JOHN D. MAZZUTO, a corporate executive, and JAMES W. MARGULIES, an attorney, have been indicted
Manhattan District Attorney Cyrus R. Vance, Jr., today announced the indictment against JOHN D. MAZZUTO, a corporate executive, and JAMES W. MARGULIES, an attorney, for illegally issuing shares of stock to enrich themselves and others, and for engaging in fraudulent activity to inflate the stock’s value and deceive investors.[1] The defendants were charged with Grand Larceny, Scheme to Defraud, Conspiracy, Falsifying Business Records, and violations of the Martin Act (New York State’s securities fraud law). The crimes charged in the indictment occurred between 2004 and 2008 and relate to Industrial Enterprises of America, Inc. (“IEAM”), a public holding corporation located in Manhattan. The defendants illegally issued millions of shares of stock in IEAM to family, friends, and close associates, and engaged in myriad fraudulent activities in their scheme to steal more than $60 million. The defendants stole from the corporation and legitimate investors, and engaged in a variety of fraudulent accounting and securities practices to disguise the theft and pump up the value of the stock.
“This was the wholesale looting of a public company for greed and self-enrichment. These defendants defrauded the market, the regulators, and their investors to line their pockets,” said District Attorney Vance. “I congratulate the ADAs in our Major Economic Crimes Bureau for bringing to light this serious matter.”
According to the indictment and documents filed in court, MAZZUTO, 61, a 20-year veteran of a prominent New York bank, was the architect of the fraudulent scheme and controlled it. He acted as Chief Executive Officer (“CEO”), President, Assistant Secretary, and was a member of the Board of Directors of IEAM. For a substantial period of time, he also acted as Chief Financial Officer (“CFO”). MAZZUTO filed a personal bankruptcy petition in federal court in 2002 and was not discharged from bankruptcy until 2009 – a period of time encompassing the defendants’ scheme. During this time, notwithstanding the bankruptcy, he personally obtained more than $15 million from IEAM, and used the illegally obtained proceeds to fund a lavish lifestyle, using millions of company dollars for homes, travel, and personal expenses. These included a $3 million home in Southampton, a $2.5 million home in Palm Beach Gardens, and more than $500,000 for travel on private jets.
MARGULIES, 45, is an Ohio-based attorney who acted as outside counsel, CFO, and General Counsel of IEAM. He also acted as CEO and was a member of the Board of Directors in 2008. According to documents filed in court, he personally obtained more than $6 million from the scheme.
According to court documents, the year-long investigation leading to the indictment revealed that the scheme was set in motion in 2002, when MAZZUTO acquired a controlling interest in a private company called EMC Packaging, Inc. (“EMC”) with the design to merge EMC into a publicly-listed corporation. In July 2004, MAZZUTO accomplished this goal by merging EMC with a dormant shell company called Advanced Bio/Chem, Inc. At the time, AVBC’s stock traded as a penny stock. Shortly after the transaction, AVBC changed its named to Industrial Enterprises of America, Inc. (“IEAM”), and acquired additional subsidiaries in 2005 and 2006.
Once in control of this publicly-listed corporation, MAZZUTO, with the assistance of MARGULIES, created the instrument for their fraud by filing a securities registration with the United States Securities and Exchange Commission (“SEC”) and registering 15 million shares of IEAM stock for issuance. This specific SEC filing can only be used to issue stock to employees for incentive purposes as part of an employee benefit plan. This filing, an S-8, does not allow a company to sell or issue stocks for profit.
Immediately after this filing, the defendants began issuing millions of shares of IEAM stock, worth tens of millions of dollars, to friends, family members, business associates, and their alma maters, and to shell companies, entities and accounts the defendants controlled. The defendants used the sale of the shares to generate cash for the business, which, in turn, inflated its stock price.
According to court documents, the recipients of the IEAM shares either were direct beneficiaries, in which case they simply sold the stock and pocketed the proceeds; or they conspired with the defendants to act as conduits, in which case the recipients sold the stock and sent the money directly back to IEAM or to entities and accounts controlled by the defendants.
In 2006, the defendants then implemented a reverse 10-for-1 stock split to increase the value of the defendants’ ongoing fraudulent share issuances by a factor of ten. In other words, every ten shares of outstanding IEAM stock was converted to one share, and the value of every share outstanding was increased ten-fold. The largest number of IEAM shares, 3.5 million, went to an attorney trust account opened by MARGULIES in December 2006. Within six months, MARGULIES liquidated the shares for approximately $17.7 million, directing more than $13 million back to IEAM to artificially inflate the company’s cash flow and pump up the share price.
