Craig Berkman, a former Oregon gubernatorial candidate, has been charged after fraudulently convincing investors to buy non-existent pre-IPO shares of Facebook and other social media companies.
Announced by the Securities and Exchange Commission (SEC), an investigation by the organization's Enforcement Division found that the 71 year-old told investors that he had access to pre-IPO stock in Facebook, LinkedIn, Groupon, and Zynga. Instead of purchasing stock before official IPOs, Berkman allegedly "misused" their investments by making "Ponzi-like" payments to earlier investors, used the money for personal expenses, and paid off charges laid against him in a bankruptcy case.
Questions were raised after investors began to ask what happened to their funds after Facebook's 2012 IPO took place. Alleged accomplice and lawyer John B.Kern then assured them the stock was being held by unnamed counterparties, but this wasn't enough to quell investor concerns.
Federal authorities say that Berkman managed to raise at least $13.2 million from 120 investors over social media IPOs, and also included a scheme where the financier falsely told investors that money would be used to fund various large-scale technology ventures.
Instead, the SEC's Enforcement Division alleges within its filing (.pdf) that the majority of the money he raised was used inappropriately. Although Berkman did use $600,000 to purchase a small interest in a fund that had acquired pre-IPO Facebook stock, none of these shares went to his investing parties. As this took place, one of the financier's firms forged a letter to show investors that the company owned nearly half a million shares in Facebook stock. Once the forgery was discovered, the fund terminated Berkman's interest and therefore any claim to Facebook pre-IPO shares.
In addition, over $5.4 million in investor money was used to pay off a bankruptcy settlement.
Berkman was arrested in Florida after the civil case was filed, and appeared before a magistrate in Tampa, Florida. The financier has been charged by the United States attorney's office with two counts of securities fraud and two counts of wire fraud. Both sentences carry up to 20 years behind bars.
SEC's Enforcement Division has also charged Kern for his participation as legal council for some of Berkman's firms.
Andrew M. Calamari, Director of the SEC's New York Regional Office, commented:
"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."
Berkman ran for governor in the state of Oregon in the 1994 and 2002 races, but was unsuccessful.