4th UPDATE:Ex-Xybernaut Executives, Lawyer Indicted In PIPEs Case
(Updates with Troutman Sanders statement in 16th paragraph.)
By Chad Bray and Amir Efrati
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NEW YORK -(Dow Jones)- A New York securities lawyer, two Israeli investors and three American businessmen were charged with securities fraud and other offenses Friday in an alleged kickback scheme involving PIPEs transactions by Xybernaut Corp. and Ramp Corp.
The indictment, unsealed in federal court in Brooklyn on Friday, names Edward Newman, Xybernaut's ex-chief executive; his brother Steven Newman, another former Xybernaut executive; Andrew Brown, Ramp's former president and chief operating officer; Martin Weisberg, a New York partner of Chicago law firm Baker & McKenzie and one-time Xybernaut director; and Israeli investors Zev Saltsman and Menachem Eitan.
They face a variety of charges, including conspiracy, securities fraud and money laundering. They each face up to 20 years in prison on each count of money laundering and securities fraud.
The Securities and Exchange Commission also has filed civil charges in the matter.
"I'm confident that Mr. Weisberg's conduct here was only as a lawyer and that the suggestion that he committed criminal acts will be disproven," said Elkan Abramowitz, Weisberg's lawyer. "We believe the charges result from a misunderstanding of the nature of the transactions and we look forward to full vindication."
Prosecutors have alleged the men, between 2001 and 2005, engaged in a scheme to defraud shareholders of Xybernaut and Ramp by issuing hundreds of millions of discounted shares in transactions known as PIPEs, or private investment in public equity, to entities controlled by Saltsman and Eitan, according to the indictment.
The men also failed to make required filings with the SEC in order to conceal their scheme, prosecutors said.
Saltsman, 45 years old, and Eitan, 51, allegedly established large short positions in Xybernaut and Ramp stock prior to the receipt of the PIPE shares, the government said.
Following announcement of the PIPE transactions and a drop in the companies' stock prices, Saltsman and Eitan would then use the discounted shares to cover their short positions and profit from the drop in share price, prosecutors said.
As a result, Saltsman and Eitan generated about $16 million in profits from trading in Ramp shares from 2002 to 2004 and about $39 million in profits from trades in Xybernaut shares from 2001 to 2004, the government said.
Saltsman and Eitan allegedly paid undisclosed kickbacks in exchange for the discounted shares, prosecutors said.
In a press release, the U.S. Attorney's office said Weisberg, 57, kept about $1.7 million of $3.1 million paid by Saltsman and Eitan and then transferred about $1.4 million to Steven Newman, 61 years old. He also arranged for the transmission of $100,000 of proceeds from one of Xybernaut's PIPE transactions to Edward Newman, 64 years old, the government said.
Prosecutors also alleged that Steven Newman received $1 million from a Swiss bank account controlled by Saltsman and $50,000 in cash was delivered to Brown, 38, in a paper bag.
Robert Nardoza, a spokesman for the U.S. Attorney's office in Brooklyn, said arrest warrants have been issued for Edward Newman and Weisberg.
Abramowitz, Weisberg's lawyer, said his client is out of the country and will likely be arraigned on the charges when he returns on Monday. Baker & McKenzie, Weisberg's current law firm, declined to comment.
Weisberg, of Waccacuc, N.Y., was a partner at now-defunct Jenkens & Gilchrist LLP during the period of the alleged crimes. In April 2005 he became a partner at Troutman Sanders LLP but was terminated by the firm a month later, according to the SEC's complaint. However, Troutman Sanders said Friday that Weisberg resigned from the firm.
John M. Tran, a lawyer for Edward Newman, declined comment Friday, saying his client was making arrangements to voluntarily surrender to authorities.
Lawyers for Steven Newman and Brown didn't immediately return phone calls seeking comment Thursday. No information was available on counsel for Saltsman and Eitan.
Brown entered a not-guilty plea to the charges at a hearing before a federal magistrate judge in Brooklyn on Friday afternoon. Bond was set at $1.5 million. A status conference is scheduled in the case for Oct. 31.
Steven Newman, who was arrested in Virginia on Friday, is expected to be arraigned by a federal judge there later Friday, said Nardoza, the U.S. Attorney's spokesman.
Saltsman was arrested in London on Thursday and prosecutors have requested the assistance of U.K. authorities to have him extradited to New York, Nardoza said. Prosecutors also are expected to seek Eitan's extradition from Israel, Nardoza said.
Companies typically turn to PIPE transactions when they are too weak to raise money through traditional stock sales. Since share prices tend to decline upon the announcement of a private placement, investors with advance knowledge can reap big profits by selling borrowed shares and then buying them back at a lower price once the private offering is announced.
Ramp, a New York health-care software company, and Xybernaut, a Fairfax, Va., developer of portable computer hardware, both sought bankruptcy protection in 2005. Xybernaut has since gone private after a federal bankruptcy judge in Virginia approved its reorganization plan last year.
-By Chad Bray, Dow Jones Newswires; 212-227-2017; chad.bray@dowjones.com
-By Amir Efrati, The Wall Street Journal; 212-416-4218
(END) Dow Jones Newswires
October 19, 2007 16:19 ET (20:19 GMT)
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