U.S. News

Ex-Oregon Governor Candidate Charged in Facebook IPO Fraud

Emmanuel Dunand | AFP | Getty Images

A former Oregon gubernatorialcandidate was arrested on Tuesday for his alleged role indefrauding investors who had hoped to buy shares of Facebook before its initial public offering in May 2012, federalauthorities said.

Craig Berkman, 71, falsely told investors he had access toscarce pre-IPO shares of Facebook and other social mediacompanies such as LinkedIn, Groupon and Zynga, the U.S. Securities and ExchangeCommission said in a statement.

But instead of buying shares for investors as promised,Berkman made "Ponzi-like" payments to earlier investors andfunded personal expenses, including costs in a bankruptcy case,according to the SEC, which filed a civil case.

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The defendant received at least $8 million from variousschemes, according to U.S. Attorney Preet Bharara in Manhattan,which filed criminal charges against Berkman.

"Berkman blatantly capitalized on the market fervorpreceding highly anticipated IPOs of Facebook and other socialmedia companies to fleece investors whose cash flow he treatedlike an ATM to fund his own living expenses and paycourt-ordered claims to victims of his past misdeeds," saidAndrew Calamari, director of the SEC's New York office.

Berkman was arrested at his home in Odessa, Florida, andappeared briefly before a federal magistrate in Tampa, Florida.A bond hearing was scheduled for Thursday in Tampa.

The Manhattan U.S. Attorney's Office charged Berkman withtwo counts of securities fraud and two counts of wire fraud.Each count carries a maximum of 20 years in prison.

In one allegation, more than 50 investors sent $4.6 millioninto a bank account controlled by a Berkman entity calledVentures Trust II, according to the complaint filed by theManhattan U.S. Attorney's Office.

Berkman told investors the funds would be used to buypre-IPO shares of Facebook, but instead the "vast majority" wastransferred to other accounts Berkman controlled for his ownpersonal benefit, according to the complaint.

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Berkman has long been active in Oregon politics and servedfor a time as the head of the state's Republican Party,according to press accounts. He lost in the Republican primaryfor governor in 1994, and he explored a bid for governor in the2002 race, according to The Oregonian.

The SEC's order details what the agency called a "recidivisthistory" for Berkman.

The Oregon Division of Finance and Securities issued acease-and-desist order and a $50,000 fine against Berkman in2001 for offering and selling convertible promissory noteswithout a brokerage license, according to the SEC statement.

In 2008, an Oregon jury found Berkman liable in a privateaction for breach of fiduciary duty, conversion of investorfunds and misrepresentation to investors related to hisinvolvement with a purported venture capital firm, according tothe SEC.

Berkman reached a settlement with the firm, called SynecticVentures, after it filed an involuntary Chapter 7 bankruptcypetition against him in 2009 for debts he didn't pay related anearlier judgment against him for $28 million, according to theSEC.

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Rather than use his own money to pay the claims, Berkmanspent more than $5.4 million from investors in his pre-IPOofferings to make payments in the bankruptcy settlement,according to the SEC.

The SEC brought a separate case against John Kern ofCharleston, South Carolina, whom it said took part in the fraudas legal counsel to some of Berkman's companies.

Marc Blackman, a lawyer for Berkman, was not immediatelyavailable for comment.

It was not immediately clear whether Kern has hired a lawyerfor his defense. Kern was not immediately available for comment.

The criminal case is U.S. v. Berkman, U.S. District Court,Southern District of New York, No. 13-mg-00732.