A partner at Baker & McKenzie has been indicted on charges that he participated in a stock fraud scheme that netted two overseas short-sellers $55 million.
According to an indictment unsealed Friday by federal prosecutors in the Eastern District of New York, Martin E. Weisberg, a mergers and acquisitions partner in Baker & McKenzie's New York office, helped Israeli investors Zev Saltsman and Menachem Eitan gain access to hundreds of millions of discounted but restricted shares in two companies he represented.
The pair allegedly evaded the restrictions on the shares by short-selling the companies' stock, using the discounted shares to cover their positions. Prosecutors charge they also paid Weisberg and executives of the two companies millions of dollars in kickbacks.
Saltsman and Eitan were also charged in Friday's indictment, as were Edward G. Newman, Steven A. Newman and Andrew Brown -- the top executives at the two companies whose shares were used in the scheme, New York health care software company Ramp Corp. and Virginia-based Xybernaut Corp., a maker of wearable computers. The Securities and Exchange Commission also filed a civil suit against the six men on Friday.
The 34-page indictment includes several counts of money laundering and securities fraud, each count of which carries a maximum prison sentence of 20 years. The six also face up to $5 million in fines on each of the securities fraud charges. The SEC is seeking disgorgement of the profits from the scheme.
The case involves a series of so-called PIPE (private investment in public equity) transactions. In such transactions, large investors are allotted blocks of discounted shares, the sale of which are restricted until after a registration statement becomes effective. From 2001 to 2004, Saltsman and Eitan allegedly used a variety of vehicles to invest almost $90 million in PIPE transactions, acquiring 123 million shares of Xybernaut and 101 million shares of Ramp.
The government charges that, prior to the effective date of the registration statements, the two would take short positions in the two companies' stock. A technique utilized by investors betting a stock price will drop, short-selling typically involves borrowing stock to be repaid at a later date when the investor hopes it will be cheaper. Saltsman and Eitan would set this date after the effective date of the registration statement, permitting them to use their discounted PIPE shares to repay the borrowed stock.
According to prosecutors, Weisberg and the executives at Xybernaut and Ramp were aware of what Saltsman and Eitan were doing and accepted money to give them continued access to the company's PIPE deals. Weisberg allegedly received $3.1 million from the Israeli investors, keeping $1.7 million for himself and transferring $1.4 million to Steven Newman. Edward Newman and Brown allegedly received payments of $100,000 and $50,000 respectively.
The government claims neither the payments nor the relationships with Saltsman and Eitan were disclosed in SEC filings prepared for Ramp and Xybernaut by Weisberg. Indeed, the SEC accuses the lawyer of lying to both it and Ramp's auditor in order to advance the pair's scheme.
Weisberg is being represented by Elkan Abramowitz of Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer. Abramowitz said Friday that his client had acted in his proper role as a lawyer throughout the charged events.
"The indictment is based on a mischaracterization of the facts," he said. "When all of the facts become public, he will be vindicated."
During most of the time the alleged scheme took place, Weisberg, 57, was a partner at New York's Jenkens & Gilchrist Parker Chapin, then an arm of now-defunct Dallas law firm Jenkens & Gilchrist. Most of the lawyers in the office, including Weisberg, left to open a New York office for Atlanta's Troutman Sanders in April 2005. Weisberg left Troutman Sanders soon after and became a partner in the New York office of Baker & McKenzie in August 2005.
A 1975 graduate of Northwestern University Law School, Weisberg began his career as an associate at Cravath, Swaine & Moore and later worked as a partner at two now-defunct firms, Gelberg & Abrams and Shea & Gould.
In a statement issued Friday, Baker & McKenzie said Weisberg had been put on leave pending the resolution of this matter.
"Though we have not had an opportunity to review this indictment, we believe the events leading to it occurred years before he joined us and have nothing to do with our firm or our clients," said the firm. "Mr. Weisberg is being advised by his own lawyer and we have been informed that he intends to plead not guilty to all charges."
The criminal case is being prosecuted by Assistant U.S. Attorneys Suzanne McDermott and John Nathanson while the SEC suit is being handled by Assistant Regional Director Gerald A. Gross.
Weisberg is the second New York law firm partner to be prosecuted this year over stock fraud involving PIPE transactions. Earlier this year, former McGuireWoods partner Louis W. Zehil was arrested and charged in the Southern District with trading in the restricted shares of companies he was representing. Zehil, who allegedly earned $18 million through his scheme, has pleaded not guilty.