Iroquois Capital’s Richard Abbe Sued For Fraudulent Takeover Scheme of XpresSPA

A co-founder of Iroquois Capital, Richard K. Abbe, is being accused of a fraudulent scheme to trick the founders of an airport spa business, XpresSpa, into a merger with a public Microcap company that resulted in a massive loss of their business investment. On August 6, a federal judge in New York allowed a securities fraud case to go forward against Abbe and other company executives. The lawsuit, which was filed in November 2017, has claims of undo influence, deception, and kickbacks used to effect a merger takeover by Form Holdings. Two claims of Securities violations consisting of 10(b)5 and Section 20 survived the defendants motion to dismiss.

Moreton and Marisol Binn, the XpresSpa founders, alleged two members of their board, Andrew Heyer of Mistral Equity Partners & Bruce Bernstein of Rockmore Capital Group, hid their financial ties and personal relationships to Form Holdings board member Richard Abbe and Salvatore Giardina along with its CEO Andrew Perlman before the 2016 merger. The complaint alleges by covering up their cozy relationship it allowed the XpresSpa directors to mislead the Binns on how much they would earn if the merger completed. And in turn the vote to approve the merger was a coordinated and premeditated effort by Bernstein, Abbe, Perlman and Giardina to deceive the Binns and other minority shareholders to take an all-stock, no cash, sale price to enrich themselves at the Plaintiffs’ expense.

The fraud claims surviving the motion to dismiss is a rare event in securities ligation for Microcap companies. That’s because most companies, including XpresSpa, sign joinder agreements that release all the parties from this type of litigation. Additionally, the investment funds like Iroquois or Barry Honig’s team of investing affiliates have typically bled dry the small company CEO’s stock barrel of cash by the time they have figured out they’d been deceived and can’t afford to file a lawsuit. But the Binn’s aren’t the kind of men to lay down to alleged market manipulators. With their ability to afford seasoned securities litigators like Rosanne Felicello and Michael Maloney of CKR Law LLP, it appears a compelling legal argument was made to blow through the general release of ligation and convince Judge Stanton to move the case forward. The defendants lawyers at Mintz Levin even tried intimidating tactics to scare the Binns into dropping the case by filing motions for sanctions against their attorneys for bringing the lawsuit in the first place. Attorney Francis Earley, of Mintz Levin, sent multiple letters to Attorney Felicello basically warning it doesn’t matter what you think happen the joinder agreement release doesn’t allow you to sue the defendants. But this month Judge Stanton said the defendants lawyers were wrong and the Binns could sue. The Judge wouldn’t even grant an oral argument to hear their motion to dismiss or sanction claims. Instead the judge ruled on the detailed information about the alleged fraud that was laid out in the briefs. Net Net I bet Richard Abbe, who I have previously reported on for his funds role in some questionable financing with MGT Capital, is starting to get a little worried about what is going to coming out in discovery.

The trouble started for the Binns when XpresSpa took a high interest senior secured loan from Rockmore Capital which is owned by the company’s director Bruce Bernstein. Besides securing anything in the company that had value against the loan there were also stringent covenants put in place that allowed Rockmore to force a default on the loan. Such as when a full audit didn’t arrive on the date Rockmore asked for it a default event occured that allowed Rockmore to add $500k of interest to the loan and scared off previous lenders, like BofA, from offering a credit facility at lower market rates. Putting the loan into default also put Bernstein in a control position over the company enabling him to significantly influence merger decisions.

Before the merger in August 2016 XpresSpa was having cash flow problems that lead to their inability to keep adding nail spas in airports and keep up with competitors. And a $6.5 million debt due in 2018 was a big thorn in their side. So when the idea of merging with a public company, that had been in the Patent troll business, and claimed to be worth $35.1 million came along it didn’t look so bad to the Binns. Especially given XpresSpa board member Bernstein made promises that once the merger was complete Form Holdings would get rid of their Rockmore debt and spend dollars on XpresSpa shops expansion into new airports, according to the lawsuit. The Binns were also led to believe the new publicly traded stock they would get was actually worth some money and would only go up in value because Form Holdings had real venture deals with companies that had valuable patents and cash flow.

