Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Tuesday, March 19, 2013

Former Oregon Gubernatorial Candidate Charged with Investor Fraud Involving Pre-IPO Shares of Facebook

This is a weird story:  Both the U.S. Attorney and the SEC have brought charges against Craig Berkman, a former Oregon gubernatorial candidate, alleging that he defrauded investors seeking to acquire highly coveted pre-IPO shares of Facebook and other social media companies.  According to the authorities, Berkman touted to investors that he had special access to scarce sources of pre-IPO stock in Facebook, LinkedIn, Groupon, and Zynga. Instead of purchasing shares on investors’ behalf as promised, Berkman misused their investments to make Ponzi-like payments to earlier investors, fund personal expenses, and pay off claims against him in a bankruptcy case.

The SEC also charged John B. Kern of Charleston, S.C., for his participation in the fraud as legal counsel to some of Berkman’s companies. When investors in Berkman’s phony Facebook fund began questioning what happened to their money after Facebook’s IPO occurred, Kern falsely assured them that their money was used to purchase pre-IPO Facebook stock being held for them by unnamed counterparties.

According to the SEC’s order instituting administrative proceedings, Berkman raised at least $13.2 million from 120 investors by selling membership interests in limited liability companies that he controlled and misappropriated virtually all investor funds that he raised.

The SEC’s order details a recidivist history for Berkman. The Oregon Division of Finance and Securities issued a cease-and-desist order and $50,000 fine against Berkman in 2001 for offering and selling convertible promissory notes without a brokerage license to Oregon residents. In June 2008, an Oregon jury found Berkman liable in a private action for breach of fiduciary duty, conversion of investor funds, and misrepresentation to investors arising from Berkman’s involvement with a series of purported venture capital funds known as Synectic Ventures. The court entered a $28 million judgment against Berkman. In March 2009, Synectic filed an involuntary Chapter 7 bankruptcy petition against Berkman in Florida for his unpaid debts arising from the 2008 court judgment. The parties to the bankruptcy proceeding reached a settlement with Berkman.

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