Feds Indict Alleged Fraudsters In Scheme That Involved A $100 Million Local Deli
Three men are facing federal fraud charges for a fraud scheme that involved a $100 million deli.
Two men from North Carolina and a third living in Hong Kong are being charged with a multitude of fraud charges by the Department of Justice, prosecutors said Monday. The three men allegedly set up a holding company, and took over another, then manipulated the value of the two companies through coordinated stock trading and market consolidation to take millions of dollars in profit. The Securities and Exchange Commission is also suing the defendants in civil court.
“We allege that the defendants’ brazen schemes resulted in the artificial inflation of the stock price of two publicly traded companies with little to no annual revenues,” SEC Associate Director of Enforcement in the Philadelphia Regional Office said in the agency’s press release. “Such manipulative schemes diminish the trust investors must have in the integrity of the markets, and we will pursue those who engage in such wrongdoing.”
The alleged scheme centered around a small deli in Paulsboro, New Jersey. One of the defendants was high school wrestling teammates with the deli owner; the defendant allegedly convinced him to put the deli in a holding company, Hometown International, under which the deli would operate as a wholly owned subsidiary. According to the indictment, around 2019, the three defendants bought the deli owners out of the company. Then in 2020, the same defendant recruited another friend to help a second company, E-Waste Corporation, find a partner for a corporate process called a reverse merger. The defendant then put his friend in charge of E-Waste, and took control of the company’s stock.
Once the defendants had allegedly taken control of both companies, they spread the stock out by transferring millions of shares to business entities controlled by the defendant to mask their involvement; the defendants also transferred shares to family members and friends, then acquired their login information to control the stock trading accounts.
The defendants then used their control over the accounts to conduct a series of coordinated trading events to manipulate the stock price and create the false impression that there was a genuine market interest in the stock. The counterfeit trades inflated Hometown International’s stock by approximately 939%, and E-Waste’s by approximately 19,900%.
Both companies became targets of scrutiny in 2021 after the market noticed that the companies both had market capitalizations of over $100 million, despite Hometown International owning just the deli, and E-Waste having no discernible business activity.
A letter to shareholders from hedge fund Greenlight Capital in April 2021 scrutinized Hometown International, pointing out that while the company owned the deli and only the deli, it had achieved a market cap of $113 million in February. “The pastrami must be amazing,” the firm mocked, before calling out regulators for not looking into the company. A CNBC article from 2021 described a successful reverse merger between E-Waste and an electric ATV manufacturer called EZRAider Global. The article said that E-Waste had a market cap of $110 million, despite having no business operations. It also pointed out many of the suspicious connections E-Waste and Hometown International had with one another.
The three defendants are charged with 12 federal criminal counts, including wire fraud, securities fraud, money laundering and conspiracy; if convicted, the defendants face up to 85 years in prison, and millions of dollars in fines. The SEC also charged the defendants with violations of federal securities laws; the agency is seeking injunctive relief, monetary penalties, and a ban on future penny stock trading.
