One-time wannabe governor charged for Facebook share Ponzi scheme
What's worse, real Facebook shares or pretend ones?
A US financier has been charged with running a $13.2m Ponzi scheme, supposedly trading in Facebook and other social networks' pre-IPO shares despite the fact that he didn't have access to them.
Craig Berkman, a former Oregon gubernatorial candidate now living in Florida, had allegedly promised his investors that he had insider access to stock in Facebook, LinkedIn, Groupon and Zynga in the heady days before they went public.
Berkman even paid some of the investors money claiming they had made that on their canny social network share investments. In reality, according to the Security and Exchange Commission's (SEC) Enforcement Division, Berkman never had any access to the shares and was paying old investors with money coming in from new wannabe stockholders.
He was also using the money he was allegedly conning out of folks to fund his own personal expenses and to pay off claims against him made in an earlier bankruptcy case, the SEC claims.
"Berkman blatantly capitalised on the market fervour preceding highly anticipated IPOs of Facebook and other social media companies to fleece investors whose cash flow he treated like an ATM to fund his own living expenses and pay court-ordered claims to victims of his past misdeeds,” said Andrew Calamari, director of the SEC’s New York Regional Office.
According to the SEC’s order instituting administrative proceedings, the financier managed to raise at least $13.2m from 120 different investors by selling them "membership interests" in his companies. He told some investors that their money would be used to directly buy shares, others were told that they were investing in firms that already held shares while still others were convinced that their money was going to fund new large-scale technology ventures.
Instead, Berkman spent nearly all the money he raised on keeping his scheme going and sorting out his legal difficulties. His troubles started when he was fined $50,000 in Oregon for offering and selling convertible promissory notes without a brokerage licence back in 2001. Then in 2008, an Oregon jury found him liable in a civil court case for breach of fiduciary duty, conversion of investor funds, and misrepresentation to investors due to his involvement in a series of purported venture capital funds known as Synectic Ventures and ordered him to pay $28m.
The following year, Synectic filed a Chapter 7 bankruptcy petition against Berkman for his unpaid debts in the court judgement.
The SEC claims that Berkman used over $5.4m of the investment funds he raised to make payments on the bankruptcy settlement and paid $4.8m to early investors to convince them their interests were making money. He took a further $1.6m to pay for his own dining and travel expenses.
The only money Berkman spent on trying to get Facebook shares was $600,000 to buy a small interest in a fund that did actually have some pre-IPO stock, but the agreement didn't give Berkman any ownership of the shares. One of his companies then used a forged letter about the purchase to falsely claim that Berkman held half a million Facebook shares. When the fund discovered the forgery, it terminated its association with Berkman.
The financier is being charged with fraud and is also facing criminal charges in New York. His lawyer, John Kern, has also been charged by the SEC for falsely assuring investors that their money was being used for Facebook stock when they became concerned after the social network's IPO.
“Lawyers and others who help shady operators commit fraud in the securities markets will be held accountable for their supporting roles. Kern was duty-bound to look out for investors’ best interests, but instead he was actively colluding with Berkman to prevent investors from discovering the fraud," Sanjay Wadhwa, senior associate director of the SEC's New York office, said. ®