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3 Jul

Hedgies Bruce Bernstein, Brian Daly & Richard Abbe accused of stock manipulation in XpresSpa: $XSPA

Richard Abbe of Iroquois Capital and Bruce Bernstein of Rockmore Capital are back in the hot seat. In a new lawsuit filed this week the hedge fund duo stand accused of recently manipulating the stock of an airport spa business called XpresSpa. Last week $XSPA caught the attention of day traders when it had a wild run up of near 160% percent closing on Wednesday at an all time high for the year. Then it dropped of a cliff the next morning and is still trading down. There are also accusation of certain stock holders getting non-public material information ahead of the public. If a trade to sell stock was executed on the non-public information that would be the basis for an insider trading charge. Bernstein is currently the chairman of the board at XpresSpa and Abbe was a former director of the board and owns stock in the company.

The alleged motives of Abbe and Bernstein to move the stock price up for one day stems from the need for the hedgies to get rid of a group of institutional investors who were senior in the debt structure of the company via a $4 million PIPE sold in May 2018. Abbe, Bernstein, and another Rockmore partner, Brian Daly, hold interest in a prior $6.5 million debt, call the Rockmore note, that could force the company into bankruptcy and take the most valuable asset the company has, which is a large group of commercial leases at airports around the world.

Bernstein’s long time investing partner at Rockmore, Brian Daly, is also named in the suit. The shareholder derivative suit filed in the southern district of New York, on June 30th, was brought by investors Moreton and Marisol Binn. The Binns are founders of XpresSpa but are no longer involved in operations of the company. This is the second lawsuit they have brought against Abbe and Bernstein for accusation of securities fraud. The first case, which was exclusively reported by this publication last year, is currently at the appellate court. The former CEO of the company, Andrew Perlman, and other interested directors were also named in the new lawsuit.

Since Team Bernstein took over XpresSpa, the Binns say capital raising that dilutes past shareholders has been on the forefront of the board’s plan. There is always a verbal promise of using the funds the pay off the Rockmore Note or grow the spa business at the 56 lease locations but it never happens. Instead the company entered into death spiral financing sold to funds who get favorable interest and warrant terms, at the expense of main street investors, in the company. Last year Bernstein and his board used Michael Hartstein of Palladium Capital to sell a PIPE investment. Palladium has been the main investment bank and placement agent for pump and dump bad actor Barry Honig. (Honig was sued in September 2018 for a massive pump and dump scheme in multiple stocks by the SEC and has recently agreed to be banned from penny stocks in a settlement with the securities regulator.) According to a fund that invested in the PIPE, half of the $4.4 million raised in the PIPE offering was sold to Honig’s investing partner and co-defendant in the SEC case Alpha Capital Anstalt–a fund who hides its investors names and operates out of Lietchenstein. Hartstein pitched the other investors in the fund they only needed to put up $500k to get in the deal, according to an investor in the deal.

On May 15, 2018, the $XSPA Directors (that includes Abbe and Bernstein) caused the Company to close on the PIPE offerings for the sale of up to an aggregate principal of $4,428,000 with 5% interest payment on secured convertible notes due on November 16, 2019. If the PIPE wasn’t paid it could be converted to common stock at a price of $12.40. PIPE stands for private investment in a public entity. Recent SEC filings disclosed the other investors in the PIPE were, Anson Investments Master Funds, Brio Capital Master Fund, The Hewlett Fund, IntraCostal Capital, L1 Capital Global Opportunities Master Fund, and Palladium Capital Advisers. Richard Abbe’s Iroquois has been a friendly investor with Alpha Capital Anstalt. Both funds were named in an SEC Subpoena asking questions about their trading as an undisclosed affiliate in MGT Capital. Alpha Capital Anstalt paid a near $1 million penalty to the SEC for their role in that deal and is currently under orders not violate further SEC rules. IntraCostal is also another friend to Honig and Abbe. It’s believed to be run behind the scenes by Mitchel Kopin formerly of Cranshire Capital.

Through out the last year XpresSpa has paid the interest on the PIPE deal and the funds have converted some of the debt to stock. Then around mid May of this year Hartstein reached out to the PIPE investors saying the company wants to restructure the price of the common stock conversion but no details were ever follow up on. According to an investor in the fund they didn’t hear back from Hartstein until the day of the stock run. After the market closed on Wednesday, June 26 the PIPE investors were offered what they thought was a sweetheart deal. The stock had just closed at $4.71. So when Hartstein called to say the company would go as low as $2.48 if everyone converted their debt to common stock and got out of the company they jumped on it. (The PIPE investors actually still hold warrants in XpresSpa.)

