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Facebook Shares Fraud Helped Investment Manager Pay Off Previous Fines: SEC

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FACEBOOK FAKE SHARES PONZI
In this May 2008 photo, Craig Berkman is photographed in Portland, Ore. Berkman, an investment adviser and onetime candidate for Oregon governor, has been charged in New York in a securities fraud scheme that capitalized on enthusiasm for Facebook's IPO. | AP

The come-on was irresistible. It was 2010 and rumors began swirling that Facebook was about to issue shares in an initial public offering, one of the most hyped stock offerings in years. An investment manager began telling a select group of business contacts he had come upon a “unique opportunity to purchase discounted shares” even before the company went public.

There was one problem with this scenario, however: Craig Berkman, the investment manager, did not actually have any plans to acquire those shares, the Securities and Exchange Commission asserted in an order filed Tuesday charging Berkman with securities fraud.

According to the SEC complaint, Berkman used the Facebook furor as the basis for a Ponzi scheme, using the proceeds served up by eager investors to pay out others he had been found guilty of defrauding in 2008, when he was aided by now-defunct firm Arthur Andersen in falsely covering up investment losses.

"Berkman blatantly capitalized on the market fervor preceding highly anticipated IPOs of Facebook and other social media companies to fleece investors whose cash flow he treated like an ATM to fund his own living expenses and pay court-ordered claims to victims of his past misdeeds," said Andrew M. Calamari, director of the SEC’s New York Regional Office, according to a statement.

Berkman’s arrest Tuesday is the latest indignity in a long fall from grace for the the investment manager, a journey that included run-ins with financial regulators during the 1990s and a civil fraud settlement in 2008.

"I can’t say I’m terribly surprised just because of all the strange things he’s been involved with over the years," said Will Vinton, a social acquaintance of Berkman, who spoke with The Huffington Post Tuesday from his shop in Portland. According to Vinton, Berkman "disappeared" from Portland in 2005 after he was found to have been defrauding investors.

Formerly a respected venture capitalist, Berkman had been lawfully taking investors’ monies since the 1970s, when he ran several Portland-area tech startups. He was also a major force in Oregon politics in previous decades, both as a fundraiser and as a Republican party official. According to The New York Times, Berkman was one of the 249 people who gave more than $100,000 to the 1988 presidential campaign of George H.W. Bush. He was elected chairman of the Oregon GOP in 1989 and ran for governor of the state, unsuccessfully, in 2002.

"He had a really good reputation here," Jim Moore, a professor of political science at Oregon's Pacific University who handicapped the state's 2002 gubernatorial race, said Tuesday. "He was a rich guy that lived in the same house he had when he first got rich. His image wasn’t flashy. He mowed his own lawn. Even when you went to his office, it was a nice place, but it didn’t scream, 'I got a ton of money, look at me.'"

"Then everything changed. He left town in a cloud," Moore said.

In 1998, Berkman was fined $10,000 by an Oregon state securities regulator for selling a restricted financial product without a license. That case of financial misconduct would pale in comparison to a case filed against him in 2005, by investors who claimed he misappropriated $33.5 million.

Following the fraud allegations, Berkman moved to Florida, bought a $3.5 million home and, then 64 years old, married Mary Ann Farrell Karlsson, a 43-year-old former Miss America contestant. In 2008, the case was decided against Berkman, with a court in Portland ordering him to pay back $28 million to investors.

Berkman appears to have been trying to do just that with the proceeds of his latest alleged fraud, although the SEC noted in its filing Friday that he also used some $1.6 million to "fund his own personal expenses, including large cash withdrawals and dining and travel expenses."

During the late stages of the recent fraud, when investors began demanding their money back from Berkman, he sent a letter to those who had entrusted him with funds saying his venture was "not a Ponzi scheme" and that he "absolutely and affirmatively rejects this assertion as false and malicious," according to the SEC filing.

That very assertion is being used to charge Berkman with two counts of securities fraud and two counts of wire fraud, according to Reuters. Each count carries a maximum sentence of 20 years in prison.

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