But none of that happen. The complaint details how Richard Abbe, through a $12.5 convertible debt deal with Form Holdings via his investment fund Iroquois, was able to load up on equity in Form Holdings via a debt to stock conversion. Form Holdings use to be called Vringo Inc. On May 9 2016, before the merger, Abbe secured a seat on the board of Form Holdings. SEC filings for both companies claim Abbe and Bernstein were independent directors of their perspective companies. Yet both men had chock holds on XpresSpa and Form Holdings because they were also their substantial creditors.

After the merger completed the Binns say Form Holdings started to sell off, for very little money, the ventures tied to patents that they claimed had millions in value. One reason for this could be the patents value were really just speculation sold as a fabulous future cash flows but the Form Holdings directors knew what looks good on paper doesn’t turn into real cash.

The lawsuit also alleges “Members of the Controlling Group, acting through various investment vehicles such as
Rockmore and Iroquois, have coordinated similar changes in control or other coordinated
activities with respect to GeoResources, Inc., USA Technologies, Inc., and TapImmune, Inc. ”
[The control group consist of: Abbe, Perlman, Bernstein and Giardina.]

Now here is were things can get dicey for Abbe and Bernstein. In a brief responding to the defendants motion to dismiss we see the plaintiff allege that Abbe, directly or through another investment vehicle or another person he controls, put some of the money up for Rockmore to lend $6 million to XpresSpa. Remember Abbe doesn’t show up on this deal in public filings until there are merger talks. And the Binns will say they never heard of Richard Abbe until they were introduced to the idea of merging with Form Holdings. What has me extra curious is what kind of documents have been put under seal in this case. Is there some kind of proof the Plaintiff has discovered to prove Abbe’s involvement in RockMore?

I emailed Bruce Bernstein directly to see if he wanted to respond to this allegation but as of press time I had no response.

But that’s not all Team Abbe allegedly did in this deal.

Form Holdings CEO Perlman, already a member of the board of Form Holdings, arranges to have Bernstein also appointed to the Board of Form. Perlman and Bernstein then arrange to have Abbe appointed to the board of Form. At the same time, Bernstein used his position as a board member of XpresSpa to cause that company to enter into the onerous Rockmore Note. Bernstein, Perlman, and Abbe then offered Heyer a sweetheart deal if he would assist them to facilitate a merger of XpresSpa into Form .The lawsuit claims XpresSPA director Andrew Heyer would be given a ton of stock, valued at $2.31 per share at the time of transaction, if he voted for the merger and the Binns were never told he was going to get this stock if he approved the deal. As far as Bernstein goes, he also got the highest amount of compensation the new company bylaws would allow, was put on the audit committee, the compensation committee and made a member of the new company board. It’s this quid pro quo alleged in the complaint, which I would call a kickback, that allowed the Section 20 violations to be litigated. Claims that you’d hope the SEC would take notice of. Net-Net the Securities and Exchange Commission has laid out in previous enforcement cases that “You can’t bribe executives with stock to motive their vote and not tell other shareholders about it”.

Honestly this whole scenario reads like the Control Group’s corporate attorneys needed to go back and read the Securities and Exchange Act definition of an independent director and disclosure rules because it looks like their clients can’t really be relayed upon to tell the whole truth. And clearly the fact pattern was enough for Judge Stanton to say if this is true then that’s material information that was omitted and it’s worth going threw discovery to build a case for trial.

Recently signs of worry about what will come out in discovery appear to be showing up via the exodus of high level executives. On July 23rd attorney Felicello wrote Judge Stanton expressing serious concern that limited discovery was going to have to be allowed. This is before the decision on the motion to dismiss came down. Anastasia Nyrkovskaya, the CFO of Form Holdings who could also be a key witness to the facts underlying the lawsuit announces she is leaving the company. And so did the senior V.P. of legal and business affairs for XpresSpa Jason Charkow. The defendants lawyer wrote back the company has preserved all their communication and attorney Felicello was over reacting. But the fact of the matter is if these two bail to another country getting them to show up for a deposition subpoena might prove difficult.

