Federal law enforcement officials arrested a Florida man Tuesday for allegedly defrauding investors by telling them he had access to shares of Facebook before its initial public offering.
The U.S. Attorney's office in New York said Craig Berkman, 71, received a total of $8 million from investors who thought they were investing in Facebook (FB) prior to the social network's IPO last year.
Berkman also allegedly misled investors about his access to shares of other social media companies before they went public, including LinkedIn (LNKD), Groupon (GRPN) and Zynga (ZNGA), according to the Securities and Exchange Commission.
The SEC charged Berkman with fraud, saying he used the money he raised to make "Ponzi-like payments" to previous investors, pay a bankruptcy settlement and fund his personal expenses.
"Berkman blatantly capitalized on the market fervor 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, an SEC lawyer in New York.
A one-time gubernatorial candidate in Oregon in the 1990s, Berkman was taken into custody in Odessa, Fla., and is expected to appear in federal court in Tampa on Tuesday. He faces up to 20 years in prison if convicted. Berkman's lawyers at Ransom Blackman LLP in Portland did not immediately respond to a request for comment.
According to court documents, Berkman told investors his private equity fund, Ventures Trust II, controlled shares of Facebook before the company went public last May. But prosecutors say Berkman had only a small, indirect investment in the then privately held company through an affiliated fund. This investment was terminated in early 2012 after the fund that held the pre-IPO shares learned Berkman had forged a letter from its lawyer to exaggerate the size of his Facebook stake.
As more investors began to redeem their shares of Facebook last year, prosecutors say a lawyer for Ventures Trust II sent another letter to investors insisting that the fund "is not a Ponzi scheme."
The SEC has filed civil charges against the lawyer, John Kern of Charleston, S.C., for helping to cover up the alleged scheme.
Prosecutors also accused Berkman of misleading investors in a business he set up called Face Off Acquisitions, which was supposed to control 1 million pre-IPO shares in Facebook through an acquisition. Berkman allegedly raised $2.5 million by telling investors that "a prominent billionaire investor" had committed to Face Off, but in reality the deal was never official.
Facebook was one of the most sought-after investments on Wall Street before its IPO went awry last May. In the months before the IPO, there were stories of early investors in the social network, including the graffiti artist who painted the company's headquarters, who would become instant millionaires.
Prosecutors say Berkman took advantage of the excitement around Facebook's IPO to dupe investors.
"As alleged, Craig Berkman seized on the interest in a highly coveted investment opportunity to swindle investors out of millions," said Preet Bharara, the U.S. Attorney in Manhattan.
Ironically, the investments Berkman claimed to have access to before everyone else failed to live up to the hype.
Facebook shares, for example, plunged almost immediately after hitting the market. While the stock regained some ground late last year, Facebook is still well below its IPO price of $38 a share.
In the biggest IPO since Facebook, animal health company Zoetis generated strong demand from investors early Friday.
Shares of Zoetis (ZTS) surged as much as 22% in its debut on the New York Stock Exchange.
The company, which spun off from pharmaceutical giant Pfizer (PFE), sold 86.1 million shares at $26 apiece late Thursday. The stock traded as high as $31.74 before easing slightly but still remained above the IPO price.
The offering MOREBen Rooney - Feb 1, 2013 10:52 AM ET
Norwegian Cruise Line (NCLH) sailed more than 30% above its initial public offering prices when its shares debuted on the Nasdaq (NDAQ) Friday.
The third largest cruise ship operator in North America sold 23.5 million shares for $19 apiece -- slightly better than the estimated range of $16 to $18.
Norwegian Cruise Line plans to use part of the $446 million it raised to pay down some of its $3.1 billion MOREMaureen Farrell - Jan 18, 2013 11:49 AM ET
Facebook (FB) stock rallied nearly 4% Wednesday, crossing $30 a share for the first time in six months.
The social network sent media invitations late Tuesday for an event at its Menlo Park, Calif. headquarters on January 15. The invitation called for reporters to "Come and see what we're building," fueling speculation that the company will make a major product announcement.
Hitting $30.28 Wednesday, the highest level since mid-July, shares of Facebook are MOREHibah Yousuf - Jan 9, 2013 12:48 PM ET
SolarCity (SCTY) is shining on its first day of trading.
In its debut on Nasdaq (NDAQ) Thursday, SolarCity closed 47% above its $8-a-share initial public offering price.
To get that pop, SolarCity was forced to scale back its expectations. The company had originally tried to price its offering between $13 and $15, which would have given it a valuation close to $1 billion, and raised $141 million.
Even though the company upped MOREMaureen Farrell - Dec 13, 2012 12:50 PM ET
YY, the first Chinese company to brave the U.S. initial public offering market since April, was expected to meet a wary investor base Wednesday. Yet YY's (YY) stock managed to rise 10% in its debut on Nasdaq (NDAQ).
A Chinese Internet social media platform with a focus on gaming and video chats, YY, priced its offering at $10.50, the low end of its expected range. The company raised $82 million for MOREMaureen Farrell - Nov 21, 2012 11:04 AM ET
Shares of home furnishing retailer Restoration Hardware (RH) surged in their debut on the New York Stock Exchange Friday morning.
The retailer raised $122 million in its IPO, which priced at $24 a share -- the high end of its estimated range. It will use the bulk of the proceeds to pay down debt and pay management fees to its private equity owners -- Catterton, Tower Three and Glenhill -- MOREMaureen Farrell - Nov 2, 2012 12:35 PM ET
Massachusetts regulators on Friday fined a Citigroup unit $2 million for failing to prevent analysts from illegally leaking confidential information about Facebook's initial public offering.
Citigroup (C) was one of several banks that competed to underwrite Facebook's (FB) IPO, along with lead underwriter Morgan Stanley (MS), Goldman Sachs (GS), Bank of America (BAC) and others.
Under U.S. securities law, IPO underwriters are not allowed to publish research on a company until MOREBen Rooney - Oct 26, 2012 11:11 AM ET
Share of Workday soared 74% as they made their stock market debut on the New York Stock Exchange.
The company provides a cloud-based software for companies to manage human resources functions like payrolls, time tracking and employee expense management. It raised $637 million in its initial public offering after pricing 22.8 million shares at $28 a piece, $2 above the high end of its estimated range. That makes it the largest MOREHibah Yousuf - Oct 12, 2012 5:40 PM ET
Investors are making a bold gamble that the housing rebound will be steep and swift with the initial public offering of Realogy.
Realogy, which owns Century 21, Coldwell Banker, Corcoran and Sotheby's International Realty, raised more than $1 billion through its initial public offering that priced Wednesday night at $27 a share -- the high end of its estimated range. It's the third-largest IPO of the year behind Facebook (FB) and MOREMaureen Farrell - Oct 11, 2012 11:54 AM ET
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