Ex-Xybernaut Executives Charged in $55 Million Fraud (Update3)
bloomberg.com
By Patricia Hurtado
Oct. 19 (Bloomberg) -- The ex-chairman and vice-chairman of Xybernaut Corp. and the ex-chairman of Ramp Corp. were charged with a securities fraud that U.S. prosecutors said generated $55 million in illegal profits from short selling.
Xybernaut's former Chief Executive Officer Edward Newman, and his brother, Steven, the company's former vice chairman, participated in a stock-trading scheme run by investors Zev Saltsman and Menachem Eitan, who ran it from Israel, according to an indictment unsealed today in Brooklyn, New York.
Saltsman and Eitan made the profits while paying kickbacks to the other defendants, according to the indictment. Andrew Brown, Ramp's former president and chief operating officer, and Martin Weisberg, a Xybernaut lawyer, were also charged.
The indictment states the six defendants used private- investment in-public-equity transactions or PIPEs involving Xybernaut, a Fairfax, Virginia-based maker of wearable computers for aircraft mechanics and telephone lineman, and Ramp, a bankrupt developer of health-care software.
PIPEs are privately negotiated sales of unregistered securities by a public company. Buyers are usually accredited institutional or individual investors, who pay a discount to prevailing market prices. The defendants are charged with causing Xybernaut and Ramp to issue hundreds of millions of dollars of heavily discounted shares in PIPE transactions between 2001 and 2005 through off-shore entities controlled by Eitan and Saltsman.
The U.S. Securities and Exchange Commission also sued the six men, making similar short-sale allegations and seeking forfeiture of the profits.
Guaranteed Profits
In order to lock in profits, Saltsman and Eitan sold the shares short in advance of the PIPE transactions and later covered their short position with the discounted stock. A short sale involves a security one has borrowed in anticipation of making a profit by paying for it after its price has fallen.
Xybernaut, which emerged from bankruptcy in December, is now a closely held company. It said at the time it completed its bankruptcy that it had been subpoenaed in a U.S. Securities and Exchange Commission probe related to company stock sales.
In May, the former-chairman of Royce Investment Group Inc. and the managing director of eight Cayman Islands-based companies pleaded guilty in a fraud scheme involving Xybernaut's initial public offering.
John Marciano, 44, former chairman and chief executive officer of Westbury, New York-based Royce, one of two underwriters of the Xybernaut IPO, pleaded guilty to a federal charge that he conspired to launder the proceeds of a securities fraud involving Xybernaut from July 1996 to May 2001.
`Front Corporations'
A second man, Robert Oosterwyk, described by U.S. investigators as the ``managing director'' of eight Cayman Islands-based businesses that were ``front corporations,'' helped conceal proceeds of the scheme, prosecutors said. He pleaded guilty in March to one count of operating an illegal money- remitting business.
At the time, prosecutors in Brooklyn said the investigation was continuing.
Robert Nardoza, a spokesman for Brooklyn's U.S. attorney, Benton Campbell, said Brown was arrested in New York, pleaded not guilty and was released on a $1.5 million bond. Steven Newman was in custody, Nardoza said, and was scheduled to appear before a federal magistrate in the Eastern District of Virginia.
Warrants had been issued for the arrest of Edward Newman and Martin Weisberg, a New York lawyer also charged in the case, prosecutors said.
Lawyers for the defendants couldn't be immediately reached for comment.
Possible Penalties
Nardoza said the defendants face charges of securities fraud and money laundering. They face up to 20 years in prison if convicted of conspiracy or money laundering. They face up to five years in prison and maximum fines of up to $5 million dollars if convicted of securities fraud.
As a result of the scheme, Saltsman and Eitan generated about $16 million in profits from Ramp shares and about $39 million from Xybernaut shares, the indictment said.
Eitan and Saltsman are accused of paying kickbacks to Newman and his brother, Brown and Martin Weisberg, described in the indictment as a New York lawyer who was part of the scheme.
Nardoza said Saltzman was arrested in London yesterday and that the U.S. is seeking his extradition. He said prosecutors also seek to extradite Etian from Israel and that warrants had been issued for the arrests of Weisberg and Edward Newman.
The case is U.S. v. Zev Saltzman, 07-cr-641, filed in the Eastern District of New York (Brooklyn).
To contact the reporter on this story: Patricia Hurtado in New York Courts at pathurtado@bloomberg.net .
Last Updated: October 19, 2007 17:13 EDT |
