Private Text shows Michael Serruya could be part of Misleading Aphria SEC Filing: $APHA $GGB

A private text exchange between an Aphria deal lawyer and a member of the board calls into question the accuracy of an regulatory filing with the Securities and Exchange Commission about a bid cannabis company Green Growth Brands made to takeover Aphria. The bid was deemed as ‘hostile’ by Aphria’s board early this year and drew press attention after Aphria’s stock had lost at least half its market share from a short seller report, published the first week of December 2018, questioning the value paid by Aphria for foreign cannabis assets that significantly benefited insiders, like Michael Serruya and Andy Defrancesco, without disclosing the true nature of the transaction. Aphria, who at the time was run by CEO Vic Neufeld, called Serruya an independent director and put him on a special committee to investigate the legitimacy of the Green Growth offer. New information shows Serruya could have used his position to cause the company to make a false and misleading SEC filing.

On February 7, 2019 Tim Kiladze reported for The Globe and Mail that based on a recent regulatory filing, then law firm partner Curtis Cusinato of Canadian-based Stikeman Elliott LLP, had been first to come up with the merger idea and brokered a meeting between the company CEOs and a board member in September 2018. Canadian multi-millionaire Michael Serruya swore in an SEC filing, on February 5 2019, that the timeline of how the Green Growth Brands bid to buy Aphria began was true. But the day The Globe and Mail story came out attorney Curtis Cusinato texted Michael Serruya from a burner phone he used saying the SEC filing didn’t tell the true story and as a result complained The Globe and Mail headline and story were “just plain wrong”.

The Globe and Mail headline read: Aphria’s former legal advisor brokered first meeting with hostile bidder

According to a text message reviewed by this reporter sent on February 7th at 9:45 am attorney Cusinato texted Serruya saying:

“You need to call me – article and your circular is just plain wrong and before that meeting I had never met CEO and CFO they didn’t even know who I was. SE did not broker meeting.”

The message was also reviewed by a person who worked with Serruya and Defrancesco to confirm their belief it was Cusinato sending the message from his burner phone. SE = Stikeman Elliott LLP. Cusinato wanted Serruya to change or clarify the filing because he felt Serruya had used his name and the name of his law firm inaccurately. This reporter confirmed with people that interacted with Cusinato that he was handing out his burner phone number to people on Bay St after the short seller report came out in December because he thought if the government or regulators were going to investigate they wouldn’t try to tap an attorney’s phone because of attorney client privilege.

“Cusinato was absolutely acting panicked at this time”, according to a Bay St source.

Assuming Cusinato is telling the truth, why would Serruya have Aphria lie about how the “hostile bid’ idea happen. Why say a big law firm and its partner lawyer came up with the bid idea? Maybe it was to hid the fact that this was really a backroom plan by insiders who didn’t have the best interest of shareholders in mind?

The Globe and Mail was first to report that Stikeman Elliott and Aphria were going to part ways after the short seller report came out because it found out that Cusinato was also the brother-in-law of Andy Defrancesco who benefited from Aphria over-paying for the foreign assets. Sources on Bay St confirmed Cusinato was actually asked to leave by the firm but allowed to resign publicly to save face. By the time Cusinato had sent the February 7th text he was no longer working for Stikeman. Then on March 6th a smaller Canadian law firm, Bennett Jones, announced they had hired Cusinato as a partner.

Aphria trades on the Canadian exchange TSX and U.S. exchange NYSE. As a result anyone who signs their SEC filings could be subject to SEC enforcement. The Securities and Exchange Act rules say you can not file misleading or untruthful public filings with the Commission especially if it is about a material event like a buy out offer. Serruya’s action could be a technical violation. Additionally it brings into question Serruya’s real independence. Regulators could examine if Serruya and Aphria made misleading statements about his independence that influenced investors decision to buy or sell the stock or vote for the Green Growth Brands bid.

I have previously reported that it was Serruya working with Aphria investor Andy Defrancesco in a backroom deal to engineer the Green Growth offer in a move to try and keep their secret control of the company, based on their own private text messages.

An additional private social media chat message, reviewed by this reporter, says that in early February Green Growth Brands director Adam Arviv was complaining to Andy Defrancesco about spending two hours on the phone with Serruya negotiating the Green Growth deal. It was odd that Arviv wasn’t complaining about negotiation with the Aphria CEO. The private messages are not totally clear what aspect of the deal Arviv was upset about but he did use threatening language when speaking with Defrancesco. The private chat is another example of how people involved in the Green Growth bid thought Serruya was in charge of the “not really hostile” bid. Arviv is the son of Harold Arviv who was accused blowing up his own disco club in the 80’s to get insurance money and also allegedly had ties to the mob. Harold Arviv went to jail in the late 80s.

Cusinato and his prior law firm Stikeman Elliott were contacted about the contents of the text message for comment and did not respond to emails. Michael Serruya has never responded to an email or phone call requesting comment or an interview.

Aphria Board Member Mike Serruya

Editor Note: Aphria’s descriptive timeline of the Green Growth Brands bid starts on page 22 of this SEC filing. Serruya’s signature swearing to the truth of the filing is on page 38. Aphria’s current CEO Irwin Simon also signed the statement.

SEC admits Team Honig is under the criminal investigation I warned about in 2016

The Securities and Exchange Commission has now confirmed there is a parallel investigation into the Team of bad actors that work with Barry C. Honig in the microcap pump and dump ring he allegedly leads. I was first to report in the fall of 2016 that the San Francisco Dept. of Justice was investigating this group, which included Honig, Michael Brauser, and Miami billionaire Philip Frost.

Nancy Brown, the lead lawyer for the SEC in the Team Honig case, said during a hearing on May 15 that “there is a parallel criminal investigation. It’s not a dual investigation, it’s a parallel investigation,” according to a court transcript from the SEC’s case against Honig, Brauser, Frost and friends.

I was first to report the Northern California DOJ flipped their first witness against Barry Honig back in 2014 via a small cap CEO named Joel Noel who plead guilty to securities and wire fraud. Noel, who ran a company called YesDTC, said that Honig knew how to buy shell companies set up by a lawyer who would release shares that should be restricted as unrestricted so trading in their pump scheme could begin fast. Noel also said Honig told him to pay a promoter, named David Zazoff, to get false press releases out to push the stock price up. The lawyer who sold the shell, Gregg Jaclin, was also arrested by the Northern California DOJ in 2017. According to a person involved in the investigation Jaclin and Honig had worked together before and Jaclin could be a viable witness for the DOJ to build their case. Jaclin’s case has been sealed since the SEC brought their charges against Honig.

Why the San Francisco office of the DOJ has waited this long to bring their case while investors in companies like $RIOT, $MARA, $MGT, and $MBVX have gone through Honig lead pump and dumps has been a mystery till now. That’s because at the May 15th hearing about a discovery schedule John O’Rourke’s lawyer Gregory Morvillo tells Judge Ramos he knows some of the defendants in the SEC vs. Honig case have signed tolling agreements with the San Francisco DOJ. This is a stunning admission. Tolling agreements allow the DOJ an extension of time to bring a case past the standard statue of limitations. Attorney Morvillo also said he thinks the tolling agreements have expired as a reason for why the San Francisco DOJ would be bringing an indictment soon. How Morvillo knew about the tolling agreements could signal his client John O’Rourke is one of the defendants that signed one of them.

Scott Zamost and Jenny Schlesinger, two CNBC print reporters, apparently went down to the SDNY court house yesterday and read a copy of the public transcript in the SEC vs Honig case. They were first to report on what the SEC said about the existent of a parallel criminal investigation. The transcript also shows John O’Rourke’s lawyer telling the judge that he thinks someone in the SEC Honig case has become a DOJ cooperating witness now and by that person being a songbird the DOJ could bring an indictment soon. The conversation started because Michael Brauser along with Robert Ladd, CEO of MGT Capital, have been pushing the SEC to show them their evidence via writing aggressive letters to the judge. O’Rourke’s attorney spoke up in court to join that argument. Attorney Morvillo told Judge Ramos “We are behind the eight ball here” in reference to how the SEC has been holding up their evidence.

