Preet Bharara, the United States Attorney for the Southern District of New York, announced today that GARY HIRST, former president and chairman of the board of Gerova Financial Group, Ltd. (“Gerova”), a publicly traded company listed on the New York Stock Exchange, was found guilty of defrauding the shareholders of that company by secretly giving away nearly $72 million of company stock to himself and his co-conspirators for no legitimate business purpose. HIRST was convicted after a two-week trial before U.S. District Judge P. Kevin Castel.
U.S. Attorney Preet Bharara said: “As the jury found today after a two-week trial, Gary Hirst conspired to commit securities and wire fraud by having Gerova issue more than $70 million worth of shares for no legitimate business purpose and by hiding his and others’ control of those shares. As a result of the manipulation of Gerova’s stock price, Hirst personally reaped more than $2.6 million in illegal profits.”
According to the allegations contained in the Indictment as well as the evidence presented during trial[1]:
From 2009 to 2011, GARY HIRST, along with his co-conspirators Jason Galanis, John Galanis, Jared Galanis, Derek Galanis, Ymer Shahini, and Gavin Hamels, engaged in a scheme to defraud the shareholders of Gerova, and the investing public, by issuing shares of Gerova stock for no legitimate business purpose and by effecting securities transactions in Gerova stock for the purpose of conferring millions of dollars of undisclosed remuneration on HIRST and his co-conspirators.
As a part of the scheme to defraud, GARY HIRST and Jason Galanis obtained sufficient control over Gerova to be able to cause Gerova to enter into transactions of their own design, and for their benefit, including the issuance of Gerova stock. Jason Galanis obtained this control without causing himself to be identified as an officer or director of Gerova in order to appear to abide by an SEC-imposed bar which forbade him from holding such positions at publicly traded companies. Among other means and methods, HIRST caused over 5 million shares of Gerova stock, which represented nearly half the company’s public float and which were intended for HIRST and his co-conspirators’ ultimate benefit, to be issued to and held in the name of Ymer Shahini, who knowingly served as a foreign nominee for the co-conspirators. HIRST, Jason Galanis, John Galanis, Jared Galanis, Derek Galanis, and Shahini understood that the purpose of the stock grant to Shahini was to disguise the co-conspirators’ true ownership interest in the stock, and to evade the SEC’s regulations for issuing unregistered shares of stock.
In furtherance of the scheme, HIRST and his co-conspirators created fraudulent, back-dated documents to conceal their theft of the stock and cover their tracks. Also in furtherance of the scheme, HIRST deliberately misled Gerova’s other officers, including its chief financial officer, and caused Gerova to fail to disclose the stock giveaway in Gerova’s public filings with the SEC. In a telephone call with Jason Galanis that was recorded by the FBI, HIRST gloated, upon reviewing a draft of one such public filing, “That whole, that whole Shahini thing, I mean, nobody, they totally missed it. Everybody.”
At the same time, and as a further part of the scheme to defraud, GARY HIRST’s co-conspirators opened and managed brokerage accounts in the name of Shahini (the “Shahini Accounts”), effected the sale of Gerova stock from the Shahini Accounts, and received and concealed the proceeds, knowing that this activity was designed to conceal from the investing public the fraudulent nature of the co-conspirators’ ownership of and control over the Gerova stock.
Jason Galanis, among others, also fraudulently induced investment advisers, including Gavin Hamels, to purchase shares of Gerova stock in the investment advisers’ client accounts by offering compensation and/or other benefits to the respective investment adviser. By causing the purchase of Gerova stock at the time, quantity, and/or price of their choosing, the co-conspirators were able to, among other things, effectuate the sale of large quantities of Gerova stock from the Shahini Accounts that the co-conspirators controlled while artificially maintaining the price of Gerova stock through coordinated matched trading. Such coordinated trading served to manipulate the market for Gerova stock and deceive the investing public.
As a result, GARY HIRST, Jason Galanis, and their co-conspirators reaped nearly $20 million in profits, including approximately $2.6 million that benefitted HIRST directly.
GARY HIRST, 64, was convicted of one count of conspiracy to commit securities fraud and one count of conspiracy to commit wire fraud, each of which carries a maximum sentence of five years in prison and a maximum fine of $250,000 or twice the gross gain or loss from the offense; and of one count of securities fraud and one count of wire fraud, each of which carries a maximum sentence of 20 years in prison. The defendant also faces a maximum fine of $5,000,000 or twice the gross gain or loss from the offense on the securities fraud count and a maximum fine of $250,000 or twice the gross gain or loss from the offense on the wire fraud count.
Jason Galanis, 46, pled guilty on July 21, 2016 to two counts of conspiracy to commit securities fraud, each of which carries a maximum sentence of five years in prison and a maximum fine of $250,000 or twice the gross gain or loss from the offense; one count of securities fraud, which carries a maximum sentence of 20 years in prison and a maximum fine of $5,000,000 or twice the gross gain or loss from the offense; and one count of investment adviser fraud, which carries a maximum sentence of five years in prison and a maximum fine of $10,000 or twice the gross gain or loss from the offense.
John Galanis, 73, pled guilty on July 20, 2016 to one count of conspiracy to commit securities fraud, which carries a maximum sentence of five years in prison and a maximum fine of $250,000 or twice the gross gain or loss from the offense; and one count of securities fraud, which carries a maximum sentence of 20 years in prison and a maximum fine of $5,000,000 or twice the gross gain or loss from the offense.
Jared Galanis, 37, pled guilty to one count of misprision of a felony, which carries a maximum sentence of three years in prison and a maximum fine of $250,000 or twice the gross gain or loss from the offense.
Gavin Hamels, 40, pled guilty on March 22, 2016, to one count of conspiracy to commit securities fraud, which carries a maximum sentence of five years in prison and a maximum fine of $250,000 or twice the gross gain or loss from the offense; one count of securities fraud, which carries a maximum sentence of 20 years in prison and a maximum fine of $5,000,000 or twice the gross gain or loss from the offense; and one count of investment adviser fraud, which carries a maximum sentence of five years in prison and a maximum fine of $250,000 or twice the gross gain or loss from the offense.
The maximum potential sentences in this case are prescribed by Congress and are provided here for informational purposes only, as any sentences for the defendants will be determined by the judge.
Mr. Bharara praised the work of the U.S. Postal Inspection Service and the Federal Bureau of Investigation, and thanked the SEC.
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