in New York federal court yesterday names personally MGT president Robert Ladd, John McAfee and three of the company board members. The investor group (aka Team Honig *) is upset that, as third-party investors, a bridge loan they made to companies MGT was trying to buy didn’t turn into millions of cheap MGT Capital stock.
It’s hard to tell what parts of the lawsuit are fact-based or fancifully interpretations of events by Team Honig because they lost out making big money on a risky bridge loan. What’s most interesting to me is we see Barry Honig, who has said in court filings and through his attorney Charles Harder in open court that he is a passive investor in MGT, totally reverse course. The lawsuit against MGT details multiple instances where Barry Honig, along with John O’Rourke, and John Stetson, are negotiating with MGT’s Ladd and McAfee to invest more money into the company dependent on an asset purchase agreement (APA) being executed.
The asset purchase at the heart of the lawsuit, said MGT would buy McAfee’s cyber-security company D-Vasive and another cyber-security startup called Demonsaw founded by famed hacker Eric Anderson (aka Elijah). The purchase would mean shareholders in Demonsaw and D-Vasive would get millions of cheap stock in MGT Capital. On May 5th, Team Honig gave McAfee’s D-Vasive a $100,000 as a convertible debt to equity bridge loan in return for shares in D-Vasive, according to the lawsuit. A few days later the investors did the same kind of loan to Demonsaw for $750,000 converting shares in Demonsaw. If both companies completed a deal to be acquired by MGT Capital the bridge loan investors would get 8.8 million of shares in MGT as a result of their D-Vasive shares merging with MGT. For Demonsaw, it would be 10 million shares of merged MGT stock. Now for the bridge note investors to get the MGT shares they depended on the people who controlled the three companies to complete a signed deal and for new shares to be issued. It’s a typical vulture-style quick money deal that nets sophisticated investors like Honig, O’Rouroke and Stetson cheap stock for little cash out but it’s also risky because these investors aren’t suppose to be in control of the companies making the deal that would net them easy profits via cheap free trading stock.
When I read the Team Honig lawsuit against MGT, Ladd, and McAfee I got the impression that Team Honig had some kind of deal terms and control of the companies that would definitely get them MGT stock for giving loans to another company that MGT didn’t legally own yet…and now we know never will.
The lawsuit says
As with MGT’s acquisition of D-Vasive, the sole reason that Plaintiffs agreed
with Ladd, McAfee, and MGT to provide bridge financing to facilitate the MGT/Demonsaw
acquisition was to ultimately receive additional equity in MGT.
In my opinion that’s active investing.
MGT will likely argue in response to Team Honig’s lawsuit the asset purchase agreement had run out of time and the contract was dead. Or that since the NYSE desisted them after the company got an SEC enforcement subpoena and wouldn’t’ approve the new shares as part of the D-Vasive/Demonsaw deal that there were terms in the contract that allowed MGT to back out of the asset purchase. Meaning there was a legal way out of the contract and they took it.
At the time of the McAfee loves MGT deal announcement, on May 9th, MGT was trading for less than one dollar. After the announcement that this penny stock was going to own a company founded by famed John McAfee, tons of main street investors bought shares in MGT and the stock shot up over eight times its trading price. MGT’s stock price was $0.48 per share on May 9 and rose to $4.15 on May 17, 2016, before settling generally in the $3 to $4 per share range through out the summer of 2016.
If the MGT / D-Vasive / Demonsaw deal had actually been closed the bridge note investors would have turned $850,000 in loans into MGT stock that could have been sold for $56.4 million (assuming 18.8 million shares sold at $3 share price). That’s one heck of a return on investment in a relatively short amount of time. And because none of these investors in the bridge loan to a private company owned more than 5% of the investment they didn’t have to tell The Street they would have owned this convertible stock and made millions. Additionally with all the new MGT stock issued investors who bought MGT on the hype of John McAfee’s involvement would have had their shares diluted.
What I think really happened here is Honig got in bed with two men (Ladd and McAfee), as street smart about how the market and deal making works as he is, and had the tables turned on him. Let’s not forget he filed a 13-G saying he also owned and sold MGT stock during the time the stock was flying high. The bridge loan stock he could have gotten if the deal closed was just extra money he could have made.
What’s ironic about this whole lawsuit is that at the end of last year Honig filed an anti-slaap libel suit against this journalist for 1)reporting he was named in an SEC lawsuit and 2) it was my opinion that the SEC was looking into the investing activities of people he invested with for trading as an affiliate without disclosing it. On February 1st 2017, at a federal court hearing in the Southern District of New York in front of Judge Paul G. Gardephe, Honig’s attorney Charles Harder (you know the slimball LA attorney that represented Hulk Hogan and has waged a war on journalist for his clients) told the judge when he was questioned how he came up with the legal basis that sentences in my reporting were defamatory against Honig “Yes, your Honor. Mr. Honig is a passive investor in stocks”. Then Harder went on to say “and one of these stocks is MGT”. There was short discussion, by Attorney Harder, about Honig not getting involved in the companies he invest in. Yet yesterday we see Barry C. Honig suing MGT and detailing, in my opinion, how active an investor he is.
Honig, without warning to my counsel, dropped his defamation suit against me a few days after that hearing.
The Team Honig lawsuit also details who Honig works with when making investments; something we rarely see in a public document. Honig through his attorneys usually claims he invest and works alone. Two of the men described as working with Honig in the lawsuit, Stetson and O’Rourke, are also named along with Honig in the SEC subpoena sent to MGT capital last year. In fact we see a text sent by O’Rourke to John McAfee literally speaking for Honig and detailing that Honig will make more investments in MGT if XYZ happens.
O’Rourke wrote back to McAfee, asking for confirmation of McAfee’s offer:
My understanding is that MGT will delist onto the QX or bulletin board and close the deal as originally agreed upon and voted upon by shareholders. In exchange, Barry [Honig] will commit to funding the company at $1.50/share
O’Rourke, who is younger than Honig, is the managing member of an investment firm called ATG Capital and has his office in the same building and the same room as Barry Honig in South Florida. Through interviewing people who have done deals with Honig I am consistently told “O’Rourke is Honig’s boy and acts at his direction”. Yet a paper trail of deals that both men invest in usually shows two separate corporate entities investing in the same company. This is how they claim they don’t work together and why it is difficult for a regulator to prove Honig is investing and trading as an affiliate group without disclosing it.
Here is a link to the lawsuit. Keep in mind you can write anything in a lawsuit and the plaintiffs have conveniently left out a copy of their bridge note contract. I asked Team Honig’s counsel at Susman Godfrey to clarify and back up with documents some of the statement of facts listed in the lawsuit but they have not responded to an email as of press time. MGT will be represented by Kramer Levin.
* Editors Note: I am using Team Honig to describe the plaintiffs in the lawsuit against MGT. The plaintiffs are: ATG Capital LLC, Four Kids Investment Fund LLC, GRQ Consultants Inc. Roth 401k FBO Barry Honig, Barry Honig, Jonathan Honig, Melechdavid Inc., and Stetson Capital Management LLC. These are not all of the 16 investors in the bridgenotes just the ones who opened themselves up to exposing their private trading records through discovery in a lawsuit.
4.6.17: This story has been updated