Authorities unveiled civil and criminal charges against a Florida man, accusing him of soliciting over $8 million from investors who thought they were purchasing discounted pre-IPO shares of popular social media companies such as Facebook and LinkedIn. However, instead of purchasing those shares, Craig L. Berkman, 71, allegedly misappropriated investor funds for his personal benefit and to partially satisfy a previous $28 million fraud-related judgment. The United States Attorney's Office charged Berkman with two counts of securities fraud and two counts of wire fraud, each of which carry a maximum term of twenty years in prison. Additionally, the Securities and Exchange Commission instituted administrative proceedings against Berkman, accusing him of violating multiple federal securities laws.
In late 2010, as investors salivated over the prospect of initial public offerings for popular companies such as Facebook, Groupon, and LinkedIn, Berkman began telling potential investors that he had special access to acquire pre-IPO shares. Berkman solicited investors to invest in various entities he had formed which would purportedly purchase these shares, promising a "5% annual simple interest return on the investment until 100% of [the investor's] principal and accumulated interest has been returned." Investors were told that Berkman had unique access to a variety of sources to purchase these shares, and that all proceeds would be used for this purpose.
In February 2012, a potential investor (who also happened to be a securities attorney) requested written assurance that Berkman's fund had already acquired the Facebook shares it purported to own. Berkman had previously obtained a letter from a law firm attesting to his 3.1899% interest in a fund that did own Facebook shares (the "Facebook Fund") - an interest which in actuality would have equated to an indirect interest in approximately 22,000 shares. However, Berkman or one of Berkman's associates used the letter to craft an elaborate forgery, altering the letter to show that the Facebook Fund had allocated nearly 500,000 shares to Berkman's the company.
However, the law firm that authored the letter soon got wind of the fabrication, and wrote Berkman to advise him that his interest in the Facebook Fund had been terminated, and that his "misconduct is consistent with a general pattern of deceit." While Berkman's lawyer, who was also charged by the SEC, threatened legal action against the law firm, none such legal action was taken, and Berkman's interest in the Facebook Fund was terminated.
In total, Berkman raised nearly $10 million from investors who thought they were purchasing highly-coveted pre-IPO shares. Additionally, Berkman also solicited investments for another company he owned called Face Off Acquisitions ("Face Off"), telling investors he planned to purchase another fund that owned a large number of Facebook shares. Investors contributed approximately $2.6 million to Face Off, despite the fact that negotiations to purchase the fund never got past formalities. Indeed, Berkman was advised that the fund's purchase price would be $28 million - an amount that was not disclosed to investors and which greatly exceeded the amount raised by Face Off.
Rather than actually purchase pre-IPO shares of Facebook, Groupon, or LinkedIn, the only legitimate purchase made by Berkman was the $600,000 interest in the Facebook Fund, which was later rescinded after the forged letter was discovered by the issuing law firm. Berkman misappropriated the remainder of investor funds, transferring over $5 million to his personal bank account to pay legal fees and creditors from an earlier fraud judgment entered against him, as well as making large cash withdrawals to fund lavish trips and other unrelated personal expenses. Additionally, Berkman used nearly $5 million to make payments to earlier investors, a classic hallmark of a Ponzi scheme.
If convicted of all charges, Berkman faces up to 80 years in prison.
A copy of the SEC Order instituting administrative proceedings is here.