NewLead accused of stock manipulation, bank fraud and money laundering

A commodity trader suing NewLead Holdings for breach of contract has made extraordinary allegations of stock manipulation, bank fraud and money laundering in a proposed amended complaint filed with the New York Supreme Court.

London-based trader TransAsia filed a civil case for breach of contract in January 2015 against the defendants NewLead JMEG, its chief executive Jan Berkowitz, NewLead Holdings and its CEO Michael Zolotas.

TransAsia seeks compensation for a failed agreement to buy 110,000 tonnes of coal from NewLead JMEG, a coal mining joint venture with NewLead Holdings. The coal was never delivered, for which NewLead JMEG has conceded liability but the other defendants have not. Splash has covered the lawsuit extensively.

The plaintiff’s counsel estimates the total damages sustained by TransAsia exceed $10m “at present”, which relate to lost profits and reputation, loss of access to financing, and the loss of its enterprise value and inability to conduct business since being forced into liquidation in the UK.

TransAsia has always alleged that NewLead JMEG signed the multimillion-dollar coal sales agreements to inflate its share price and to obtain credit from banks, which the defendants deny. The defendants’ three counterclaims were last year terminated in favour of TransAsia.

In the proposed amended complaint (see note below), TransAsia says it was an “attractive target” for the defendants because of its access to credit facilities and customers who were ready and waiting to order large volumes of coal.

TransAsia says NewLead JMEG signed coal offtake contracts worth “a total of nearly $1 billion” during 2013, which were then presented to lenders as loan collateral. “Contract counterparties were required to issue letters of credit that were then used by Defendants to obtain credit they had no way of securing,” TransAsia states in its proposed amended complaint.

The trader said that, after twice amending the documentary letter of credit (LoC) issued for its coal purchase agreement with NewLead JMEG, it was contacted by NewLead Holdings’ CEO Michael Zolotas, who requested a stand-by LoC instead. TransAsia alleges Zolotas requested this specific type of LoC because “that type of instrument can be used as collateral to obtain funds… without actually delivering any coal”.

The offtake contracts were also presented to investors through press releases, public filings and in NewLead Holdings’ financial reports to signal the company’s apparent upside potential, TransAsia said. “Defendants then lined their own pockets by selling the shares at an inflated price to the unsuspecting stock-buying public, who relied on the company’s deceptive press releases touting their successful entry into the coal mining business,” the plaintiff said in its new proposed complaint.

Late last year, NewLead retracted the series of press releases it made in 2013, in which it purported to have bought coal mines, mining assets and coal sales contracts, and admitted that none of the transactions had been completed.

The plaintiff said that, to date, there is “no evidence that NewLead JMEG actually owned or even had access to 100,000 tons of coal at any time”. TransAsia alleges that the defendants never owned any coal mines, wash plants or coal loading facilities on the Kanawha canal, despite representing they did at the time that the coal purchase agreement was signed.

The plaintiff alleges these possibly fraudulent practices were made “for the defendants’ own profit” and “as part of an elaborate ‘pump and dump’ scheme” to prevent NewLead Holdings from being delisted from the NASDAQ Global Select Market, upon which it was listed until July 22, 2014.

Defendant Jan Berkowitz was also accused by the trader of forging coal assays, using the letterhead of testing firm SGS. By way of evidence, TransAsia said SGS had served Berkowitz with a cease and desist letter, telling him to stop forging the company’s documents.

TransAsia also alleges that the defendants never had a contract in place with barge operator Ingram for the transport of coal from Kentucky to New Orleans, from where a post-panamax bulker had been fixed to take the cargo to India. Berkowitz is also accused of fabricating barge schedules.

Zolotas used his personal Yahoo! email account, which is not subject to monitoring by US financial regulators, to instruct Berkowitz on their coal operations “in order to perpetrate fraud and to evade discovery”, TransAsia claims.

Judge Charles E Ramos of the New York County Supreme Court ordered in early December that Zolotas’ computer hard drive must be handed over to experts with no deletions to undergo forensic analysis to retrieve almost 1,500 emails pertinent to the case, including some from Zolotas’ Yahoo! email account.

TransAsia alleges that the defendants have issued millions of shares in NewLead Holdings as salaries and bonuses, as well as to companies owned by themselves or their family and associates. The plaintiff has also requested to add a new related party, NewLead Holdings (US), Corp., to its complaint as an ‘alter-ego’ of the other defendants (and vice versa).

In 2013, TransAsia notes that the defendants “surreptitiously” issued over $43m in NewLead shares to themselves, a “financial advisor”, “consultants” and their associates.

Where share issuance is concerned, the numbers speak for themselves. In just over two months between December 22, 2015 and March 4, the number of NewLead Holdings’ outstanding common shares grew by 1,310,512,532 shares.

On March 4, the company effected its sixth reverse stock split in six years, which reduced the number of its outstanding common shares from 7,376,409,881 to around 24,588,033 shares in a ratio of 1:300.

UPDATE: The court has since granted TransAsia’s request to amend its complaint.