Failed Facebook Stock Deal Brokered From Jail Spurs Probe

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Pedestrians are reflected in a window near a display of the share price for Facebook Inc., displayed at the Nasdaq MarketSite in New York, on May 29, 2012. Close

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Photographer: Scott Eells/Bloomberg

Pedestrians are reflected in a window near a display of the share price for Facebook Inc., displayed at the Nasdaq MarketSite in New York, on May 29, 2012.

Troy Stratos, a failed music producer and screenwriter, wasn’t going to let confinement in a California jail stop him from getting in on the Facebook Inc. (FB) craze.

While awaiting trial on charges that he stole at least $7 million from the ex-wife of actor Eddie Murphy, Stratos tried to broker a private sale of 40 million shares in the social- networking company before it went public, he said under oath in his January bail hearing in federal court in Sacramento.

Stratos said he was working as a middleman for Timothy D. Burns, the co-founder of a wealth adviser based in Conshohocken, Pennsylvania, who paid Stratos half of a $22.4 million fee before his arrest to locate the shares and complete the sale.

The unlikely deal never came off. Burns, whose wealth- management firm oversaw $27 million in client money, never got his Facebook stock, which would have cost about $1.3 billion in the private market in the second half of 2011. Stratos didn’t get the rest of his fee. A federal grand jury is looking into the transaction, said David Weiner, Stratos’s lawyer.

“I had intimate contacts that were Facebook shareholders, and I had an opportunity with legitimate Facebook buyers to put them together,” Stratos said in the hearing. The arrest, he said, complicated the deal by making him look like some “wild con man,” he said.

Assistant U.S. Attorney Todd Pickles, the prosecutor on the case, declined to comment. Burns, 33, didn’t return multiple phone calls and e-mails. Will Nystrom, a Boston-based lawyer who is representing Burns and his firm in the Stratos matter, declined to comment.

Capote Protégé

Facebook is the latest venture to turn toxic for Stratos. Investors in a supposed comeback CD by his step-mother, the jazz singer Nancy Wilson, won a $2.1 million judgment against him in 2001. Stratos worked with Richard Hack, a protégé of author Truman Capote, on movie scripts including “Plantation,” about a wealthy sugar cane-growing family in Hawaii. Next Level Media, the Vancouver, British Columbia, company set up to make his films, shut in 2003 after failing to pay its bills, according to Tamara Hegan, Next Level’s former office manager.

Burns is the founder of both ESG Wealth Management LLC, a registered investment adviser, and ESG Family Office, which caters to wealthy clans, managing their money and other affairs. ESG Family Office does estate planning, pays bills, plans events, finds sports tickets and gets access to exclusive clubs, according to its website. ESG Family Office said on its website that it represents 15 wealthy families with assets under administration of $3.75 billion.

After working as an investment adviser at Morgan Stanley, Burns started the business in 2005, according to the website. He is a graduate of St. Joseph’s University, a Jesuit school in Philadelphia, and sits on the board at Kyle’s Treehouse, an autism organization in nearby Newtown Square.

Pre-IPO Shares

Burns tried to find sellers of pre-IPO Facebook shares through Soumaya Securities LLC, Stratos said at his Jan. 23 bail hearing. Soumaya is a Los Angeles-based company that Stratos set up in August 2011, according to California Secretary of State records. Soumaya’s chief executive officer was a man named Ken Dennis, Stratos said at the hearing.

In the second half of 2011, Facebook employees and early investors were selling shares for an average price of $32 in private transactions, according to SharesPost Inc., which tracks non-public companies. ESG was looking for 40 million shares, said Weiner, Stratos’s lawyer in Cameron Park, California. Facebook went public at $38 in May and has fallen 48 percent since then.

Walter Urban, another lawyer for Stratos, said his client is telling the truth about receiving the money from ESG.

“It did take place,” Urban said. “There is documentation. What he testified to under oath is true.”

Spent Fee

While trying to close the Facebook deal, Stratos lived in a rented penthouse apartment in Marina del Rey, near Los Angeles, according to court documents. Stratos said at the hearing he spent the first half of his fee soon after getting it, paying old debts and trying to develop a restaurant and bar in Las Vegas. He also bought a Range Rover, a Chevrolet Camaro, and an Audi R8 convertible that cost more than $200,000.

“I’ve spent the $11 million,” Stratos said. If the Facebook deal founders, “Soumaya will owe Mr. Burns and ESG Capital a refund,” Stratos said at the hearing.

Louis Nader, a producer of the Kevin Spacey movie “Swimming with Sharks,” said Stratos paid him $680,000 up front last year to make a series of commercials he hoped to sell to Nike Inc. (NKE) The animated spots were supposed to show a creature collecting garbage in space, then finding a pair of Nike shoes and rushing off to Earth to get more.

“It wasn’t a bad idea,” Nader said. Stratos disappeared in December before the spots were done, he said.

Nicole Murphy

Stratos said he was about to complete the Facebook transaction when he was arrested in December on charges that he took money from Eddie Murphy’s ex-wife, Nicole, starting in 2005. Stratos, who knew Nicole as a teenager in Sacramento, offered to invest her divorce settlement in Dubai and the United Arab Emirates. Instead, he transferred the money into his personal accounts, according to the U.S. Justice Department’s Dec. 16 indictment. Stratos has pleaded not guilty.

Stratos kept working on the Facebook deal in jail, he said, dictating text messages to a third party to send to Burns. In those messages, Stratos claimed to be Ken Dennis, U.S. Magistrate Edmund Brennan in Sacramento said in a Jan. 31 order denying Stratos bail.

Brokering closely held securities was a new business for Stratos. In the late 1990s, he persuaded a Hawaii real estate agent named Dennis Rush and some friends to invest $1.9 million in a CD and video featuring singer Nancy Wilson, who had married Stratos’s biological father. The idea was to spark a comeback like the one that made Tony Bennett popular with the MTV generation in the early 1990s, Stratos told Rush and the other investors.

Stratos’s Disappearance

They shot the video, and then Rush learned that Stratos didn’t own the rights to Wilson’s hit, “If I Had My Way,” as he’d claimed, Rush said in an interview. Rush said Stratos disappeared. Rush filed a complaint against Stratos in May 2000 and won a $2.1 million judgment against him in 2001.

Stratos paid it in late 2011, Rush said. At the January bail hearing, Stratos said he used some of the money he got from Burns to pay Rush and other investors.

Stratos had another bail hearing in September and remains in the Butte County detention center in Oroville.

The case is U.S.A. v. Stratos, 2:11-CR-00537-LKK, U.S. District Court, Eastern District of California (Sacramento)

To contact the reporters on this story: Anthony Effinger in Portland at aeffinger@bloomberg.net; Katherine Burton in New York at kburton@bloomberg.net

To contact the editors responsible for this story: Michael Serrill at mserrill@bloomberg.net; Christian Baumgaertel at cbaumgaertel@bloomberg.net

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