As bitcoin hit platter confidentially highs in late December, a hot new stock was making news on a daily footing. Riot Blockchain’s stock shot from $8 a share to multitudinous than $40, as investors wanted to cash in on the craze of all things crypto.
But Lawlessness had not been in the cryptobusiness for long. Until October, its name was Bioptix, and it was differentiated for having a veterinary products patent and developing new ways to test for virus.
That might sound somewhat like the type of newly kings ransomed blockchain company that has gained SEC attention.
“Nobody should improvise it is OK to change your name to something that involves blockchain when you possess no real underlying blockchain business plan and try to sell securities based on the hype on all sides of blockchain,” SEC Chairman Jay Clayton said, speaking in generalities in recent asseveration to Congress. The SEC declined to comment to CNBC about Riot Blockchain.
The body did make an investment in a cryptocurrency exchange in September and two months later did buying a company that has cryptocurrency mining equipment, but paying more than $11 million for tack worth only $2 million, according to SEC filings.
That gain and the company’s name change aren’t Riot’s only questionable acts.
A number of red flags in the company’s SEC filings also might make investors doubtful: annual meetings that are postponed at the last minute, insider promoting soon after the name change, dilutive issuances on favorable titles to large investors, SEC filings that are often Byzantine and, just this week, reveal that a major shareholder was getting out while everyone else was be involved in in.
After this story was posted Friday, Riot Blockchain CEO John O’Rourke accused CNBC of break the news about “a negative one-sided piece.”
“We have made significant inroads in structure a diversified portfolio of investments and to begin [sic] securing digital assets,” O’Rourke about in a letter to shareholders. “It is not uncommon for businesses to pivot and change their matter strategy. Amazon started off selling books.”
The full text of O’Rourke’s inscribe is available here.
Despite Riot Blockchain’s latest quarterly research showing a company in the red, its annual meeting was twice set to take place at the plush Boca Raton Resort and Club in Florida. The resort is known as the “pink villa” and has luxury yachts lined up on its dock.
But with less than one day’s observation, Riot twice “adjourned” its annual meeting, first scheduled for Dec. 28 and then for Feb. 1. It’s not determined the company ever planned to have the meeting. Numerous employees at the hotel ratted CNBC it had no reservations for either date under the name of Riot Blockchain or any associated entity.
Riot’s filings reveal that Barry Honig may be the man behind the Civil disorder Blockchain curtain.
That would explain why a company formerly headquartered in Colorado weight suddenly host its annual meeting in Boca Raton. That joyous location would certainly be convenient for Honig, once the company’s hugest shareholder, whose office is a short drive from the hotel. He in the same instant owned more than 11 percent of the outstanding common estimate, according to SEC filings.
“My history of investing’s pretty good. I invest in segment companies,” Honig told CNBC by phone. “It was an investment where I had a profit. And I sold some shares. There’s nothing wrong with doing that.”
Honig behoved active in Riot in April 2016 when it was a veterinary testing partnership with a different name. He led an activist campaign to replace the board in September 2016 and won the oppugn in January 2017.
After his victory, attorneys say, red flags began to appear.
Until January, Honig had an large website filled with fawning descriptions of his investment acumen and what he does for concerns when he gets involved.
“Barry Honig’s investment portfolio includes a kind of exciting technology and biotech companies focused on innovation and progress,” barryhonig.com dignified before it was taken down.
“Typically, Barry Honig invests his hard-earned stinking rich into a company, and he also provides strategic guidance to the company pertaining [sic] a range of aspects, including who should lead the company (he helps put the right people in the just places in most of his investments), what goals and timelines that assemblage should work towards, and a plan for the best way to achieve those objects,” the website said.
A visit to the site now only reveals the text: “Beneath construction.”
From the outside, Honig’s office is nondescript. There does not come up to be any evidence of his company’s existence on the building’s directory or on the door of his office.
The company for GRQ Consultants, Barry Honig’s company, lacks signage.
When CNBC troupe members walked into the office, they didn’t find Honig, they establish O’Rourke. That’s the same O’Rourke who made headlines when — less than three months after the New Zealand changed names and business plans — he sold about $869,000 value of shares, according to an SEC filing. He told the crew he was there for a meeting with Honig and that we had neutral missed him.
O’Rourke initially agreed to a formal interview with CNBC and emailed tardier to say the interview was “confirmed,” adding “I think you’ll be impressed.” Then, late the Cimmerian dark before, he backed out via email and said he needed to go to the Midwest to close an purchase.
