Last week’s Securities and Exchange Commission suit against high-profile small-cap equity investors Barry Honig and Phillip Frost appears to be the first moves in a much broader crackdown against a network of brokers, promoters and even attorneys that worked with them on numerous transactions, according to internal documents and private communications I’ve obtained. Creatively named llcs, like Pump Pump Loose Loose Partners, were created to hide what appears to be kickbacks paid for pushing unsuspecting retail clients into Team Honig’s deals when it was time to dump the stock.
As the SEC went to lengths to note in their claim, a large chunk of Honig’s alleged profits came from heavily trading shares prior to the release of “favorable and materially misleading articles” that suggested there was growing investor interest in these stocks.
While the pre-release trading was mostly Honig, Frost and their associates, once the articles were released, a broker-dealer with a decent-sized investor network was integral to sustaining these alleged promotions. Based on a series of interviews, as well as documents I have either obtained or seen — including emails, texts and internal memorandums — London-based Laidlaw & Company is Honig’s preferred broker.
Within Laidlaw, two penny stock veterans, Matt Eitner and James Ahern (both of whom are in their 30’s and who had worked together at Aegis Capital) are Honig’s lieutenants in executing “the dump” portion of the purported stock manipulation scheme. Eitner and Ahern’s path to running Laidlaw is typical of many boiler rooms — they were put in charge after FINRA expelled the firm’s original owners, Martin and Steven Sands of Sands Brothers Asset Management. (According to a former Laidlaw executive who knows both Ahern and Eitner, Ahern runs the firm’s daily operations but he can’t hold the chief executive title because he failed his series 24 — FINRA’s supervisory test — twice. Thus Eitner, who did pass his series 24, is listed as the CEO.)
Unsurprisingly, Ahern’s record has a few potholes. Starting out at as a retail broker at Casimier Capital (where he worked under Richard Sands, another member of the Sands family) and Aegis Capital before he joined Laidlaw in 2010. The four customer complaints against Ahern, the first from 2005, all claim either their accounts where ‘churned’ or that the trading volume exceeded agreed upon limits. Ahern strongly denied any wrongdoing in each of the four customer complaints, an example of which can be found here.
By way of contrast, Eitner’s record, which mirrors Ahern’s with stops at Casimier Capital, Aegis Capital before arriving at Laidlaw in 2010, is cleaner, with only two complaints.
According to several brokers who worked directly with Eitner and Ahern, their strategy for accommodating clients like Honig was more 1994 than it was 2018. For example, if Laidlaw couldn’t sell the agreed upon amount in a secondary offering, they had a simple solution: they would “stuff” shares into the accounts of retail investors.
In another instance, according to documents I reviewed with former Laidlaw insiders, unsold shares were left in the firm’s principle account. When Sterne Agee, Laidlaw’s clearing firm called and sought answers about the stock, they were told there was a clerical error and Laidlaw was given the day to get the shares sold through the syndicate deal out of the firm’s principle account and into customer accounts. The problem was clients hadn’t really bought all those shares yet so they had to come up with a place to put the shares or Sterne Agee could sound off the alarm bells to FINRA about net capital violations.
Additionally, to give the appearance of a fully subscribed offering, Eitner and Ahern directed Laidlaw’s brokers to park stocks and violate the T-2 settlement rules, according to two people directly reporting to them, one of whom has provided FINRA sworn testimony about these actions. According to this individual, the offerings discussed in the session with investigators were
MabVax Therapeutics, Spherix, Relmada, Meddvex, Pershing Gold, PolerityTE Inc, Protea and most recently CoolTech. CoolTech ticker was recently changed to $AWSM from $IFON. $AWSM is the believed to be the current pump and dump in play by this team.
All of the transactions above were led by Laidlaw and all featured Barry Honig and colleagues as an early-stage investor.
Per the SEC, here’s how it worked: Honig and his colleagues would acquire large equity positions in exchange for financing a development-stage company’s debt, at which point LaidLaw would come in to do a secondary Regulation D offering to accredited investors or structure a Private Investment in a Public Company (PIPE) deal.
Where it gets interesting is how Ahern and Eitner structured the sales process.
Taking a page from Jordan Belfort’s “The Wolf of Wall Street,” interviews, emails and texts I’ve reviewed show Eitner and Ahern aggressively driving Laidlaw’s 100 plus broker sales force to sell these deals through the use of coercion or even dismissal.
