Three men accused of using a New Jersey deli as a $100 million umbrella company have been charged with securities fraud and civil action by the Securities and Exchange Commission.
North Carolinians James T. Patten, 63, and Peter L. Coker Sr., 80, were arrested Monday on 12 counts of securities fraud, conspiracy to commit securities fraud, and conspiracy to manipulate securities prices.
Mr. Patten also faces charges on four counts of manipulation of securities, four counts of wire fraud, and one count of money laundering. Third co-conspirator Peter L. Coker Jr., 53, a resident of Hong Kong, is still at large.
“Mr. Patten, Mr. Coker Sr., and Mr. Coker Jr. took steps to gain control of both entities’ management and stock with the ultimate intention of entering reverse mergers, a transaction through which an existing public company merges with a private operating company. A successful reverse merger would allow the defendants to sell shares of each entity at a significant profit,” the U.S. Attorney’s Office for the District of New Jersey (USAO-NJ) said in a statement.
Scott A. Thompson, associate director of enforcement in the SEC Philadelphia Regional Office, said in a statement, “We allege that the defendants’ brazen schemes resulted in the artificial inflation of the stock price of two publicly traded companies with little to no annual revenues.”
In 2014, two New Jersey residents created Your Hometown Deli, and one of the new owners discussed the matter with Mr. Patten, who suggested creating shell company Hometown International, which would wholly own the deli as a subsidiary, according to court records.
From July 2014 to June 2015, Mr. Patten would use his control over the corporate activity of Hometown International to privately sell shares to associates and relatives of himself and his fellow co-conspirators, prosecutors said. Under the private placement exemption, these sales were not subject to SEC regulations.
In 2019, Hometown International began publicly selling shares on the OTC Marketplace, a three-tiered trading platform.
In December 2019, Mr. Patten arranged the sale of approximately 2 million shares worth about 38% of the company from the two original owners to Mr. Coker Jr. for $3,000.
In February 2020, Mr. Patten sold Mr. Coker Jr. an option to buy 1.5 million more shares, worth around 28% of the company; Mr. Coker Jr. became Hometown International’s chairman of the board, before exercising the option for $500 in March 2020.
Later in 2020, Mr. Patten offered assistance to another friend, this one the owner of E-Waste Corporation, an unsuccessful company publicly traded on the OTC Marketplace. The pattern, according to authorities, proceeded to repeat itself.
“On or about Sept. 25, 2020, E-Waste sold approximately six-million shares to Global Equity, an entity controlled by Mr. Coker Jr. On the same day, Mr. Coker Jr., and Benchmark Capital, LLC, a company controlled by Mr. Patten, attained approximately 475,000 and 250,000 shares of E-Waste, respectively,” the indictment reads.
On Oct. 14, 2020, 500,000 more E-Waste shares were sold and split between Mr. Coker Jr. and Europa Capital, an entity controlled by Mr. Coker Sr. and another unnamed co-conspirator.
The defendants are accused of then transferring millions of shares to friends, family members, associates and private financial entities, and “gained control over their trading accounts by obtaining their log-in information,” according to the USAO-NJ statement.
The three defendants are accused of engaging in “match and wash” coordinated trades, trading in Hometown International and E-Waste Corporation stocks on both sides of the transaction.
Through this alleged scheme, “defendants artificially inflated the price of common stock of Hometown International [from $1.00] to more than $13.00 per share, which produced a market capitalization of approximately $100 million for a single-store deli with less than $40,000 in annual revenue,” according to the SEC’s civil complaint.
E-Waste Corporation was even more inflated, with common stock going “from $0.10 to $10.00 per share, which resulted in a market capitalization of approximately $120 million for a shell company with no revenue.”
The inflation rates were astronomical.
“Their scheme had the ultimate impact of artificially inflating Hometown International’s stock by approximately 939 percent and E-Waste’s stock by approximately 19,900 percent,” according to the USAO-NJ statement.
Before the three defendants could attempt to cash in, however, the matter was publicized in a note to clients by hedge fund manager and founder of Greenlight Capital David Einhorn.
“The largest shareholder is also the CEO/CFO/Treasurer and a Director, who also happens to be the wrestling coach of the high school next door to the deli. The pastrami must be amazing,” Mr. Einhorn noted.
If convicted, the three defendants face a maximum of 20 years and a $5 million fine for each count of securities fraud and manipulation of securities prices.
The wire fraud and money laundering charges each carry a maximum penalty of 20 years in prison and a fine either of $250,000 or twice the gross gain or loss, whichever is greater.
The two conspiracy charges carry a maximum of five years in prison and a fine either of $250,000 or twice the gross gain or loss, whichever is greater.
The SEC civil complaint seeks “injunctive relief, disgorgement plus prejudgment interest, civil penalties, a prohibition against participating in any penny stock offerings, and an officer and director bar against Coker Jr.”