Former Industrial Enterprises of America Inc. Chief Executive Officer James W. Margulies was found guilty by a New York jury in connection with an $110 million stock fraud.
Margulies, 47, of Cleveland, was convicted in New York state Supreme Court of grand larceny, scheming to defraud, conspiracy, violation of general business law and falsifying business records. Sentencing is scheduled for Aug. 9.
Margulies and another former Industrial Enterprises chief executive, John D. Mazzuto, 62, of Palm Beach Gardens, Florida, were indicted in May 2010 in what prosecutors described as a pump-and-dump scheme.
Mazzuto, a Yale University graduate and ex-managing director at the former Chemical Bank, pleaded guilty to two counts of grand larceny, scheming to defraud and violation of general business law and testified against Margulies during the trial.
Acting state Supreme Court Justice Gregory Carro set bail at $1.5 million, more than twice the amount of Margulies’ bail at arraignment. Prosecutors had sought an increase because Margulies is considered a flight risk, noting that his wife opened a bank account in Panama.
“The defendant’s pump-and-dump scheme artificially inflated stock prices before he sold off the shares, leaving honest investors holding worthless stock,” Manhattan District Attorney Cyrus R. Vance said in a statement.
The defense said during the trial that Margulies was a “family man” and a successful lawyer who was duped by Mazzuto, whom they called the “principal architect” of the scheme.
“We quarrel with the verdict and we intend to appeal,” said Martin Adelman, one of Margulies’ attorneys.
Prosecutors said Mazzuto used the $12 million he got from the company to buy a $3 million home in Southampton, New York, and a $2.5 million home in Palm Beach Gardens, and spent more than $500,000 for travel on private jets.
Margulies used $7 million to get out from “under a mountain of debt,” pay off a $1 million mortgage on his home and pay $450,000 in back taxes, Assistant District Attorney Garrett Lynch said in closing arguments last week, according to the transcript.
“Yes, Mazzuto was the architect, absolutely, but James Margulies was the engineer and the builder,” Lynch said. “He is the one who figured out how to get it done and he got it done.”
Mazzuto testified that in 2002 he acquired a controlling interest in a closely held Lakewood, New Jersey-based industrial-gas provider called EMC Packaging Inc.
He said merged EMC into Advanced Bio/Chem Inc., a Texas- based publicly listed shell company with no operations. He said he changed the combined company’s name to Industrial Enterprises of America Inc. (IEAM) and hired Margulies to coordinate production of financial statements.
Mazzuto and Margulies then registered 15 million shares of the company’s stock with the U.S. Securities and Exchange Commission to issue to employees and consultants, prosecutors said. Instead, they began giving millions of shares to friends, family members, business associates and their alma maters, among others.
Some of the recipients were direct beneficiaries, meaning they sold the stock and pocketed the proceeds, while others acted as conduits, selling shares and sending the money back to the company or entities and accounts controlled by Mazzuto and Margulies, prosecutors said.
Boost Share Price
In 2006, Mazzuto and Margulies did a reverse 10-for-1 stock split, increasing the value of each outstanding share tenfold, prosecutors said. The largest number of shares, 3.5 million, went into an attorney trust account opened that same year by Margulies, prosecutors said.
Margulies sold the shares for about $17.7 million within six months, directing more than $13 million back to the company to artificially inflate cash flow and boost the share price, prosecutors said.
Mazzuto resigned as CEO and interim finance chief in February 2008, when Margulies briefly took over both positions, according to a company statement. Margulies also resigned and Industrial Enterprises sought Chapter 11 bankruptcy protection in May 2009.
Stockholders sued the company in federal court in Manhattan in November 2007, accusing Mazzuto and Margulies and others of making false representations about Industrial Enterprises’ financial condition. The court approved a settlement in the case on May 31.
Mazzuto testified that he decided to approach prosecutors in December about a plea agreement to reduce his sentence after having a difficult time during the seven months he spent in jail. Both face as long as 25 year in prison on the most serious charges. Mazzuto is scheduled to appear in court again on Sept. 20.
Prosecutors had agreed to recommend a sentence of one to three years in prison if he cooperated and complied with his plea agreement, until Mazzuto was arrested twice earlier this year for driving under the influence of alcohol. Prosecutors are no longer obligated to recommend the more lenient sentence.
Mazzuto testified last month that he is an alcoholic who drank until he was “senseless” and has three prior convictions involving domestic violence. He said he has been married six times, was in the midst of a divorce and filed for personal bankruptcy in 2002.
In January, Yale agreed to pay a $1 million settlement to Industrial Enterprises for the value of shares Mazzuto gave the university in 2007, according to the Yale Daily News. The original donation was $1.7 million. The school said in a statement that it had no knowledge of fraudulent activities and accepted the gift of shares in good faith, according to the paper.
The case is People v. Margulies, 2503-2010, New York state Supreme Court (Manhattan.)
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