Additionally the company just filed with the SEC announcing they have a $20 million goodwill write down. This is basically saying they don’t think the brand XpresSPA has held value and they might be bailing on the whole airport spa biz. Something they promised they’d grow at the time of the merger, according to the lawsuit.

The defendants have till the end of the month to answer the lawsuit. And then the interesting part begins as discovery happens and these alleged bad actors have to go through sworn depositions.

The Plaintiffs attorneys would not comment on the case. The defendants lawyer didn’t respond for comment. Some of the claims for unjust enrichment, negligent misrepresentation, and breach of fiduciary duty were thrown out of the case. But the strongest claims of Section 10(b)5 and Section 20 violations remained. The company Form Holdings is also a defendant in the case. Remember if you prove fraud (Section 10b5) you get to ask a jury for triple damages.

Form Holdings changed its ticker symbol this year so you can now find them under ticker $XSPA.

Editors Note: This type of reporting is costly from researching volumes of legal documents and corporate records. Donations are important and very helpful to keep this publication going.This publication does not take donations from the subjects of a story.

Microcap Attorney Jaclin’s Co-Conspirator Turned DOJ Witness in Shell Factory Scheme

This story has been updated

A 20-year veteran of Microcap financing deals, attorney Gregg Evan Jaclin, has been charged with running a shell-factory shop and securities fraud for nearly a decade. Yesterday I reported at Growth Capitalist the government has been building their case against Jaclin and his co-conspirator Imran Husain for years. Jaclin is accused of filing false opinion letters that allowed stock, which U.S. securities law says should be restricted, to freely trade within months of a private company going public through buying one of the Jaclin/Husain shells.

Jaclin, who denies the SEC charges, is currently working in the industry as the chairman of the corporate securities group at New Jersey-based Szaferman Lakind LLP. He lives in a million dollar home in West Windsor, NJ with his wife, Jill Gartenberg Jaclin, and their two kids.

Gregg And Jill Jaclin

Gregg And Jill Jaclin

Jaclin previously co-owned a law firm, Anslow & Jaclin, where he allegedly issued false SEC filings for the public shell companies named in the government’s complaint. Jaclin’s former partner Richard Anslow joined another top microcap financing law firm, Ellenoff Grossman & Schole LP, in October 2013. Anslow acknowledged he was interviewed in the SEC investigation of the shell factory scheme, according to his managing partner Doug Ellenoff. Ellenoff also told this reporter Richard Anslow doesn’t believe he is still part of the SEC investigation. I was able to ask Anslow face to face, at the Marcum Microcap Conference in NYC on June 1st, if the SEC had directly told him he is no longer part of the investigation, which centers on false filings and opinion letters written by a firm (Anslow+Jaclin) he co-owned. Anslow shook his head when I posed the question and started to walk away from me really fast. I followed him asking the question again along with asking “are you running away from a reporter’s questions”. Anslow escaped and I never got my answer. Anslow has not been charged by the government in this case.

The Securities and Exchange Commission complaint against Jaclin was filed by the regulator’s L.A. office in the district of Central California federal court on May 12, 2016. The SEC thanked the DOJ team in Northern California for assisting them in building their case but I found it odd they didn’t mention parts of Husain’s sworn plea agreement that talked about Jaclin’s role in coaching Husain, in 2012, to get some of the puppet CEO’s of the shell companies to lie to the SEC when the regulator began investigating who actually had control of the companies. It makes me wonder if these details are being saved for a DOJ criminal complaint against Jaclin. When I reached one of Husain’s lawyers, Victor Sherman, he told me he thought criminal charges were coming against Jaclin.