There could be questions now on if the company should have put out an 8-k that night announcing the material change, which would add near a million shares to the market with the conversion. The 8-K likely would have had main street shareholders dumping stock Wednesday night in after market trading. Instead main-street investors didn’t hear about it till an 8-K was filed with the SEC around 9am. I reached out to investors in the PIPE deal and no one responded for comment on the record. One fund said they sold after the 8-K was filed and didn’t make money on the conversion.

I emailed one of Bernstein’s attorneys asking if they told the PIPE investors when they would put out the 8-K. Bernstein was also informed I knew about the timing of the restructured PIPE deal. His attorney has refused answer or comment on this as of press time. If the new lawsuit makes it to the stage of discovery I would expect there to be subpoenas of trading records to see if there was trading on non-public information by any of the pipe investors or directors of the company, or former directors like Abbe, ahead of the dump on Thursday.

Bernstein’s Temporary Restraining Order
On Monday there was a hearing in the first case the Binns brought in front of Judge Stanton. I attended it. Bernstein sent four lawyers from two different law firms who sat across from the Binns one attorney Michael Maloney. Michael has a co-counsel Rosanne Felicello who was out of town. The hearing was to determine if the temporary restraining order issued on April 28th against Bernstein and the Rockmore Note was going to be lifted. You can read the backstory on the TRO drama here. An attorney, who only does deal transactions and is not a trail lawyer, showed up as one of Bernstein’s four lawyers. Attorney Brian Haskel had not put in an appearance with the court. He said he was there representing Bernstein personally and is with the firm Sills Cummins & Gross. Bernstein’s other lawyers told the Judge Stanton that Haskel was there because he knows the most about the Rockmore Note. In the middle of the hearing attorney Haskel blurted out to Judge Stanton that the company has “Gotten rid of an aggressive lender” and called Alpha Capital Anstalt a bad fund. Haskel was trying to convince the judge that by converting the remaining $2.4 million of the PIPE deal it would help the company with its going concern auditors opinion. The judge was asking about the Rockmore Note though and had to scold attorney Haskel twice. Once for making a scowl at him and the other for talking as a sidebar when he was asking questions. When I reached Haskel by phone the next day to clarify if he was also at the hearing speaking for another corporate entity he said no he was only there to represent Bernstein personally.

Haskel’s answer is odd because a review of SEC filings made last year shows Haskel is named as the deal attorney to send communication to for Rockmore and was the lawyer on the original Rockmore note sold to XpresSpa. Bernstein had to remove himself as having any management control of the fund(it’s called B3D) he moved the Rockmore note into. B3D was owned by Bernstein and Daly. Bernstein even signed an affidavit submitted to the court saying he is not in control of management decisions for the note that could cause XpresSpa to file bankruptcy. He did this in hopes of Judge Stanton lifting the TRO because Stanton had previously said Bernstein would be breaching his fiduciary duty as chairman of XpresSpa if he was also acting as the decision maker calling in the Rockmore Note that would bankrupt the company. In a series of emails back and forth with attorney Haskel I tried to get a straight answer out of him regarding why Bernstein’s personal attorney was there to speak as an expert about the Rockmore note if Bernstein wasn’t really in charge of the Rockmore note anymore. I didn’t get a straight answer.

Attorney Haskel did want me to print this statement from him though.”There appears to be a misunderstanding of a statement I made at the hearing yesterday. In responding to Judge Stanton’s inquiry, I conveyed that Alpha was an aggressive lender, i.e. a lender that would extend credit to a business in XpresSpa’s position, and in that context made the point that permitting Alpha to convert its debt to equity improved XpresSpa’s capital structure.” The transcript will show he didn’t actually explain any of that context to Judge Stanton though. And if his client, Bernstein, really thinks this then why did they sell the PIPE deal to Alpha Capital Anstalt in the first place.

Judge Stanton kept the TRO in place and said he will lift it if the fund that is in charge of the Rockmore note now finishes a deal to extend the maturity date of the note to 2021 as the company alluded will happen in their last 8-k. He basically wasn’t going to let Team Bernstein run free until they actually did what they said in the 8-k. The hearing was considered a temporary win for the Binns and main street shareholders but they still have an uphill battle to get rid of the alleged bad actors running the company. Judge Stanton also told Andrew Perlman’s lawyer from Boise Schiller that he will not dismiss the case in it entirety until the TRO decision is done and all the defendants will be dismissed at one time. The XpresSpa defendants put out a PR statement saying the first Binns case is dismissed but that’s not true and anyone can see this if they review the court docket. The defendants did win a summary judgement decision to throw out the securities fraud claims for the reverse takeover merger that I previously reported. But given that decision in now with an federal appeals court it’s not accurate for the company or the directors to say the case is over.

