Written by Janice Shell
July 30, 2014: It's midsummer, and the penny stock market is for the most part on vacation. OTC volume is extraordinarily low, especially when compared to the heady days of the pot rush in February and March. Promoters, perhaps rattled by the recent arrests of Eric Cusimano and Gabe Nix, are avoiding high-profile campaigns. Even the SEC seems to have reached for the umbrella drinks, scaling back sharply on suspensions and other enforcement actions in July.
The Hollywood-handsome Discala, who bears a resemblance to Mad Men's Jon Hamm, enjoyed the spotlight, and was once married to Jamie-Lynn Sigler, co-star of HBO's classic series The Sopranos. They've since divorced, and Discala has remarried, but it's always good to see life imitating art, though nobody but shareholders got killed as a result of Discala's scheme.
Six co-conspirators--Marc Wexler, Ira Shapiro, Matthew Bell, Craig Josephberg, Kyleen Cane, and Victor Azrak--worked with Discala on his plan, and were indicted by the DOJ. Cane and Azrak were not named in the parallel SEC action.
Discala and his cohorts' scheme is described by the SEC in its complaint as "sophisticated," but to experienced penny observers, it was not. The idea, as always, was to gain control of large amounts of the stock of one or more companies, run the stock, and then dump for outrageous profits. The only departure from the norm was that no paid promotions were used. Instead, Bell and Josephberg, who were brokers, simply encouraged their clients to buy. None of the three companies involved had a great deal of stock issued and outstanding, so relatively small purchases made for big moves in price.
The vehicle for the group's first Pump and Dump was CodeSmart Holdings, Inc. (ITEN). In early 2013, CodeSmart was a private company offering training in medical billing through its CodeSmart™ University. On 9 May 2013, CodeSmart executed a reverse merger transaction with First Independence Corp., an SEC registrant that filed its initial Form S-1 on 11 April 2012. The SEC says that in 2012 and 2013, Discala, Wexler, Bell, and Josephberg came to control 3 million of the company's 6 million shares outstanding. By May 2013, when the reverse merger was executed, the group directly owned 1,537,500 shares, or 51 percent, of the original 3 million, and had handed the remaining 49 percent to Discala's family and some business associates. At the time of the merger, those "friends and family" shares were "invisible," as their holders didn't qualify as greater-than-5-percent owners. It was therefore not apparent in the relative 8-K that Discala's group was in charge.
|ITEN beneficial owners, 9 May 2013|
|Ira Shapiro, CEO of CodeSmart|
|Codesmart's Executive Team Page|
(This page was deleted from the website shortly after we published this article)
The scene was set. Between May and September 2013, the perpetrators ran two pump and dumps into which they sold their ITEN holdings, making millions in profits. In its complaint, the SEC includes a chart showing the effect of the pump campaign.
|The SEC's ITEN chart|
The role of the brokers, Bell and Josephberg
At the time of the first ITEN pump, Matthew Bell was working for WFG Investments in Texas. FINRA Broker Check shows that numerous customer complaints were lodged agains him for "unsuitable recommendations" made in May and June 2013. Though the record isn't entirely clear, it seems that WFG terminated him, and he moved on to Securities America, also located in San Antonio. He isn't currently licensed as a registered rep, and given his indictment, is unlikely ever to be again.
Using matched trades, Bell sold stock owned by Discala, Wexler, and Discala's other associates to his own clients. According to the SEC, those clients bought 205,000 shares of ITEN. To coordinate the trades, Bell and Discala spoke or texted nearly 6000 times; he and Wexler communicated 80 times. Bell had also been gifted 125,000 shares by Discala, and sold most of them as he was advising his clients to buy.
Josephberg also received 125,000 shares from Discala, and like Bell, he has a long and unsavory disciplinary record as a broker. During the relevant period he worked for Halcyon Cabot Partners in New York City. His role in the scam was identical to that of Bell.
Everyone made out like bandits. The DOJ says that Discala boasted that the CodeSmart manipulation "should be in the hall of shame."
Discala was riding high, and planned to expand his operations. But evidently the authorities had their eye on him, when AJ and his co-conspirators got their hands on a large block of shares in Cubed, Inc. (CRPT), in the spring of 2014, they were ready. In May, they obtained permission to tap his phones, and listened in on his plans to manipulate the stock. The group was simultaneously manipulating the stock of two other companies, StarStream Entertainment, Inc., (SSET) and The Staffing Group Ltd. (TSGL). The 2014 manipulations were successful, but couldn't be sustained as long as the CodeSmart pump, and didn't result in as much profit.
Or perhaps they were cut short when the DOJ made its move.
When the SEC announced its lawsuit against the Discala group on 17 July, it suspended only one of the manipulated companies. That was Cubed. In the relative notice, the agency said the action had been taken because of "a lack of current and accurate information about the company, particularly with respect to the company's current financial condition."
