Riot Blockchain Inc (NASDAQ:RIOT) shares are on a tear today, plunging 30% in the market after the worst kind of publicity has hit the Wall Street grapevine: an SEC investigation.
Here’s the word on the Street
For context, Riot Blockchain has gone through a metamorphosis. It was only in the fall that the company changed its name, hitching a ride on the crypto craze that had been captivating the Street, with Bitcoin stopping just under $20,000 in December.
Before October, Riot operated under the trade name Bioptix- which makes sense for a reputation built on animal healthcare, owning key intellectual property rights to its veterinary products. This is a company that had granted licensing to innovative single chain reproductive hormone technology for use in non-human mammals.
Then, the former diagnostic equipment maker sprang for rebranding. The new priority? Investing in crypto fever, shelling out dollars for blockchain businesses. Suddenly, the days of the Bioptix era were over, with the company ditching remaining patents and intellectual property- complete with ticker change to RIOT. Shares subsequently shot up like wildfire by the end of December, on back of bitcoin hype- over 400%; and the SEC absolutely noticed.
SEC chairman Jay Clayton finds it fishy, explaining: “Nobody should think it is OK to change your name to something that involves blockchain when you have no real underlying blockchain business plan and try to sell securities based on the hype around blockchain.”
The name change did not come out of thin air. A month before, Bioptix-turned-Riot had taken a bite into a crypto exchange; two months after, RIOT put down $11 million plus for a company with cryptocurrency mining equipment valued at much less- $2 million, based on SEC filings. Suddenly, there is a question mark.
…and then there were more warning signs: a yearly conference delayed at the eleventh hour; insider traders that seemingly understood to ditch shares quickly after Bioptix ditched its old name; new equity that was issued with terms that were advantageous to big investors; labyrinth-like SEC filings that are almost too convoluted- as if on purpose; and the most recent guilty finger prints point to a monster shareholder who knew to jump just as the rest bought into the company.
In under 24 hours, the yearly annual meeting poised for a luxurious yacht-filled backdrop at Florida’s Boca Raton Resort and Club had been put on delay- canceled both in December and February. According to CNBC, the hotel had various employees claiming there were never any reservations for December 28th nor for February 1st under Riot’s name. Meanwhile, keep in mind, this is a company that was once based in chilly Colorado. What could shift the annual meeting to Florida?
Riot’s filings point to Barry Honig, who at one time stood as the investor who had the biggest lion’s share invested in the company, having owned over 11% of the outstanding common stock, based on SEC filings. Is it a coincidence that Honig’s place of work just happens to be right by the upscale Boca Raton hotel- where RIOT intended (or pretended) to schedule its yearly conference?
Honig spoke with CNBC, noting, “My history of investing’s pretty good. I invest in public companies,” adding: “It was an investment where I had a return. And I sold some shares. There’s nothing wrong with doing that.”
It was after Honig fought to wipe the board clean starting in September two years ago, and emerging triumphant by last January that lawyers are saying danger signs started to flash.
Notably, the CNBC crew went to scout out Honig’s officer- where the man was nowhere to be found, but interestingly enough, there was Riot CEO John O’Rourke; the very Riot CEO who dumped around $869,000 in shares before three months had even come to pass following the rebranding. CNBC tried to get to the bottom of this with an interview. Initially, O’Rourke prepared CNBC to be “impressed” only to flake out in an email, blaming a forthcoming M&A deal that needed i’s to be dotted, t’s crossed.
According to CNBC, lawyers have said were O’Rourke and Riot’s major investor Honig sharing the same office, exchanges of information would be called into question.
“You just can’t imagine that the CEO and the investor are going to have an appropriate wall between them where they’re not engaging in discussions or dialogue about what’s appropriate for the company on a day to day basis or in the future,” pointed out corporate partner at Gibson, Dunn, & Crutcher LLP Richard Birns.
Defensively, Honig has tried to claim no part in O’Rourke’s part in stepping into role of CEO of RIOT, arguing that the board and the former CEO Michael Beeghley “are the ones that made the decision in regards to John O’Rourke becoming the CEO, okay? John O’Rourke doesn’t work for me, okay?”
When Birns took a closer look at RIOT’s SEC filing, he shared with CNBC even more points of caution circling the company. “I see a company that has had a change of control of the board. I see a company that has had a change in business. I see a company that has had several dilutive issuances immediately following the change of the board and change of the business. And I see a stock that has gone zoom,” Birns warns, putting it bluntly: “And what I understand a significant amount of insider selling. So yes, these are red flags.”
As far as Honig is concerned, everything is out there, up to code, in the filings: “It’s all disclosed in the public filings. And those are all the obligations I have,” Honig asserted, retorting: “I’m very comfortable with what I had to do and what I was obligated to do. … I’m not going to talk about my personal trading history or my bank account.”
Keep in mind another red flag: this is a former stock manipulator accused 18 years ago, fined a quarter of a million and charged with a 10-day suspension, as per the Financial Industry Regulatory Authority. After being thrown the accusation of manipulating stocks once more, Honig responds simply: “The answer’s no.”
What about Riot’s CEO dumping shares two months ago?
Honig wrote in an email to CNBC: “I sold less than 10 percent of my overall position to assist with covering tax obligations as a result of so-called phantom income tax from the vesting of restricted stock awards. It is common for Executives to sell stock to cover such tax obligations. I could have sold more stock in that window but chose to sell just 30,383 shares.”
When asked the cash Honig reaped on his Riot investment, the former leading shareholder of the company did not want to answer: “I wasn’t fortunate enough to do as well as you might think and people might speculate. … I don’t regret anything.”
Red flags are running abundant- and for this reason, Riot investors are starting to run for the hills.