Morvillo went on to say, “If one or more of our clients gets indicted you can bet we will be back here asking for a stay in this case. In the meantime, while San Francisco drags its feet on this, we don’t think it’s appropriate for the SEC to act as a stalking horse for the U.S. Attorney office.”

I reported this month the SEC has played a stall game putting off defendants in the case from getting discovery by delaying motion filing dates and extending times for defendants like Honig to sign a settlement agreement. The SEC said in a letter to Judge Ramos last month that Honig has agreed to settle their case in principle but it’s not a signed deal yet and the SEC commissioners have to vote on it so the judge gave them a six week extension on the defendants filing their motion to dismiss. Scott Zamost and Jenny Schlesinger at CNBC are likely wrong when they reported that Honig’s settlement was called off.

The court transcript shows SEC attorney Brown was trying to get judge Ramos to scheduled the defendants for depositions with the SEC before all the discovery is due April 30 2020. Robert Ladd, CEO of MGT, Michael Brauser, John Stetson, and John O’Rourke wanted the depositions to be latter in 2020 closer to the end of discovery. The debate in court was the SEC was worried that the defendants would get all their discovery and then assert something called “the act of production doctrine”. This would mean the defendants like O’Rourke and Brauser could tell the SEC they aren’t going to turn over their emails that the SEC has asked for because it could incriminate them in the DOJ case. The SEC said they had from 600,000 to 1.2 million of documents to turn over for discovery. The SEC also admitted a lot of the docs came from a laptop that the ex-husband of a former MGT Capital employee had. It’s unclear if those docs will be admissible since the laptop was likely stolen in a bitter divorce battle, according to a person involved in the case. The whole discovery and deadline delay drama is like an episode of Billions where the government plays dirty tricks to get convictions and the Wall St bad actors have better lawyers to outsmart them.

I don’t know who the new Honig cooperating witness is that O’Rourke’s lawyers says the DOJ has under their thumb. And I highly doubt O’Rourke’s lawyer knows if the DOJ is wrapping up their case unless he has made an agreement for his client to self surrender. Chris Carey at was first to notice Frost’s company $OPK had mentioned in recent SEC filings that while Frost had settled with the SEC ‘other government agencies’ could also bring a case. John Ford who lives in Northern California was the first member of the group to settle with the SEC before the case was brought and court docs show he has been cooperating. Additionally, another stock promoter who was charged criminally by the DOJ in stocks that Honig did not invest in has made a plead deal with the DOJ this week. Brian Robert Sodi, known as the Mailman, worked with a lot of bad actors in a lot of stocks and the DOJ only charged over a few stock frauds. I have confirmed the DOJ could use him to testify against Honig because Honig had worked with him. Sodi’s attorney Brent Baker of Clyde Snow LLP told me today, “Brian is looking forward to the whole truth coming out now and is now ready to put this matter behind him.” Sodi plead guilty to only one of the ten counts of wire and securities fraud against him and could be asked to pay up to $2 million in restitution. His sentenced will be delayed now until the government is done using him as a C.W.

The CNBC reporters didn’t attend the SEC vs. Team Honig hearing. Or get anyone else in the case to try and talk about who the DOJ recently flipped. They also failed to report the questionable tactics the SEC has been using to try and get the defendants to do depositions before they got all the SEC’s discovery.

Schlesinger and Zamost also mislead their readers when they reported this was the first time a criminal investigation into Team Honig had been confirmed. They broke basic journalistic ethics by not reporting the San Francisco DOJ investigation was first confirmed and reported by me at this publication a few years ago. I had confirmed in 2016, via a lawyer for an investor victim in the case who was interviewed by the SF-DOJ, an interview with a Honig co-conspirator who was also interviewed by the SF FBI, and had a copy of a FBI case number for the Team Honig investigation before I went to print. I did on-the-ground shoe-string reporting to get this important news out to investors unlike the CNBC print reporters who simply read a court transcript first and then executed journalism theft by not linking and credit the first reporter to break the DOJ news. At this publication I always name, link and credit any publication and the journalist who reported news first because it’s likely they have good sourcing on a story and readers should know that.

Additionally Honig was so freaked about about me finding out about the SF-DOJ investigation that he used anti-media lawyer Charles Harder to sue me in 2017 and tried his best to get the story taken down and to get an apology from me. I fought the case for a year and won. Honig dismissed his suit in January 2018 and the reporting stayed up and was sourced in other news reports. Additionally now that we know there were tolling agreements signed I think Honig knew he was under criminal investigation when he sued me and so did his attorney Charles Harder, which is one of the most unethical things a lawyer could do. Clearly the point of the lawsuit was for Honig to try and figure out who I knew was talking to the FBI and SEC. But I held my ground and never told even as discovery was starting.

Criminal charges are the only thing that have a chance of stopping the Team Honig pump and dump ring given the SEC has shown they are accepting low dollar fines from defendants that have settled. Philip Frost paying $5mn is less than his spends in his bar bill in a year. A ban on being a director in a penny stocks could slow Honig down but I don’t see how it helps given he has a file-a-fax of rent a board member guys he can call. The SEC amended compliant, filed in March, clearly shows Honig is willing to break the law and pay others like John Stetson to make hidden investments he is really funding so even if he is banned he could get nominees to do his dirty work. Jail time and a felony convection is the only strong hold the government has if they really want to protect investors and clean up the microcap market. Let’s hope the DOJ gets off their butts and acts soon as there are current Honig pump and dumps happening that likely include PolarityTE, Marathon Patent and RIOT Blockchain.

This story has been updated with details of the tolling agreements with the DOJ and news about the problems with discovery in the SEC case.

May 15th Court Transcript can be read here

The Seedy World of Microcap Stock Advisors

UPDATE March 6th 2015: AJ Discala’s trading partner at OmniView Capital has thrown in the towel. Marc E. Wexler who was charged on multiple counts of securities fraud plead guilty to two felony charges on October 15th and agreed to pay a forfeiture bond of $1.4 million. Wexler who lives in Colts Neck New Jersey plead to conspiracy to commit securities fraud and securities fraud in the stock CodeSmart ($ITEN). The DOJ’s original complaint said they believed Wexler had made $2.2 million in manipulative trading of CodeSmart. Sentencing appears to be held in Wexler’s case as it is possible he is turned government witness against his partner AJ Discala. Discala switched criminal lawyers a few months ago hiring New York-based Charles A. Ross. AJ and his fellow co-defendants are still slugging through motions for discovery and fighting the DOJ charges. Ex-SEC enforcement attorney Tom Sporkin who ran the microcap fraud unit is also helping Discala on the case. Sporkin is now a white-collar defense lawyer for Buckley Sandler in Washington D.C. The SEC parallel case was stayed in mid-November, which is typical when the DOJ leads on criminal charges. If convicted Discala faces years in prison. AJ told this reporter he will fight the case to trial.

Original Article Sep 18,2014
The CEO of a merchant bank that helped fund dozens of micro-cap companies claims he is a target of regulatory overreach after he was indicted in late July on ten counts of criminal misconduct for his alleged role in pump and dump stock schemes. Abraxas J. Discala (known as A.J.), CEO of Connecticut-based OmniView Capital Advisors, was arrested while on business in Las Vegas in July after the Justice Department revealed what appeared to the DOJ to be damaging wiretaps labeling him as a ringleader who tried to manipulate the price of penny stocks and mislead investors about financials in public companies. The DOJ used Discala’s status as the ex-husband of an actress to get their arrest splashed across international headlines in a move to show Obama’s task force on financial fraud is finally arresting Wall Streeters. But a look inside the deal documents show the Justice Department doesn’t know who the bad actors really are in this case. This reporter was given exclusive access to deal contracts, executive’s emails, and conducted interviews with some of the players involved in one of the alleged stock frauds called CodeSmart ($ITEN). The case shows a unique look at the backroom deals made to help small entrepreneurial companies raise capital through alternate public offerings and highlights the questionable tactics microcap advisors use to get discounted free trading stock.

