The connections between Vicis Capital LLC and Midtown Partners & Co. — two firms featured in an earlier Sharesleuth investigation – go well beyond the list of small public companies they provided with more than $150 million in financing.
Sharesleuth has learned that key executives at both the New York hedge fund and the Tampa, Fla.-based investment bank have past ties to a man named Bryan J. Zwan, who once appeared on the Forbes 400 list of richest Americans.
Zwan is the founder and chairman of Digital Lightwave Inc., which settled fraud charges with the Securities and Exchange Commission in 2000. He also is a prominent member and financial backer of the Church of Scientology.
Documents show that:
– Vicis’ three founders – John D. Succo, Shad L. Stastney and Sky M. Lucas – were partners with Zwan in a predecessor fund, Victus Capital LLC, from 2001 until 2005.
– Midtown Partners’ chief executive, its research director and two senior vice presidents previously worked for H.C. Wainwright & Co., a New York investment bank that Zwan controls.
– Christopher D. Phillips, who headed Midtown Partners’ parent company from 2004 to 2008, also worked for Zwan. He had been a director of Zwan’s family foundation, and was chief financial officer of several other Zwan-controlled entities, including two that bankrolled Digital Lightwave.
Phillips jumped to Vicis in February 2008, as managing director. He said in a legal affidavit last year that he oversaw its operations. Vicis listed $2 billion in assets under management in its latest quarterly filing with the SEC, down from $2.6 billion just three months earlier and $5 billion at the start of 2009.
The PIPEs Report, a trade publication, reported last month that Vicis was winding down its funds after being inundated with redemption requests from investors. It also said that Phillips had left Vicis.
Vicis now is down to between $1 billion and $1.5 billion in assets, according to sources in the hedge fund industry.
Midtown Partners and H.C. Wainwright both have been among the most active U.S. firms in raising money for companies through so-called PIPE (Private Investment in Public Equity) deals.
Midtown Partners tied for sixth in the number of transactions completed last year, with 15 deals worth $70 million. It tied for fourth in 2008 and tied for fifth in 2007. H.C. Wainwright ranked fourth in total transactions in 2005 and third in 2004.
Some of those transactions generated short-term gains that may have boosted Vicis’ reported returns and increased profit payouts to the fund’s managers. The deals also produced millions in placement fees, stock and warrants for Midtown Partners. The shares of most of those companies have declined markedly, however, leaving Vicis and its investors with little to show for the money. Even the holdings that still show gains are illiquid, and any profits may exist only on paper.
Phillips resigned from the board of directors of three of Vicis’ portfolio companies in January.
His name does not appear in any of the corporation filings for Vicis Capital, Midtown Partners or its parent company, Apogee Financial Investments Inc. Nor does it show up in any other public records directly related to those companies.
Zwan’s lawyers told Sharesleuth that Zwan parted ways with Succo, Stastney and Lucas in early 2005, when Victus sold all of its holdings to Vicis. They added that Phillips resigned from all of his positions at Zwan’s companies the previous year.
But Sharesleuth’s investigation determined that the overlapping relationships between Zwan, Phillips and their associates are more complicated than that.
At least 10 public companies listed both Victus and Vicis as investors in registration statements they submitted to the SEC between June 2005 and February 2006 – after the date when Victus reportedly sold its assets to Vicis.
Florida corporation filings show that Phillips was listed as treasurer of one Zwan company, Trendium Inc., in a document it filed on Jan. 24, 2005. He was listed as chief financial officer of another Zwan company, ZG Consulting Inc., in a document it filed with the state in May 2005.
Zwan’s lawyers asserted that the SEC filings and corporation filings were erroneous.
The SEC said it does not check every registration statement to ensure that shareholder lists are accurate. But securities experts told Sharesleuth that it was unlikely that filings by so many companies would have the same error. Some of those filings were submitted by large corporations, such as Leucadia National Corp. and Novell Inc., and were prepared by top-tier law firms, including Weil Gotschal & Manges.
Sharesleuth also found that three people close to Zwan — all officers or directors of Digital Lightwave — have additional ties to Vicis, Midtown Partners or Apogee Fianncial.
We noted that Robert F. Hussey, former chief operating officer of H.C. Wainwright and current president of Digital Lightwave, is listed in SEC filings as chairman of World Racing Group Inc. (Pink Sheets: WRGP.PK). World Racing Group’s most recent proxy filing with the SEC listed Vicis as its biggest shareholder, with a 32.5 percent stake.
Robert Moreyra and Peter H. Collins, two other Digital Lightwave directors, are co-managers of a limited liability company in Florida with Hans C. Beyer, general counsel of Apogee Financial.
