The SEC has charged former Oregon gubernatorial candidate, Craig Berkman, with a violation of the antifraud provisions of federal securities laws. Berkman’s fraud has been referred to as a Ponzi-like scheme where investors were promised access to pre-IPO shares in Facebook, Groupon, Zynga, and LinkedIn. The SEC alleges that John B. Kern, and Berkman’s lawyer, aided and abetted this violation.
In December 2010, Berkman created Venture Trust II LLC, which he represented to investors as owning shares in Facebook. Venture Trust II, however, did not own shares in Facebook but instead had a small interest in another investment fund with an indirect interest (“F1”). Once F1 discovered that Venture Trust II had been showing investors a forged letter from what was supposed to be F1’s lawyers, F1 terminated Venture Trust II’s interest. In March 2012, Berkman created Face Off Acquisitions LLC, which was “designed to acquire a New York-based LLC that already held more than 1 million pre-IPO shares of Facebook” (“F2”). Berkman told investors that a prominent billionaire was backing Face Off Acquisitions, although said billionaire had never heard of Face Off Acquisitions. Berkman also informed investors that he had acquired F2, although F2 and Berkman had only spoken briefly over the span of two years. Berkman received about $5.5 million from Venture Trust II’s investors and about $2.5 million from Face Off Acquisitions’ investors.
Berkman is alleged to have defrauded these investors by deceptively promising the first set of investors that he would use their money to purchase pre-IPO shares of social media companies. Next, he baited a second set of investors into believing that their investment would be going towards purchasing pre-IPO shares of Facebook or to a company that held pre-IPO Facebook shares. Finally, he led a third set of investors to believe that their money would be used to fund various new large-scale technology ventures. From the 120 investors that Berkman received money from, he raised an estimated $13.2 million dollars. Berkman spent over $5.4 million of the invested funds towards his bankruptcy settlement. He spent another $4.8 million in Ponzi-like payments to early investors as a way to secure confidence by showing that their “investment” had actually made money. Berkman also used approximately $1.6 million of the investors’ money to make large cash withdrawals and pay his dining and travel expenses. Only about $600,000 of those funds was used to purchase a small interest “in an unrelated fund that had acquired pre-IPO Facebook stock.”
This small interest made to the F1, the company that had acquired pre-IPO Facebook stock, did not entitle investors to ownership of the stock. Kern, Berkman’s lawyer, drafted and signed a memorandum to concerned investors assuring them that the Berkman had used their money to purchase pre-IPO Facebook stock being held by an “unnamed counterparty.” Kern was aware that this memorandum was false because F1 had previously informed Kern that because of the forged documents, F1 had terminated Venture Trust II’s interest. Kern therefore aided in the fraud and received nearly $300,000 from his dealing.
The U.S. Attorneys Office for the Southern District of New York has brought a parallel criminal action against Berkman. Berkman was arrested for having received a total of $8 million from his phony pre-IPO Facebook stock scheme the majority of which he is reported to have absconded for his own benefit.