Laidlaw brokers I spoke to said they often questioned their bosses about why they had to pitch their clients investments with worthless balance sheets and few real assets. They also told me that Laidlaw clients would always lose money long term on these deals. Brokers at the firm were allowed to buy stock in these deals with no limits but when a client called to sell there was often a restriction placed on their order system. They had to call executives to get approval for a sale order which could take days. Instead of telling clients about this internal hold, a move that appears to be design to prop up the stock, these brokers would talk their clients into holding on a few more days or not inform them at all. Another way to solve the issue would be to do a cross-book order. These means shares would be transferred from one clients account to another Laidlaw client without putting the order into the system for market makers to see trading volume.
When Ahern talks about it he calls it “We Are Pretty Fucking Good At This”. WPGAT is listed as a managing director of PPLL Partners LLC, which stands for Pump Pump Loose Loose. These two entities are seen on multiple issuer offerings as getting ‘consulting fees’ from $10k a month to $30k. (Link to Protea SEC filing here) It is not uncommon to see consulting fees in small cap offerings. But securities laws say Eitner and Ahern have to direct their brokers to inform the retail clients that senior leadership at the firm is also earning money on the side. And that the money raised in the secondary offers from these retail clients to going back to pay the Eitner-Ahern llcs.
“A broker dealer’s failure to disclose a conflict of interest is a material violation of the securities laws. The BD has an obligation to investors to disclose side payments received from the issuer for on boarding investors. I would strongly recommend the BD get counsel to advise them on these violations. Today’s strict SEC enforcement environment will lead to adverse actions against a BD hiding the ball from investors,” SEC defense attorney Richard Gora of Connecticut-based Gora Law LLP told this reporter.
Ahern and Eitner would reward brokers who sold well on their Honig backed deals by getting paid out of WPGAT LLC money. They were known in the firm as the WPGAT group. WPGAT is believed to be funded through consulting fees or possible cash kickbacks. According to internal documents seen by this reporter and interviews with Laidlaw staff here are some of the brokers in that group: Richard Michlski, Kevin Wilson, Brian Robertson, Michael Murray, Luke Kottke, Daniel Kuhar, Henry McCormack, Christopher Oppito.
To give these brokers a sense that everything at Laidlaw was being done on the up and up SRFK LLP attorney and named partner Mike Ference would conduct the broker’s annual compliance meeting where he presented a slideshow and answered broker questions about compliance rules at the end. Brokers where also directed to speak with SRFK attorneys Ross Carmel and John Hitchings. Honig’s deal attorney Harvey Kesner, who I recently reported was removed from this law firm’s name, also answered questions about deal legitimacy and communicated directly about sales volume on deals with Honig, Ahern and Eitner according to emails seen by this reporter. Ross D. Carmel has since left SRFK and is a named partner at a new New York based law firm. Attorney Ference did not respond for comment.
On Tuesday MabVax, who is Victim company C in the SEC complaint against Honig, sued the law firm Honig recommends issuers use for outside counsel when he invest in their company. That firm is SRFK LLP. MabVax is blaming Kesner and other attorneys at the firm on bad legal advice for how they disclosed and structured capital raising deals for the company.
A study commissioned by Reuters with the assistance of Columbia University Law School identified nearly fifty FINRA registered broker dealers where a large percentage of its brokers had “red flags” on their public disclosures. Attorney David Liebrader who writes the Securities Fraud Lawyer Blog said, “These red flags include customer disputes, arbitration claims, regulatory actions taken by FINRA, the SEC or state regulators, civil actions, bankruptcies and terminations after allegations of wrongdoing. The study sought to identify firms who welcomed or tolerated brokers with these types of disclosures.” Laidlaw & Company was high up on the ‘bad brokers’ study.
Laidlaw’s outside counsel Richard Friedman. a former SRFK named partner who is now at Sheppard Mullin, was called to respond to this story. As of press time there was no response. Barry Honig did not respond to an email for comment about his relationship with Laidlaw. Matt Eitner did not respond to an email or return phone calls to his secretary asking for a response to the evidence I gathered for this story.
Stay tuned for part two of this saga as I dive into details on how the money moved in specific Honig backed stocks at Laidlaw. If you are a broker or client at Laidlaw you can contact me at email@example.com to have a confidential conversation about your experience.