Moreyra, who once was a managing director at H.C. Wainwright, also has been involved in business ventures with Apogee and its principals, including President Richard J. Diamond. One of those deals, the purchase of a struggling incentive travel business, ended in $3.7 million in judgments against a group whose members included Moreyra, Richard Diamond and D. Jerry Diamond, Apogee’s chief operating officer.
Once again, Sharesleuth is not alleging any wrongdoing by Zwan, H.C. Wainwright, Digital Lightwave, Hussey, Moreyra or Collins. But we think that investors who have put money into Vicis or are considering investments in any of the small cap companies linked to the fund and to Midtown Partners might want to know more about their histories and connections.
(Disclosure: No one associated with Sharesleuth.com has any position, short or long, in any of the companies mentioned in this story).
More recently, Moreyra was one of the initial managers of Forge ABS LLC, a Zwan-backed company that put together a $1.5 billion pool of collateralized debt obligations underwritten by Merrill Lynch & Co.
That pool, like many others assembled in 2007, went bad, leading to big losses for investors who traded in the securities, and to litigation alleging that the risks of the securities were understated.
Zwan’s attorneys said Moreyra introduced Zwan to the investment professionals who put together the pool. They added that Moreyra has not been involved in that business for several years.
Moreyra and Beyer also were involved with Mirabilis Ventures Inc., an Orlando-based private equity firm that was used by its chief executive to facilitate a $181 million tax fraud and money laundering scheme.
According to court documents and SEC filings, Beyer started doing legal work for Mirabilis in November 2004. He then served as a senior vice president at the company from September 2005 until the end of 2006, overseeing its private equity investments.
Mirabilis’ deals in that period included the acquisition of at least two businesses connected to Moreyra and Collins. During that time, documents show, Beyer also worked with Midtown Partners on financing packages for some of that firm’s clients.
Mirabilis collapsed when its fraud, orchestrated by Chief Executive Frank L. Amodeo, was exposed. In the aftermath, the company sued Beyer, alleging negligence and breach of fiduciary duty in relation to some of its complex financial deals.
It also noted in one filing that Mirabilis and Amodeo provided more than $9.6 million toward projects in which Beyer had “a potential direct economic impact.”
Mirabilis had previously sued Moreyra, Collins and several companies with which they were associated. Mirabilis alleging that it had invested $16 million through them in various projects, including a Trump Tower venture in Tampa. According to news accounts of the case, Mirabilis found that the projects were hindered by previously undisclosed problems.
Moreyra and Collins also were caught up in the litigation stemming from Mirabilis’ bankruptcy and fraud. Among other things, the federal government initiated forfeiture proceedings against properties in which they had an interest.
Moreyra and Beyer did not respond to questions from Sharesleuth.
Zwan’s lawyers said he was unaware of Hussey’s connection to World Racing Group and Vicis. They said he was unaware of Moreyra’s prior business dealings with the owners of Midtown Partners. They also said he was unaware of Moreyra’s dealings with Beyer at Mirabilis, or of his current partnership with Beyer in the limited liability company.
Zwan’s lawyers noted that Digital Lightwave, which converted in January from a public company to a privately held one, is in the process of restructuring its board. As part of that process, Moreyra and Collins will not continue as directors.
Zwan cofounded Digital Lightwave in 1990. The company’s main product was a portable device for monitoring and analyzing fiber-optic telecommunications networks.
Digital Lightwave went public in 1997 at $12 a share, giving the company a market capitalization of more than $300 million. It became the subject of an SEC investigation the following year.
The SEC alleged that Digital Lightwave, with Zwan’s knowledge, booked revenue for orders that had not formally been placed by its customers, a tactic that inflated its sales and earnings and helped prop up its stock price.
According to the SEC’s complaint, Digital Lightwave employees even put the unassembled components of some units into boxes and classified them as completed orders.
The company wound up restating its financial results in January 1998, wiping out 49 percent of its reported revenue for the second quarter of 1997 and 83 percent of its reported revenue for the third quarter.
Digital Lightwave and Zwan settled the SEC charges without admitting or denying guilt. (read more on the case below).
Digital Lightwave enjoyed a resurgence during the tech boom. Its stock tripled in the first three months of 2000, peaking at $150 a share, after it landed several big telecommunications companies as clients.
Zwan sold more than $340 million in Digital Lightwave stock between 1999 and 2001, while retaining a majority stake in the company. That put him on the Forbes 400 list of the richest Americans, with an estimated net worth of $600 million.
