New York Attorney and Two Registered Brokers Arrested for Engaging in a $300 Million Market Manipulation Scheme
Defendants Profited by Selling to Elderly Investors Worthless Stock of a Company That Purported to Provide Medical Coding Training Required by the Affordable Care Act
|U.S. Attorney’s OfficeNovember 04, 2015|
BROOKLYN, NY—Darren Ofsink, a Manhattan attorney and founder of Ofsink LLC; Michael Morris, a registered broker and managing director of Halcyon Cabot Partners, Ltd. (Halcyon); and Darren Goodrich, a registered broker; were arrested earlier today on charges of securities fraud, wire fraud, and conspiracy to commit securities fraud, mail fraud, and wire fraud in connection with a $300 million market manipulation scheme. In addition to the three defendants arrested today, the eleven-count superseding indictment unsealed this morning charges four additional defendants who were arrested in July 2014: Abraxas J. Discala, also known as “AJ Discala,” the Chief Executive Officer of OmniView Capital Advisors LLC; Ira Shapiro, the Chief Executive Officer of CodeSmart Holdings, Inc., a publicly traded company; Craig Josephberg, a registered broker; and Kyleen Cane, a Las Vegas attorney and managing partner of Cane Clark LLP.1 Three defendants, Marc Wexler, Matthew Bell, and Victor Azrak, who were charged in the underlying indictment, have pleaded guilty and are awaiting sentencing.
Ofsink and Morris will be arraigned later today before Magistrate Judge Viktor V. Pohorelsky, at the United States Courthouse, 225 Cadman Plaza East, Brooklyn, New York. Goodrich’s initial appearance for removal proceedings to the Eastern District of New York is scheduled for this afternoon at the United States Courthouse, 312 North Spring Street, Los Angeles, California. Discala, Shapiro, Josephberg, and Cane will be arraigned on the superseding indictment at a later date.
The charges were announced by Robert L. Capers, United States Attorney for the Eastern District of New York, and Diego Rodriguez, Assistant Director-in-Charge, Federal Bureau of Investigation, New York Field Office (FBI).
“As alleged, licensed professionals such as Ofsink, Morris, and Goodrich abused their positions of trust and became part of an elaborate scheme designed to defraud the securities markets and the investing public through false and misleading press releases and manipulated trading activity. The three were entrusted to be gatekeepers to the securities markets but instead perpetrated one of the largest market manipulation schemes ever, and by doing so, preyed upon unsuspecting and elderly investors,” stated United States Attorney Capers. “Today’s three arrests and the seven arrests last year, reflect the scope of this fraud and our commitment to bring to justice those who abuse our financial markets in order to fraudulently enrich themselves.” Mr. Capers expressed his appreciation to the FBI for its tireless efforts in leading the investigation and thanked the United States Securities and Exchange Commission, New York Regional Office, for their significant cooperation and assistance.
“Using investment schemes like ‘pump and dump,’ ‘wash trades,’ and ‘match trades,’ the defendants were able to manipulate stock prices to profit themselves while defrauding unsuspecting investors. The FBI is committed to investigating and bringing to justice those who prey upon trusting individuals for their own personal gain.” stated FBI Assistant Director-in-Charge Rodriguez.
As alleged in the indictment and other court filings, between October 2012 and July 2014, the defendants agreed to defraud investors and potential investors in four public companies: CodeSmart Holdings, Inc. (CodeSmart), trading under the ticker symbol ITEN; Cubed, Inc. (Cubed), trading under the ticker symbol CRPT; StarStream Entertainment Inc. (StarStream), trading under the ticker symbol SSET; and The Staffing Group, Ltd. (Staffing Group), trading under the ticker symbol TSGL (collectively, the Manipulated Public Companies) by artificially controlling the price and volume of traded shares in the Manipulated Public Companies through false and misleading press releases, false and misleading SEC filings, fraudulent concealment of the defendants’ and their co-conspirators’ ownership interests, engineering price movements and trading volume in the stocks, and unauthorized purchases of stock in accounts of unwitting investors.
The CodeSmart Manipulation Scheme
In early May 2013, the defendants engineered a reverse merger of CodeSmart, a private company, with a shell public company. After gaining control of CodeSmart’s three million purportedly unrestricted shares, the defendants, including Ofsink and Morris, on two occasions fraudulently inflated CodeSmart’s share price and trading volume and then sold their shares at a profit when the price reached desirable levels — a scheme commonly referred to as a “pump and dump.” The first pump and dump occurred between approximately May 13, 2013 and August 21, 2013. During this period, the defendants manipulated CodeSmart’s stock price by raising it from $1.77 to a high of $6.94 (a 291% increase), before causing it to drop to $2.19 (a 217% decrease). The second pump and dump occurred between approximately August 21, 2013 and September 20, 2013. During this period, the defendants manipulated CodeSmart’s stock price by raising it from $2.19 to a high of $4.60 (a 104% increase), before causing it drop to $2.13 (a 116% decrease).
