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StraightPath promoters face US criminal charges in IPO fraud

By Jonathan Stempel

NEW YORK, Nov 29 (Reuters) - U.S. prosecutors charged three former principals of StraightPath Venture Partners with defrauding investors by promising access to hot private start-ups that had the potential to conduct initial public offerings, in a $386 million "pre-IPO" fraud.

Michael Castillero, Francine Lanaia and Brian Martinsen were each charged with securities fraud, wire fraud, investment adviser fraud and conspiracy, U.S. Attorney Damian Williams in Manhattan said on Wednesday.

Castillero and Martinsen each also face two obstruction charges related to the alleged deletion of records that the U.S. Securities and Exchange Commission had subpoenaed.

Benjamin Allee, a lawyer for Lanaia, said his client denied the allegations and looked forward to defending herself. Lawyers who have represented Castillero and Martinsen did not immediately respond to requests for comment.

According to an indictment, the defendants used boiler-room style call centers to market nine StraightPath funds as a "tremendous opportunity" for unsophisticated, mom-and-pop investors to invest early in high-tech, high-growth startups.

Investors with the Jupiter, Florida-based firm were allegedly told they could buy shares of pre-IPO companies such as Impossible Foods and Kraken at cheap prices that could soar once the companies went public, and the defendants would not make money until the shares became profitable.

In reality, according to prosecutors, the defendants sold shares at inflated prices while pocketing the markups, and paid agents upfront and back-end fees.

The defendants allegedly raised the $386 million from at least 2,000 investors, kept more than $74 million, and paid tens of millions of dollars to associates and referral agents, in a scheme lasting from 2017 to April 2022.

According to the indictment, after the SEC began probing StraightPath's operations, the defendants began texting each other about making an unnamed fund manager a scapegoat.

"Fran is going to wamboosle the sec lady," Martinsen allegedly texted. "They will talk weather for 45 min and the lady will forget what she's looking for."

The SEC filed related civil charges against the defendants and StraightPath in May 2022. A federal judge appointed a receiver for StraightPath the following month.

The case is U.S. v. Castillero et al, U.S. District Court, Southern District of New York, No. 23-cr-00622. (Reporting by Jonathan Stempel in New York; Editing by Stephen Coates)

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