Pair to Plead Guilty in $16-Million Stock Scam
In a cautionary tale for small companies and investors, a professional gambler and convicted scam artist agreed to plead guilty to issuing nearly $16 million worth of counterfeit stock in an Orange County Internet start-up.
Maseia “Matthew” Bardasian, 68, of Reno acknowledged his role in a fraud and money-laundering scheme that flooded the stock market with 1.1 million shares of MindArrow Systems Inc., according to papers filed Thursday in federal court in Santa Ana.
Also agreeing to plead guilty was stock transfer agent Nikki Ann Daly, 43, also of Reno.
Transfer agents keep track of company shareholders and stock transactions--a function corrupted with surprising ease at MindArrow. Regulatory and court records reviewed by The Times link Bardasian to at least three other similar scams.
Prosecutors said Daly, instructed by Bardasian, issued phony MindArrow stock certificates to companies and trusts controlled by Bardasian and to herself. In a complex set of transactions, the counterfeit shares were transformed into seemingly legitimate ones and sold to the public, netting Bardasian $16 million. He gave $1 million to Daly, prosecutors said.
“By exploiting an apparent regulatory loophole, Bardasian and Daly were able to convert [Daly’s firm,] RTT Transfers, into a veritable counterfeit-stock printing press,” Assistant U.S. Atty. John Hueston said.
The discovery of the counterfeit shares in February caused Nasdaq to halt trading in MindArrow shares for three months. The Aliso Viejo company’s two founders gave up 1.1 million shares of their own stock to make up for the bogus shares, and the company took an $18.7-million charge to get trading resumed.
MindArrow, which creates advertising in the form of easy-to-open e-mail attachments, was formed in 1999 as investor interest in the Internet crested. Company officials said a brokerage that first traded MindArrow stock referred MindArrow’s founders to Daly’s company, saying it was cheap and customer-friendly. The brokerage has since gone out of business.
In the hurry and excitement of forming the company, the founders never investigated RTT or even asked if it was registered with the Securities and Exchange Commission, which it was not, said MindArrow chief executive Robert Webber. Webber, who was hired a year later, replaced MindArrow with a nationally known transfer agent, which eventually discovered the fraud.
“We would hope the visibility of this incident will be a warning for other companies,” Webber said.
Bardasian’s attorney, Fred D. “Pete” Gibson III of Las Vegas, didn’t return a telephone call seeking comment.
Sources said Bardasian and Daly have cooperated for months with a federal investigation that now is focused on the roles others may have played in the scam. Federal prosecutors would say only that their investigation is continuing and that MindArrow is not a target or suspect.
Daly’s lawyer, Scott N. Freeman of Reno, said Daly had worked as a bookkeeper in Vacaville, near Sacramento, where Bardasian initially lured her into the scheme by promising to train her as a transfer agent and pay her $30 per transaction.
In their plea agreements, Bardasian and Daly agreed to make restitution. A federal judge already has frozen $4.6 million in Bardasian’s assets, including two 2001-model Jaguar automobiles worth a total of $110,000. Both have agreed to plead guilty June 25 to two counts of mail fraud and one of money laundering.
Bardasian touts horse-race picks on his Web site, where he describes himself as “a serious player” with “40 years of experience” who “earns a lucrative living” at the track.
But SEC records, public corporate filings, probation records and lawsuits describe a different career, including a 1990 Nevada conviction for felony check-kiting and property fraud and additional cases involving the manipulation of stock transfer agents.
Bardasian settled the first case in 1991 by promising the SEC to go straight and repay $130,000 earned by selling unregistered stock in a small company he had promoted. The SEC forgave the debt when Bardasian produced records showing he was broke.
SEC spokesman John Heine said the agency requires only companies that file public financial reports to have registered transfer agents. MindArrow, formed in a merger with a publicly traded shell company, didn’t initially report its financial results, so RTT wasn’t required to register with the SEC.
When MindArrow did start reporting to the SEC last year, listing RTT as its transfer agent, the SEC didn’t ask why RTT had never registered.
“What was the SEC doing here?” said Alan Block, a professor at Pennsylvania State University. Block said the cases support a study he co-wrote that concluded the SEC is a “regulatory black hole” for penny-stock frauds, allowing repeat offenders to stay in business for decades.
But securities expert John C. Coffee, a Columbia University law professor, wouldn’t draw such broad conclusions because transfer-agent fraud is rare and regulators can close loopholes.
