Stockholm Syndrome and Stock Promoters

Stockholm Syndrome is a psychological disorder where a kidnap victim develops intense feelings of loyalty to his kidnapper. A similar pathology is common in domestic abuse cases where a battered wife or child will staunchly defend an abusive husband or father. A lesser-known pathology is one that I like to refer to as Battered Investor Syndrome, or BIS, a disorder where defrauded investors continue toxic relationships with stock promoters who repeatedly lie to them while stealing or wasting their hard-earned money. I can't claim to understand the root causes of BIS, but I know that until BIS victims acknowledge and accept the facts and decide "I'm mad as hell and I'm not going to take it any more" the cycle will continue and the promoters will keep going back to the same victims for more money and more forgiveness.

 

Over the last five years, I've had a once in a lifetime opportunity to watch the life cycle of a major stock fraud and study BIS in detail. The events I've witnessed still amaze me and they would make for a fascinating business or law school case study. But I'm far too tired to even try my hand at writing a detailed summary of the convoluted history.

 

The basic story is simple. A group of promoters agreed to join forces to create a new company that would finance R&D work on a new technology. Their business structure was doomed from the start but the details didn't matter because the inevitable failure could always be blamed on bad R&D results. Besides, these promoters were not ones to let the facts get in the way of a good story. Over a period of 18 months, the promoters sold stock to about 1,400 unwary investors in transactions that were never registered under applicable law. As one might expect, none of the investors received anything that remotely resembled a disclosure document. Overall, the promoters raised between $10 and $15 million. Some of the money went to R&D but the bulk the cash simply disappeared. The house of cards collapsed when securities regulators started asking questions about illegal stock sales.

 

Unlike most scams that abruptly end when the securities investigation begins, this company was different because the last round of investors included a handful of businessmen who were unwilling to accept a complete loss. So the investors banded together as allies, forged a new relationship with the owners of the patents, formed and financed a new company and then put a mechanism in place to protect the innocent investors who were defrauded by the scam. By the time the investor group was finished with its work, the new company owned the patents outright, a majority of the stock had been set aside in trust for the scam victims and the new company was adequately financed and fully compliant with applicable securities laws.

 

It didn't take long before the promoters of the original scam saw substantial value in the new company and decided that they wanted a big interest in the new company as compensation for their valuable contribution in causing the original train wreck. Predictably, the organizers of the new company didn't want anything to do with the promoters who had already skimmed millions of dollars from their original scam. So what started as a silly greenmail demand from the promoters quickly degenerated into an outright war.

 

Over the next four years, the promoters engaged in a non-stop campaign of historical revisionism, disinformation, Orwellian double-speak and scorched-earth litigation. Their arguments distorted the history of the old company and misconstrued the goals of the new company and its organizers. But as I noted earlier, the promoters were not ones to let facts stand in the way of a good story. In 20/20 hindsight, I don't believe the promoters ever believed they could win their lawsuits. Nevertheless, I'm convinced they believed they could make the litigation so expensive and time consuming that the new company would be forced to capitulate and offer a huge settlement. Thankfully, the new company was able to rise to the challenge, continue in operation and defend its position honorably and honestly.

 

While the promoters won the occasional procedural victory, they never won a court hearing based on facts and evidence. Even so, they were able to create enough fear that the BIS victims reportedly financed the bulk of their litigation costs. The litigation has finally been resolved. The promoters have no claims against or interests in the new company and all the money and time spent on litigation has been wasted.

 

Overall, the BIS costs have been staggering. The BIS victims lost between $10 and $15 million when they invested in the original scam. The frivolous litigation against the new company impeded its financing activities, reduced the price it could have gotten for its stock and forced the new company to divert substantial money and energy from technology development to litigation. The net effect of the litigation was to reduce the ultimate benefit to the BIS victims by more than 50% and disqualify a large number of BIS victims from participating in the payout at all. As the final insult, rumor has it that the promoters were able to shift the burden of financing their frivolous litigation to the shoulders of BIS victims and new pigeons who never got adequate disclosure. By the time the dust settled, BIS was responsible for at least three levels of economic loss and intense fear among the BIS victims who have never understood the simple truth that the promoters are pathological liars who will happily squander vast amounts of investor money if it advances their personal interests.

 

The promoters' hearing before the securities regulators is scheduled to begin soon and I have no doubt that they will be severely sanctioned because there is no defense against the alleged securities law violations. I remain hopeful that this final nail in the promoters' coffins will be enough to instill a little confidence that the new company has always been a steadfast defender of the BIS victims. I also hope that BIS victims' interest in the new company will be enough to offset some substantial part of the injuries they suffered at the hands of the promoters.

 

I'm an eternal optimist and believe that sooner or later the BIS victims will realize who their enemies were and who their friends are. The BIS victims and the new company both deserve a break. I suppose time will tell.