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Federal Prosecutors Intervene in StraightPath Fraud Case

The Justice Department asked a federal judge to suspend action in a civil fraud case involving the founders of StraightPath Venture Partners LLC, which marketed funds to invest in pre-IPO shares, saying the proceeding could interfere with a related criminal investigation.

Prosecutors Allison Nichols and Jason Richman said in a court filing Tuesday that three of the defendants in the civil case, Brian Martinsen, Michael Castillero and Francine Lanaia, have used the proceedings discovery process to seek documents related to meetings between the Securities and Exchange Commission and Justice Department investigators. The three defendants opposed the motion for a 90-day stay.

A lawyer for the three defendants, Scott Sherman of Nelson Mullins Riley & Scarborough LLP in Atlanta, didnt immediately respond to requests for comment on the stay request. A fourth defendant, Eric Lachow, hasnt taken a position on a stay and is seeking separate counsel, the prosecutors said. All the defendants have previously denied wrongdoing in the case.

StraightPath funds collected at least $410 million from more than 2,200 investors and charged exorbitant fees while making Ponzi-like payments to investors and paying themselves and sales agents more than $100 million, the prosecutors said. They added that the SECs civil fraud complaint alleges that Messrs. Martinsen and Castillero deleted subpoenaed emails of StraightPath sales agents to thwart regulators.

The SEC and the court-appointed receiver overseeing the windup of the firm must respond to document and record requests by Monday, the prosecutors said in the court filing seeking the stay. They said the stay wouldnt prevent the receiver from continuing her work and may actually accelerate her efforts to identify assets and distribute them to investors by halting distractions from the discovery process.

The receiver, former bankruptcy court judge Melanie Cyganowski of law firm Otterbourg PC, has said that many StraightPath investors have contacted her team to say they face financial hardship because they cant get back their invested cash. She has said in court filings that she is working to resolve the matter as quickly and inexpensively as possible, but that investors may not get all their money back.

Some investors have raised concerns over the cost of a receivership and how long it may take to get any of their investment back.

In their filing for a stay, the prosecutors said that the underlying facts in the civil case are substantially the same as those involved in the criminal investigation, so putting the civil case on hold would avoid a duplication of court proceedings if criminal charges are brought. The lawyers said the defendants have asked to be heard in the criminal probe before any indictments are sought, and that hearing wont happen until later this month at the earliest.

In May, the SEC brought its case against StraightPath and the four individual defendants in U.S. District Court for the Southern District of New York in Manhattan.

The firm, founded in 2017, had marketed private funds that it said would be used to purchase shares in startups before their initial public offerings. But the SEC said StraightPath didnt always hold as many pre-IPO shares as it claimed to investors. The firm ceased operations in February once it learned of the SECs plans to bring its civil action to court.

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