Why not suspend CodeSmart? It was, after all, the first and most elaborate pump and dump in which Discala and his buddies engaged. And it was the only one of the four whose CEO was indicted by the DOJ and sued by the SEC.
The SEC in fact dedicates a considerable portion of its complaint to detailing Shapiro's actions. The agency finds that Shapiro issued a succession of misleading press releases--as many as one every three days--designed to make ITEN stock appealing to potential buyers. On 28 May 2013, ITEN--or FICF, as it was then--announced that its CodeSmart™ University product had been made the "exclusive strategic partner for ICD-10 education and consulting services to Binghamton University, part of the State University of New York ("SUNY") system." Shapiro himself was quoted as saying, "Binghamton University has already begun to offer CODESMART™ University programs for both experienced coders and new coders… and will also serve as the distribution channel to all SUNY schools throughout New York State."
According to the SEC, CodeSmart was not Binghamton's "exclusive strategic partner," nor was the relationship with the school anything new. Binghamton had offered a CodeSmart ICD-10 course for some time, but only one person had ever registered to take it. Less than a week later, on 4 June, Shapiro issued a similar press release, this one stating that Ramapo College in northern New Jersey would "exclusively" provide CodeSmart products to its students. Shapiro pronounced that "this partnership… will help to prepare the region for the challenges ahead with regard to ICD-10 certification." In reality, the college had not authorized the PR, and, as of that date, had not finalized an agreement with CodeSmart.
Many similar announcements--some fluff, others supposedly substantive--followed through the summer months. In August, Shapiro publicized a letter to shareholders in which he thanked them for "becoming part of the CODESMART family," and brought them up to date on exciting developments that, in retrospect, may or may not have occurred. The next day, he announced that he had purchased 25,000 shares of stock on the open market at $3.21 a share, for a total price of $80,250. He smarmily explained that the purchase was "symbolic of my confidence in the Company and its mission." And that mission was critical: as he'd noted in his earlier letter, "in cost and impact" the switch to ICD-10 would exceed that of Year 2000 software remediation. But wait… Those of us who followed the Y2K circus back at the millennium remember that as far as overhyped software companies were concerned, it was a complete bust.
The stock purchase press release drove ITEN's stock up 14 cents the day it was issued. What the SEC finds objectionable about the transaction is that Shapiro failed to disclose--in the PR and in the accompanying 8-K--that it was Discala who paid for the shares. Josephberg had made the trade, and on 3 September he wired Discala's assistant, requesting payment. Approximately $81,000 was then wired from Discala's Fidelis bank account to Shapiro's bank account. Shapiro did sign a promissory note pledging to made good on the money within 18 months.
The new CodeSmart pump
AJ Discala and his team of stock manipulators are unlikely to be fooling around with ITEN anymore, but in recent days the company's stock, which had been on a sharp decline for many months, has enjoyed a run fueled by message board chatter.
|ITEN chart, 23 July to 29 July 2014|
Given the very recent announcement of indictments and an SEC enforcement action, it's difficult to understand why anyone would imagine that CodeSmart was worth buying. Nonetheless, some posters insisted that it was "oversold," as it had been trading as high as $0.30 in late May. Clearly there were players who simply followed popular gurus who claimed their "groups" were buying, failing entirely to realize the company CEO had recently participated in his very first perp walk. Others just didn't care, characterizing the 17 July announcements as "old news".
It should be remembered that "old news" of that kind can have lasting effects. Though the naive would like to believe that CodeSmart is somehow a sound company that's worth some interest at these levels, that is probably not the case. It now seems rudderless. The company has not commented on their CEO's arrest. No attempt has been made to remove Shapiro's name from the website, much less to remove him from office. That suggests there's no leadership, and very little substance, at ITEN.
CodeSmart's financial prospects are dismal. It's repeatedly had to restate financial reports, most recently in an amended 10-K for the year ended 31 December 2013. Revenues for the year were a mere $268,880; net loss was $16 million. There's a good deal of convertible debt, making present and future dilution a certainty.
Anyone who's missed the writing on the wall should read Diego Roca's letter of resignation, filed with the SEC on 30 April. Roca was the company's CFO, and served as a director as well. His parting shot was brief and to the point:
I no longer have confidence that the company can succeed based on the representations of senior management. Furthermore, the reluctance and resistance to make the required adjustments based on the company's current financial condition and imminent insolvency is concerning…"Imminent insolvency" is not a problem that another injection of toxic financing will fix.
While the SEC chose not to suspend ITEN on the 17th, it could still change its mind. Recent high volume and volatile price might persuade it of the wisdom of that course. It could also bring a litigation. Just today--29 July--the regulator sued MSGI Technology Services for fraud; earlier this month it had charged Christopher Plummer, a serial con artist who'd entered into a joint venture with Barbera, in connection with a different scam.
ITEN isn't worth $0.0075. We'd venture to say it's worth nothing at all.