Discala, age 43, started his career with a Chicago-based firm, TJM Institutional Services, selling bonds after he decided not to go into the family real estate business. He married Sopranos actress Jamie Lynn-Sigler for three years in the early 2000’s taking a break from the Wall Street business and acted in part as the actress’s manager. He returned to high-finance and focused on helping growth companies raise capital. Omniview, his firm, typically made bridge loan investments in microcap companies and consulted with company CEO’s on how to build growth pre-IPO. Discala and his partner Marc Wexler were not registered as placement finders and did not take a cash fee for their advisory services. Instead they would get deep-discounted restricted or unrestricted stock before a company was brought to the public markets as payment for their services. This stock was placed in multiple accounts and the SEC accused Discala of masking who actually had control of the shares so he could avoid reporting owning more than 5 percent of Codesmart’s stock.

AJ would bill himself as a long-term investor when pitching CEO’s and have all parties involved sign lock-up/leak-out agreements, prepared by his counsel, controlling how much of his stock he could sell into the market at a given time. Discala says his goal was to ensure that no one could dump the stock and hurt the currency of the company. He also would hire third-party due diligence subject matter experts to fill any management gaps. “I go in as a long-term investor with members of my team who are very active at trying to add value to a company pre-ipo,” Discala told this reporter.

Discala was arrested after the DOJ started listening in on his daily conversations and learned AJ was working with others to try and move the price of microcap stocks higher. Government wiretaps, obtained for 60 days, started with the Southern District of New York after a whistleblower told them to look into AJ Discala but the case was quickly kicked over to the DOJ’s B-team in the Eastern District of New York, which is run by Loretta Lynch. Lynch’s office is best known for their failure to convict the Bear Stearns hedge fund managers during the financial crisis. Only one of the seven people arrested in Discala’s case live in the E-DOJ’s jurisdiction and none of the stocks in the complaint are domiciled in Lynch’s jurisdiction. Emails show associates of Discala believe a man named Danny Weinstein has talked to the feds about players in the microcap space after a group of eastern Europeans were arrested in April for stock manipulation. Weinstein is believed to have turned confidential informant in the case of US v. Alexander Goldshmidt after a group of investors threatened his life when they lost money in a stock deal; he is also believed to be an unnamed co-conspirator in the case.

The government secured a court order to wiretap Discala after they made the arrest involving the Weinstein/Goldshmidt crew. The tapes give the appearance of Discala and Wexler planning stock purchases at specific prices between each other and using two stockbrokers, who worked for small time brokerage firms, to get their mom and pop clients to buy the stock and create a market. Discala met one of the brokers, Matthew Bell, after consulting for a different company where he learned a large portion of the investors in the company stock were clients of Bell’s. His goal was to find a stockbroker that believed in the small cap stocks he was investing in and was willing to pitch the often risky investments to his main street clients. Discala saw Bell as a more efficient way to get market traction on a microcap stocks than hiring a stock promoter. The problem is the DOJ’s complaint accuses both stockbrokers Discala worked with, Bell and Craig Josephberg, of not telling clients they also received discounted unrestricted stock. The stockbrokers would’ve had to clear the gifted the stock through their compliance office because it would be considered receiving outside compensation from one (Discala) of their clients.

The SEC complaint says, “Both Bell and Josephberg received 125,000 (which later split 2 to 1) unrestricted shares for pennies for investing their clients into CodeSmart stock. Both failed to disclose to their clients their financial incentive to purchase CodeSmart shares for them.”

The DOJ and the Securities and Exchange Commission both brought parallel cases against Discala and crew. Seven people including one lawyer and the CodeSmart CEO were arrested with Discala. But it appears there should have been more arrest.

It is not illegal for companies to give stock to brokers but brokers do have to disclose their ownership of such stock to their clients if they are recommending a buy or sell on the stock. The government complaints do not name the firms the brokers worked for but this reporter learned neither of the brokers were still working for the firms at the time of their arrest. Josephberg was working at Halycon Cabot Partners at the time of the alleged crimes.

Discala, Wexler, Bell, and the other broker ,Craig Josephberg, are accused of selling their gifted stock at the height of the stocks’ trading price for millions in profit. But the DOJ, and parallel SEC complaint, offer no time specific details on when these sell orders went through for profits at the direction of the arrested OmniView executives.

CodeSmart is a company that trained computer programs for medical coding that is about to be required because of ObamaCare legislation. The company founder, Ira Shapiro, who also faces criminal charges, sought the help of Jeffery Howard Auerbach, a registered broker, to get introductions to bankers to help him raise capital. FINRA’s brokercheck shows Auerbach is being sued for $2 million by a client claiming negligence and multiple FINRA securities violations. Auerbach worked for New York-based Kuhns Brothers Securities when he brought the CodeSmart deal to AJ Discala. Emails from April 2013 that Auerbach sent show independent investment professionals: Danny Weinstein, Joe Salvani, Neil Rock, and Seth Fireman were going to act as ‘advisors’ to help Shapiro with the CodeSmart capital raise. When they backed out Discala agreed to raise funds for the bridge loan of $250,000. This money was needed to boost the company balance sheet before a public shell could be bought and a reverse merger completed. Small companies often use reverse mergers to go public because of the significant cost savings.

Deal documents created by Discala’s attorney, Darren Ofsink, show Wexler got 750,000 converted shares for his $150,000 part of the bridge loan investment and a company called ECPC got 500,000 shares for their $100,000 investment. One of the investors in ECPC is a man named Rusty Allen.

After the bridgeloan, Discala quickly worked with attorney Darren Ofsink to find an S-I registered shell to reverse merge CodeSmart into and take the company public. Omniview’s outside counsel Darren Ofsink recommended buying the shell of a Florida based company started by Sheldon Rose, according to emails from Ofsink. The attorney told Discala that Sheldon Rose “was the most meticulous shell guy he’d ever worked with”. When buying a shell you have to make sure enough time has passed so a legal opinion would approve some of the shell’s restricted shares become unrestricted and can trade on open markets as soon a reverse merger is complete; or you face SEC violations if you don’t get the timing right. OmniView pulled together more investors and for $350,000 bought a public shell called First Independence. The reverse merger was complete on May 21st, 2013 according to SEC filings.

The only person to stay in the deal from the original capital raise group was an independent stock marketer Joe Salvani; who had been charged by the SEC during the boom for selling securities to investors in without being a registered broker. New York State business registration records shows he owns or is affiliated with JFS Investments, Hudson Park Capital, and Draper Inc. All his LLC companies latter received free trading shares in CodeSmart, according to contracts and emails from company executives seen by this reporter. In the late 90’s Forbes published a feature story on Salvani called the ‘Master Tout’. Detailing how he gets discount stock in microcap companies to help market the stock to mainstreet investors and find access to capital. The article alluded to his uncanny ability to spread out his gifted stock into the markets as the price raises and sell these stocks before they crashed.

Salvani told this reporter who saw him entertaining at a hot Wall Street hang out, called STK, in August that he works with a registered broker- named Dan Walsh who currently works in the capital markets group of Garden State Securities (a broker/dealer). Salvani will tell company CEO’s he can help create an active market in their stock and get financing through Garden State Securities even though he doesn’t work for the broker dealer. Dan Walsh, when asked by this reporter, if he works on advisory deals with Salvani did not respond for comment.

