Corporate Executive Convicted in $300 Million Market Manipulation Scheme
Defendant Profited by Selling Worthless Shares to Investors
Abraxas J. Discala, also known as “AJ Discala,” the Chief Executive Officer of OmniView Capital Advisors LLC, was convicted today of eight counts in the indictment by a federal jury in Brooklyn. Discala was convicted of conspiracy to commit securities fraud, conspiracy to commit mail fraud and wire fraud, and two securities fraud counts related to the publicly-traded companies CodeSmart Holdings, Inc. and Cubed, Inc., and four counts of wire fraud related to Cubed and the publicly-traded company StarStream Entertainment Inc. The verdicts followed a five-week trial before United States District Judge Eric N. Vitaliano. When sentenced, Discala faces a maximum of 20 years’ imprisonment.
Richard P. Donoghue, United States Attorney for the Eastern District of New York, and William F. Sweeney, Jr., Assistant Director-in-Charge, Federal Bureau of Investigation, New York Field Office (FBI), announced the verdict.
“Discala and his network of company insiders, brokers and others executed a scheme designed to dupe investors into believing that companies with little in the way of assets were worth hundreds of millions of dollars by manipulating trading activity. At the end of the day, the defendant’s criminal game of musical shares cost unsuspecting investors millions,” stated United States Attorney Donoghue. “Today’s verdict sends a powerful message that this Office, together with our law enforcement partners, will hold corporate executives accountable when they use their expertise to facilitate the commission of crimes.” Mr. Donoghue expressed his appreciation to the Securities and Exchange Commission, New York Regional Office, and the Financial Industry Regulatory Authority, Inc., Criminal Prosecution Assistance Group, for their assistance in this case.
“Investors know they’re taking a chance when purchasing stock and other securities, but they don’t anticipate the odds being stacked against them from the start,” stated FBI Assistant Director-in-Charge Sweeney. “In so many cases, we see criminals in the white collar world autonomously controlling other people’s money and diverting it for their own benefit. Stealing is stealing, in whatever form or fashion, and today’s conviction proves just that.”
The evidence at trial established that in May 2013, Discala, along with separately charged co-conspirators, engineered a reverse merger of CodeSmart, a private company, with a public shell company. After gaining control of CodeSmart’s three million purportedly unrestricted shares, Discala and his co-conspirators on two occasions fraudulently inflated share price and trading volume of CodeSmart, which traded under the ticker symbol ITEN, 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 May 13, 2013 and August 21, 2013. During this period, the co-conspirators manipulated CodeSmart’s stock price causing it to rise from $1.77 to a high of $6.94, before “dumping” their shares thereby causing it to drop to $2.19.
The second pump and dump occurred between August 21, 2013 and September 20, 2013. During this period, the defendant and his co-conspirators manipulated CodeSmart’s stock price causing it to rise from $2.19 to a high of $4.60, before selling, or “dumping,” their shares causing it drop to $2.13. During the entire period, Discala and his co-conspirators coordinated their trading activity to artificially control CodeSmart’s stock price. Evidence at trial established that Discala made more than $2.8 million in trading profits from the CodeSmart pump and dumps, while investors lost millions of dollars.
CodeSmart’s market capitalization at its highest closing price of $6.94 per share on July 12, 2013 was $86,347,800. That same day, CodeSmart filed with the U.S. Securities and Exchange Commission 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 evidence at trial also established that in early 2014, Discala and his co-conspirators defrauded investors and potential investors in Cubed, which traded under the ticker symbol CRPT. Discala and his co-conspirators 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 conspirators used an “escrow account” to successfully control the price and trading volume of Cubed’s stock, and to conceal the defendant’s and their co-conspirators’ ownership interests. In a telephone call intercepted pursuant to a judicially authorized wiretap, Discala boasted to a co-conspirator about his control over Cubed’s stock price through the use of the escrow account, stating, “I’m the [expletive] brake and the gas . . . . If I take my foot off the brake it’s 55 [dollars] tomorrow.” At the same time the defendant and their co-conspirators were touting Cubed to prospective investors, Discala stated on an intercepted call that, “We’ll be out before [expletive] company will even see if the Cube works, ok?”
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 that reported less than $1,500 in cash holdings, zero revenue, negative stockholders’ equity, a net loss of $15,000 and accrued professional fees of $131,824.
The evidence at trial also established that, in addition to manipulating the stock of CodeSmart and Cubed, between October 2013 and July 2014, Discala also fraudulently manipulated the stock of StarStream Entertainment Inc. and The Staffing Group, Ltd. StarStream was a Nevada corporation with its principal place of business in Monterey, California. It was promoted as a company that produced, promoted, supported and developed motion pictures, and it traded under the ticker symbol SSET. The Staffing Group was a Nevada corporation with its principal place of business in New Orleans, Louisiana. It was promoted as a company that recruited, hired, employed and managed skilled workers for clients, and it traded under the ticker symbol TSGL.
The jury also acquitted Discala of two wire fraud counts. Separately charged defendant Kyleen Cane was acquitted of the three counts against her.
The government’s case is being handled by the Office’s Business and Securities Fraud Section. Assistant United States Attorneys Shannon C. Jones, Patrick T. Hein and Mark E. Bini 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 “AJ Discala”)
Scarsdale, New York
E.D.N.Y. Docket No. 14-CR-399 (ENV)