Nine shell companies were listed in the SEC complaint as being fraudulently built to look like real companies but in my investigation of the alleged scheme I found there were a lot more deals that fit the same pattern as described by regulators. Such as the case against Cary Lee Peterson who bought a shell from Jaclin and reverse merged a company called RVPlus. Although Peterson was arrested in March Paul Fishman, the head of the DOJ in New Jersey, didn’t get a jury to indict Peterson until May 10th- 2 days before the SEC filed their complaint against Jaclin. In the Peterson case the government quotes emails between Peterson and the “lawyer on the deal” negotiating the price of the shell. SEC records show that lawyer is Gregg Jaclin. Peterson is quoted saying ‘I’m not paying that price’ if the restriction on the legend for the shares isn’t removed so I can trade these shares within the first few months. Jaclin and Husain charged between $215k-$425k, which is high, per shell company they sold.

Private companies will pay more for a shell if it’s considered a ‘clean shell’. This means the public company has reported to the SEC for a year and it has a real business plan with at least 40 different shareholders. The scheme laid out in the SEC complaint says nominee shareholders were made up and Husain hired puppet CEOs to pretend to run the companies when it was really him pulling the strings. It’s those actions that are a BIG no-no, according to the SEC.

The New Jersey DOJ confirmed the RVPlus CEO, Cary Lee Peterson, was unable to post bail last week and had to get a public defender, which makes me wonder if the DOJ will also press him to turn government witness against Jaclin and others in the scheme. So far there are no public criminal charges against Jaclin but the pressman for the DOJ in Northern Cal reminded me there could be a sealed indictment against Jaclin that no one knows about.

Allegedly lying in SEC financials for public companies and writing false opinion letters isn’t the only thing Jaclin is culpable of. In 2011, Jaclin and his former law partner Richard Anslow made a press announcement that they were going to merge with a New York-based top-billing microcap law firm named Schenzia Ross Friedman Ference LLP. Yesterday, I reported at Growth Capitalist the merger quickly fell apart because the partners at Schenzia Ross were uncomfortable with some the deals Anslow+Jaclin worked on. Even though no merger docs were ever signed to form the new firm, I found Jaclin was signing opinion letters for S-1 filings with the firm name: Schenzia Ross Friedman Ference Anslow LLP in 2011 and 2012. One such filing was for Health Direct, an issuer listed in the SEC complaint against Jaclin. Harvey Kesner, a partner at Schenzia Ross, told me after reviewing the SEC filing of Health Direct with other partners of Schenzia Ross, “the filing was not on behalf of SRFF and the use of any portion of the firm name is unauthorized”. Signing the wrong law firm name could make an issuer’s S-1 filing considered a false opinion in the eyes of the SEC.

If the statements Husain made in his plea deal are true then Jaclin would have known the SEC investigation started as far back as at least August 2012 when one of their puppet CEO’s was called in for questioning. From that point on when the SEC started asking Jaclin questions he had a legal obligation to tell the issuers trading exchange, OTC Markets, that he was under investigation. OTC’s contract with attorneys who represent Issuers with opinion letters published on their trading platform clearly states under rule 12 in the Attorneys Agreement:

The letter must state to the best knowledge of counsel, after inquiry of management and the directors of the Issuer, whether or not the issuer of the Securities, any 5% holder, or counsel is currently under investigation by any federal or state regulatory authority for any violation of federal or states securities laws, and if so, the details of such investigation must be provided in such letter.

Imran Husain is the only co-conspirator of Jaclin’s named in the SEC complaint. But it’s possible more players in the microcap space will be arrested by the DOJ or charged with an enforcement action by the SEC. One name that comes to mind is microcap financer Barry Honig. I reported for Growth Capitalist the CEO of YesDTC, one of the issuers in the Jaclin complaint, was also arrested and made a plea deal with the DOJ in 2014. His name is Joe Noel. Noel and Husain both said in sworn testimony it was Barry Honig who bought the shell (created by Jaclin/Husain) that YesDTC merged into. The SEC successfully charged YesDTC for being a pump and dump. Noel then went on to say that Barry Honig ‘made him’ hire a stock promoter to aid in the pump and dump of YesDTC and alluded to the notion that Honig was also a control person in YesDTC. This matters because it affects Honig’s 9.99% investment in the company and his timing of when he can sell his shares. Honig has gone on the record through his attorney, Harvey Kesner, that he was not a control person of YesDTC, that he was cheated by Joe Noel, and Noel is lying in his DOJ plea statement. Honig has never been arrested or charged by the SEC for his role in investing in microcap stocks.