Walsh’s bio touts his work as primarily helping micro-cap companies raise capital through PIPE deals and that he is an equities trader. Garden State Securities has nineteen regulatory enforcement actions against the firm and is currently being sued for deceptive marketing practices in stocks they sold retail customers and other securities violations, according to FINRA. An email on May 14th, 2013 from Codesmart’s CEO Shapiro to Discala says, “Salvani and Walsh were asking the company for $6 million shares (which would have been 10% of the company’s outstanding shares at the time) and they wanted the restricted shares to vest as soon as their ‘consulting’ contracts were executed”. Meaning they wanted to get paid in deep discounted stock they could trade right away for a profit. This reporter saw Salvani sign a contract for 2.5 million CodeSmart shares that vested right away but no final contract was seen signed by Dan Walsh personally. Instead, contracts seen by this reporter, show Garden State Securities received 313,332 (post 2:1 split) shares in CodeSmart on June 6th 2013 that become unrestricted in January 2014 for financial advisory services. These shares were granted shortly after the reverse merger was completed when the stock was trading above $6.

By June 28th, 2013, within six weeks of the reverse merger, CodeSmart had run up to $6.90. At the time of the reverse merger on May 21st, 2013 the stock was trading around $2.30. The government’s complaint alleged Wexler and Discala flooded the market with shares via the stockbroker’s clients in May but fails to mention Joe Salvani also had 2.5 million unrestricted shares and a history of moving shares throughout his network of brokers. Wexler and Discala had signed lockup agreements to not offload more than 5% of the shares they held at a time. Discala also held unrestricted shares in a company he controlled called Fidelis and so did stockbroker Josephberg in an LLC called Garper, according to the government complaint. It’s unclear if the stockbrokers had signed lockup agreements in their personal accounts. Salvani was not arrested or charged by the SEC in the CodeSmart case.

The SEC claims in court documents the First Independence shell became effective August 2012 and applied for distribution of 3 million shares to its original 24 investors in January 2013. Sheldon Rose was able to gather all the shares and sell them to investors Discala found in May 2013. The SEC is claiming in litigation the timing of the subsequent required forms for a reverse merger, including a Form 10, was not done timely to allow the 3 million shares to become unrestricted for the CodeSmart investors. A legal opinion letter written by Diane Harrison of Florida-based Harrison Law P.A. on May 21st, 2013 was given to the original CodeSmart investors by Darren Ofsink’s office telling them that on advice of counsel the shares were now free to trade. The Harrison letter stated First Independence (the issuer) registration statement was declared effective by the SEC on March 6th 2012. The letter was also sent to IslandStock Transfer, a clearing firm, stating as of May 21st the issuer had met the reporting requirements of Section 13 of the exchange act and had filed quarterly reports for over one year. The DOJ’s complaint does not argue that the shares were restricted. When shares become unrestricted in a public shell there are multiple firms that have to approve the shares to trade which included broker dealers and clearing firms. None of the firms involved in selling the CodeSmart shares found the shares to be restricted.

According to emails from Ofsink’s office these investors received free trading shares of the reverse merger for funding the purchase of the shell: Fidelis Holding (owned by Discala) 312,500 shares, Jeffrey Auerbach 150,000 , Marlene Goepel (Discala assistant at OmniView) 125,000, Joe Salvani (Hired Stock Promoter/Consultant of CodeSmart) 312,500, OmniView Capital (owned by Wexler and Discala) 362,500, ECPC 187,500, Darren Ofsink 125,000, Craig Josephberg (a stockbroker arrested with DiScala) 368,750, and Lucy Ostrovsky 125,000 shares. Documents from Ofsink’s office say all these shares were prices at $2.3 cents.

People involved in the investigation told this reporter the SEC was working on their own investigation and the Eastern DOJ rushed the charges when they thought Discala was going to leave the country and had offshore accounts set up to hide money. The DOJ learned after Discala’s arrest he was just planning a trip to Europe so his wife’s parents could meet their 10-week old daughter. Discala, who grew up in a prominent East Coast family of lawyers and real estate moguls, has deep roots in the United States. The FBI raided Discala seaside home in Rowayton, Conn. at 6am waking up his wife and baby girl who were alone in the house. Mrs. Discala told FBI special agent Michael C. Braconi her husband was on business in Las Vegas. AJ Discala waited at his Wynn Hotel room for the feds to arrest him and a Vegas federal judge release him to fly home on his own without a bond. A few days later the eastern DOJ prosecutor, Walter Norkin, reneged on a verbal bail agreement Discala’s attorney had made and got a judge to agree to strict bail requirements putting Mr. Discala on home confinement and post a $2 million bond. The bond was secured by his family’s homes. Court transcripts show Norkin believed, based on their wire taps, Discala and crew were planning to commit more securities fraud in a company called Scanbuy that AJ was raising capital for. A notion Discala finds absurd and without a fact basis. After the arrest Scanbuy pulled Discala’s advisory contract.

CodeSmart Needed More Capital

Discala had told the shell investors that Joe Salvani’s friend at a boutique investment bank called Axiom was set to fund a $4mn PIPE deal to help make sure the company had working capital after the reverse merger was complete. Discala had also met with Axiom who assured him they were on board to fund the PIPE transaction. Based on emails, interviews with people involved in the deal and copies of a contract; Randy Fields of Axiom committed his firm on May 15th, 2013 to a $4 million PIPE investment in return for a $22,500 retainer and $1.5 million of CodeSmart common stock. After the reverse merger was complete Axiom backed out of the PIPE financing. Randy Fields did not return a request for comment asking why his firm did not fund the deal. At that point Discala choose to help find investors in the PIPE, raising only $2,624,300 million at $3 per share of common stock which was a 17% discount to the stock on the day it closed June 5th, 2013. Investors included: Marc Wexler, Discala’s father Joseph Discala, Omniview Capital, and ECPC a firm that also invested in the bridge loan. All received discounted stock that was restricted. Codesmart never made interest payments on the PIPE deal and ECPC was given 400,000 shares of unrestricted stock as an ‘advisor’ in the PIPE according to emails and SEC filings.

Before the PIPE was funded, emails show Salvani, worked with deal finder Eli Washrsager, to negotiate a $20 million financing contract with Sam Chanin, CEO of Factor CU Financing. The $20 million facility would lend $4000 of tuition per student for programs that went through the CodeSmart University; an online training program. Discala used the signed contract by Chanin to help convince others to invest in the PIPE financing. But on June 20th, CodeSmart CEO Ira Shapiro tried to change the financing agreement and Chanin sent an email to Salvani and Wahrsager that he was backing out of the deal. Discala says in hindsight this was a pattern he says Shapiro repeated; promising investors contracts that never came to fruition. Salvani and Wahrsager did not respond for comment regarding their role in this deal. The canceled Chanin contract was a big problem for CodeSmart’s growth strategy. But investors never learned about the failed financing; which likely would have deflated the stock’s value that was already trading above $6 only two months after becoming a public company.

Meanwhile Shapiro and Salvani got a small time research group called Umbrella Research to write an analyst report with a price target of $12 that was promoted on the CodeSmart website and sent around to main street investors who were clients of the two arrested stockbrokers. The brokers are Matthew Bell and Craig Josephberg (known as Jobo). Discala says Salvani offered Umbrella $50,000 to write the research report but never paid the firm. Discala covered the bill after it went unpaid so Umbrella could get the report published. Checks seen by this reporter were then paid by Umbrella to three of Salvani’s LLC’s who had been gifted unrestricted stock as part of his investor relations/ marketing consulting agreement. The checks say they are buying CodeSmart shares in what appears to be a sale of stock via a secondary transaction. Umbrella research told this reporter CodeSmart CEO Ira Shapiro told Umbrella to buy the shares from Salvani. It is unclear why CodeSmart didn’t grant the shares directly to the research firm. Salvani’s three firms (JFS Investments, Hudson Park Capital, and Draper Inc.) each received $583 for a total of around $1600 from Umbrella Research. Umbrella analyst, Joe Giamichael, told this reporter they put a $12 buy rating on CodeSmart in their initial research report but were not informed a PIPE deal was planned to follow the reverse merger which would have changed their price target.