Zwan bought an initial 30 percent stake in H.C. Wainwright in the summer of 2001. At the time, the company was based in Boston and was battling a sharp decline in revenue because of a downturn in the economy and stock market. It jettisoned its retail brokerage business the following year, but continued to struggle. According to news reports, it got another capital infusion in 2003.
H.C. Wainwright’s most recent registration with the Financial Industry Regulatory Authority says Zwan now owns 75 percent of the company, which has relocated its headquarters to New York.
Zwan’s lawyers said Phillips helped him oversee H.C. Wainwright, and suggested that Phillips might have established a relationship his eventual hedge fund partners in the course of that work.
Zwan formed Victus Capital in 2001, with Succo, Stastney and Lucas as managers. According to media accounts, the fund was launched with $175 million in capital. Zwan’s lawyer’s said all of the fund’s money came from him.
SEC filings show that most of Victus’ early investments were in convertible notes of various pharmaceutical, technology, finance and consumer products companies, and were purchased as part of larger placements involving multiple buyers.
Victus operated from a six-story, turn-of-the-century building on Manhattan’s upper east side that Zwan had purchased for $31.5 million. He later sold the property for $45 million to New York Mayor Michael Bloomberg, who plans to use it as the headquarters for his charitable foundation.
VICTUS AND MIDTOWN
Sharesleuth’s review of SEC filings shows that only a few of Victus’ investments were placed by H.C. Wainwright. One of them was a $1 million investment in February 2004 in a Tampa company called PetCare Television Network Inc.
SEC filings also show that, at the time of the deal, Richard Diamond, Beyer and other people connected to Midtown Partners and Apogee already owned 13 percent of PetCare Television’s shares. Victus put another $1 million into PetCare Television on July 28, 2004. That same day, PetCare Television entered into a consulting contract with TotalCFO LLC, a company then headed by Chris Phillips.
SEC filings show that the next infusion of cash — $250,000 in March 2005 — came from Vicis rather than Victus, and that Midtown Partners was the placement agent rather than H.C. Wainwright.
Zwan’s name did not appear in any of the filings related to Victus’ investment in PetCare Television, now known as Medical Media Television Inc. (OTCBB: MMTV.OB).
According to SEC filings, control over convertible notes, shares and warrants that Victus held in certain companies shifted to Vicis in the spring of 2005.
The assets included 5.5 million shares in Chembio Diagnostics Inc. (OTCBB: CEMI.OB), a New York company that develops and markets kits that test for HIV, Syphilis or other diseases. A few months before the asset transfer, two senior vice presidents from H.C. Wainwright moved to Midtown Partners, and Midtown Partners took over as Chembio Diagnostics’ placement agent.
SEC filings for other companies in which Victus and Vicis held stakes listed Succo, Stastney and Lucas as having voting power over both funds until as recently as October 2005.
Michael Messinger, H.C. Wainwright’s chief operating officer, reiterated to Sharesleuth that H.C. Wainwright, Zwan and Victus “have no connection, financial or otherwise” to Vicis or Midtown Partners.
Richard H. Kreger, who headed H.C. Wainwright’s investment banking team, joined Midtown Partners as senior vice president in December 2004, along with J. Rory Rohan, another of H.C. Wainwright’s bankers.
John R. Clarke, who had been H.C. Wainwright’s president, became Midtown Partners’ chief executive in September 2007. William Relyea, H.C. Wainwright’s director of research, followed in 2008, as did two senior vice presidents, Ari Fuchs and Michael Rindos.
It is not uncommon for investment firms to seek injunctions or file lawsuits when multiple employees jump to a rival. But Zwan’s attorneys said H.C. Wainwright had no objection to its employees leaving for Midtown Partners.
Of the six H.C. Wainwright executives and investment bankers who moved to Midtown Partners, four remain.
The son of Vicis co-founder John Succo also has worked for Midtown Partners. The Financial Industry Regulatory Authority listed him as a registrered representative of Midtown Partners from June 2008 to April 2009, and his current LinkedIn.com profile lists him as an associate.
Financial statements that Midtown Partners filed with FINRA show that the firm collected $26 million in investment banking revenue over the past five years. It paid out nearly $11.8 million of that in salary, commissions and finder’s fees, and distributed an additional $10.8 million in cash and stock to its owners.
Those same financial statements show that Midtown Partners had less than $100,000 in investment banking revenue in 2004, before Vicis began doing business with the firm.
DIGITAL LIGHTWAVE FRAUD CASE
The SEC brought fraud charges against Digital Lightwave and Zwan in 2000, alleging that the company manipulated sales and earnings through sham “bill and hold” transactions in 1997. The SEC also alleged that the company issued false press releases and false financial statements in connection with those activities.
