By Brian Bandell – Senior Reporter, South Florida Business Journal Sep 7, 2018, 4:40pm EDT Updated 3 hours ago Billionaire Phillip Frost, the CEO of Opko Health and one of Miami’s most well-known entrepreneurs, is among 10 people named in a civil penny-stock fraud lawsuit by the Securities and Exchange Commission.
A Miami Beach resident, Frost has a net worth of $2.6 billion, according to Forbes. News of these civil charges could rock South Florida’s business world. Miami-based Opko (Nasdaq: OPK) was also named in the SEC complaint.
"The SEC failed to provide notice of its intent to sue prior to filing the complaint, which contains serious factual inaccuracies," Opko said in a statement late Friday. "Had the SEC followed its own standard procedures, Opko and Dr. Frost would gladly have provided information that would have answered a number of the SEC’s apparent questions, and filing of this lawsuit against them could have been avoided. Opko and Dr. Frost have always prided themselves on adhering to the highest standards of financial disclosure, and they are confident that once a proper investigation is completed and the facts of the case have been fully disclosed, the matter will be resolved favorably for them.”
Shares of Opko fell 18 percent to $4.58 on Friday before Nasdaq halted trading at 2:34 pm.
Shares of Ladenburg Thalmann Financial Services (NYSE: LTS), of which Frost is chairman and a major investor, dropped 15.7 percent, to $2.90.
On Friday, the SEC filed a civil lawsuit in New York federal court, alleging a penny-stock fraud that generated over $27 million, with Frost allegedly participating in two of the three companies that had stock manipulated. The leader of this scheme was allegedly Barry C. Honig, of Boca Raton.
The SEC complaint says the defendants manipulated the share prices of three companies in a “classic pump-and-dump scheme” from 2013 into 2018. Honig would orchestrate the acquisition of large amounts of stock at steep discounts while securing a substantial ownership interest in the companies, and then he and his associates would conduct illegal stock promotion activity and “manipulative trading” to boost the stock prices. Afterward, Honig and his associates would allegedly sell their shares for inflated values.
“As alleged, Honig and his associates engaged in brazen market manipulation that advanced their financial interests while fleecing innocent investors and undermining the integrity of our securities markets,” said Sanjay Wadhwa, senior associate director in the SEC’s Division of Enforcement, in a news release. “They failed to appreciate, however, the SEC’s resolve to relentlessly pursue and punish participants in microcap fraud schemes.”
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In addition to Honig and Frost, the individuals charged by the SEC were John Stetson of Fort Lauderdale; Michael Brauser of Lighthouse Point; John R. O’Rourke III of Fort Lauderdale; Mark Groussman of Miami Beach; Robert Ladd of Raleigh, North Carolina; Elliot Maza of New York; Brian Keller of California; and John H. Ford of Bolinas, California.
The companies named in the SEC complaint were Opko, Alpha Capital Anstalt, ATG Capital (owned by O’Rourke), Frost Gamma Investments Trust (a major investment vehicle Frost uses to buy stock), GRQ Consultants (owned by Honig), HS Contrarian Investors (owned by Honig and Stetson), Grander Holdings (owned by Brauser), Melechdavid Inc. (owned by Groussman), Southern Biotech (owned by Frost, Honig and Brauser), and Stetson Capital Investments (owned by Stetson).
The SEC complaint said Honig would direct Frost, Stetson, Brauser, O’Rourke and Groussman when to buy, hold or sell stock in coordination with one another in order to manipulate stock value. Honig would then pay Ford to author materially misleading stock promotion articles, while engaging in manipulative trading shortly before those stories were made public, according to the SEC.
Some of these articles by Ford on the Seeking Alphaplatform touted billionaire Frost as an investor in these companies, which led to a spike in stock value, according to the SEC. Ford falsely said in the articles that he had no business relationship with the company mentioned in the article, despite being compensated by Honig, the SEC said.
The companies allegedly involved in the trading were BioZone Pharmaceuticals, MGT Capital Investments and MabVax Therapeutics Holdings. Maza was CEO of BioZone while Keller was the chief scientific officer. Ladd was CEO of MGT Capital Investments. None of these companies were charged by the SEC.
Maza, Keller and Ladd worked with Honig’s group to take steps beneficial to them while not disclosing this activity to other shareholders, the SEC said in its complaint.
In the case of MGT Capital and MabVax, Frost, Honig, Brauser, Stetson, O’Rourke and Groussman broke securities laws by failing to disclose that their group had a beneficial ownership of the companies, according to the SEC.
Frost allegedly participated in the schemes with BioZone and MabVax stock.
For example, after a Ford article in 2013 touted BioZone, its daily trading volume jumped from 1,100 shares to over 4.5 million shares while its price increased from 48 cents to 97 cents. Shortly afterward, Frost sold BioZone shares for $1.09 million, according to the SEC. Including Frost, the co-defendants made $9.3 million selling BioZone stock in the pump-and-dump, the SEC alleged.
The SEC is seeking civil penalties and the disgorgement of ill-gotten gains against the defendants. It will also seek an order preventing the defendants, including Frost, from participating in future penny-stock offerings.
The SEC wants a federal judge to bar Ladd, Maza and Keller from serving as officers or directors of public companies, but it did not request the same order for Frost.
In order to prove its case for a "pump-and-dump," the SEC must demonstrate that the parties acted in coordination in their stock deals and willfully deceived the investing public, said Richard Serafini, a white-collar criminal defense attorney in Miami who previously worked in the SEC's enforcement division. The timing of their trades and any messages sent between them can be used to show the parties worked together, he added.
In order to defend the case, the defendants will probably look to prove that they didn't act in concert, and that the public wasn't given false information about the companies, Serafini said.
A doctor, Frost co-founded Key Pharmaceuticals and started generic drug maker Ivax Pharmaceuticals. After Ivax was sold to Teva Pharmaceuticals for $7.6 billion in 2005, Frost spent several years as chairman of Israel-based Teva.
In addition to serving as Opko’s chairman, CEO and largest shareholder, Frost is the chairman of Miami-based Landenburg Thalmann Financial Services, and a major shareholder of Miami-based Vector Group (NYSE: VGR) and Coconut Grove Bank. The Frost family has been among the biggest donors to the University of Miami and the Frost Museum of Science in Miami.
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