“Unfortunately immediately after our initiation, management chose to do a placement at a huge discount to market and did not want to entertain any of the capital formation suggestions we had. Our relationship with management drastically deteriorated after that,” analyst Joe Giamichael told this reporter in an interview.

Umbrella also said on the record they did not work with AJ Discala or Joe Salvani in any way to prepare the research report. It took Umbrella until April 2014 to downgrade the stock after it was trading below $1.

Positive press releases kept coming out the company touting contracts with universities to use CodeSmart’s training but then the contracts were never fulfilled. The analyst covering the stock and CodeSmart’s CFO, Diego Roca, were questioning if Ira Shapiro was every telling the truth about his company’s earning potential. At its height the stock reached near $7 and went through a 2 for 1 stock split, doubling the unrestricted shares for CodeSmart early investors.

The Justice Department indictment states Discala was part of a group that wrote false or misleading press releases. Jules Abramson, who was hired as outside press for CodeSmart, told this reporter Discala was not part of the press release writing; except to approve one quote in one release that announced Omniview had been hired latter in 2013 as a business consultant to help the company meet its financial targets. Abramson said Ira Shapiro provided the press release information which was vetted and approved by attorney Daren Ofsink office. After the company went public Ofsink also served as corporate attorney for CodeSmart while he was still AJ Discala’s attorney.

A few months after CodeSmart was trading publicly the stock started to take a slide. Discala and a former CFO of the company, Diego Roca, both told this reporter they could see short action in the stock. It is hard to short micro-cap stocks unless a broker dealer is allowing naked shorting because there is often not enough outstanding stock on the market to borrow for the short action. A broker dealer, like Garden State Securities, could have helped make the short action happen but only a regulator would get access to trading records to prove this. Discala had gotten some original CodeSmart investors to sign ‘lock-up’ agreements. These contracts, seen by this reporter, say the holder of unrestricted shares has to hold their shares for 60 days after the reverse merger and can’t sell off more than 5% of the stock they hold at a time. But Discala believes not everyone was honoring those agreements.

Fighting the Short Squeeze

As the stock slide and hovered around $2-$3 Discala was working on another $1.5 million long-term private equity placement agreement for CodeSmart. But it had conditions for Shapiro to put in more internal controls and allow Discala his own board members. Discala also started to ‘gift’ stock his companies owned to the stockbrokers he was working with so they could sell it to their clients who were losing value in their CodeSmart stock. The regulators complaint says Discala and Wexler were dumping their shares and got brokers Bell and Jobo to sell more shares to their clients. The regulators complaint shows Bell telling his clients they could buy CodeSmart for only .19 when it was trading above $2 that day. Discala says he gave away the shares at his cost to what he invested in CodeSmart so people would not rush to sell their shares during the short squeeze. The government is arguing that regardless of profit the timed buying and selling of stock Discala and Wexler were doing equals a match trade. In their view these transaction are market manipulation to create an appearance of market activity by more than a few players. Discala will argue he is a long-term investor trying to support a stock against short sellers. In November 2013, Shapiro fired Discala and OmniView as advisors to raise capital. Ofsink, acting as attorney for CodeSmart, tried to get Discala to sign an agreement absolving Shapiro and CodeSmart from any liability in canceling their consulting contract with OmniView. Discala declined and hired a private investigation firm to go over all the deal documents and public filings of CodeSmart. Those findings were seen by this reporter and were also binders that the FBI seized from Discala’s office the day of his arrest.
Meanwhile Shapiro continued to work with Garden State Securities; the broker-dealer where Salvani’s pal Dan Walsh worked. CFO Diego Roca told this reporter Garden State introduced CodeSmart to Redwood Fund II a Florida-based firm that did small SPA transactions for them. Redwood sold multiple deals, valued at $50,000 to $100,000 each, of short-term debt to discounted equity to funds like: Black Mountain Equities, Magana Equities, Fife Trading and their own Redwood fund. The deals are called SPA’s and were completed at the end of 2013 through spring 2014. Redwood is run by Gary Rodgers and John DeNobile. CodeSmart CFO Diego Roca told this reporter it was the only funding they could get on the market and were always running out of cash because of Shapiro’s spending and unfulfilled contracts. He publicly filed an 8-k when he quit CodeSmart in April 2014 saying he could not support the actions of management. Diego told this reporter the SEC told him they had tried to subpoena records from CodeSmart before the arrest were made and Shapiro ignored them. After the arrest of his CEO, Diego Roca came back into the company as the Chief Restructuring Officer and has turned over company emails and records to the SEC. Deigo says he was told he is not under SEC investigation and was not arrested by the DOJ.

Before Discala was arrested in July he was interviewing lawyers to sue CodeSmart for fraud as an outside investor in the firm. Discala expressed concern over what he sees as Ofsink’s conflict of interest while he was attorney for him and CodeSmart. (Ofsink was not arrested by the DOJ or sued by the SEC and did not respond for comment for this story.) In fact, emails starting on June 7th between former CFO Roca and Ofsink, show Ofsink knew the FBI was investigating CodeSmart before Discala was arrested in late July because the FBI tried to go to homes of the CodeSmart executive’s homes. According to Discala, Ofsink never warned his client, Discala, of this; who was being wired tapped at the time. The DOJ’s complaint list three confidential witnesses against Discala; AJ has yet to learn their identities.

The SEC is supposed to give a defendant notice they plan to charge or bring an enforcement action against a firm. The defendant is then given a chance to come in and do an interview. Often this process is called receiving a ‘wells notice’ and public companies have to disclose in SEC filings this is happening so stock investors are informed. None of this happen in the CodeSmart case and it was only in August that the SEC started to push subpoenas and document request in the stocks Discala and crew were arrested for. The SEC can claim because the DOJ thought Discala was planning to leave the country with money they could get an ex partie order and circumvent standard civil rights Discala should have. AJ Discala plans to fight this case to trial and recently hired former micro-cap enforcement lawyer for the SEC Tom Sporkin. Sporkin, who spent 20 years with the SEC, is a now a partner at Buckley and Sandler LP.

Sporkin told this reporter, “I will be asking for a bill of particulars right away.” Sporkin will do this because the government needs to show how the text messages between two business partners correlate to the exact timing of stocks being bought and sold. This would be a defense to the governments’ accusation of wash or match trades. The government could also try to prove Discala and team were to trying to support an upward price of the stock to benefit a larger scheme if say they or any of their affiliate companies had bought call options in CodeSmart. A call option would bet that the price of CodeSmart stock will go up to a certain price at a date in the future.

The SEC is expected to agree to a stay of their civil complaint while the defense litigates the DOJ’s criminal charges. Discala was kept on an ankle bracelet keeping him confined to him home for over 45 days. A federal judge ordered it cut off last week. The government also admitted in legal filings they overstated Discala’s wealth and he does not have a $7 million trust fund as they touted in the arresting press release. Early in this case we already have the DOJ admitting to errors to get an arrest. Court documents show the government seized bank accounts with less than $200,000 in them and the Discala family was allowed only $30,000 to live on. As a condition of his bail agreement Discala is currently out of the money-raising business.

