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The Chief Executive Officer of a publicly-traded company began publishing a series of false and misleading statements on a messaging board. The CEO created an alias in an effort to disguise his identity. Investigators with the Securities and Exchange Commission became aware of the CEO’s messaging. They launched an investigation.
The CEO lied during the investigation. Federal prosecutors later convened a grand jury. The grand jury voted to return an indictment, charging the CEO with securities fraud and with making false statements. The indictment exposes the defendant to the potential loss of liberty and forfeiture of his personal property.
Upon completion of this Case Study, participants should:
- Understand aspects of securities fraud;
- Understand the penalty for making false statements;
- Understand grand jury proceedings.
- Understand implications of forfeiture laws.
State of the Industry
Many people that work in normal business settings engage in behavior that can attract the attention of government investigations. Those investigations can lead to fines, injunctions, disgorgement, and potentially, charges for white-collar crimes. People do not know how easily their behavior on the job can lead them to prison. Sometimes, people lie to investigators. Those lies may lead to criminal charges for cover-up crimes, like making false statements.
Our team at Compliance Mitigation provides ongoing training. We help business professionals understand the costs and consequences of misbehavior. The more people know about such consequences, the better prepared they become to avoid behavior that may lead them into government investigations or white-collar criminal prosecutions.
Background and Analysis
This lesson profiles Keith Berman, who served as the Chief Executive Officer of Decision Diagnostics Corp (DECN), a medical-device company based in California. The company’s common stock traded stock on the “OTC” (Over-the-Counter) market.
All of the information in this case study comes from the criminal indictment against Berman and press release issued by the Department of Justice.
According to the indictment, Berman misled investors about his own compensation. Prosecutors state that Berman’s misrepresentations were “material,” meaning that people may have made investment decisions based upon what Berman published.
In early 2020, Berman and his company began experiencing financial difficulties. Berman wrote an email suggesting that he intended to exploit the global pandemic as an opportunity to deceive investors, allowing him “to raise millions.”
Berman made false statements about DECN’s ability to develop and market a test that would detect whether a person had the coronavirus. He wrote press releases. He misrepresented news that he received from government officials, and he lied about what he learned from his business vendors. Despite a vendor telling Berman that the vendor’s product would not detect COVID-19, Berman continued to publish false and misleading information on message investor message boards describing his company.
Berman created a fictitious account in an effort to conceal that he was behind the misrepresentations. As a result of Berman’s false and misleading statements, the company’s stock price rose by more than 1,500 percent.
Investigators with the Securities and Exchange Commission questioned Berman under oath. Berman lied to the investigators.
Prosecutors convened a grand jury in a federal district court. The grand jury is a group of citizens that listen to evidence investigators gathered to implicate Berman in federal crimes. The members of the grand jury voted to indict Berman for charges related to securities fraud, and to charges related to making a false statement to law enforcement officers. As a result of the criminal indictment, Berman faces the potential loss of liberty for up to 20 years, and he also may lose all of his personal property.
According to the information presented by the government, Berman made decisions with a clear intention to deceive investors. Although he may have lived most of his life as an honorable person, the evidence suggests that he got into financial trouble. Rather than responding to his troubles in an honorable way, he concocted a scheme to pump up the price of his stock. When government officials questioned him, Berman got himself into further trouble by lying in response to questions the investigators asked.
Legislators passed securities laws to protect public markets. Anyone that attempts to manipulate those markets with false or misleading statements may face felony charges. Those charges can lead to decades in prison.
With regard to making false statements, it’s important to know that a person does not have to respond to questions from a law-enforcement officer. On the other hand, if a person chooses to respond, he should tell the truth. Lying to a federal law enforcement officer is a federal crime, punishable by up to five years in federal prison—for each lie. A person may face criminal charges for lying to a federal officer regardless of whether the person is under oath.
Keith Berman faces a difficult predicament as a result of the indictment for violating securities laws and making a false statement. The statutory penalty for securities fraud is 20 years in prison, and the statutory penalty for making a false statement is five years in prison. There are fines associated with such convictions, too.
Judicial proceedings that follow will include a plea hearing. In most cases like Berman’s, defendants will choose to enter into a plea bargain with hopes of lessening the exposure to punishment. Prosecutors may agree to limit Berman’s exposure to prison, provided that he pleads guilty early and works on a mitigation strategy.
If Berman pleads guilty, he will undergo a presentence investigation with a probation officer. The probation officer will complete a report, calculating a “loss amount” that will influence the sentence length.
Berman will have to decide whether he wants to accept responsibility and plead guilty. He may choose to put the government to the test of proving the case to a jury beyond a reasonable doubt. The decision he makes going forward will have monumental influences on his life. Depending on the plea or the outcome of a verdict, Berman could face decades in federal prison and enormous fines.
With all of the evidence the government cited in the indictment, it would seem that prosecutors have a strong case. Like most defendants, he likely will plead guilty to avoid the downside of being convicted at trial. His best option will be to craft an effective mitigation strategy. That strategy should show the judge that Berman has a full grasp of the crime he committed. His mitigation strategy should show empathy for the victims of his crime, show what he learned from the experience, and help the judge understand what steps he is taking to make things right.
The criminal indictment charges Berman with engineering a fraudulent scheme that he began at the dawn of the pandemic. Yet the indictment also insinuates his problems began long before he started the fraud. According to paragraph 8 of the indictment, he spent more than $360,000 of corporate funds to use webcams that would allow to participate in live chat sessions with people in foreign countries. Those expenditures likely led him into financial difficulties, putting pressures on him. Crime became a bad response to financial pressures that he created. Then, when confronted with the crime, he made things worse by lying.
Keith Berman’s behavior mirrors the behavior of many people who have been convicted of white-collar crimes. They get into a bad situation. Then, normal people turn to criminal behavior, not understanding the consequences.
We recommend more training to profile the personal stories of people that broke the law during the course of business. When people understand how authorities view crimes like securities fraud, or lying to federal officers, they may be more inclined to make law-abiding decisions.
We like to say that people are innocent until proven guilty. At this stage, a grand jury has charged Keith Berman with serious crimes. We’ll see how the process unfolds.