Charges filed in Facebook IPO fraud

Beware where you buy shares in initial public offerings, since apparently those can be faked just like lottery tickets or anything else.

Federal prosecutors filed charges Tuesday against a Florida man for trying to sell fake Facebook shares.

Here’s the story from Wall Street Journal reporter Chad Bray:

A Florida financier who once served as Oregon’s state Republican chairman has been arrested in an alleged multimillion-dollar scheme to market fake shares of Facebook Inc. and other social-media companies before they went public, federal authorities said Tuesday.

Federal prosecutors in Manhattan alleged that Craig Berkman, 71 years old, promised investors in two separate schemes that he had access to shares of Facebook, well before the company’s closely watched initial public offering last year. However, he never held the shares and used millions of dollars he received from investors for his own benefit, prosecutors said.

Mr. Berkman allegedly raised $8 million from investors as a result of his claims to having access to Facebook shares, prosecutors said.

“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.

A lawyer for Mr. Berkman didn’t immediately return a phone call seeking comment Tuesday.

Reuters added these details to the story:

Craig Berkman, 71, falsely told investors he had access to scarce pre-IPO shares of Facebook and other social media companies such as LinkedIn Corp, Groupon Inc and Zynga Inc, the U.S. Securities and Exchange Commission said in a statement.

But instead of buying shares for investors as promised, Berkman made “Ponzi-like” payments to earlier investors and funded personal expenses, including costs in a bankruptcy case, according to the SEC, which filed a civil case.

The Manhattan U.S. Attorney’s Office charged Berkman with two counts of securities fraud and two counts of wire fraud. Each count carries a maximum of 20 years in prison.

In one allegation, more than 50 investors sent $4.6 million into a bank account controlled by a Berkman entity called Ventures Trust II, according to the complaint filed by the Manhattan U.S. Attorney’s Office.

Berkman told investors the funds would be used to buy pre-IPO shares of Facebook, but instead the “vast majority” was transferred to other accounts Berkman controlled for his own personal benefit, according to the complaint.

Berkman has long been active in Oregon politics and served for a time as the head of the state’s Republican Party, according to press accounts. He lost in the Republican primary for governor in 1994, and he explored a bid for governor in the 2002 race, according to The Oregonian.

The SEC’s order details what the agency called a “recidivist history” for Berkman.

The Oregon Division of Finance and Securities issued a cease-and-desist order and a $50,000 fine against Berkman in 2001 for offering and selling convertible promissory notes without a brokerage license, according to the SEC statement.

In 2008, an Oregon jury found Berkman liable in a private action for breach of fiduciary duty, conversion of investor funds and misrepresentation to investors related to his involvement with a purported venture capital firm, according to the SEC.

Berkman reached a settlement with the firm, called Synectic Ventures, after it filed an involuntary Chapter 7 bankruptcy petition against him in 2009 for debts he didn’t pay related an earlier judgment against him for $28 million, according to the SEC.

Rather than use his own money to pay the claims, Berkman spent more than $5.4 million from investors in his pre-IPO offerings to make payments in the bankruptcy settlement, according to the SEC.

I guess there is something to be said for buying stock through a broker affiliated with a bank. At least you know your money isn’t going to pay back old debts. And you’ll actually get the stock shares instead of nothing.