The Short Squeeze
XpresSpa’s one day stock run last week baffled day traders who started speculating on Stocktwits and other stock messaging boards that XpresSpa was going to be in the Bitcoin business. That’s not true though because the company sold it’s bitcoin/blockchain assets to a company that was heavily invested in by Barry Honig called Marathon Patent Group ($MARA) back in January 2018. Instead the stock run is alleged to have happen by something much more nefarious.

The Company’s stock has consistently traded below $3.00 since March 2019. On June 25, 2019, the price of the Company’s stock closed at $1.82. Between June 25, 2019 and open of the market on the morning June 26, 2019, however, the volume of short interest in the Company’s stock spiked from 1,180 to 2,877,376. The magnitude of short interest created a short squeeze causing the price of the stock to skyrocket on June 26, 2019 to as high as 158% from the prior close. That day, the stock closed at $4.71, representing a gain of 129% from the last close. No news concerning the Company had been reported on June 26, 2019 and the Company made no filings with the SEC on that day, wrote attorney Maloney for the Binns to the court on Monday July 1st.

According to the lawsuit, by artificially driving down the company’s value below the balance of the $6.5 million Rockmore note, the defendants could try to “foreclose on the lease portfolio, convert the Rockmore note into stock at artificially depressed prices, or simply purchase stock for themselves as artificially depressed prices.”

The Rockmore note investors’s plan alleged in the lawsuit is on track, between January 4, 2017 and June 28 2019, the stock price of XpresSpa dropped by more than 95 percent, falling from $42.79 to $1.94 per share, according to the lawsuit. Michael Maloney of CRK Law, the Binn’s attorney, wrote they think the value of the airport lease portfolio is between $19 million and $39 million, but the directors of the company did not disclose this in filings with the Securities and Exchange Commission. Instead because of a one time goodwill impairment charge last year of around $19 million the company claims its worth only around $3.6 million.

There has been some creative accounting and planing surrounding the value of the Airport Leases. For any accounting geeks out there what the XpresSpa directors did is pretty interesting leverage of a pending accounting rule change. It hinges on two things: The true net value of the leases analysis and the cost of carry and payoff of the note and how that impacts a going concern. Some might call it ingenious planing and accounting but whether it is fraud/manipulation depends on the actual numbers.

The new shareholder derivative lawsuit is going to need discovery and a forensic accounting if it plans to get past summary judgement this time.

Editors Note: This story has been updated 7-4-19.
A trade publication covering commercial real estate, called The Real Deal, has also figured out the XpresSpa directors shenanigans make for interesting news and ran a story on the new lawsuit that you can read here. After the story ran XpresSpa finally deiced to make a statement on the record. North Carolina resident Brian Daly is obviously upset that he was named in a lawsuit about XpresSpa stock manipulation and got the company to make a glowing statement about him being a ‘respected’ lender. Brian his wife Helen also have their own holistic spa business recently opened in Charlotte, North Carolina called The Invigory. If the Binns get discovery in the new lawsuit it will be really interesting to see if there is evidence that it’s always been Brian Daly working behind the scenes directing Bruce Bernstein to execute the alleged takeover plan.

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3 May

Federal Judge Halts Rockmore Capital Bruce Bernstein plan to seize XpresSpa Assets : $XSPA

UPDATE 6.27.19 – The hearing to determine if the temporary restraining order against Bruce Bernstein, Rockmore, and B3D LLC will remain is July 1st 2019 at 3pm in the Southern District of New York federal court in front of Judge Stanton.

Origninal Text

A federal judge has stopped Hedge fund manager Bruce Bernstein of Rockmore Capital from gutting the assets and cash of XpresSpa Group by issuing a temporary restraining order on Monday against Rockmore’s move to manufacture a default on a $6.5 million senior secured note against the Airport spa business. Because the asset of the public company are currently less than the amount of the note the move would have forced XpresSpa to file bankruptcy giving Bernstein a clear path to steal assets because his fund’s senior note makes it is first in line to collect. Bernstein, along with his investing partner Richard Abbe of Iroquois Capital, are currently being sued by XpresSpa founders Marisol and Morton Binn for securities fraud for their alleged role in telling lies about who owns the debt that forced a reverse merger with a public company gone bad.