Editors Note: May 26 2016
When Jaclin learned I was reporting on him he called my cell phone late Friday night, which was the day after his SEC charges were announced, and left a voice mail he wanted to talk. It was past 9pm and I didn’t call him back that night. At 7am Saturday he then tried to write a somewhat threatening letter to an editor, Shelly Kraft, who he thought I was reporting for. Jaclin tried use the fact his firm had spent money sponsoring conferences of Kraft’s in the past and as a result he should be able to control the line of questioning I was doing researching his background. When I saw the emails Saturday I reminded Jaclin, via email, I am a freelance journalist who is isn’t controlled as a staff writer by any publication and if he had complaints they should come directly to me. I had also pointed out Shelly Kraft doesn’t own the publication I was planning on selling his story to. After that he refused to return my calls and asked for questions in email. Once he saw I had the DOJ secret plea deal from his co-conspirator I got an email late Saturday night that he’s hired an ex-SEC lawyer out of Colorado who instructed him not to comment on the case. But Jaclin couldn’t help himself and still tried to reach out to influence reporting on his case, this time to the correct editor of the publication I sell stories too; his goal appeared to be to muzzle me. Luckily I have an ethical and amazing editor at www.growthcapitalist.com who politely listened to Jaclin’s fear that reporting on his SEC fraud suit and other possible crimes is ’embarrassing his kids’ but my editor didn’t try to stop me from looking into other deals Jaclin might have done that are not legal and gather more evidence of his alleged crimes. The level of reporting and type of coverage I am allowed to do at www.growthcapitalist.com is unique, impactful, and full of details to help inform and warn the market. As a result the coverage is behind a paywall and you have to pay for it. I encourage anyone who invests in small cap stocks or cares about free markets to try subscribing. It’s worth it!

Feds Finally Arrest DiScala’s Microcap Attorney Ofsink

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 – teribuhl@gmail.com.

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.

No Bail for Microcap Ringleader B.J. Gallison

A Southern California guy whose parents were pillars of La Jolla society has just been told there is no way he’s getting bail. Harold (B.J.) Gallison Jr. was arrested on July 14th for the second time as the ringleader of multiple microcap frauds. On Friday the Dept of Justice showed a San Diego federal judge how B.J. Gallison has moved over $400k into beneficiary accounts in the last ten months while he likely knew he was once again under federal investigation. Meanwhile Wendy Silver Gallison, his wife, and their two small children are holed up in small house in a remote desert section of San Diego called Valley Center facing frozen bank accounts.

The career criminal history of B.J. Gallison for his role in everything from bucket shop broker dealer operations (La Jolla Captial) to his recent escapades of helping owners of microcap companies hide their stock and money launder their cash while they executed pump and dump schemes (Moneyline Brokers) has been chronicled by a seasoned San Diego investigative reporter and editor Don Bauder. (He is a colorful writer with great inside detail so I totally recommending reading his reports.)

This is a case of complete government fail to stop a man with no apparent respect for earning a dollar legally or respecting the laws of free markets. In the current case, filed June 24th and unsealed July 14th, the SEC sued 15 other people with him and the DOJ criminally charged 8 of Gallison’s cohorts.

There are likely others that are working as confidential informants or co-conspirators that the government hasn’t named yet in this case and I’d love to hear from anyone who knows these people. Starting with anyone from San Diego who has interacted with Wendy Silver Gallison. She was named as the director of two Nevada incorporated companies the DOJ said recently received monies from B.J. Gallison’s Moneyline operations.