The defendants 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. MAZZUTO routinely made false or misleading representations about IEAM in a series of press releases, investor meetings and calls, and investor conferences, as well as in various public filings. 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. The investigation is continuing.
District Attorney Vance thanked Assistant District Attorney Garrett A. Lynch, of the Major Economic Crimes Bureau, who handled the case with the assistance of Assistant District Attorney Harold J. Wilson, Senior Investigative Counsel in the Major Economic Crimes Bureau. The case was handled under the supervision of Executive Assistant District Attorney and Chief of the Investigation Division Adam Kaufmann, Assistant District Attorney Richard Weber, Chief of the Major Economic Crimes Bureau; Assistant District Attorney Gary T. Fishman, Principal Deputy Chief of the Major Economic Crimes Bureau, and Assistant District Attorney Adam S. Miller, Deputy Chief of the Major Economic Crimes Bureau. Assistant District Attorney Sarah Sacks also participated in the investigation. Investigative paralegals Pope McCorkle, James MacFadyen, and Gee Hyun Lee assisted in the investigation. Investigators Erika Figueroa and Santiago Batista also assisted in the investigation under the supervision of Deputy Chief Investigator Thomas Jackson of the District Attorney’s Office Investigation Bureau.
District Attorney Vance thanked the Financial Industry Regulatory Authority (FINRA), and Carson McLean of FINRA’s Criminal Prosecution Assistance Group, for their assistance. District Attorney Vance also thanked the United States Securities and Exchange Commission for its assistance.
Defendant Information:
JOHN D. MAZZUTO, 9/16/1948
11503 Green Bayberry Drive
Palm Beach Gardens, FL 33418.
Charges:
* Grand Larceny in the First Degree, 2 counts, class B felonies
* Violation of General Business Law (Martin Act), class E felony
* Violation of General Business Law (Martin Act), class E felony
* Scheme to Defraud in the First Degree, class E felony
* Conspiracy in the Fourth Degree, class E Felony
* Falsifying Business Records in the First Degree, 51 counts, class E felonies
JAMES W. MARGULIES, 6/8/1964
18 Country Lane
Cleveland, Ohio 44124
Charges:
* Grand Larceny in the First Degree, 2 counts, class B felonies
* Violation of General Business Law (Martin Act), class E felony
* Violation of General Business Law (Martin Act), class E felony
* Scheme to Defraud in the First Degree, class E felony
* Conspiracy in the Fourth Degree, class E felony
* Falsifying Business Records in the First Degree, 33 counts, class E felonies
[1] A class B felony is punishable by up to 25 years in prison and a class E felony is punishable by up to 1 1/3 to 4 years in prison.
“This was the wholesale looting of a public company for greed and self-enrichment. These defendants defrauded the market, the regulators, and their investors to line their pockets,” said District Attorney Vance. “I congratulate the ADAs in our Major Economic Crimes Bureau for bringing to light this serious matter.”
According to the indictment and documents filed in court, MAZZUTO, 61, a 20-year veteran of a prominent New York bank, was the architect of the fraudulent scheme and controlled it. He acted as Chief Executive Officer (“CEO”), President, Assistant Secretary, and was a member of the Board of Directors of IEAM. For a substantial period of time, he also acted as Chief Financial Officer (“CFO”). MAZZUTO filed a personal bankruptcy petition in federal court in 2002 and was not discharged from bankruptcy until 2009 – a period of time encompassing the defendants’ scheme. During this time, notwithstanding the bankruptcy, he personally obtained more than $15 million from IEAM, and used the illegally obtained proceeds to fund a lavish lifestyle, using millions of company dollars for homes, travel, and personal expenses. These included a $3 million home in Southampton, a $2.5 million home in Palm Beach Gardens, and more than $500,000 for travel on private jets.
MARGULIES, 45, is an Ohio-based attorney who acted as outside counsel, CFO, and General Counsel of IEAM. He also acted as CEO and was a member of the Board of Directors in 2008. According to documents filed in court, he personally obtained more than $6 million from the scheme.
According to court documents, the year-long investigation leading to the indictment revealed that the scheme was set in motion in 2002, when MAZZUTO acquired a controlling interest in a private company called EMC Packaging, Inc. (“EMC”) with the design to merge EMC into a publicly-listed corporation. In July 2004, MAZZUTO accomplished this goal by merging EMC with a dormant shell company called Advanced Bio/Chem, Inc. At the time, AVBC’s stock traded as a penny stock. Shortly after the transaction, AVBC changed its named to Industrial Enterprises of America, Inc. (“IEAM”), and acquired additional subsidiaries in 2005 and 2006.
