A former financial consultant to Rockwell Medical Inc. (Nasdaq: RMTI) has been implicated in a second securities fraud case, this one involving an alleged pump-and-dump ring that netted at least $13 million.
The consultant, Michael J. Xirinachs, was not one of the nine people charged in the case, nor was he identified by name in the court documents.
But Sharesleuth’s review of the federal indictment unsealed last week found that another of the alleged participants in the scheme — “Unindicted Co-Conspirator 2” — was identified as a hedge fund manager who controlled Emerald Asset Advisors LLC, based in Cold Spring Harbor, N.Y.
Xirinachs is the sole manager and shareholder of Emerald Asset Advisors. He also is one of the co-founders of Rockwell Medical, a Michigan-based company that makes and distributes dialysis products.
The indictment alleges that Xirinachs worked with some of the defendants to artificially boost the stock price of a company called Genmed Holding Corp. (OTCBB: GENM), so that they could profit by dumping their shares on unsuspecting investors. It says that during the promotion and manipulation campaign, campaign, Xirinachs sold at least 2.2 million shares of Genmed stock he got from the defendants.
It also says that he and some of the defendants bought shares on the open market in advance of the campaign, to create the appearance of investor demand.
PREVIOUS CASE
The Securities and Exchange Commission previously brought charges against Xirinachs and Emerald Asset Advisors in connection with their role in a massive fraud scheme involving a now-defunct company called Universal Express Inc. (formerly OTCBB: USXP).
A federal judge found Xirinachs and Emerald Asset Advisors liable for selling billions of unregistered shares of Univeral Express. They were ordered last year to pay more than $10 million in disgorgement, interest and fines. Another person charged in the Universal Express case, a stock promoter named Tarun Mendiratta, was among those indicted last week.
Xirinachs’ alleged involvement in the Genmed case came after his contract with Rockwell Medical had expired, but while he was still holding warrants equal to more than 3 percent of the company’s common stock.
(Disclosure: Mark Cuban, the majority owner of Sharesleuth.com LLC, has a short position in Rockwell Medical’s shares. Chris Carey, the editor of Sharesleuth, does not invest in individual stocks and has no position in Rockwell Medical’s shares).
XIRINACHS AND ROCKWELL MEDICAL
Xirinachs, a former stock broker and investment banker, helped bring Rockwell Medical public in 1997. At that time, he owned more than 15 percent of its shares. He also had a consulting contract that paid him $300,000 the first year and $240,000 the second year.
Rockwell Medical signed Xirinachs and Emerald Asset Advisors to another consulting contract in November 2008. Its stock more than doubled in the 15 days following the signing of the agreement, which called for Emerald Asset Advisors to introduce the company to licensing partners, acquisition candidates, analysts, brokers and institutional investors. Rockwell Medical’s shares surged at a time when the overall stock market was slumping because of the global financial crisis.
Emerald Asset Advisors got 700,000 warrants as compensation, exercisable at prices ranging from $1.99 to $ 7 a share. Sharesleuth calculated last year that those warrants likely were exercised at a profit of somewhere between $2.5 million and $3.2 million.
THE PUMP AND DUMP CASE
The people arrested last week in connection with the alleged pump-and-dump scheme included Regis M. Possino, a disbarred lawyer with convictions for drug dealing and fraud, and Sherman Mazur, a onetime real estate mogul who served prison time for fraud. Mazur’s nephew and business partner, Ari Kaplan, also was charged.
The FBI said Possino and Mazur were the architects of the scheme. Possino and some of the other people charged in the Genmed case also were charged under a second indictment, covering several other companies.
The FBI said in a press release that the evidence in two cases included wiretaps that resulted in the interception of more than 60,000 phone calls and 24,000 text messages.
It said the two schemes netted more than $30 million from some 20,000 investors in the United States and abroad.
According to the indictment, Kaplan enlisted Xirinachs to help boost Genmed’s share price in mid-2011.
The indictment says Xirinachs told a stock promoter in June 2011 that Mazur and Kaplan had 17 million Genmed shares they wanted to unload at a price above the level where the stock was trading. When Kaplan asked Xirinachs if it would be difficult to boost Genmed’s share price from 7 or 8 cents a share to 15 cents, Xirinachs reported responded that the promoter “would come up with a plan.’’
According to the indictment, Xirinachs added that the promoter might need more compensation that the 6 million Genmed shares previously discussed, adding that the promoter would take the stock price “to whatever she’s got to do.’’
On July 14, 2011, Kaplan and Mazur transferred approximately 7 million Genmed shares to an entity called Coastal Consulting Ltd.
Two months later, the indictment said, Xirinachs and Kaplan discussed the progress of the manipulation campaign. Xirinachs told Kaplan that he was behind the recent 50 percent increase in the price of Genmed’s shares, adding that the stock “had moved with relative ease.’’
Xirinachs added that he thought the stock would be even higher the following day, prior to the start of the next wave of promotion.
According to the indictment, Xirinachs caused Coastal Consulting to sell nearly 2.3 million Genmed shares between Sept. 12 and Sept. 21, 2011. Genmed’s stock was trading at 8 cents a share at the start of that period.
Roughly 7.6 million shares changed hands by the end, driving the price down to 3 cents. The stock now trades in a range of 1 cent to 2 cents.
THE UNIVERSAL EXPRESS CASE
Less than a year after Rockwell Medical entered into the consulting agreement, the Securities and Exchange Commission brought civil charges against Xirinachs, Emerald Asset Advisors and four other parties.
The SEC It alleged that the defendants engaged in the unregistered distribution and sale of more than 21 billion shares of a penny stock company called Universal Express Inc. The SEC said they generated more than $34 million through the sale of the shares, and that Xirinachs accounted for more than half of that total.
According to the SEC’s complaint, Emerald Asset Advisors bought nearly 6.4 billion shares of Universal Express directly from the company in 2006 and 2007, through an arrangement not covered by any registered stock offering.
The SEC said Emerald Asset Advisors then sold 6.3 billion of the shares into the public market, generating $11 million in proceeds. That was roughly $3.1 million more than it had paid for the shares.
The SEC also said that Xirinachs opened a brokerage account for an offshore entity called North Atlantic Resources Ltd., which bought 9.2 billion shares of Universal Express stock, for a fraction of a cent each.
The SEC said North Atlantic sold 9.5 billion shares of Universal Express’ stock into the public markets, including shares it bought from Emerald Asset Advisors. It collected roughly $6.5 million for those shares — more than double the $3 million it paid Universal Express.
A judge granted the SEC’s request for summary judgment against Xirinachs in 2011. Despite the court’s finding on the violations, Rockwell Medical agreed three months later to modify the terms of its agreement with Xirinachs, to give him more time to exercise some of his warrants.