I spoke with Wendy briefly today (home: 760-751-0141), who lives at 11966 Betsworth Rd Valley Center, Ca and she confirmed Faith Services Inc was a company related to her that she served as director. She got all caggy when I tried to get her to explain why B.J.’s off-shore broker dealer entities (Stix Pix Inc, Jurojin), named in the DOJ complaint, were making regular deposits into the Faith Services Comerica Bank account to the tune of $257,500 from September 2014 to March 2015. The only really answer I got out of Wendy was “I’d have to talk to the lawyer about that”. But she wouldn’t tell me who ‘the lawyer’ is. When I eventually asked what she thought of her husband’s arrest she hung up.

Now Wendy likely knew this payday with the government was coming. She tried to erase her Facebook page this month but a cached view still shows Wendy is a church going lover and likes Valley Central Community Church. Religious organizations are often an easy tax shelter for finance criminals but we still have no clear answer on how many other shell corporations B.J. and Wendy could have stuffed their ill-gotten gains in. I find it interesting that Wendy and the kids are living in a home worth less than the $421,400k the DOJ says her husband tried to hide in the last ten months. If you know Wendy from church in Valley Center, feel free to reach out to me at teribuhl@gmail.com.

Another unnamed long time person in the scheme could be B.J.’s lawyer Irving Einhorn who wrote me this week saying he’s not representing B.J. Gallison. Einhorn was named in a 2010 civil case by clients of Gallison’s at GISBeX (an online trading platform many think he started to run during his first prison sentence in 2005). The clients accused Einhorn, in court documents, of strong arming them to stop their litigation against GISBeX when the online broker wouldn’t return the money or stock in their account. Einhorn allegedly told the clients he’d report them to the SEC. The clients, who filed suit in South Florida, had been trading in one of the stocks listed in the most recent DOJ case $BYRN. The company was a total pump and dump and these GISBeX clients (who honestly could be nominee accounts) said they even found an email chain between Einhorn and Gallison about $BRYN being a pump and dump.

Gallison has now hired a former SEC enforcement lawyer, Steven Goldsobel, who hasn’t return my calls or emails for comment. Goldsobel has represented other microcap fraudsters. He was at Gallison’s detention hearing and wasn’t able to argue his client out of jail.

UPDATE JULY 22
I have more detailed report on the players in this fraud and the microcap stocks involved at www.growthcapitalist.com. If you know more about Wendy, B.J. and their old lawyer friend Irving Eihorn please reach out to me at teribuhl@gmail.com

DOJ Document presented at Gallison’s Bail hearing

Harold B.J. Gallison Money Deposits Sep-July by Teri Buhl

NanoViricides Lab Building in Foreclosure Litigation

A biotech stock that recently raised $20 million in registered direct offerings came under pressure this month by a short sellers research report published at Seeking Alpha. Connecticut-based NanoVircidies has been the subject of multiple stories I reported for Growth Capitalist over the last six months detailing alleged miss-use of company assets and inaccurate statements made in SEC filings. New information shows the research facility $NNVC has touted in press releases is currently subject to foreclosure litigation in Milford, Conn state court by a former architecture firm named Svigls Partner LLP.

NanoViricides medial test facility at 1 Controls Drive in Shelton, Conn is owned by its CEO Anil R. Diwan through another company called Inno-Haven. The biotech firm has said in previous SEC filings that Inno-Haven, founded in 2011, will own their research lab but they plan to sign a lease on the building. Although no lease details or contracts have been published. CT State case ANN-CV13-6014531 was filed in August 2013 which list a mechanics lien against Inno-Haven and NanoViricides (as a relief defendant) for $17,659.85. A Milford court clerk confirmed for me today the litigation is asking for ‘possession of the lien premises’ at 1 Controls Dr. The 18,000 square-foot building has a $1.35 million mortgage on it according to a Shelton, Conn town clerk but no official lien’s have been filed against the property yet in Shelton.

The biotech firm said last week it now wants to buy the building, instead of lease, from Anil Diwan and his holding company Inno-Haven, but if the architecture firm that is suing for unpaid building supplies, labor, and material is able to secure a court ordered lien it might make it difficult to transfer the property to NanoViricides if a sale went through. Another option, according to real estate attorney Mark Schartz, is Inno-Haven could sell the building to NanoViricides and the public company would use their funds to pay off the $17k bill.

