Home > News > Newsmakers > Former CEO Gets Over 11 Years for ‘Massive’ Market Manipulation
Newsmakers

Former CEO Gets Over 11 Years for ‘Massive’ Market Manipulation

AJ Discala was convicted of orchestrating pump and dump schemes through two reverse mergers.
By Michael Katz

The former CEO of OmniView Capital Advisors LLC was sentenced to more than 11 years in prison for masterminding a multimillion dollar market manipulation scheme. Abraxas “AJ” Discala was convicted of two counts of securities and wire fraud conspiracy, two counts of securities fraud, and four counts of wire fraud.

“Discala conspired to manipulate trading activity in penny stocks in furtherance of a scheme to defraud the securities market and investing public of millions of dollars,” Breon Peace, US attorney for the Eastern District of New York, said in a statement.

Discala purported to raise capital for startup private companies and offered to take them public through reverse mergers with public shell companies in exchange for control of a large portion of the free trading or unrestricted stock. Discala and his co-conspirators then artificially inflated the stock through manipulative trading and promotional campaigns, creating large profits for themselves, according to the Department of Justice (DOJ).

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The DOJ said Discala and his co-conspirator enacted a reverse merger of privately held CodeSmart with a public shell company. However, after he gained control of CodeSmart’s unrestricted shares, Discala and his co-conspirators fraudulently inflated CodeSmart’s share price and trading volume on two occasions and then sold the unrestricted CodeSmart stock at a profit. CodeSmart CEO Ira Shapiro, who was named as one of Discala’s several co-conspirators, issued numerous press releases with false information to help boost CodeSmart’s stock price.

Discala and his co-conspirators profited by selling CodeSmart stock, which had been issued to them for pennies, to clients and customers of investment adviser Matthew Bell and registered broker Craig Josephberg. The CodeSmart shares were often sold to Bell’s clients and Josephberg’s customers without their clients’ and customers’ knowledge and consent. Additionally, Bell and Josephberg sold CodeSmart shares in their personal trading accounts while simultaneously buying CodeSmart stock in their clients’ and customers’ accounts.

CodeSmart’s market capitalization at its highest closing price was more than $86.3 million. At the same time, CodeSmart filed an amended Form 10-K with the US Securities and Exchange Commission (SEC), in which it listed only $6,000 in total assets, $7,600 in revenue, and a net loss of $103,141. In less than six months, the stock’s share price plummeted to $0.66 from a peak of $6.94, and another six months later the stock closed at $0.01 per share.

Discala and his co-conspirators made more than $6 million in illicit trading profits from the CodeSmart scheme and caused more than $12 million in losses to approximately 800 CodeSmart investors who purchased the publicly traded stock.

They also pulled the same scheme when they took a privately held company called Cubed Inc. public through an asset purchase agreement with a public shell company. After gaining control of all of Cubed’s unrestricted shares, Discala and his co-defendants created trading volume in the stock and were able to successfully control the price and volume of Cubed’s stock.

Cubed Inc. reached its highest closing price of $6.75 per share, which gave it a market capitalization of approximately $200 million. The company previously filed a Form 10-Q with the SEC that reported less than $1,500 in cash holdings, zero revenue, negative stockholders’ equity, a net loss of $15,000, and accrued professional fees of over $130,000. Cubed also raised more than $2 million in a private offering of stock to investors who were deceived by how Cubed stock was performing in the market.

In addition to being sentenced to 138 months’ imprisonment, Discala was ordered to pay nearly $2.5 million in forfeiture. The amount of restitution will be determined by at a later date.

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Home > News > Asset Allocation > Junk Bonds Will Return as Much as Stocks in 2022, Says Northern Trust
Asset Allocation

Junk Bonds Will Return as Much as Stocks in 2022, Says Northern Trust

Outpaced last year, high yield is in solid shape at a time when stocks may come back to earth, the firm argues.

 

By Larry Light

Junk bonds had an OK 2021 and should do even better this year, in a par with stocks, which have been breaking records. So says Northern Trust Asset Management, which expects a 9% return for high yield for 2022.

“We expect high-yield returns to rival those of equity markets,” the firm said in a report. The analysts’ point is that junk will boost its gains, while stocks will decelerate.

Last year, junk bonds rose around 4%, as all the action centered on stocks, with the S&P 500 gaining almost 27%. But Northern Trust expects the stock market, after its long ride since March 2020, to slow its advance and increase by high single digits this year. Many have forecast that equities are overdue for a slowdown in their torrid appreciation.

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While popular wisdom contends junk always trails stocks, the report declared that “high yield has outperformed US equities during up markets nine of the last 30 years.” That is, one-third of the time. The firm added that this junk return will come “with a lower risk profile” than stocks have.

Junk issuers these days have solid fundamentals, which have led to relatively narrow credit spreads to comparable Treasurys, Northern Trust noted. The spread now is just over 3 percentage points, which is low compared with the gap that prevailed even before the pandemic, when the economy was doing well with low inflation. At the start of 2019, the spread was 5.4 points.

Interest rate hikes, which appear to be coming, have historically hurt junk less then other types of bonds, studies have shown. The expected rate boosts are hardly large, and thus continued low interest from other fixed income should enhance junk’s allure, in the firm’s view.

“We prefer credit risk over interest rate risk,” the report said. And, certainly, with a very small default rate in 2021, of 0.4%, high yield now has the profile of a low-risk investment. The long-term default average for junk is 3.5%.

This year, junk should benefit from further spread tightening, which would help boost its prices. New high-yield paper had a robust issuance in 2021, of $464 billion, the most in at least 10 years, according to S&P Global Market Intelligence.

Indeed, half of the junk market is rated BB, the level right below investment grade. Energy was the best returning junk category last year, with low double digits, and analysts believe it will continue to be in the new year.

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