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.
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. 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, RTT Transfers, saying it was cheap and customer-friendly. The brokerage has since gone out of business.
MindArrow's 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 RTT with a nationally known transfer agent, which discovered the fraud.
"We would hope the visibility of this incident will be a warning for other companies," Webber said.
Sources said Bardasian and Daly have cooperated for months with a federal investigation now focused on the roles others may have played in the scam. Federal prosecutors said MindArrow itself is not a target or suspect.
Bardasian and Daly agreed to make restitution. A judge already has frozen $4.6 million in Bardasian assets. Both have agreed to plead guilty June 25 to two counts of mail fraud and one of money laundering.