U.S. District Court of New York Judge Stanton issued the order after the Binn’s attorneys, Rosanne Felicello and Michael Maloney of CKR Law, called for an emergency hearing this week. Bernstein was once again trying to argue that he is an independent director of XpresSpa, he serves as the chairman of the board, and as a result doesn’t have a conflict of interest in calling in a debt that would wipe out the XpresSpa main street investors, in which he has a fiduciary duty as chairman to protect. He even paid for another lawyer outside his current 3 corporate attorneys at Mintz Levin to represent him at the hearing in a move to try and look independent. But Judge Stanton wasn’t buying it.

Michael Maloney of CKR Law, the Binn’s lawyer, argued what Bernstein was doing is actually doing is fraudulent conveyance. That is because in the past few years Bernstein has simply extended the due date of the $6 million note so the accountants don’t declare the company has a going concern. XpresSpa actually pays the high interest Bernstein lobbed on the company at 12 percent but all of sudden in what appears to be a vengeful move he tried to call in the full debt on the note. It’s possible this is because Judge Stanton is about to decide on Summary Judgement in the securities fraud case that personally names him. His scorched earth agenda caused Judge Stanton to say Bernstein does have a fiduciary duty to XpresSpa shareholders first, over his roll as an investment professional trying to call in a debt and take the remaining $3.5 million of cash the company said it currently has on hand. This is a first for Judge Stanton who was basically saying “you don’t act or look like an independent director.”

The attorneys at Mintz Levin have till 5pm today to file an 8-K announcing the TRO as a material event for XpresSpa. SEC rules require public companies to tell shareholders about important events that affect the company’s financials within four days of the event happening. I asked Bernstein if he also paid for the new lawyer that showed up at the TRO hearing representing him as an individual. If he used XpresSpa money to pay for that lawyer it would be an unethical move by a director of the company.

This isn’t the first time Bernstein has tried to use a manufactured default of the Rockmore note to benefit himself at the disadvantage of XpresSpa shareholders. Before the forced merger with public company Form Holdings, Rockmore issued a notice of default against XpresSpa back in June 2016. Rockmore said XpresSpa hadn’t made sure Rockmore got audited financials in the time frame it required. All the interest on the loan was still getting paid but XpresSpa needed an extension on when the principal of the debt was due. As a result of the default Bernstein is accused of basically blackmailing the board to do a deal with Form Holdings. XpresSpa had interest from another business to do a merger and that business had also had been given a signed right of first refusal if other buyers came along. Bernstein blew past that and told the board of XpresSpa he’d take back the default if they did the Form Holdings deal so in July 2016 a term sheet for the merger was signed. Rockmore also got an additional $500,000 added to the $6.5 million principal due after the company agreed to merge with Form Holdings saying Rockmore deserved the additional funds because they called off the default.

XpresSpa had $51 million of revenue as of the last financials filed with the SEC and owns leases in Airports, which are considered an asset. But it’s not shown positive net income. Since Team Bernstein took over executives salaries have been up to $2 million a year in total while the company is loading up on expenses and not growing the business. The stocks trades barley above $2 on the NASDAQ under the ticker $XSPA.

Bernstein came to the temporary restraining order hearing with a plan. He told Judge Stanton that control of the Rockmore note had been moved to a North Carolina LLC called B3D. He said there is a co-owner in B3D that can make decisions also so he really is not the guy calling in the Rockmore note. Ironically in a SEC filing last year Bruce Bernstein has signed documents as the controlling director of B3D. On top of that, the other B3D guy Bernstein told the judge could control the Rockmore Note is none other than Brain Daly who is a top investment manager and has some ownership of Rockmore Capital. Daly has worked with Bruce for years.

Apparently Judge Stanton saw through that argument because the temporary restraining order is also against any successors of the Rockmore Note or persons that can control B3D. Meaning Brian Daly also got notice of the TRO.

Bernstein recently tried to secretly sue this journalist, via a sealed complaint filed in NY state court, to reveal sources in my reporting on the alleged fraud and lost the lawsuit. Bernstein thought his ex-wife was leaking information to me that they had agreed to be confidential but our hearing showed that was not the case. I didn’t get confidential information nor was she the source. Sheryl Aufrichtig, his ex, had given the Binns lawyers at CKR Law some unsolicited but critical financial information of Rockmore Capital, which Judge Stanton had agreed to be sealed from the public while they are litigating the fraud case. The hedge fund manager’s move to intimidate a professional journalist with a state court lawsuit backfired though because it unsealed documents in the federal case that could prove Bernstein and Richard Abbe lied to shareholders in SEC filings.

