June 13 (Bloomberg) -- John D. Mazzuto, the former chief executive officer of Industrial Enterprises of America Inc., secretly pleaded guilty to his role in a $60 million stock fraud at the seller of automotive chemicals.
Mazzuto admitted in New York state court to committing two counts of grand larceny, a scheme to defraud and a violation of general business law, according to the Jan. 14 plea agreement made public last week. He agreed to cooperate and is testifying against James W. Margulies, an Ohio attorney who served as Industrial Enterprises’ counsel, chief financial officer and, briefly, CEO. Margulies is now on trial.
Mazzuto, 62, a Yale University graduate and former managing director at Chemical Bank, created IEAM by taking a private company he controlled and merging it with a public company. According to prosecutors, IEAM illegally issued millions of shares of stock to friends, family, associates and Yale.
On the witness stand last week, Mazzuto said he, Margulies and others engaged in fraudulent accounting and securities practices, inflating the company’s stock value and deceiving investors.
“Since I was the public face of the company, I got investors to buy the stock,” Mazzuto testified. “Jim’s role was to then create all the paperwork to make these transactions look legitimate even though they weren’t.”
Margulies, 47, who also was indicted for grand larceny, a scheme to defraud, conspiracy and other crimes, denies the charges, his lawyer, Martin Adelman, said in a June 10 interview after Mazzuto ended his testimony for the day.
“This is one of the grand scamsters of our generation,” Adelman said of Mazzuto.
Mazzuto, who prosecutors said illegally obtained $15 million from Pittsburgh-based IEAM and used it to fund a lavish lifestyle, including homes in Southampton, New York, and Palm Beach Gardens, Florida, testified that he couldn’t make bail after he was arrested in May 2010. A judge had set bond at $2 million. He spent seven months behind bars.
“The company is fully cooperating with the prosecution,” Tom Curran, an attorney for IEAM, said today in a phone interview. “The company is actively engaged in an effort to gather all of its records to determine what action needs to be taken to regain property that may have been transferred.”
During his testimony, Mazzuto said he had a “difficult time dealing with jail,” found God and approached prosecutors in December about a plea deal to reduce his potential sentence.
Mazzuto faced as long as 25 years for the most serious charges against him. If he cooperated and fully complied with his plea agreement, prosecutors agreed to recommend a sentence of one year to three years in prison. Mazzuto testified June 9 that he hadn’t lived up to his obligations under the deal because he was arrested in January and again in February for driving under the influence of alcohol.
“I’m an alcoholic, and when I got out of jail I drank myself senseless on certain nights and I got in the car and was arrested,” he said. The cases, in Florida, are pending.
Mazzuto testified he also was arrested in 2007 for driving while impaired. He testified to three convictions, in 1997, 1998 and 2003, involving domestic violence. He has been married six times, he said, and is in the midst of a divorce. He filed for personal bankruptcy in 2002.
Prosecutors are no longer obliged to recommend the lenient sentence. Grand larceny charges carry a maximum sentence of 8 1/3 years to 25 years in prison.
Joan Vollero, a spokeswoman for Manhattan District Attorney Cyrus Vance Jr., declined to comment on the case.
As part of his plea agreement, Mazzuto forfeited $1 million, which he said represented all his assets in January.
Mazzuto said he started investing in companies in the late 1990s. He graduated from Yale in 1970 and went to work for Chemical Bank, now JPMorgan Chase & Co., where he became a managing director of corporate finance before leaving in 1988, he testified. He then worked for Merchant Bank, and went out on his own in 1991, he said.
In 2002, Mazzuto acquired a controlling interest in EMC Packaging Inc., a closely held Lakewood, New Jersey-based company that packages industrial gases, he testified. In 2004, he merged EMC into publicly listed Advanced Bio/Chem Inc., a company with no operations.
Mazzuto said he ran the company and chose Margulies to coordinate the production of the financial statements. After the deal, Advanced Bio/Chem changed its name to Industrial Enterprises of America Inc. It later acquired other companies.
Mazzuto was CEO of IEAM, a seller of antifreeze and other automotive additives and chemicals, from 2004 to 2008. Under questioning from Assistant District Attorney Garrett Lynch on June 9, Mazzuto said that he committed crimes during that time and engaged in fraudulent conduct with others.