The SEC noted in its complaint that Digital Lightwave had only recently become a publicly traded company, and was under intense pressure to meet analysts’ earnings expectations.
Digital Lightwave’s shares had fallen more than 60 percent from their initial offering price, partly because the company fell short of projections in its first quarter after going public.
Digital Lightwave already had a certain amount of notoriety because Zwan is a prominent member and financial backer of the Church of Scientology, and many of the company’s other managers also were Scientologists.
The list included Denise Licciardi, the sister of worldwide church leader David Miscavige. She was vice president of administration at Digital Lightwave, and was reported to be among the employees who participated in the revenue scheme.
According to one account in the St. Petersburg Times, a Digital Lightwave employee who learned of the improper activities reported them not to company management, but to church leaders.
Zwan stepped down as chief executive in late 1998, after the SEC began investigating. Hussey stepped in as interim chief executive. The SEC brought its complaint against the company in March 2000.
Digital Lightwave, which has headquarters in Clearwater, Fla., immediately settled the charges without admitting or denying guilt. The company had previously settled a shareholder class-action lawsuit relating to its revenue-recognition issues and subsequent earnings restatements. It agreed to pay $4.3 million in cash and issue 1.8 shares of stock, for a total cost of $8.5 million.
Zwan settled the charges against him in 2001, also without admitting or denying guilt. He agreed to the entry of an injunction barring him from violating securities laws that prohibit making false or misleading claims to auditors, and from aiding and abetting so-called “books and records” violations by public companies.
Zwan paid a $10,000 fine and the fraud charges against him were dismissed. According to news reports, the SEC’s case against Zwan was hindered in part by its inability to locate Licciardi as a witness while it was preparing for trial.
Zwan returned as Digital Lightwave’s chairman after settling the SEC case, but was unable to reverse the company’s fortunes. He took it private last year, buying out minority stockholders for 5.5 cents a share.
Digital Lightwave’s SEC filings show that, as recently as June 14, 2004, Chris Phillips was chief financial officer of Optel Capital LLC and Optel LLC, two entities that loaned Digital Lightwave more than $28 million and later converted that debt to stock.
Digital Lightwave converted to a private company by merging with Optel Acquisition Corp.
Other public records offer additional links between some of the people mentioned in this story.
Filings in the 2004 bankruptcy case of D. Jerry Diamond, chief operating officer of Midtown Partners’ parent company, show that he owed $120,000 to Moreyra.
Sky Lucas, one of Vicis’ founders, has three vehicles registered at an address in Land O’ Lakes, Fla., that is home to a number of businesses headed by Chris Phillips and other members of his family, state records show.
The businesses listed at that address – 20711 Sterlington Drive in Land O’Lakes, Fla. — include TotalCFO and Debt Opportunity Fund LLLP, whose managers or partners include Vicis and Chris Phillips’ wife, Tonya Phillips.
Debt Opportunity Fund has invested in some of the same companies as Vicis, and has used Midtown Partners as its placement agent.
Public records show that another company, Phantom R.R. LLC was incorporated using the Sterlington address last November. They also show that a 2005 Rolls Royce Phantom, some of which sell used for more than $200,000, was registered at the address at about the same time.
The records did not list a manager for the limited liability company that registered the vehicle.
Property records show that Lucas also used the Land O’ Lakes address in two recent purchases of residential property, totaling nearly $1.6 million. Real estate and court records show that he has purchased more than $13 million worth of property in the Tampa-St. Petersburg area since 2008.
OWNERSHIP OF FIRMS
H.C. Wainwright’s registration with the Financial Industry Regulatory Authority shows that Zwan owns 75 percent or more of the company, through three entities identified as H.C. Wainwright Holding Corp., ZGNY Investments LP and ZGNY Inc.
The ownership of Midtown Partners is less clear cut, because details contained in FINRA and SEC filings do not match up perfectly.
Midtown Partners’ most recent FINRA registration shows that Apogee Financial owns 75 percent or more of the firm.
The filing says that Christopher Phillips’ sister, Natalie Phillips Collins, and his father, Dale Edward Phillips, own between 50 percent and 75 percent of Midtown Partners through an entity called FAMALOM LLC.
SEC filings show that FAMALOM is a part owner of Apogee Financial.
The FINRA filing says that Deecembra D. Diamond owns 25 percent to 50 percent of Midtown, also through Apogee Financial. She is married to Richard Diamond, Apogee’s chief executive.
The filing says Clarke, Midtown Partners’ chief executive, and Bruce H. Jordan, its president, each own less than 5 percent.
Sharesleuth will continue to follow this story and report on what we find.