Manhattan District Attorney Cyrus R. Vance, Jr., today announced the conviction of JAMES MARGULIES, 47, an attorney and corporate executive, for looting a Manhattan-based public company of more than $90 million worth of illegally issued securities, and stealing more than $20 million from investors. MARGULIES fraudulently issued more than 40 million shares of stock, and then used the proceeds from the sale of that stock to inflate the company’s balance sheet and pump up the value of the stock. This allowed him to sell the stock at inflated values and covertly fund the company with the proceeds, while also bankrolling his lavish lifestyle. Following a 6-week trial, a jury in New York State Supreme Court today found the defendant guilty of Grand Larceny in the First Degree, Scheme to Defraud in the First Degree, Conspiracy in the Fourth Degree, Falsifying Business Records in the First Degree, and violations of the Martin Act, New York State’s securities fraud law. The defendant is scheduled to be sentenced on August 9, 2011.
“The defendant’s pump-and-dump scheme artificially inflated stock prices before he sold off the shares, leaving honest investors holding worthless stock,” said District Attorney Vance. “While the victims in this scheme – including a teachers’ pension fund in Ohio and the Methodist Church – lost millions on their investments, the defendant spent the stolen money on homes, expensive jewelry, luxury travel, and private jets.”
As proven at trial, between 2004 and 2008, MARGULIES illegally issued millions of shares of stock in Industrial Enterprises of America, Inc. (“IEAM”), a public holding corporation located in Manhattan, to his family, friends, and close associates. MARGULIES served as IEAM’s Chief Financial Officer, General Counsel, and outside counsel, and also served as Chief Executive Officer and a member of the corporation’s Board of Directors in 2008. The defendant stole from the corporation and legitimate investors, and engaged in a variety of fraudulent accounting practices to disguise the theft and pump up the value of the stock.
MARGULIES tried to conceal the fraudulent share issuances and the flow of stock proceeds back into the company by creating fake consulting agreements for share recipients; structuring sham private stock transactions; falsely recording stock proceeds as revenue; and lying to outside auditors and regulators. These misrepresentations duped investors and shareholders into investing millions of dollars in IEAM. One outside investor lost more than $20 million investing in IEAM stock.
In January 2005, MARGULIES filed a securities registration with the United Stated Securities and Exchange Commission (“SEC”) and registered 15 million shares of IEAM stock for issuance. This filing, termed an S-8 stock registration, allows companies to register stock to be issued only to employees and consultants for compensation and incentive purposes as part of an employee benefit plan, and does not allow a company to sell or issue stock for profit. However, as proven at trial, the defendant immediately began issuing millions of shares of IEAM stock following this filing to friends, family members, business associates, and to shell companies, entities and accounts the defendant controlled. The defendant used the sale of the shares to generate cash for the business, which, in turn, inflated its stock price.
All told, MARGUILES issued some 43 million shares, almost all of it to support the fraudulent scheme. He spent his ill-gotten gains, totaling more than $7 million, on luxury items such as a $500,000 vacation club membership in Exclusive Resorts, a $350,000 ring for his wife, and private jet travel. He also spent more than a million dollars paying off the mortgage on his home, and purchased a secondary home for more than a million dollars.
District Attorney Vance thanked Assistant District Attorneys and Senior Investigative Counsel Garrett Lynch and Harold Wilson, both of the Major Economic Crimes Bureau, represented the People at trial. The case was prosecuted under the supervision of Assistant District Attorney Christopher Conroy, Deputy Chief of the Major Economic Crimes Bureau; Assistant District Attorney Richard Weber, Chief of the Major Economic Crimes Bureau; and Executive Assistant District Attorney Adam Kaufmann, Chief of the Investigation Division. Trial Preparation Assistants David Coit, James MacFadyen, Pope McCorkle, and Gee Hyun Lee, and Supervising Investigator Santiago Batista, also assisted in the investigation under the supervision of Thomas Jackson, Deputy Chief Investigator of the District Attorney’s Office Investigation Bureau.
JAMES MARGULIES, D.O.B. 6/8/64
Grand Larceny in the First Degree, a class B felony, 2 counts
Violation of General Business Law (Martin Act), a class E felony, 2 counts
Scheme to Defraud in the First Degree, a class E felony, 1 count
Conspiracy in the Fourth Degree, a class E felony, 1 count
Falsifying Business Records in the First Degree, a class E felony, 24 counts