Editor Note: This case is a unique opportunity for the SEC to make case law on how far institutional investors in mirco cap stocks can go to get traction in a stock. There is little question Discala and Wexler had a plan to support an upward price movement in the stocks they invested in. Hedge Funds get together often and plan large buys or sells in a stock, which Company CEO’s don’t always find ethical but our securities laws allow it. Without big name analyst research and a large bank like Goldman or Morgan Stanley taking a company public small cap stocks face large challenges in going public to raise capital. They don’t have the funds or capital to pay for expensive IPO’s; that is why a reverse merger has been favorable in the past. The Jobs act and the rules the SEC is currently making for RegA Plus are trying to address these hefty cost for small cap companies and give them better access to capital. But this is slow to come. In Discala’s case he was trying to use an alternate public offering to get the stock to move. Is this criminal? Unless he is naked shorting, falsifying press releases, selling restricted shares with illegal opinion letters from attorneys ,there is a large question looming if Discala really broke any laws. Do Discala and Wexler face technical violations of the 1934 Securities law- maybe? Everyone who invest in a stock wants it to go up. The Street will be watching this case to see how far the courts allow pre-ipo investors in companies to get upward movement and an active market in micro-cap stocks. Lorretta Lynch’s DOJ boss in D.C. will be watching to see if she overreached in charging Discala or if she can finally get a conviction in a Wall Street case. I will be watching if Joe Salvani or Darren Ofsink also get arrested for their role in Codesmart.

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The Mess the WSJ Made: Famed trader Joe Lewis not Investing in Bitcoins

The Wall Street Journal had Bitcoin investors all excited Monday morning after it reported legendary currency trader turned investor Joe Lewis was spending a whopping $200 million on a Bitcoin miner company. Except it took only a few hours for CNBC reporter Scott Wapner to call his friends at Joe’s investing firm, Tavistock Group, and confirm the story was completely unfounded. The WSJ had major egg on its face and the story reported by Harriet Agnew and Robin Sidel was pulled down from their online publication. So how did a story like this get past a seasoned reporter like Sidel and the layer of editors that are ultimately responsible for hitting the print button?

The news of a Bitcoin miner, Avalon, getting any VC or Angel money started Sunday at a Bitcoin blog called . I spoke with Danny Ashton who runs the site and he said they had the tip from an unnamed source that had pieced together a series of details that looked like the investment could be coming from something called the Phoenix Fund which is supposed to be Swiss-based.

Bitcoin Examiner writes:

There might be a major deal being made in the Bitcoin ecosystem in the next few days: a deal that mixes the names of BitSynCom LLC’s founder, Yifu Guo, and a Swiss private equity fund, which is allegedly about to invest $200 million to make sure the brand Avalon emerges as the leader in the mining technology race.

Then they go on to tell readers this is a rumor and their source is anonymous. They are setting up the story as speculative. Not the best method of journalism but perfectly ok if they state this is what ‘we are hearing’ but we don’t know if this is fact yet – which they did. Speculation can at times force a story into the light…it’s a method I’ve used. Their headline even said the word ‘might’ be getting a $200mn investment.

The Bitcoin blog then goes on to tie in a man named Andrew Laurus who is allegedly setting up this huge investment. Laurus is sourced as being related to Bitcoins based on his twitter profile which says: ‘taking time off for Bitcoin mining project’. Danny Ashton, of Bitcoin Examiner, said he didn’t know if Laurus was the source for the story.

Here is where a game of Telegraph starts. This unnamed source throws out Laurus is working with ‘the Travistock bunch’ — a firm Joe Lewis does actually own. Then all of a sudden there is this unexplained jump that Lewis owns The Phoenix Fund.

A bunch of other names are thrown into this deal; a Taiwan microchip manufacturer TSMC, Bitsyncom, and the unknown private equity guys at The Phoenix Fund.

The team at Bitcoin Examiner closes out the story reminding readers once again this is all rumor, their source is anonymous, and they have to actually confirm all this. Then BOOM – the Wall Street Journal has taken this mess of maybes and printed it as FACT with a big bold photo of Mr. Lewis and a promotion of the story above the fold in their Money and Investing – C Section.

WSJ: Bitcoin's New Champion by Teri Buhl

The Journal didn’t only get the fact that Joe Lewis was putting that much money into a Bitcoin miner deal wrong but they also printed Mr. Lewis “leads the Phoenix Fund, a Zurich-based private equity fund that on Tuesday plans to invest $200 million in Avalon, a company that makes computer servers aimed at creating Bitcoins, according to people familiar with the situation.”

There is so much wrong about that sentence that could have been fact checked it’s scary. 1) Mr. Lewis public relations person Lauren Morgan told me today the WSJ NEVER even called for comment. If they had they would have learned what CNBC got on the record, which was Mr. Lewis has nothing to do with the Phoenix fund. 2)If you regularly report on Bitcoins like I’ve had the chance to for a year now, you know computer servers do not make Bitcoins. They might help distribute the digital formula that moves the Bitcoin volume and pricing but no one or no machine makes a Bitcoin- that’s why it’s called a digital currency. 3)I have not found a real private equity fund called The Phoenix Fund that has $200 million to invest in Bitcoins.

The simple lack of fact checking that appears to have gone on with the Sunday night editors at the WSJ is amateur beyond belief.

I’ve reached out to the lead byline reporter on the story, Harriet Agnew, who appears new/young and recently been covering UK hedge funds, but she refuses to answer who her editor was. The only answer I got from her was this:

Fyi we have just published a correction:


05 Aug 2013

Investor Joe Lewis isn’t investing in a bitcoin venture called Avalon and doesn’t lead a Zurich-based private-equity fund called the Phoenix Fund. An article on the supposed investment was inaccurately published and has been removed.


Neither Harriet or the other experienced reporter on the story, Robin Sidel, have admitted who came up with the lede in this report – meaning whose idea was it to link Joe Lewis to this apparent non-deal? Lauren Morgan at Joe Lewis’s firm also told me the WSJ won’t tell them who the editor is. It’s a massive duck and cover by what is supposed to be a pillar of business journalism.

Here is where the story gets even more troublesome. It’s clear that Harriet, Robin and their editors are not really well sourced or well versed in the Bitcoin investing space. A quick email to VC’s I’ve sourced and reported as investing in real Bitcoin companies like Bitpay or CoinLab said, “The BTC market is only worth around $1 billion now so why would someone make a single investment of 20% of the market ($200 million) into one company?” Then we have the fact that the highest round of investment in a BTC company at one time has been what Coinbase got with around $5 million. We have yet to see any BTC company get a double-digit million investment so how does it makes sense that triple digit millions are getting put into a deal. The WSJ also could have called around to VC’s and asked if any Bitcoin miner deal will get funded and how much is likely to be spent… like I did. The answer I got was ‘high single digit millions is all the Bitcoin miner space is worth right now.’

This is basic high-finance gut-instinct reporting skills that most journalist trying to report on a subject like Bitcoin investing would ask BEFORE you hit the print button.

And even if the WSJ editors didn’t figure out the math on this deal doesn’t it make sense to do a quick google search to see what active Bitcoin players are talking about over at chatroom It would have shown as early as Sunday they were challenging the notion that you barely need $20 million to build out a better mining technology and were making fun of the idea that Avalon would use the rest of the money to hold a long position in Bitcoins.

These chatroom users also point out that the only link to $200 million and the word Avalon comes from a press release in Jan 2011 when San Diego-based VC firm Avalon Ventures closed a fund with $200 million. I called the VC firm to see if this fund was designed to invest in Bitcoins or if they have ever invested in Bitcoins and the answer was NO.

That leaves us with what is the motive of this anonymous source. It’s possible this person was writing Bitcoin Examiner and the WSJ reporters trying to get something printed but knowing how the WSJ likes to lift other original reporting and source it as their own I’m going with they just lifted a rumor story from Bitcoin Examiner and really screwed up by trying to turn it into deal-making news reported as FACT.

Joe Lewis firm made this statement yesterday, “”Unfortunately, many immature investments and investors would like the association of private investors like Joe Lewis. They bring instant credibility,” said Douglas McMahon, senior managing director of Tavistock Group, a private investment organization founded by Lewis.”‘Our’ Joe Lewis has nothing do with Bitcoin, Phoenix Funds or Andrew Laurus,” said McMahon.

