Stock trader guilty of fraud involving San Diego firm
SAN DIEGO — A New Jersey stock trader who conspired with the chief executive officer of a San Diego-based company to defraud its own shareholders out of more than $28 million pleaded guilty Tuesday to federal charges.
Mark Allen Lefkowitz, 44, pleaded guilty to conspiracy to commit securities fraud. He faces up to 25 years in prison and a $250,000 fine when he is sentenced Feb. 4 by U.S. District Judge Irma Gonzalez.
According to court documents, Lefkowitz and the CEO of the San Diego company manipulated the company’s share price and volume to benefit corporate insiders at the expense of shareholders.
Court documents refer to the company executive simply as “CEO” and his company as “Company A” because neither has been charged with a crime to date.
As a result of the fraud, the company issued more than 9 billion new shares of stock that it did not register with the Securities and Exchange Commission. Those new, unregistered shares diluted the value of existing shares, causing them to drop in value by as much as $7 million, according to court papers.
At the same time, Lefkowitz received free-trading shares from the company which were worth more than $28 million, according to documents filed by the SEC.
To carry out the fraud, Lefkowitz and the CEO exploited a little-known provision of securities laws allowing companies to issue unregistered shares of stock to settle “bona fide” debts, prosecutors said.
The CEO, on behalf of Company A, would enter into “purported” loan agreements with various corporations owned by Lefkowitz, most of them based in the Turks and Caicos Islands.
It was understood by Lefkowitz and the CEO, however, that Company A would purposefully default on the loan agreements. After the company defaulted, one or more of Lefkowitz’s companies would initiate a sham “lawsuit” against Company A in a Florida court, according to court papers.
Very soon after the lawsuit was filed, the CEO and Lefkowitz would draft a settlement agreement with terms extremely favorable to Lefkowitz. In short, the CEO would agree to Company A’s debt by issuing new, unregistered shares of stock worth as much as five times, or more, than the debt Company A actually owed, court papers show.
Prior to the written settlement agreement being presented to the court, Lefkowitz and the CEO would enter into a secret side-agreement in which Lefkowitz would sell the new unregistered shares to unsuspecting investors who were unaware of the fraudulent way Company A’s stock was being diluted.
The CEO would then kick back a portion of the proceeds from the sale of the new shares to one of Lefkowitz’s companies, according to the government.
After the court in Florida would authorize the company to issue the new, unregistered shares to Lefkowitz, he would sell the shares on the open market to buyers who were unaware what type of shares they were. Lefkowitz would then transmit a portion of his profits to a bank account in the Turks and Caicos Islands, prosecutors said.
Lefkowitz also plied the San Diego-based CEO with perks, including paid vacations to Las Vegas and the Turks and Caicos Island, according to the plea agreement.