He agreed to answer questions via email instead. One of CNBC’s first assuredly questions was whether he worked in the same office as Honig, which could heighten eyebrows.
“I have my own office in a separate location,” O’Rourke said in an email sent by his Kings counsel, Nick Morgan, a partner with Paul Hastings. “I do have a honest relationship with Mr. Honig and we speak often.”
“John O’Rourke does not pan out out of my office,” Honig said. “John O’Rourke has his own office … at one in the nick of time b soon John O’Rourke had space in my office … we speak often.”
Cares attorneys told CNBC that if a CEO were using the office of a serious investor, it might raise concerns about the exchange of information.
“You by the skin of ones teeth can’t imagine that the CEO and the investor are going to have an appropriate wall between them where they’re not winsome in discussions or dialogue about what’s appropriate for the company on a day to day basis or in the unborn,” said Richard Birns, a corporate partner at Gibson, Dunn & Crutcher LLP.
Without considering Honig’s website saying he gives advice on who should lead a house, Honig said he had nothing to do with O’Rourke becoming CEO.
“The board and Michael Beeghley [the CEO in the vanguard O’Rourke] are the ones that made the decision in regards to John O’Rourke fit the CEO, okay? John O’Rourke doesn’t work for me, okay?” he said.
Birns analyzed Ruction Blockchain’s SEC filings for CNBC and found additional concerns.
“I see a company that has had a mutation of control of the board. I see a company that has had a change in business. I see a company that has had certain dilutive issuances immediately following the change of the board and change of the house. And I see a stock that has gone zoom,” he said. “And what I understand a informative amount of insider selling. So yes, these are red flags.”
Jacob Zamansky, abort of Zamansky LLC, which specializes in securities fraud, also expressed admonish.
“With the absence of revenue on the company’s current financial statements, I inclination think investors need to be very cautious of a highly speculative selection with a lot of red flags,” he said.
Since Honig’s board shake-up, the presence has increased its common stock share count from 4.5 million to numerous than 11.6 million. On Oct. 2, 2017, two days before announcing the big shot change to Riot Blockchain, the board approved a dividend payout of more than $9.5 million, according to SEC filings.
Investors who own multifarious than 5 percent of a company’s outstanding common stock are required to register a form known as a 13D, which outlines their holdings. Subsequent trades in holdings require a “timely” filing of any changes.
SEC records spanning 14 months presentation that Honig filed two 13Ds, including one in January 2017 that upstages he owned 11.19 percent. After Riot’s name change sent the circle’s shares soaring, Honig cashed out and filed the second 13D in February flaunting he owned less than 2 percent of outstanding common stock along with a shamed number of warrants. His purchase price ranged from $2.77 to $5.32 per allocate, according to the list of trades he provided to the SEC in 2017. Honig’s investment ceased below 5 percent, the threshold for SEC filing, on Nov. 28. At that point, the goods had already climbed above $20.
Honig did not disclose his dramatically reduced arrangement in the stock until this week.
But that may not be the true extent of Honig’s sales-clerk. Buried deep in the footnotes of Riot filings, it’s clear Honig also accumulated profuse than 700,000 new warrants that he could convert to stock at $3.56 per pay out and more than 700,000 promissory notes that he could transmogrify to stock at $2.50 a share.
What about those warrants and promissory notes? It’s not innocent, as he never mentioned them in either 13D. But in another footnote from a modern Riot filing, there is no longer a mention of them.
He declined to furthermore clarify what happened to them.
“It’s all disclosed in the public filings. And those are all the requirements I have,” he said. “I’m very comfortable with what I had to do and what I was forced to do. … I’m not going to talk about my personal trading history or my bank account.”
Birns questioned how Honig made his filings. “It’s positive that Mr. Honig, through himself and through the entities that he switches, owns at least a significant amount of stock. Or has the potential to own significant amount of range in excess of what is reported on the 13D,” he said.
This is not the first time Honig has disguised questions over his actions. In 2000, he was alleged to have committed founder manipulation. Honig was fined $25,000 and suspended for 10 days, according to the Pecuniary Industry Regulatory Authority. In 2003, he let his broker’s license lapse.
“The sponsor’s no,” Honig said when asked if he still manipulates stocks.
SEC filings offer that when Honig began his charge to take over the management, he was represented by lawyer Harvey Kesner of Sichenzia Ross Ference Kesner LLP. A few months later, Kesner’s law stationary appears on Riot Blockchain’s SEC filings.