A few motives come to mind here: Someone with a sizeable long position in Bitcoin coins (lets say $500k – $1 million) wanted the daily trading value of Bitcoins to go up so they could cash out. This sucks because there is already so much miss-reported on how the value of Bitcoins can be manipulated and as journalist we shouldn’t be enabling traders to move a market on false info not vetted. There wasn’t much of a movement in BTC price yesterday so thank goodness it didn’t work.
A Bitcoin miner company needed to get word out that they could get big investment money so whoever might really be considering to give them a few million would do it. Butterflylabs has the equipment Bitcoin miner pros use now. There has also been talk heard at the London Bitcoin conference in July that there is a better ASIC rig being worked on by some ex Silicon Valley hotshots. This of course is my SPECULATION based on reporting on this sector for a bit.

We might never get the answer to the motive of the story source but I strongly believe the Wall Street Journal editorial board owes the reader an investigation into what happen in this major failure of reporting check and balances. They need to admit who the editors were and explain how the story got to print. And honestly someone needs to get fired.

Now if hundreds of millions of dollars ever do get invested in a Bitcoin company I’m going to recommend checking who is so dialed into what is happening in this market they’ll at least give you a fact checked, vetted, insightful report. The folks over at American Banker have also done some quality reporting on Bitcoins under the editorial leadership of Marc Hochstein and RT’s top Biz TV host Max Keiser often has excellent guest talking about the digital currency.

Here is the story the WSJ had to take down:

Who is Harriet Agnew's Editor?

Who is Harriet Agnew’s Editor?

Hearst CT Newspapers Making Side Deals After Class Action Suit Challenges How Arrest Are Reported

Two well-known Connecticut lawyers are spearheading a class action lawsuit against the dominate news publisher in Fairfield County in a move to get Hearst newspapers to take down online news reports of people who have been arrested but then have the charges waved or dropped. Bill Keller, New York Times columnist and the paper’s former Editor in Chief, wrote on the case yesterday arguing the lawyers, Mark Sherman and Stephan Seeger, are trying to erase history with their novel lawsuit. Keller’s column drove a boat load of comments on the issue from around the country encouraging an interesting debate on how news organization follow and report criminal arrest stories. Publicly, Hearst is fighting the case but I’ve learned the their Connecticut publications are also making private side deals now with people who contact the paper and ask to have their arrest story reflect the final outcome of the case—or the ‘new truth’. That is if they agree to opt-out of Sherman’s class action suit against Hearst.

Hearst hired a top media law lawyer, Cameron Stracher, to defend the suit because Sherman is trying to get a costly libel claim through. The idea is to hold Hearst newspapers accountable for continuing to publish an arrest story online after the person has had the charges dropped through one of the State’s accelerated rehabilitation programs because Connecticut has an ‘erasure law’ that says a person can legally testify they have never been arrested if they complete the AR program. The state believes they are expunging the record so Sherman argues the media should have to also.

“The truth changes in a day. One day my client would have to say she’s been arrested, the day the charges are waived or dropped she can legally state she’s never been arrested. So if a paper keeps an arrest published online and people read the story after the record is expunged are they reading the truth? Is the publisher continuing to print an untruth? New readers see the story, new ads are published next to it, the publisher is still profiting from what isn’t a legal fact anymore,” attorney Mark Sherman told me in an interview this week.

The problem most journalist and editor’s see is the fact that a person WAS arrested and went through some legal proceedings in a court house, which is all a true historical event that is documented and was available to the public. Sherman argues by keeping the story up, Hearst is still making money on a prior news event that is now false. Police blotters typically draw high ad rates because they are often the most read stories for local news publications. The Norwalk Hour rotates out their online arrest stories every 60 days but publications like Hearst (Greenwich Time, Stamford Advocate, CT Post) or AOL/Patch leave them up for a long time and use background key word coding to draw your attention to similar arrest stories.

Sherman’s suit, which is scheduled to be heard this month in Hartford Federal Court, started with a Greenwich mom that works as a nurse who was arrested after the local keystone cops tried to bust her adult sons for dealing pot. It was small amount of pot they found at her house, which with new Marijuana laws in the state would likely only equal an infraction. The State made a deal to waive the charges if she went to a drug class. The problem for the Greenwich mom/nurse is when she looks for jobs employers first see her pot arrest when they Google her name and there are no reports the charges are gone now. Sherman told me he took the case pro-bono because he thinks this is an important issue. He’s also got a local reputation as the go-to lawyer when your teen gets busted for DUI’s, drugs or other misconduct because, if you can afford him, he’s good at making deals to get people into AR programs and thus legally he gets their arrest erased.

Most of my peers in the media I spoke with think Sherman is just being a bully and trying to make court reporter jobs extremely difficult while trying to get some dough from Hearst big pockets. There is also the idea that this suit is trying to ‘control history’ not just erase it. I don’t think an arrest report should be taken down as a news story. But Sherman and Seeger are onto an important issue. Cops and Court reporters need to finish the story–even if that means a lot more work. It’s not a sexy headline to say the Greenwich mom who was busted with her sons for pot actually had the charges dropped but it’s the truth and reporting it is equally as newsworthy as the arrest.

There is another issue here. Arrest reports are often a one side re-write of what the local cops choose to put in a request for warrant report or dole out at their weekly news briefings with reporters. A lot of what you see in a warrant report doesn’t reflect what actually happen– I’ve seen first hand how some Cops lie and make stuff up to get a judge to think their is probable cause. And in the Norwalk, CT court there are judges like Judge Huddock who was known to sign any warrant report put in front of him. Then there is the fact if the arrested person speaks it could be held against them in court so until you get to trial. or see defense motions filed to challenge the arrest, a reporter often only has a story from the view of the cops to print. Unfortunately I have witnessed, while working for Greenwich Time, how editors at Hearst don’t encourage their court reporters to always follow up on the case and report out the ending. And that, I think, is a serious error in journalistic behavior. In France they won’t print the person’s name until they are convicted. In the U.S. military they won’t do perp walks because they actually assume the person is innocent until a trial proves otherwise.

But printing a person’s name who is arrested in this country is perfectly legal and also seen as somewhat of a watchdog deterrent. I think it’s OK to print the accused name and everything you can find out about them as long as the reporter does what they can to follow the story through court motions and update original arrest stories with dropped charges. What is ironic with the Hearst case is they are spending big dollars to defend Sherman’s suit but I’ve learned they are also making side deals with people who contact them and complain about their arrest stories not being updated. Since Sherman filed his lawsuit I have seen copies of releases from Hearst that say the paper will add code to the online story to take the person’s name out of a Google search and update the arrest story with details of how the charges were dropped but the story stays online. Now to make this deal Hearst also makes the complaining person sign a release that they will have no claims in Sherman’s class action suit against them.

When I asked Hearst outside counsel Cameron Stracher about this secret release deal he claimed he didn’t know what was going on. The releases I saw were drawn up by some of Hearst in-house lawyers like Ravi Sitwala. The official quote I was given was, “Cameron Stracher, an attorney for Hearst, says he has no knowledge of whether or not Hearst has entered into or drafted such releases.” Which in my view is basically spin for ‘oh shoot how did she find that out’.

Sherman’s chances are slim of getting his case past Hearst motion to dismiss in Federal court and if he does I’d expect even more media organizations to join in the fight. But what Sherman has accomplished is some accountability at Hearst –considering we now know they are making these private update-the-story deals. Unfortunately I don’t think it’s the right change. Our Fairfield County courts are filled with people being overcharged or wrongly charged. And the Stamford/Norwalk judges easily allow these AR programs to go through which a lot people, even if innocent, take because they can’t afford to fight to charges.

