By Chris Carey
Jim McNair contributed to this report
(First of two parts)
Three companies whose stock made big moves last year are linked by undisclosed relationships that raise numerous red flags about the deals that helped attract investors, boost share prices and enrich certain players.
A Sharesleuth investigation found that financier Barry C. Honig and a handful of associates sold at least $70 million of stock in those companies — PolarityTE Inc. (Nasdaq: COOL), Marathon Patent Group Inc. (Nasdaq: MARA), and Riot Blockchain Inc. (Nasdaq: RIOT) –- as their share prices rose by triple digits, then tumbled from those highs.
The companies, by comparison, had less than $1 million in combined revenue in fiscal 2017, and $180 million in losses. Our investigation found that surges in their share prices were aided by a daisy chain of deals involving Honig and a recurring cast of business partners and investors. They included John R. Stetson, PolarityTE’s executive vice president and chief investment officer; John R. O’Rourke III, Riot Blockchain’s chairman and chief executive, and Mark E. Groussman, who once headed Marathon Patent’s predecessor and was a large shareholder in all three companies.
Our investigation found that Honig personally sold at least $30 million of stock in PolarityTE and Riot Blockchain from late August to mid-December without reporting those sales, as required under Securities and Exchange Commission rules for non-passive investors who own 5 percent or more of a company’s shares.
We found that Honig and his associates stood to receive more than $40 million in new shares through the acquisition of two bitcoin companies in which they had undisclosed stakes. The largest of those deals was cancelled late last month.
Our analysis of SEC filings and other documents found that:
– Honig and his associates were among the biggest investors in Riot Blockchain, Marathon Patent AND two new bitcoin companies they agreed to acquire for stock initially valued at $197 million. Those deals were struck on consecutive days in early November. Honig’s network was to get more than half of the shares to be issued for the bitcoin companies, which had little, if any, revenue and modest assets. Their presence on both sides of the deals was not disclosed at the time, and has not been fully explained since.
– A limited partnership headed by O’Rourke provided $5.3 million in financing to Marathon Patent in August and September, in return for convertible notes and warrants. It wound up with the equivalent of 11.8 million shares, which soared in value after Marathon Patent said it was getting into the cryptocurrency game by merging with one of the bitcoin companies, Global Bit Ventures Inc. The closing of that deal was delayed repeatedly, and Marathon Patent announced on June 28 that it had decided to walk away. Our analysis suggests that Revere already had sold at least 3.6 million of its shares, some during last November’s surge. We estimate that the proceeds were around $13.9 million (see calculations here). The rest of the stock would be worth $6.7 million at the current market price, although it’s possible that some of those shares have been sold as well. SEC filings show that more than 8 million of the 11.8 million shares — or nearly 40 percent of Marathon Patent’s total outstanding — have been issued to Revere or other unknown parties. Revere has not filed a Form 13D or Form 13G reporting ownership of those securities, nor has anyone else.
– Honig and a limited liability company managed by Stetson provided cash to Global Bit Ventures in September, in return for convertible notes. That was less than six weeks before Marathon Patent finalized the merger agreement. A later SEC filing showed that the notes somehow found their way to a second limited liability company, managed by O’Rourke. That entity also had preferred stock in Global Bit Ventures, and stood to receive 20.5 million of the 70 million shares that were to be issued to the bitcoin company’s investors. Its stake would have been worth $17.5 million at the current market price.
– Honig, Groussman and another longtime associate, Michael H. Brauser, were shareholders in Kairos Global Technology Inc., the bitcoin miner that Riot Blockchain bought on Nov. 1 for roughly $12 million. Kairos’ owners exchanged their 1.75 million shares of common stock for 1.75 million shares of Riot Blockchain’s convertible preferred stock valued at $6.80 a share. Honig, Groussman, Brauser and two other large Riot Blockchain shareholders owned more than 50 percent of Kairos. Riot Blockchain did not disclose that cross-ownership at the time of the deal. We found that Honig, Groussman and the other investors had purchased their Kairos stock just a day or two before the acquisition. A financial statement in a January SEC filing showed that Kairos sold 750,000 shares for 10 cents a share on Oct. 30 and 1 million shares for $3.10 on Oct. 31.