Former Industrial Enterprises of America Inc. (IEAM) Chief Executive Officer James W. Margulies was sentenced to seven to 21 years in prison for his role in a $110 million securities fraud at the automotive fluids company.
New York State Supreme Court Justice Gregory Carro handed down the sentence in Manhattan today. Margulies, of Cleveland, was convicted in July of grand larceny, scheming to defraud, conspiracy, and falsifying business records in what prosecutors called a “massive” pump-and-dump scheme.
“This is basically a case of greed,” Carro said. He told Margulies, a lawyer who will lose his license, that the sentence should serve as “a general deterrent that will scream out from this courtroom that people like you are going to be treated harshly.”
Margulies, 47, and another former Industrial Enterprises CEO, John D. Mazzuto, 62, were indicted in May 2010. Mazzuto, who had a Yale University baseball field dedicated to him in 2009 for his support, pleaded guilty and testified against Margulies at trial. Mazzuto hasn’t been sentenced.
Mazzuto and Margulies registered 15 million shares of their company’s stock with the U.S. Securities and Exchange Commission to issue to employees and consultants, prosecutors said, and gave millions of shares to friends, family members, business associates and their alma maters, including $1.7 million to Yale.
In January, Yale, which said it had no knowledge of the fraud, agreed to pay a $1 million settlement to IEAM for the value of the shares, according to the Yale Daily News.
Some of the recipients sold the stock and pocketed the proceeds, while others sold shares and sent the money back to the company or entities and accounts controlled by Mazzuto and Margulies, prosecutors said.
The judge initially ordered Margulies to make restitution of $7 million, the amount prosecutors said he took for himself over three years. The defense later disputed the restitution and the judge put the order on hold until a Sept. 26 hearing.
Margulies used his ill-gotten gains to pay off a $1 million mortgage on his home, pay $450,000 in back taxes, buy a $500,000 membership in a time-share, and purchase tens of thousands of dollars of first-class travel and a ring that cost more than $300,000, according to Manhattan Assistant District Attorney Garrett Lynch.
“My actions were well-intended at the time,” Margulies said today of his involvement in the company, speaking to the judge. “By the time I recognized the potential harm of my actions, it was too late.”
The judge didn’t buy Margulies’s claims. “You say you got into it innocently,” Carro said. “Yet this fraud started Day One, the day those shares went on the market. You knew what Mr. Mazzuto was up to from the very first day.
“I constantly hear you weren’t the architect, but you were the engineer,” the judge went on. “Without you, this crime would never have taken place.”
Margulies asked for probation, telling the judge that he needed to be at home with his children, including a girl who has special needs. Carro rejected that request.
“It’s not my sentence that’s going to devastate these children,” the judge said. “It is your actions.”
New York attorney Thomas Curran, who represents the company, said in the courthouse afterward that Pittsburgh-based IEAM planned to take action against at least 10 unidentified, unindicted co-conspirators.
‘Going After Them’
Current IEAM chief executive officer Robert L. Renck Jr., who also was at the courthouse, said in an interview the company had filed 14 actions against 118 people and corporate entities in federal bankruptcy court.
“It’s not over,” Renck said. “This was the end of the beginning, not the beginning of the end.”
Renck, managing partner at R.L. Renck & Co., said he got involved with the company because the broker-dealer had invested $3.7 million on behalf of clients. “A group of us were defrauded and we went in to investigate,” he said.
Asked whether Manhattan prosecutors would pursue the unindicted co-conspirators, Assistant District Attorney Harold Wilson said, “The investigation continues.”
Wilson, who worked under Robert Morgenthau when he was district attorney and now serves under Cyrus Vance Jr. in the office’s Major Economic Crimes bureau, said the case was “the latest in a long tradition of the office trying to protect the financial markets in the city.”
The case is People v. Margulies, 2503-2010, New York state Supreme Court (Manhattan).
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