After I published the unsealed findings an additional high net-worth investor in XpresSpa, Roman Kainz, sued for securities fraud, which now doubles Bernstein and Abbe’s litigation cost. The new lawsuit also added a new investment professional, William ‘Bill’ Phoenix, who is believed to aid and abetted in the fraud. Richard Abbe has quit the board of XpresSpa but it’s unclear if he is still pulling Bernstein’s strings. As I previously reported the duo have a pretty cozy relationship given Abbe allegedly got Bernstein to hide his investment in Rockmore Capital and the senior secured debt that controls XpresSpa. If those action are proven as securities fraud in the federal court case it could open the door for an SEC enforcement action against the Bernstein and Abbe.

Bernstein would not return a request for comment on the temporary restraining order.

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16 Aug

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.

10 Comments
13 Feb

SEC knew Collecting $14.5 mn Hedgie Ribotsky fine Would Fail

N.I.R. Group hedge fund founder, Corey Ribotsky, filed for personal bankruptcy leaving a whopping $36 million of debt unpaid a year after he settled with the SEC for investor fraud. Today I am reporting for Growth Capitalist that court records allude to the notion that the government knew Ribotsky wouldn’t be able to pay his multi-million dollar fine when they backed down from taking him to trial and agreed to a settlement in 2013.

Long Island-native Corey Ribotsky ran a hedge fund that mainly invested in PIPE’s for over a decade. These are private interest bearing loans made to small cap companies that turn into discounted stock warrants if the borrow can’t payback the loan in a certain amount of time. To simplify what usually happened in N.I.R. Group PIPE transactions the borrow usually doesn’t pay back the loan and the hedge fund gets cheap stock they can sell for cash on the open market which can drag down the price of a small cap stock to unsuspecting penny stock investors. Ribotsky raised hundreds of millions of dollars from upper middle class investors that he met via his charity work, a north shore country club or through introducing brokers.

I began investigating Ribotsky for investor fraud in 2008 while reporting for the New York Post. It took the SEC until September 2011 to finally sue the hedge fund manager for securities violations & investor fraud. By the time the SEC sued, investors in N.I.R.’s once $800 million hedge fund had lost their money, and Ribotsky continued to earn millions in fees managing and unwinding a fund whose valuations were allegedly inflated.

Between investigative reporters documenting Ribotsky threatening & lying to investors, along with internal whistleblowers, the government’s case against Ribotsky was built for them before they sued. Yet at the end of the day we only saw the Securities and Exchange Commission bar Ribotsky from the industry for only four years and collect zilch from him to return to investors.

It wasn’t till three years after the securities regulator sued Ribotsky for stealing millions from his investors that we learn the government is having an impossible time collecting any money to return to N.I.R. Group investors.

On November 13 2014, SEC attorney Kenneth Byrne wrote Judge Bianco the Commission had started “collection proceedings against Ribotsky that included discovery of his income and asset”. The government never got Ribotsky to admit guilt and his lawyer Doug Hirsch told the court the SEC knew before they settled the case in November 2013 that Ribotsky didn’t have anywhere near the assets or earning potential to pay the amount the SEC wanted in a fine (See Attorney Hirsch letter below). Bankruptcy records show Ribotsky stopped making mortgage payments on his $6.8 million loan to Signature Bank in September 2012, which was secured by his family home at 11 Bostwick Lane, Old Westbury, NY. The property is in a llc called ZFL and listed as an asset owned 100% by Ribotsky. Additionally, court records show $549,321.48 in town property and school taxes have not been paid on the home dating back to 2011. On July 19th 2013, months before the SEC settlement, Signature Bank started foreclosure proceedings in Nassau County court against the home. Total debt owed by ZFL to Signature bank is now $7,203,277.78. Any SEC collection efforts would be behind Signature Bank who has a secured claim on one of Ribotsky’s largest assets. A recent order by Ribotsky’s bankruptcy judge shows Signature Bank, who claims they were close to finishing the foreclosure right before Ribotsky filed bankruptcy, will be allowed to move forward with their case and collect funds from a foreclosure auction.

Ribotsky also had ownership interest in another home, 317 Bedford Ave Bellmore NY, which is also held in a LLC. Court filings show Ribotsky testified in a bankruptcy hearing he transferred 50% of his interest in 317 Bedford to Howard Tanney at no consideration. A 2004 bankruptcy exam has been ordered against Howard Tanney to prove Ribotsky did not commit fraudulent conveyance via the home interest transfer.

