Short Sell Scam Nets Kick Backs
By Frank Schloegel
CCH Wall Street
October 26, 2007
The SEC indicted six individuals and two firms for their collective role in an elaborate $55 million scam that left two firms that had been on the brink, in financial ruin.
The major focus of the case was Zev Saltsman and Menachem Eitan, two Israeli investors from the technology firm Xybernaut. They acquired discounted shares of Xybernaut and Ramp, an electronic communications firm, via private investments in public equity transactions. Before announcing a transaction, they would short sell the shares, then cover that sale with the discounted stock and turn a huge profit.
The two investors hid the scheme from the SEC and the investment community by using several shell companies and offshore accounts to create an international maze of transactions to buy and sell the Xybernaut and Ramp shares.
The men also paid out more than $4 million to company directors to keep their exploits hidden. They also paid off their fellow defendants Edward and Steven Newman from Xybernaut, Andrew Brown from Ramp, and Martin Weisberg, an attorney who worked for both firms.
The SEC named all six as well as Xybernaut and Ramp in this case.
Neither Xybernaut nor Ramp could turn any of its ideas into a profit, but that did not keep the directors from announcing record results and a bright future. In reality, the firms were remaining afloat by seeking out PIPE transactions from Saltsman and Eitan.
Between 2001 and 2004, Saltsman and Eitan invested a total of $67 million in PIPE transactions with Xybernaut, and in return, received approximately 123 million Xybernaut shares, which represented approximately 85% of the total shares issued during that period or approximately 58% of the total issued and outstanding shares as of September 30, 2004, the SEC said.
The situation was similar at Ramp. Saltsman and Eitan bought 63% of Ramp stock issued from 2001 to 2004 for $21 million. The Commission requires that all investors who obtain more than 5% interest in a company must file with the SEC. The two men never did that.
Weisbergs role was that he was working for Saltsman and Eitan to maintain control of the boards, and also filing false statements to the SEC to hide their involvement with Xybernaut and Ramp and the true state of affairs at the firms, the Commission said.
Weisberg and the directors made each investment appear to be unique and unrelated to keep them off the SECs radar. In exchange for helping, the directors began to get kick backs.
Saltsman and Eitan paid Steven Newman and Weisberg $4.1 million in undisclosed payments to ensure their access to future PIPE deals and to maintain control over Xybernaut, the SEC said.
Edward Newman collected $100,000 as a financial advisor, which the men took directly from PIPE transaction funds.
Brown, at Ramp, received $50,000 from the investors. Brown did not tell his company until 2005, after which, the firm fired him. Last year, Ramps and Xybernauts respective exchanges delisted them both after destroying $100 million in market worth.
The stock price of both firms began to fall under the weight of all the false sales. The SEC requested information on the transactions in 2004 and a year later both Ramp and Xybernaut faced lawsuits and the Newmans and Brown were all out of a job.
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