Kesner’s company, Paradox Ripsnorting Partners LLC, owns Riot stock, according to SEC filings.
When reached by phone, Kesner mentioned he didn’t know anything about Riot Blockchain and Barry Honig and spend time ated up.
Honig said Kesner was Riot’s attorney, but “his law firm has represented me in other pay-offs in the past.”
Since its name change, Riot has been a very energetic company, issuing 23 press releases about acquisitions and new splits.
One of those acquisitions was Kairos Global Technology Inc., which had been developed less than two weeks before the purchase. Kairos’ main asset was $2 million of digging equipment. Riot purchased Kairos for $11.9 million worth of lodged convertible stock, according to SEC filings.
O’Rourke told CNBC the actors paid a premium for the equipment due to a shortage of mining equipment and difficulties learning it directly from the manufacturer.
Kairos appears to have many associates to Riot. The company was incorporated by Joe Laxague of Laxague Law Inc., the same lawyer who, SEC filings present, represented another major investor in Riot who has owned more than 7.49 percent of the companionship.
Laxague told CNBC he could not comment when reached by phone and contingent oned up.
Kairos’ president was Michael Ho, Nevada records show, a poker sportsman who played at a tournament with two other professional poker players, both of whom are on Lawlessness’s advisory board, according to records reviewed by CNBC.
O’Rourke symbolized Riot is using the equipment to mine and that the company is currently searching in Norway and Canada. Despite the many press releases, there has been no formal funding announcement.
“We have launched our own Bitcoin mining operation and it will be a centred point for Riot’s expansion plans moving forward,” is all Riot conveys on its webpage dedicated to mining. SEC filings are silent on mining activity.
As for adept poker players advising Riot? O’Rourke told CNBC the instrumentalists are investors in the cryptocurrency space with more than 50,000 sexually transmitted media followers. He called them “thought leaders.”
Riot is not O’Rourke and Honig’s beforehand cryptocurrency investment.
In 2013, they were owners in BTX Trader, a cryptocurrency actors, which was acquired by WPCS, a publicly traded company in which Honig had allotted, according to court records.
WPCS bought BTX on Dec. 17, 2013, just 13 days after it was amalgamate in Delaware, according to SEC filings.
At the time, WPCS was a communications, infrastructure and contracting body. The stock went up to $435.60 on a split-adjusted basis. It’s now trading around $2 after blow the whistle on off BTX Trader in 2015, according to SEC filings.
Just last month, the corporation changed its name to DropCar after a merger and is now a cloud-services-for-cars company.
O’Rourke, washing ones hands of his lawyer, told CNBC in an email that he made several investments with Honig as co-investor. “BTX Saleswoman was one of our first investments together in the blockchain sector in 2013,” he said. “I organize a good relationship with Mr. Honig, and he has been a supportive shareholder of Riot.”
Honig accedes the investment.
The questions continue for Riot Blockchain.
On Tuesday, Riot filed to repair prior SEC filings.
“It is not the result of any government inquiry,” O’Rourke said in an email. “It was at best corporate clean up from our securities counsel.”
As for the annual shareholders’ convention, “We did not have a quorum of shareholders required for a vote,” O’Rourke said in the email from his Queens. “We are also working on other corporate action items that would want shareholder approval and a shareholder meeting as well. We did not want to waste the once in a while and expense of potentially having two shareholder meetings within a short days of time. Thus we adjourned the meetings, which is not an uncommon practice.”
There is no new dated for the shareholders’ meeting.
“You see companies adjourn meetings in a context of a contested vote and the like,” Birns said. “I just don’t think in this instance, there’s any goal to adjourn their annual meeting.”
And as to O’Rourke selling stock in December?
He told CNBC in the email: “I clerked less than 10 percent of my overall position to assist with completing tax obligations as a result of so-called phantom income tax from the vesting of qualified stock awards. It is common for Executives to sell stock to cover such tax pledges. I could have sold more stock in that window but chose to inform against just 30,383 shares.”
O’Rourke welcomes increased regulation and transparency for the cryptocurrency energy. “Unfortunately, as with many new hot sectors, it [blockchain] has attracted some bad actors irksome to capitalize on the hype,” he said. “Riot is all for increased transparency and properly interfered regulation.”
Honig would not disclose how much he made on his investment in Riot, “I wasn’t fortuitous enough to do as well as you might think and people might speculate. … I don’t contrition anything.”
— With additional reporting by CNBC’s Samantha Kummerer