The government watched reporters like myself, Matt Goldstein, and Nathan Vardi for four years detail Ribotsky’s fraud via on record sources and documents, but only managed to make one criminal arrest of Ribotsky’s right hand guy Daryl Dworkin. In 2010 Dworkin quickly turned DOJ government whistleblower and plead guilty to taking bribes while working at N.I.R. group. The fund was eventually forced into an outside receiver (PwC) taking over in the Cayman Islands who was given some decent access to a document trail of fraud allegedly committed by Ribotsky.

The SEC could have at least deposed Daryl Dworkin in their case, as court filings in SEC v. Ribotsky show the DOJ’s deal with him was he had to testify for the SEC. But the government settled right before the deposition was going to happen. Dworkin’s testimony would have at least helped investors learn what he was telling the DOJ about Ribotsky’s role in the fraud, which could have aided any investor civil suits against the hedge fund manager.

At a sentencing hearing I attended for N.I.R. Group executive Daryl Dworkin on November 5 2014 the DOJ had to admit to federal Judge Dearie they didn’t charge Ribotsky with criminal fraud because they didn’t think they had enough evidence to convict him. For four years the DOJ delayed Dworkin’s sentencing while they worked him for information against Ribotsky.

A month after the Dworkin sentencing Ribotsky finally tells his version of what he did with some of the millions he took from his investors via his chapter seven federal bankruptcy filing. The December 17 2014 bankruptcy shows he’s been sued numerous times but never paid up on judgments rendered by the court. Interest and stock in financial companies Ribotsky owned were primarily transferred to another top N.I.R. Group executive Robert ‘Bobby’ Cohen. The bankruptcy court has ordered Cohen to go through a 2004 examination of some of the transferred stock. Additionally, Christopher Machton of Great Neck NY, who got a $300,000 loan from Ribotsky has been given a 2004 exam subpoena from the bankruptcy court to prove he got the funds and how they were used.

“The government is suing him and he simply moved money around so he didn’t have to pay fines”, is what one Boston-based N.I.R. Group Investor told me after he read Ribotsky’s bankruptcy documents. In fact, in 2012 Ribotsky says in court filings he still made $1.2 million. That was the year he was getting kicked out of his fund, fighting a SEC lawsuit, and investors learned via the receiver the hedge fund assets were super hard to sell and illiquid. Meaning there wasn’t a ton of hope of getting their hard earned dollars back from the hedge fund.

The case was a complete failure by Loretta Lynch’s office (the black woman Obama has put up to be the next head of the DOJ) and an abysmal victory by the SEC – who at least got Ribotsky to agree to stop committing fraud for a few years.

At Dworkin’s sentencing hearing in Brooklyn, NY I got to see how the DOJ and SEC lawyers acted in this case. I was surprised by their egos given how little they accomplished. Government lawyers told Judge Dearie they were working hard to recover money for investors but they simply haven’t been able to do it. After the hearing I cornered SEC attorney Kenneth Byrne and a little man with horn rimmed glasses who was running the DOJ case to ask them face to face how they felt about their inability to get justice for investors and collect any money. DOJ attorney Daniel A. Spector scowled at my question and instead of answering it demanded to know my name and who I report for. I said my name was Teri Buhl and you should clearly know who I report for now. (Spector’s predecessor who started the NIR Group case had interviewed me in 2009 to get help finding NIR investors Ribotsky had lied to so I know the DOJ had been reading my reporting.) Attorney Spector’s ego kicked in and gave me a smug look saying they can’t comment on the case except what I heard them say in court. Now after a case is over the DOJ can comment and usually issues a press release. But in this case the PR girl for the DOJ admitted since there was no jail time for Dworkin there wouldn’t be a public comment. Meaning they didn’t want to promote a case that got so little for investors.

As I watched the SEC attorney and the DOJ boys leave the court room and slink into the elevator I did something I rarely do when asking subjects of a story questions. I asserted my opinion. I looked them both in the eye and said, “You should be ashamed of yourself for not doing more for the defrauded investors. You had this case handed to you an a platter.”

Attorney Spector’s rebuttal was silence and later in the day he refused to get his press person to answer how much Dworkin was ordered by the judge to pay in a forfeiture bond. The bond was ordered in court but the amount was not mentioned. This was public record and they had to answer my reporter question. Instead they stonewalled me and we had to wait a few days to print the news of Dworkin’s sentencing at Growth Capitalist until all the court documents from the hearing were filed online. Dworkin received NO jail time, no penalty fine for his three felony convictions, and only a forfeiture bond to give back the $400,000 he had taken in bribes to bring PIPE deals to N.I.R. Group. And to this day we don’t know if the government will even collect that from him given he can’t earn big money working on Wall Street any more and he told the court his home is in foreclosure.

