Federal regulators are alleging that a Charleston lawyer made misleading statements on behalf of a prominent client who was offering investors access to shares of Facebook and other social media firms before their hotly anticipated initial public offerings.
In administrative proceedings filed Tuesday, the U.S. Securities and Exchange Commission alleged John B. Kern facilitated the investments in Craig Berkman’s companies and then helped conceal the frauds when they began to unravel.
The commission claims Berkman, 71, masqueraded as “a sophisticated fund manager who defrauded investors” seeking coveted pre-IPO shares of Facebook. LinkedIn, Groupon and Zynga. He was arrested on related criminal charges at his home in Florida on Tuesday.
Berkman raised more than $13 million from about 120 investors, even connection to Facebook stock, and then misappropriated the money, according to the SEC.
Kern, 49, and an unnamed California investment manager, also 49, allegedly made up the scheme’s supporting cast.
“When investors in Berkman’s phony Facebook fund began questioning what happened to their money after Facebook’s IPO occurred, Kern falsely assured them that their money was used to purchase pre-IPO Facebook stock being held for them by unnamed counterparties,” the commission said in a statement.
The SEC alleges Kern, who served as general counsel to the funds, received approximately $293,000 from the various investment accounts.
Reached at his office Tuesday, Kern said he’s under “strict instructions” from his lawyer in New York “not to talk to anybody about the proceeding.”
“I’d be happy to do it when he gives me the OK,” he said.
Alex Rue, a retired SEC attorney in Atlanta who handled the case of Charleston Southern Ponzi schemer Al Parish, said the fact that the SEC is pursuing the case administratively instead of in U.S. District Court is “unusual.”
But, he said, there are good reasons for the agency’s lawyers to pick this route. It denies Berkman the full discovery process he would be entitled to in a civil case, a process that could help him in his criminal case. And the Dodd-Frank financial reform law gave the internal agency proceedings more teeth.
“So there is thought to be some home-court advantage,” said Rue, who had seen the filing but is not involved in the case.
The alleged scheme
Berkman is a former Oregon state Republican Party chairman and gubernatorial candidate who had most recently been living in Odessa, Fla., the agency said.
He is no stranger to investment-related legal trouble. According to the SEC order, he was fined $50,000 for operating without a brokerage license in 2001, and in 2008, an Oregon jury found he misrepresented investors, among other things, leading to a multimillion-dollar judgment and then Berkman’s involuntary bankruptcy.
It was against that backdrop that he set up a web of similarly named companies and began soliciting investments in the social media companies.
The first fraud, according to the SEC, involved offering pre-IPO Facebook stock for $25 or $30 per share. According to the SEC, Berkman’s Ventures Trust II LLC didn’t have those shares to sell, only a stake in other funds that had acquired some.
“Instead of purchasing shares on investors’ behalf as promised, Berkman misused their investments to make Ponzi-like payments to earlier investors, fund personal expenses, and pay off claims against him in a bankruptcy case,” the commission said.
Kern’s alleged role in the scheme was obtaining a letter describing Ventures II’s partial ownership of one of the funds with Facebook stock. That letter was then altered to make it appear Venture II had almost half a million pre-IPO Facebook shares, the SEC alleged.
The other fund, not named in the SEC case, got wind of the forgery, and cut ties with Venture II in March 2012. Kern objected and threatened legal action but never took any.
In a related deal, Berkman solicited investors to buy a fund that held other pre-IPO Facebook shares, the SEC alleged. But while that purchase was very unlikely, “Berkman and Kern falsely portrayed the Actual Facebook Fund 2 deal as imminent to prospective investors,” including in an April 14 letter drafted by Kern.
Berkman allegedly perpetrated a third fraud after the Facebook IPO on May 18, though the SEC does not specify Kern’s role, if any, in that scheme.
‘False and malicious’
Last summer, as investors apparently expressed anxiety about their money, Kern wrote a memorandum “to address concerns that have been raised about the integrity of the funds.”
The memo claimed Ventures II was subject to a non-disclosure agreement that prevented the identification of the counterparties that actually had the Facebook stock. He claimed Ventures II “is not a Ponzi scheme and absolutely and affirmatively rejects this assertion as false and malicious.”
“As Kern knew or at least recklessly disregarded, his statements were false,” the SEC order states, pointing to the disintegrated relationship with the fund whose letter was forged as proof.
The SEC order, which initiates cease-and-desist proceedings at the agency, gives the respondents 20 days to file an answer to the allegations and calls for a public hearing in 30 to 60 days. The presiding administrative law judge must then issue an initial decision within 300 days. That’s a much quicker timeline than federal court, Rue said, although appeals likely would follow.
Kern, who went to law school in Oregon, operates John B. Kern International Law at 180 East Bay St. in downtown Charleston. The SEC said he also has an office in the Republic of San Marino, which is within Italy.
In addition to his law firm, Kern was board chairman of Charleston Habitat for Humanity about a decade ago.
He also is the founder, chairman and CEO of a biofuel business called Carolina-Pacific LLC. The company planned to recycle sawdust into pellets for use as a coal substitute in Europe and had been seeking a $200,000 state grant in 2007 to get started.
A biography on the company’s site said Kern also worked for five years as an aide to the late Republican U.S. Sen. Mark O. Hatfield of Oregon and other federal lawmakers before going to law school.
The S.C. Supreme Court’s Office for Disciplinary Counsel suspended Kern for 90 days in August 2011 for commingling of a $20,000 legal retainer with his own personal operating account. Records show Kern acknowledged doing so, and he repaid the client in full. No evidence of misappropriation was found, and Kern was reinstated to practice law in February 2012.
Reach Brendan Kearney at 937-5906 and follow him on Twitter at @kearney_brendan.