CodeSmart’s market capitalization at its highest closing price of $6.94 per share on July 12, 2013 was $86,347,800. However, that same day, CodeSmart filed with the SEC an amended Form 10-K, in which it listed only $6,000 in total assets, $7,600 in revenue, and a net loss of $103,141. By December 30, 2013, CodeSmart’s stock was trading at $0.66 per share, and on July 9, 2014, its stock closed at $0.01 per share.
The defendants profited by selling CodeSmart stock, issued to them at pennies, to unsuspecting investors, often without the investors’ knowledge and consent. Additionally, the defendants, including investment advisers and brokers, were selling CodeSmart shares in their personal trading accounts at the same time that they were purchasing that stock in their clients’ and customers’ accounts. During the first pump and dump, the defendants and their co-conspirators sold approximately 800,000 shares of CodeSmart in their personal accounts while they purchased virtually the identical amount in unsuspecting investors’ accounts.
The Cubed Manipulation Scheme
In March 2014, the defendants took Cubed public through an asset purchase agreement. Between April 22, 2014 and April 30, 2014, they concocted trading volume in this stock by purchasing more than 50% of the total number of Cubed shares purchased during this period.
A judicially-authorized wiretap of Discala’s cellular telephone revealed that the defendants and their co-conspirators fraudulently manipulated Cubed’s stock by artificially controlling the price and volume of that stock through, among other things, wash trades and matched trades.2 Rather than generating significant market interest and causing a quick pump and dump that would elicit regulators’ scrutiny this time, the defendants gradually increased the price of Cubed’s stock to give it the appearance of a legitimate company with genuine and steady market demand for the security. The defendants used an escrow account maintained by Cane to successfully control the price and volume of Cubed’s stock. For example, on May 20, 2014, during a telephone call between Discala and Azrak, Discala emphasized his control over Cubed’s share price through the use of the escrow account, stating, “I’m the [expletive] brake and the gas, [expletive]. If I take my foot off the brake it’s 55 [dollars] tomorrow (laughter).”
On June 23, 2014, Cubed reached its highest closing price of $6.75 per share, resulting in a market capitalization of approximately $200 million. Previously, Cubed filed with the SEC a Form 10-Q and reported less than $1,500 in cash, zero revenue, negative stockholders’ equity, a net loss of $15,000, and accrued professional fees of $131,824.
This prosecution was the result of efforts by President Obama’s Financial Fraud Enforcement Task Force (FFETF) which was created in November 2009 to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. With more than 20 federal agencies, 94 U.S. Attorneys’ Offices and state and local partners, it’s the broadest coalition of law enforcement, investigatory, and regulatory agencies ever assembled to combat fraud. Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state, and local authorities; addressing discrimination in the lending and financial markets; and conducting outreach to the public, victims, financial institutions, and other organizations. Since fiscal year 2009, the Justice Department has filed over 18,000 financial fraud cases against more than 25,000 defendants. For more information on the task force, visit http://www.StopFraud.gov.
The government’s case is being prosecuted by the Office’s Business and Securities Fraud Section. Assistant United States Attorneys Walter M. Norkin, Shannon C. Jones, Winston M. Paes and Patrick Hein are in charge of the prosecution, with assistance provided by Assistant United States Attorney Claire Kedeshian of the Office’s Civil Division, which is responsible for the forfeiture of assets.
- ABRAXAS J. DISCALA, also known as “AJ Discala”
- Age: 44
- Residence: Norwalk, Connecticut
- IRA SHAPIRO
- Age: 54
- Residence: Congers, New York
- CRAIG JOSEPHBERG
- Age: 42
- Residence: New York, New York
- KYLEEN CANE
- Age: 60
- Residence: Las Vegas, Nevada
- DARREN GOODRICH
- Age: 37
- Residence: Manhattan Beach, California
- DARREN OFSINK
- Age: 46
- Residence: Merrick, New York
- MICHAEL MORRIS
- Age: 63
- Residence: Merrick, New York
E.D.N.Y. Docket No. 14-CR-399 (S-1) (ENV)
1The charges announced today are merely allegations, and the defendants are presumed innocent unless and until proven guilty.
2Wash trades are purchases and sales of securities that match each other in price, volume, and time of execution, and involve no change in beneficial ownership. For example, a wash trade occurs when Investor A buys 100 shares at $5.00 of Company A through Broker A while simultaneously selling 100 shares at $5.00 of Company A through Broker B. Matched trades are similar to wash trades but involve a related third person or party who places one side of the trade. For example, a matched trade occurs when Investor A buys 100 shares at $5.00 of Company A through a broker, while Investor B, who coordinates with Investor A, simultaneously sells 100 shares at $5.00 of Company A through a broker. Both wash trades and matched trades are used to create the appearance that the stock price rose as a result of genuine market demand for the securities.