I was hung up on when I called Inno and Nano’s attorney Harry Schochat to ask about how the unpaid bill would be settled. Stewart Margolis, the attorney for the architecture firm Svigls Partners, chose not to comment on the current litigation. CT court records show their next pre-trial hearing is March is March 26th 2013.

If NanoViricides says it’s near completion of the building renovation and it just boosted it’s balance sheet with near $20 million in cash from discounted equity sales to institutional investors why doesn’t it just pay off the $17k bill. It would avoid costly legal fees and any lien’s against the research lab they keep touting in press releases will help advance the company’s goals and finish developing their drugs.

The company is also facing another problem today. Shaquoia Garo, from Columbia University-College of Physician and Surgeons, confirms in an email NanoViricides cofounder Eugene Seymour did not receive a medical degree from the University. Seymour stated in his bio’s he had medical training at Columbia. When the news first showed up as a possible allegation on Seeking Alpha today the company took down it’s website at the 3pm hour while trading in the stock was still going on. The company bio was edited today and the NanoVircides website was back online after the market closed. Where Seymour got his medical training is now a vague line on his bio.

The Seeking Alpha research report, which raised a lot of the questions I brought to light last year in my reporting at Growth Capitalist, led to a New York based law firm issuing a press release they want to start an investor class action suit against the biotech stock and its founders. When I reach the attorney on the suit, Benjamin Sachs-Michaels of Harwood Feffer, he said he could not talk about the case but enjoyed reading my reporting on the company. It’s unclear if any $NNVC investors have signed on to the suit yet.

NanoViricides is continuing to promote its company at investor conferences and is registered to present in April at a small-cap stock conference in Las Vegas run by Market Nexus Media.

Regulators Investigating Firms Sub-Account Use in Shorting Stocks

Government regulators are investigating investment firms that set up sub-accounts with their broker dealers to mask illegal short selling schemes. I reported for Growth Capitalist this week that FINRA and the SEC are currently doing a sweep of hedge funds and their brokers dealers for the use of sub-account under the hedge funds master account to essentially naked short a stock.

The regulatory investigation is on top of the short selling fines the SEC imposed on 22 firms last month. The government is focused on how firms short a stock within a five day rule before a new issue for the stock – which is basically naked shorting.

The use of sub-accounts, sometimes set up in names of people who are not actually the investor in the funds, is similar to the ‘rathole’ game Jordan Belfort used in the mid-90’s at his illustrious Long Island firm Stratton Oakmont. You might remember Belfort from his tell-all novel ‘The Wolf of Wall Street’ – which is now going to be a lucid and greedy portrayal of what can happen behind the scenes with stock trading in a major motion picture this year.

But regulators aren’t just looking at bucket shops trying to use straw buyers. Even if a real investor’s money is being used to short a stock in the subaccount, while the Master account is long the stock, say five days before a new issue (illegal practice Rule 105), FINRA or the SEC is likely to come after the firm. And they’ll fine the broker-dealers for not inspecting what the hedge funds are doing via compliance violations even if the broker-dealer had little or no intent on allowing the hedgie to do illegal trading.

Last year the poster child for this kind of scheme, William Yeh of Genesis Securities, was banned from nearly every stock exchange for what he did with master and subaccounts. You can read all about Yeh’s scheme in the FINRA lawsuit here.

I am now seeing Wall Street securities lawyers warning their clients to be on guard for this kind of thing:

Master/sub-account relationships raise a host of regulatory issues for firms and carry the risk that the firm does not know the identity of its “customer” as required by federal securities laws, including the Customer Identification Program (CIP) provisions of the Bank Secrecy Act, and FINRA Rule 3310. In some situations, despite the fact that there is an intermediary master account, a firm may be required to recognize a sub-account as a separate customer of the firm. FINRA examiners closely review firms’ procedures for determining the beneficial ownership of each account within a master/sub-account structure in accordance with the guidance published in Regulatory Notice 10-18. FINRA examiners will review firms’ systems for monitoring, detecting and reporting suspicious activity in master/sub-account structures, whether or not the sub-account should be considered the firm’s customer for CIP purposes.

