Two Investment Frauds Centered on Pre-IPO Shares of Facebook

Two Investment Frauds Centered on Pre-IPO Shares of Facebook

 Fraudulent investment funds purporting to give the public an opportunity to acquire pre-IPO shares of potentially hot stocks such as Facebook have been front and center in the District Court in Manhattan in recent days. In one case a former Oregon gubernatorial candidate and securities law recidivist pleaded guilty while in the other a Florida businessman was sentenced to prison. In both cases investors lost millions of dollars.

The first centered on a scheme orchestrated by Craig Berkman, a one time aspiring political figure. Over a period of about two years beginning in 2010 Mr. Berkman raised an estimated $13.2 million from over 120 investors for three fraudulent investment schemes.

Ventures Trust LLCs: Investors were told these entities held large quantities of pre-IPO shares of Facebook, Groupon, LinkedIn, and Zynga. In fact they did not. One entity did have a small, indirect interest in pre-IPO shares of Facebook.

Face-Off Acquisitions, LLC: This entity, investors were told, would use the funds to purchase an existing special purpose vehicle that owned a significant stake in Facebook. The representation was false.

Assensus Capital Investors, LLC: In this scheme investors were lured to provide funding for what they were told would be an investment in various start-ups, including technology, medical device and energy companies. Investor funds were supposedly secured in part by interests in pre-IPO shares of Facebook. The claims were false.

In fact Mr. Berkman misappropriated much of the money raised from investors. These was not the first such schemes in which Mr. Berkman has been involved. Previously, the Oregon Division of Finance and Securities issued a cease and desist order against him and imposed a $50,000 for selling securities without a license. Later an Oregon jury found him liable in a private action for breach of fiduciary duty, conversion of investor funds and misrepresentations.

Now Mr. Berkman has pleaded guilty to one count of securities fraud and one count of wire fraud. He is scheduled for sentencing on October 1, 2013. U.S. v. Berkman, No. 13-mg-00732 (S.D.N.Y.). The SEC has a parallel action pending. In the Matter of Craig Berkman, Adm. Proc. File No. 3-13249 (Filed March 19, 2013).

In the second case, Florida businessman John Mattera was sentenced to serve 11 years in connection with a fraudulent investment fund scheme tied to pre-IPO shares of stocks like Facebook. He had previously pleaded guilty to securities and wire fraud charges. U.S. v. Mattera, 1:12-cr-00127 (S.D.N.Y.).

From 2010 through 2011 Mr. Matteria served as Chairman of the Advisory Board of Praetorian Global Fund Ltd., a mutual fund. In that capacity he was responsible for the investment decisions.

Beginning in the late summer of 2010 Mr. Mattera and others offered investors the opportunity to purchase shares in special purpose entities related to the Praetorian. Those vehicles supposedly owned pre-IPO shares of companies such as Facebook and Groupon. Based on these representations about $11 million was raised. Investors were assured that their funds would be held in escrow until after the IPOs.

In fact the representation were false. Most of the investor money was transferred to other entities with which Mr. Mattera was associated. About $4 million was spent by Mr. Mattera for personal items. The SEC has a parallel case pending. SEC v. Mattera, Civil Action No. 11-cv-8323 (S.D.N.Y. Filed Nov. 18, 2011).

For more commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.

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