For those of you familiar with Ribotsky I have uploaded a copy of his unsecured creditors. Tom Sporkin, securities attorney at Buckley Sandler who was a former SEC enforcement lawyer, told me it is very hard to get a bankruptcy court to forgive a government fine so Ribotsky will technically still be liable for the $14.5 million the SEC is supposed to extract from him. But chances of that happening are zero to none in my view. I’d expect Ribotsky to end up moving to the Cayman Islands. A place one of his former best friends told me he often took a private jet to and visited an off-shore bank; after he’s done telling an American bankruptcy court he has no money to pay $36 million back.

Ribotksy attorney Doug Hirsch letter to Judge in SEC case over lack of ability for Ribotsky to ever pay SEC fine.

Ribotsky Attorney Letter to Judge Over Nonpayment by Teri Buhl

Ribotsky List of Bankruptcy Creditors

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Corey Ribotsky Bankruptcy Creditors by Teri Buhl

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9 Comments
28 Jan

Plainfield Asset Mgt Investors Insulted by Ex- Hedgie Executive’s Cheap Cash Offer

A former top dog portfolio manager at hedge fund Plainfield Asset Management, Marc Sole, is using the funds of his new hedge fund to try and buy out remaining investors in the now defunct Plainfield for a discount. According to offer documents seen by this reporter Sole, who now works for $4 billion Hudson Bay Capital, offered investors in four liquidating Plainfield funds 52 cents on the dollar. The problem is investors say they never received a transparent valuation from Plainfield, or the liquidator PwC Cayman, of the remaining amount of their interest in the funds.

Plainfield made international headline news in 2008 for gating their $5 billion hedge fund and locking investors from cashing out. The fund founded by Max Holmes, who now teaches at NYU’s Stern school of business, was investigated by the SEC for inflating investors assets to receive excessive fees. The SEC cleared the fund of its investigation in June 2012, according to a letter from the SEC, but Holmes was extremely slow in winding down the fund. Plainfield 2008 Liquidating Ltd. and Plainfield 2009 Liquidating Ltd. were put into voluntary liquidation in the Cayman Islands on December 31st 2013 according to public filings at gazettes.gov.ky According to investors, the portion of assets in these funds is only a sub/residual piece of what Plainfield had originally invested in.

Plainfield was also investigated by the Manhattan D.A. for its loan to own practices with small cap companies but was never charged by the D.A. for wrong doing.

Sole started with Hudson Bay in 2011, he was one of Max Holmes right hand guys helping pick investments for the failed fund. The Hudson Bay Absolute Return Credit Opportunities Fund made the offer to Plainfield investors, who are mostly institutional money, on December 16th 2014. Investors were given only 30 days to decide if they want to take the deal. Ian Stokoe and David Walker are running the Plainfield liquidation at PwC Cayman.

Sole chose to enlist the help of Plainfield’s former General Counsel Thomas X. Fritsch who is now an attorney for white-shoe Wall St. law firm Boies, Schiller & Flexner LLP. Fritsch is known for his dirty tactics defending Plainfield after the media was questioning the ethics of the hedge fund leadership. In 2011 I published a story showing Max Holmes caught on camera encouraging his staff how to avoid possibly incriminating emails by cc’ing Fritsch on the communication to claim attorney client privilege.

Unlike investors, Sole and Fritsch who worked as senior executives at Plainfield through its hype and downfall should have some sense of what assets are being liquidating and judge what value they could fetch on the open market.

One institutional investor who received the Hudson Bay offer told this reporter in an email, “Needless to say as an LP I find this offer in extremely poor taste and offensive. Are Sole and Fritsch that desperate to make a buck that the only way they can do it is to use inside info to screw over LPs? Shameful.”

Fritsch and Sole did not return a request for comment at press time.
The same Plainfield investor said, “We don’t have any visibility/transparency from Plainfield to ascertain current value. Our firm wrote off significant amounts in prior years. This is a stub/residual piece. We didn’t even dignify the offer [from Hudson Bay] with a response.”

It’s unclear how many Plainfield investors took the Hudson Bay offer which expired on January 15th 2015.

Plainfield’s website says, “At the end of May 2012, Plainfield substantially completed the liquidation of the funds which it managed and deregistered, in good standing, from the S.E.C.” Legal filings in the Cayman’s obviously show there is more liquidation to be done. Why Marc Sole is now offering investors some discounted cash for the fund’s remaining investments is unclear.