“We sold stock in a form that was not allowed by the SEC rules,” he said. “We then covered up the sale of that stock by creating a set of phony documents. We used those documents then to deal with the outside accounting firms to falsify reports going out.”
Once in control of the public company, Mazzuto, assisted by Margulies, filed with the U.S. Securities and Exchange Commission and registered 15 million shares of stock for issuance, according to prosecutors. According to Mazzuto, IEAM filed an S-8, a filing required when companies want to issue stock to their employees.
Millions of Shares
Prosecutors said in a statement after the indictment that Mazzuto and Margulies issued millions of shares, worth tens of millions of dollars, to friends, family, business associates and Yale, and to shell companies, entities and accounts they controlled. Some were direct recipients, while some were conduits.
“I had those individuals sell the stock and I had them keep 10 percent of those sale proceeds as their commission. The other 90 percent came into the company,” Mazzuto testified.
In effect, the sale of shares was used to generate cash for the business to inflate its stock price, prosecutors said.
In 2006, Mazzuto and Margulies did a reverse 1-for-10 stock split. The largest number of shares, 3.5 million, went into an attorney trust account opened by Margulies in December 2006, according to prosecutors. Within six months, Margulies liquidated the shares for $17.7 million, moving more than $13 million back to IEAM to inflate cash flow and boost the stock price.
Interim Finance Chief
Mazzuto resigned as CEO and interim finance chief in February 2008, according to a company statement, when Margulies briefly took over both posts. Margulies resigned the following month, according to company filings. On May 1, 2009, the company sought Chapter 11 bankruptcy protection.
The company was sued in federal court in Manhattan in November 2007 by stockholders who said that the company, Mazzuto, Margulies and others made false representations and omissions about IEAM’s financial condition, according to a company filing. The court approved a preliminary settlement for $3.8 million in April 2009.
According to the Yale athletics website, in April 2009, the school commemorated “one of its great supporters” by officially dedicating John and Theresa Mazzuto Field. Yale also renamed the head coach position the Mazzuto Family Head Coach of Baseball. Mazzuto played shortstop for the school.
“I learned many lessons as a Yale baseball player,” Mazzuto is quoted as saying. “Most importantly, I learned that if you lose, there will be another game tomorrow.”
In January, Yale agreed to pay a $1 million settlement to IEAM 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.
Baker & McKenzie LLP, the world’s second-largest law firm by number of lawyers, and former partner Martin Weisberg were sued in April over claims they created a legal structure that led to IEAM’s demise, according to a complaint filed in U.S. Bankruptcy Court in Wilmington, Delaware. The plaintiffs, suing on behalf of the company, are seeking $600 million in damages.
“Defendants created a legal structure that enabled an unlawful pump-and-dump scam, misleading or outright false Nasdaq and SEC filings, and participation in a host of internal corporate malfeasances designed to raid the company of its working capital,” according to the complaint.
Weisberg, who left the firm in October 2007, declined to comment. Jessica Wiltse, a spokeswoman for the Chicago-based law firm, had no immediate comment.
Buy a Home
The plaintiffs accused Margulies of wiring $2.7 million of IEAM shares processed from the trust account in September 2006 to an account in Weisberg’s name for the purchase of a home for Mazzuto.
Mazzuto testified last week that in the summer of 2006 he decided to buy a house in Southampton, New York.
“The house cost $3 million,” he said. “To raise the money involved the selling of shares.”
Mazzuto testified that Weisberg provided advice to him and that Baker & McKenzie worked on litigation issues, large transactions and raising money. Baker McKenzie has until June 20 to respond to the complaint in the Delaware case, according to the docket.
The case is People v. Mazzuto, 2503-2010, New York state Supreme Court (Manhattan). The shareholder suit is Mallozzi v. Industrial Enterprises of America Inc., 07-CV-10321, U.S. District Court, Southern District of New York (Manhattan). The bankruptcy is In re Industrial Enterprises of America Inc., 09-11508, U.S. Bankruptcy Court, District of Delaware. The Baker lawsuit is Industrial Enterprises of America Inc. v. Baker & McKenzie LLP, U.S. Bankruptcy Court, District of Delaware.
To contact the reporter on this story: Karen Freifeld in New York State Supreme Court at 5387 or firstname.lastname@example.org.
To contact the editor responsible for this story: Michael Hytha at email@example.com.