STRS stakeholders...we got pumped and then we got dumped!

From John Curry, September 9, 2011

Mazzuto convinced institutional investors, including the State Teachers Retirement System of Ohio and the Methodist Church, to buy millions of illegally-issued shares of Industrial Enterprises stock. Defense lawyers for Margulies referred to Mazzuto as "one of the grand scamsters of our generation."

The Manhattan district attorney's office said Margulies did the legal work to paper over the stock scam, while John Mazzuto, who preceded Margulies as Industrial Enterprises' chief executive, was the public face of the company.

http://www.cleveland.com/business/index.ssf/2011/09/pepper_pike_lawyers_sentenced.html

Pepper Pike lawyer sentenced to 7-21 years in prison in stock scam

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September 9, 2011
By Alison Grant, The Plain Dealer

Cleveland-area attorney James Margulies was sentenced to seven to 21 years in prison today for his role in a $110 million pump-and-dump stock fraud.

Margulies, 47, was also ordered to pay $7 million in restitution --- the amount that prosecutors said he profited in the scheme.

Prosecutors said Margulies and other conspirators artificially inflated the price of shares in Industrial Enterprises of America, which owns a company north of Pittsburgh that makes antifreeze and other car chemicals; lured in investors; then dumped their shares, leaving innocent investors holding the bag.

Margulies made a statement before the sentencing in which he said he had never heard the term "pump-and-dump" before getting entangled in Industrial Enterprises. He said he was untrained to recognize the scam perpetrated by others.

Prosecutors said the conspiracy allowed Margulies to live a high-rolling life -- paying for a $500,000 vacation club membership, a $350,000 diamond ring for his wife and the balance remaining on the mortgage for his French country manor in Pepper Pike, now listed for sale at $1.5 million.

Margulies was convicted of securities fraud, grand larceny and other crimes in July. He had served as finance chief, legal counsel, and for about a year, chief executive of Industrial Enterprises while working in a small law firm he opened on Chagrin Blvd. after several years at Jones Day's Cleveland office.

The Manhattan district attorney's office said Margulies did the legal work to paper over the stock scam, while John Mazzuto, who preceded Margulies as Industrial Enterprises' chief executive, was the public face of the company.

Mazzuto convinced institutional investors, including the State Teachers Retirement System of Ohio and the Methodist Church, to buy millions of illegally-issued shares of Industrial Enterprises stock. Defense lawyers for Margulies referred to Mazzuto as "one of the grand scamsters of our generation."

Judge Gregory Carro told Margulies today, "He was the architect, but you were the engineer."

Shares in Industrial Enterprises peaked at $8.50 in May 2006 before crashing in 2007 as the scheme came to light, wiping out $20 million in investor holdings. It trades today for less than 5 cents a share.

Mazzuto, 62, spent seven months in jail, unable to afford bail, before agreeing to testify against Margulies.

Mazzuto said during the trial that he is an alcoholic who often drank himself "senseless." He was arrested for drunken-driving twice in Florida after striking the plea deal, so prosecutors are no longer bound to recommend a light sentence.

On the stand Mazzuto testified in detail about the fraud. It began when Mazzuto gained control of a private company, EMC Packaging Inc., which sold industrial gases. In 2004 he merged it with another company that traded publicly as a low-priced, speculative stock that had no operations and existed only on paper.

Prosecutors said a Cleveland real estate developer, Peter Vanucci, introduced Mazzuto and Margulies when Mazzuto was looking for a public shell corporation to drop on top of EMC Packaging.

Renamed Industrial Enterprises of America, the now-public company, headquartered in New York, began issuing a type of stock restricted for use as employee compensation. Instead, IEAM used associates and "front" companies to sell shares to unsuspecting investors.

Part of the scheme involved a stock promoter in Texas whose "programs" to boost the value of penny stocks drew upon a list of 1,000 to 2,000 people who would buy a corporation's stock to push up its value, in return for fees for engaging in the conspiracy.

The original indictment of Margulies and Mazzuto included 10 unnamed co-conspirators. Testimony suggested that a handful of them are businessmen from the eastern suburbs of Cleveland. Assistant District Attorney Garrett Lynch said today the investigation is continuing.