Hudson Bay Offer Docs Plainfield 2008 Lidquidating LTD by Teri Buhl

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17 Jan

Social Rejection?: Hedgie Steve Cohen Wants Out of East Hampton

The world’s most infamous trader wants to get out of East Hampton, NY. Yesterday I reported for the New York Observer that Stevie Cohen, of SAC Capital, is trying to broker a private deal to sell a $60 million ocean front home he bought less than a year ago. His reasoning, according to a person on the deal, is East Hampton is ‘too Jewish’ and he has instructed people to start looking for another home in other Hampton enclaves.

This one real estate transaction has fueled a social media debate about what he’s really doing. Having lived and worked among Cohen-ites and his SAC Captial traders for the last decade out in Connecticut’s gold coast I don’t think his comment is a signal of anything anti-Jewish. Instead I believe it shows his social network could be failing since the hedge fund he founded plead guilty to supporting a culture of massive inside trading.

Cohen paid the highest fees to broker dealers who moved his trades for over a decade but according to people who worked with him, starting from his early days a Gruntal & Co, they hated him because of the way he did business. I’ve been told stories of dealers at Lehman leaking other funds trade volume to Cohen and Cohen even funding smaller hedge funds to use them to create liquidity when he wanted to short a stock. The years of alleged cheating to beat the markets has left sour grapes in mouth of many on Wall Street. And now that he’s shutting down his large hedge fund his volume of fee paying to The Street will shrink. This could mean people aren’t as motivated to play friendly with the Cohens in their social time.

Stevie Cohen Family photo

Before we ran the story about why he wants to sell his East Hampton home I had multiple conversations with Cohen’s outside pressman (aka his block and tackle Flack) Jonathan Gashalter about what was going to be reported and he expressed anger at the idea we’d print the ‘too Jewish’ comment. He also would not go on the record to say neither house is up for sale before he went to print. No one knows what’s really in this hedgie’s mind when he said it and I’m sure Cohen never thought it would get repeated. Stevie Cohen has gotten stories held or changed for years through Gashalter but as the market ( and my peers in the media) are apparently waking up to how he operates it was refreshing to see the New York Observer stand by the news report and my reporting.

The news on anything Cohen, or what his family, does isn’t going to stop. Nick Verbitsky, director of Frontline’s new blockbuster film ‘To Catch a Trader’, told me the FBI even admitted that have three stock trades they are still investigating that could lead to criminal charges against Cohen. It’s my understanding one of them has a whistleblower willing to flip on Cohen; which is something we have yet to see in the DOJ’s seven plus years of trying to nail Cohen for inside trading.

Even if the DOJ is never able to get a criminal charge against Stevie, how the markets and his social network respond to what ‘they think’ he’s done is much more of a barometer for how The Street will or won’t police itself.

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16 Mar

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

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

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

Stevie laughing with wife Alex at the SEC

Stevie laughing with wife Alex at the SEC

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

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

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

4 Comments
26 Feb

New Stream Hedge Fund Executives Charged with Criminal Fraud

Today at 1pm in Hartford, Conn. federal court executives of Ridgefield-based hedge fund New Stream Capital were indicted on 19 counts of conspiracy, securities fraud and wire fraud. Tom Carson, DOJ pressman, confirmed the arrest of David A. Bryson and his co-founder Bart Gutekunst along with his CFO Richard Pereira last week. The case has been unsealed today. I first reported in 2009 the hedge fund was being investigated for investor fraud by the FBI at Hedge Fund Implode and continued to report on the fund’s bankruptcy and investor lawsuits for DealFlow Media and Forbes over the last two years.

The federal documents unsealed today also mentions a co-conspirator #2 labeled as a marketing and client relations person. This would be David’s sister, Tara Bryson, who I first reported was arrested for growing a pot farm in her Newtown, CT mansion with her boyfriend at Forbes. Tara Bryson went on to run a goat cheese farm and sell at local farmer markets in Fairfield County which include New Canaan. She was not charged with her brother today but did settle with the SEC in their civil suit against the fund for overvaluing assets and reaping millions in fees.

Also not in handcuffs today was Perry Gillies, the former GE executive and chief operations guy New Stream brought in to help communicate with investors and manage staff.

David and Bart used their homes as collateral for the $5 million bond. Rich, the CFO, only had to post a $300,000 bond. David’s wife Kristin Bryson was in court with him and does external public relations for IBM. The $3 million Bryson home in Ridgefield is up for sale – they bought it while David was running New Steam in 2006. All three plead not guilty and went home to their families in Ridgefield and Weston. The New Stream executives are facing over 100 years in jail if convicted on just five of the 18 counts of securities and wire fraud.

I’ve reported more on the history of New Stream, the names of funds that invested in New Stream, and how the investors led lawsuits built the government’s case for them at Growth Capitalist.

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