Once in control of this publicly-listed corporation, MAZZUTO, with the assistance of MARGULIES, created the instrument for their fraud by filing a securities registration with the United States Securities and Exchange Commission (“SEC”) and registering 15 million shares of IEAM stock for issuance. This specific SEC filing can only be used to issue stock to employees for incentive purposes as part of an employee benefit plan. This filing, an S-8, does not allow a company to sell or issue stocks for profit.
Immediately after this filing, the defendants began issuing millions of shares of IEAM stock, worth tens of millions of dollars, to friends, family members, business associates, and their alma maters, and to shell companies, entities and accounts the defendants controlled. The defendants used the sale of the shares to generate cash for the business, which, in turn, inflated its stock price.
According to court documents, the recipients of the IEAM shares either were direct beneficiaries, in which case they simply sold the stock and pocketed the proceeds; or they conspired with the defendants to act as conduits, in which case the recipients sold the stock and sent the money directly back to IEAM or to entities and accounts controlled by the defendants.
In 2006, the defendants then implemented a reverse 10-for-1 stock split to increase the value of the defendants’ ongoing fraudulent share issuances by a factor of ten. In other words, every ten shares of outstanding IEAM stock was converted to one share, and the value of every share outstanding was increased ten-fold. The largest number of IEAM shares, 3.5 million, went to an attorney trust account opened by MARGULIES in December 2006. Within six months, MARGULIES liquidated the shares for approximately $17.7 million, directing more than $13 million back to IEAM to artificially inflate the company’s cash flow and pump up the share price.
The defendants 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. MAZZUTO routinely made false or misleading representations about IEAM in a series of press releases, investor meetings and calls, and investor conferences, as well as in various public filings. 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. The investigation is continuing.
District Attorney Vance thanked Assistant District Attorney Garrett A. Lynch, of the Major Economic Crimes Bureau, who handled the case with the assistance of Assistant District Attorney Harold J. Wilson, Senior Investigative Counsel in the Major Economic Crimes Bureau. The case was handled under the supervision of Executive Assistant District Attorney and Chief of the Investigation Division Adam Kaufmann, Assistant District Attorney Richard Weber, Chief of the Major Economic Crimes Bureau; Assistant District Attorney Gary T. Fishman, Principal Deputy Chief of the Major Economic Crimes Bureau, and Assistant District Attorney Adam S. Miller, Deputy Chief of the Major Economic Crimes Bureau. Assistant District Attorney Sarah Sacks also participated in the investigation. Investigative paralegals Pope McCorkle, James MacFadyen, and Gee Hyun Lee assisted in the investigation. Investigators Erika Figueroa and Santiago Batista also assisted in the investigation under the supervision of Deputy Chief Investigator Thomas Jackson of the District Attorney’s Office Investigation Bureau.
District Attorney Vance thanked the Financial Industry Regulatory Authority (FINRA), and Carson McLean of FINRA’s Criminal Prosecution Assistance Group, for their assistance. District Attorney Vance also thanked the United States Securities and Exchange Commission for its assistance.
Defendant Information:
JOHN D. MAZZUTO, 9/16/1948
11503 Green Bayberry Drive
Palm Beach Gardens, FL 33418.
Charges:
* Grand Larceny in the First Degree, 2 counts, class B felonies
* Violation of General Business Law (Martin Act), class E felony
* Violation of General Business Law (Martin Act), class E felony
* Scheme to Defraud in the First Degree, class E felony
* Conspiracy in the Fourth Degree, class E Felony
* Falsifying Business Records in the First Degree, 51 counts, class E felonies
JAMES W. MARGULIES, 6/8/1964
18 Country Lane
Cleveland, Ohio 44124
Charges:
* Grand Larceny in the First Degree, 2 counts, class B felonies
* Violation of General Business Law (Martin Act), class E felony
* Violation of General Business Law (Martin Act), class E felony
* Scheme to Defraud in the First Degree, class E felony
* Conspiracy in the Fourth Degree, class E felony
* Falsifying Business Records in the First Degree, 33 counts, class E felonies
[1] A class B felony is punishable by up to 25 years in prison and a class E felony is punishable by up to 1 1/3 to 4 years in prison.
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