Joon H. Kim, the Acting United States Attorney for the Southern District of New York, and William F. Sweeney Jr., the Assistant Director-in-Charge of the New York Field Office of the Federal Bureau of Investigation (“FBI”), announced the arrest and unsealing of a complaint charging LISA BERSHAN, BARRY SCHWARTZ, and JOEL MARGULIES with securities fraud, wire fraud, and conspiracy to commit those offenses in connection with a scheme to defraud investors in a company variously called The Awake Company and Starship Snacks (“Starship”).
BERSHAN and SCHWARTZ were presented earlier today in federal court in Atlanta, and MARGULIES was presented earlier today in federal court in Tennessee.
In a separate action, the SEC filed civil charges against BERSHAN, SCHWARTZ, and MARGULIES.
Acting U.S. Attorney Joon H. Kim said: “As alleged, while promising a sure thing, in the form of guaranteed returns, the defendants were actually selling nothing but lies. Instead of using investors’ money to grow the business, they allegedly spent it on plastic surgeries, jewelry, and cars. Thanks to the terrific investigative work of the FBI, the defendants will now have to answer in court for their lies.”
FBI Assistant Director-in-Charge William F. Sweeney Jr. said: “Bershan, Schwartz, and Margulies allegedly led investors to believe their company was on a guaranteed path to success. To further support their claim, as charged today, they promised to buy back any shares that didn’t appreciate within a year, including a supplemental interest payment of five percent. Samples of chocolate intended to represent the caffeinated snack they had supposedly developed were provided to some for good measure, but the chocolate was void of its key ingredient. In the end the numbers didn’t add up as this sweet deal turned sour.”
According to the allegations in the Complaint unsealed in Manhattan federal court:[1]
As alleged, BERSHAN, SCHWARTZ, and MARGULIES created Starship with the stated goal of marketing and selling a caffeinated chocolate snack. BERSHAN, SCHWARTZ, and MARGULIES subsequently raised over $2 million from investors by telling them that their investments in Starship would be personally guaranteed against any losses; that Starship was on the verge of a lucrative acquisition by another entity, Monster Beverage Corp. (“Monster”); and that Starship’s signature product had been developed successfully. All of these representations were false and misleading. Starship had no ability to honor the guarantees that it and BERSHAN made to investors. It was never in talks with Monster to be acquired. And it had never developed or engaged a third party to develop its caffeinated snack. After receiving investor monies, moreover, BERSHAN, SCHWARTZ, and MARGULIES used those funds to maintain their own extravagant lifestyles, spending hundreds of thousands of dollars on things like luxury clothing, plastic surgery, interior decorating, and luxury housing in New York City.
Beginning in August 2015, BERSHAN, MARGULIES, and SCHWARTZ began soliciting investments in Starship. In order to assure investors that their investments in Starship would be safe, BERSHAN sent investors images of herself in what appeared to be a mansion with subject lines like, “Just a glimpse – my parents sure as hell didn’t leave me this.” BERSHAN and MARGULIES also signed investment documents providing that “[t]he Company and Lisa Bershan, its founder, have committed to repurchase” investors’ shares at the price that they had paid for them if they had not appreciated within a year, and further guaranteeing that “Lisa Bershan . . . [would] add an interest payment of 5%” in such an event. These guarantees were not made in good faith, as neither BERSHAN nor Starship had any significant assets or ability to honor the guarantees they were making. To the contrary, BERSHAN had unpaid tax liabilities and multiple outstanding civil judgments (and did not actually own the mansion that, as discussed above, she implicitly held out to investors as her own).
In addition to making bogus guarantees, BERSHAN, SCHWARTZ, and MARGULIES also told investors that Starship was in discussions to be acquired by Monster, and that this transaction would take place through a one-to-one exchange of Starship stock for Monster stock. In October 2015, for example, MARGULIES sent an email to multiple investors that sought additional investments and expressly stated, “[t]he deal as I am certain you have heard is done thanks in no small part to the extraordinary talents and skills of our CEO, Lisa Bershan. If you are not aware of the deal, it is a one to one --- share for share exchange of [Starship] for Monster after a six month holding period of [Starship] shares.” Given that Monster’s stock was, at the time, trading at many multiples of the $3 per share that Starship’s investors initially paid at the time, this purported transaction would result in tremendous gains for Starship investors. But there was no basis for the claim that the “deal . . . [was] done.” Starship was never acquired by Monster or any other entity, and, indeed, was never in negotiations with Monster.
Finally, BERSHAN, SCWHARTZ, and MARGULIES misrepresented the nature and progress of Starship’s purported business to investors. BERSHAN, SCHWARTZ, and MARGULIES told investors that Starship had developed its caffeinated chocolate snack, when, in reality, it had not done so. Indeed, in order to mislead investors into thinking that the product was further along than it actually was, BERSHAN, SCHWARTZ, and MARGULIES actually provided samples of normal chocolates to certain investors, falsely telling them that the chocolates were caffeinated as per Starship’s business plan.
In total, BERSHAN, SCHWARTZ, and MARGULIES raised over approximately $2 million from investors based on these false representations. Much of this amount was simply misappropriated by BERSHAN and SCHWARTZ (or paid to MARGULIES). Between August 2015 and July 2017, for example, BERSHAN and SCHWARTZ spent over $39,000 on plastic surgery; over $209,000 on retail purchases, including jewelry, clothes, and interior decorating; over $11,900 at a Mercedes dealership; and hundreds of thousands of dollars on luxury housing.
MARGULIES, 72, of Murfreesboro, Tennessee, BERSHAN, 65, and SCHWARTZ, 71, are each charged with one count of conspiring to commit securities and wire fraud, which carries a maximum prison sentence of five years in prison; one count of securities fraud, which carries a maximum sentence of 20 years in prison; and one count of wire fraud, which carries a maximum sentence of 20 years in prison. The charges also carry a maximum fine of $5 million, 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 sentencing of the defendants will be determined by the judge.
Mr. Kim praised the exceptional work of the Federal Bureau of Investigation, and thanked the Securities and Exchange Commission for its assistance.
The allegations contained in the Complaint are merely accusations, and the defendant is presumed innocent unless and until proven guilty.
[1] As the introductory phrase signifies, the entirety of the text of the Complaint and the description of the Complaint set forth herein constitute only allegations, and every fact described should be treated as an allegation.
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