On the flip side, the AR programs are also easily given out to young adults (or 16+ minors) where there is solid evidence of hosting say underage drinking parties or driving while intoxicated which feels like the state isn’t really interested in delivering a punishment for these crimes. Take the case of New Canaan 19-year-old Avery Underwood who was charged with a felony forgery because they cops found a fake CT ID on her when they busted an underage drinking party she hosted where her mom Lori Anderson was found hiding in the closet when the cops came. Sherman, her attorney, got Avery into an AR program and her record was erased after a probation period. But it doesn’t mean the crime didn’t happen and I think it serves a public interest for Avery’s name and address to be reported so other parents in the community can know where underage drinking parties were happening. As a journalist covering this story I would never agree to take it down. I’d been updating the case during the legal proceedings and finished the story by reporting her AR plan but her case remains published online.

What we really need is dominate market publications like Hearst to investigate the cops and the courts instead having their beat reporters build up a favor bank with local cops to get news before another hyper-local news sites like the AOL Patch print it. I’d love to see a Hearst reporter track all the arrest turned into AR programs and print the number of trials the Norwalk or Stamford court actual win v. lose each quarter. Or how about a data analysis story of all the charges that get plead down while people are forced to pay burdensome bonds. Besides me, I’ve seen about one Darien reporter, at a non-Hearst publication, take on his local cops this past year and follow a case where there was serious miss-information in a warrant report resulting in the charges being nullified right before trial. But a few reporters working diligently to report a person’s ‘whole history’ doesn’t make up for Hearst ‘incomplete histories’.

Reuters is Writing Stories to Help JP Morgan Defend Itself from the NYAG Now

J.P. Morgan’s outside counsel at Sullivan & Cromwell are showing signs of desperation in their mortgage securities fraud lawsuits. You know the ones that the bank says in SEC fillings are now $140 billion of litigation. Last week the banks lawyers got a Reuters reporter to write a hit piece on the New York Attorney General’s $22 billion civil fraud suit against JPM / Bear Stearns.

The Reuters story, by Karen Freifeld, basically speculated a judge would be looking at a conflict of interest in the AG’s office because they hired a top lawyer from the firm, PBWT, who first discovered some of the alleged Bear Stearns rmbs fraud. Freifeld starts by writing a line that ‘legal experts’ think the former PBWT attorney who worked on the Ambac v. JP Morgan Securities suit has a conflict because she also played a role in the NY AG’s suit. Karla Sanchez, the lawyer in question, started with the NY AG in January 2011 – after the explosive amended Ambac complaint was filed. This is the complaint you just saw me talking about in the Frontline film The Untouchables.

It’s odd for Retuers to not quote actual working lawyers in the story and leave the reader guessing that the reporter actually found attorneys to back up her claim. I called five securities lawyers last week trying to get one of them to go on the record that they saw a conflict here but none would. That’s because Robert Sacks, JPM’s puffy chested outside counsel from Sullivan & Cromwell, doesn’t actually lay out in the motion what he thinks the conflict is.

The Reuters reporter, who has indirectly become a JP Morgan’s flack, also doesn’t explain to the reader that JP Morgan’s lawyer, Sacks, didn’t actually file a motion in the NY AG’s case in New York civil supreme court. All he really did is indirectly mention the idea in a damn footnote in a motion for an entirely different case. On February 19th Sacks filed a motion trying to stop Judge Ramos from allowing AMBAC/PBWT to get loan file discovery and CLAS database records from third-party due diligence firm Clayton – info they been asking for over a year that Clayton is also fighting to not turn over because it’s likely really really damaging. [ You see on top of all this Clayton is apparently STILL covering up for it’s big bank clients even though they signed an agreement to help the State of New York prosecute their financial crisis cases in turn for them not getting sued for their role in billions of rmbs fraud. ] It’s this motion that has the footnote that Reuters in turn made into a story to discredit the NY AG’s head of economic cases.

Here is what the footnote says:

Defendants understand that, upon joining the NYAG, this former PBWT partner was
initially screened from participating in the NYAG’s investigation relating to Bear Stearns, but
that the screen was later lifted and she participated in the investigation. Following concerns
raised by defendants, the NYAG apparently reimposed the screen. Defendants have asked the
NYAG to confirm whether there is additional information about this lawyer’s involvement in the
matters leading up to the NYAG’s suit against Bear Stearns that they should be aware of before
deciding what further action is warranted.

Somehow that footnote made the Reuters reporter think this:

The case against JPMorgan is similar to one that the lawyer had worked on before joining the Attorney General’s office, JPMorgan said in court papers this week, raising the possibility of a conflict of interest.

I did some background checking on what the lawyer in question here, Karla Sanchez, did at PBWT. She ran all of discovery in the monoline suits so yea she would know where the bodies are buried. But she didn’t leave PBWT and go work for a firm to use that info to harm her prior client Ambac. That’s where a real conflict would be. Instead people inside the AG’s office explain she simply led an administrative role in overseeing his case – for a little while – that is a copy cat of the Ambac case. But then so is nearly every rmbs putback case against JP Morgan/Bear Stearns filed in the last two years by clients of Bear’s mortage trading team. The real bulldog lawyer the AG put on the case actually came from the DOJ and joined last summer. I was told by someone familare with the case she was frustrated with the lack of action against the banks at the DOJ and jumped to work for the NY AG because he was actually going to try and hold them accountable. Her name is Virginia Romano and she’s actually known to get things done and not roll over.

Reuters went out and spent a few $ to even FOIA the AG’s records to show when Karla did or didn’t have her hands on the case. This is where the NY AG did something kind of stupid. They originally wouldn’t let her touch the case out of extra caution that JP Morgan would complain. Then they figured it was ok for her to play an admin role in the case – it’s not like she brought over whistleblower emails from the Ambac litigation – the AG actually had to subpoena PBWT for that kind of stuff in May 2011. And by the time she joined his office most of what Ambac had was public anyway because their suit had finally been unsealed and I broke news about it at The Atlantic. JP Morgan did end up complaining about her working the case so the NY AG took her off it. The NY AG should have stuck to their guns and just left Karla on the case. This all happen last year. Which is why it’s odd that Attorney Sacks is brining it up now in a footnote in a lawsuit that isn’t the NYAG’s case. And keep in mind NO motions have been filed in the AG’s suit against JP Morgan talking about a conflict of interest that Reuters somehow thinks could affect his case.

Now using footnotes in a legal motion to say something nasty that the press can then turn use as quotes for a story is an old trick – even PBWT has done it in their litigation against JP Morgan. Heck I’ve found some of great details in my series of reporting on this fraud in footnotes. But the reporter then has the responsibility to check out if actually true. Big Law lawyers like JP Morgan has hired often do dirty block and tackle moves for their clients and this one simply reads like they are trying to distract Judge Ramos from the real issues at hand and just be an all out dick trying to smear one of the NY AG’s top lawyer.

There was actually some real news on this case last week. JP Morgan had asked the court to assign the case to Judge Ramos – who is also trying the Ambac case. Ramos is an old judge who has said in court testimony he doesn’t like Ambac’s fraud claim although he hasn’t ruled it out. A few days after Sacks filed the motion that is the subject of this story Ramos was removed from the case. Yep on Thursday Judge Marcy Friedman became the new judge on the NY AG’s case. So all the ranting Sacks has been making to Ramos in the Ambac case about the AG’s case is kind of moot now as he’s got a new judge to brow beat into believing that the JPM (via Bear) didn’t really steal billions from their own rmbs clients.

Editors Note: AMBAC and JP Morgan have a conference meeting with Judge Ramos on Monday (2-25) at 4p.m. If the Reuters reporter is looking for some real news on these cases that’s a good place to start. I emailed Robert Sacks at Sullivan & Cromwell to ask how long he’d been working with the Retuers reporter to get that story published but he didn’t answer the email.

Here is motion Sacks filed that started this whole story:
JPM Brief 75

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.