Staff Report
Published March 21, 2013

Charleston attorney John B. Kern has been charged with aiding and abetting fraud by the Securities and Exchange Commission related to a financier accused of selling fake Facebook shares before the social media company went public.

Charleston attorney John B. Kern

On Tuesday, the SEC announced charges against Kern and Craig Berkman, a Florida resident who once ran for governor in Oregon. Kern was unavailable for comment Thursday morning.

Berkman is accused of masquerading as a fund manager who lied to investors, telling them he had special access to shares of Facebook, LinkedIn, Groupon and Zynga before the companies went public. Pre-initial public offering shares for all of the companies, most recently Facebook, were in high-demand, which led to Facebook bumping up its initial strike price.

Kern served as legal counsel to some of Berkman’s companies and vouched for Berkman when investors began asking what had happened to their money, according to SEC investigators. Kern assured investors their money had been used to purchase pre-IPO Facebook shares that were held by an unnamed third party. None of it was true, the SEC said.

The SEC said Berkman raised at least $13.2 million from 120 investors. The SEC said Berkman defrauded investors with three offerings, including the social media pre-IPOs and selling “membership interests” in LLCs that he controlled. He also told another group of investors he was going to use their cash to back large-scale tech ventures, the SEC said.

“Instead of purchasing shares on investors’ behalf as promised, Berkman misused their investments to make Ponzi-like payments to earlier investors, fund personal expenses, and pay off claims against him in a bankruptcy case,” the SEC said in a statement.

SEC investigators found that Berkman did use $600,000 to buy interest in an unrelated fund that did own pre-IPO Facebook stock. Berkman didn’t have access to any of the stock, and when the company found out he was using a forged letter saying he had nearly 500,000 Facebook shares through them, they cut ties with Berkman, the SEC said.

Kern showed up in the SEC’s investigation three months after Facebook went public, the SEC said, when he wrote and signed a memo to concerned investors backing up claims of Berkman’s nonexistent Facebook shares. In the memo, Kern said a third party had confirmed and reconfirmed ownership of the pre-IPO shares, the SEC said.

“Kern knew this statement was false because the ‘counterparty’ had told Kern that it was terminating Berkman’s company’s interest in the fund because of the forged letter,” the SEC said. Kern received nearly $300,000 out of the offering proceeds, the SEC said.

Berkman and Kern have 20 days to respond to the allegations, which were filed as an administrative proceeding by the SEC. A fact-finding hearing before an administrative law judge has been ordered for 30 days after the charges were filed.

“Lawyers and others who help shady operators commit fraud in the securities markets will be held accountable for their supporting roles,” said Sanjay Wadhwa, senior associate director of the SEC’s New York Regional Office. “Kern was duty-bound to look out for investors’ best interests, but instead he was actively colluding with Berkman to prevent investors from discovering the fraud.”