And FINRA says it’s using 16 examiners to figure out if a hedgie/traders master account is basically being allowed to operate as an unregistered broker-dealer:

FINRA examiners also will focus on whether the firm is properly monitoring transactions in master/sub-account structures for potentially manipulative activity and reporting that activity, as appropriate, on a Suspicious Activity Report (SAR). In a recent enforcement action, FINRA sanctioned a firm for failing to adopt risk-based procedures to verify the identity of sub-account holders, even though these customers lived overseas in high-risk jurisdictions and could freely execute trades for their own profit, and also for failing to adopt effective procedures for detecting suspicious activity.

The problem with these regulator inspections is master/sub-account relationships have now also raised issues under other FINRA and SEC rules, such as margin rules and books and records requirements. Meaning firms could get hit with a ‘net-capital charge’ if the regulator thinks there is prop trading in the sub account and the real owner who reaps the dollars is different than the master account.

This is seen as a ‘Johnny Come Lately’ action by the SEC and FINRA by some small cap stock CEO’s who have been made to look like lunatics for complaining about naked shorting over the last decade and our Chris Cox/ Mary Shapiro style of leadership at the SEC did nothing about it. Others think it’s a witch hunt by the SEC because Main Street is frustrated at their total lack of getting BIG fines out of traders who break securities laws and keep making millions of dollars.

Casino Investors claim Hedgie Plainfield designed Equity Grab Scheme

Plainfield Asset Management is back in the news for their role in an alleged predatory lending scheme with a Colorado casino. I reported for Growth Capitalist this week investors in American Gaming Group sued the manager of Wildwood Casino for getting a sweet deal from hedge fund Plainfield to buy the millions in debt the fund held for a deep discounted price.

A breach of fiduciary duty claim was made because, Joe Canfora the casino manager hired by investors, allegedly bought the debt with equity warrants for himself with out telling the investors the opportunity was available. Canfora runs Merit Management and allegedly has a history of working with Plainfield and Innovation in the past. PFAM sale to Canfora put him in the lead as the top equity investor because of the warrants in the deal that enabled him to buy company stock for cheap. A move that shocked initial investors in the deal.

Growth Capitalist also highlighted the role of LA-Based Innovation Capital, run by Matt Sodl, who helped American Gaming Group raise over $50 million during the casino build out phase. One investor called the relationship between Innovation, Plainfield, and Canfora ‘the axis of evil’ because they felt the financial firms forced investors to put Canfora into the job who loaded it up with unnecessary debt and expenses. A move designed to make it a distressed company rip for a take over if you can buy the discount debt.

Plainfield, a once $5 billion fund run by Max Holmes, was forced to shut down and liquidate its investments early in the financial crisis. I previously reported for Greenwich Time and Dealflow Media that regulators and the Manhattan D.A. were investigating the fund for predatory lending along with securities violations. The fund managers have yet be charged with any wrong doing but did fight a bucket of civil lawsuits filed by small cap companies who borrowed money from them.

Canfora is believed to have not even put up the funds to buy the Plainfield debt. It’s difficult to pass the Colorado gaming board ownership standards and some investors have speculated if the true owner of Canfora’s equity stake is a member of one of the financial firms who did the original casino financing. PFAM had tried to make an equity investment in the casino during the build out phase but didn’t get pass the Colorado gaming board review.

The investor suit is currently in arbitration but Canfora hasn’t taken their claims lightly. He sued investor John Schaffer for defamation in Colorado state court after Schaffer spoke out during a public gaming board hearing last summer on Canfora’s questionable actions. The defamation suit was tossed out in December but Canfora still denies he has done anything to harm investors in his role as casino manager.

A wealthy Philly businessman recently hired Canfora to manage a new casino he won bidding rights on in the city of brotherly love. Canfora also up and quit the Colorado casino management job around the time the investor lawsuit was filed.

Retail Broker John Carris Investments Accused of Massive Fraud by Regulators

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

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

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

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

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

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

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

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