Ex-execs charged in NYC with looting $60M from auto-chemical company through stock scam

Ex-execs charged in $60M stock scam in NYC

NEW YORK — A former bank director built himself a financial fiefdom out of automotive-chemical companies, then plundered it through a series of stock frauds that let him live lavishly even though he’d declared bankruptcy, prosecutors said Tuesday.

As CEO of Industrial Enterprises of America Inc., John D. Mazzuto illegally gave stock to friends and relatives, pumped up the share price by making the company look more profitable than it was and lied to investors, according to the Manhattan district attorney’s office.

The proceeds got him multimillion-dollar houses in the Hamptons and Florida, $500,000 worth of private jet travel and the status of a major benefactor of Yale University’s baseball team, prosecutors said.

Mazzuto and James W. Margulies — a Cleveland lawyer who was the company’s finance chief and briefly succeeded Mazzuto as CEO — pleaded not guilty to grand larceny, scheming to defraud and other charges. Together, they’re accused of stealing more than $60 million from the now-bankrupt company.

“This was the wholesale looting of a public company for greed and self-enrichment,” District Attorney Cyrus R. Vance Jr. said.

Mazzuto’s attorney didn’t immediately return a call. Margulies’ lawyer declined to comment outside court.

Mazzuto, 61, was a managing director for the former Chemical Bank before he started acquiring a series of companies in 2002 to create Industrial Enterprises, prosecutors said. Subsidiaries made antifreeze, windshield-wiper fluid and other car chemicals at plants in Pennsylvania and elsewhere.

Mazzuto and Margulies began by issuing millions of shares of a type of stock that can legally be given only to employees — and funneling the shares to relatives, associates and shell companies, according to prosecutors. When the stock was sold, money was channeled back to Mazzuto and Margulies or was used to inflate the company’s cash flow and boost its stock price, prosecutors said.

The two doctored records to make the influx of cash look like legitimate earnings and used the company’s seeming success to draw in new investors, one of whom ultimately lost $20 million, prosecutors said. They wouldn’t identify the investor.

Briefly traded on the NASDAQ exchange, the stock now trades for pennies a share on the over-the-counter bulletin board, an electronic quotation service.

Mazzuto filed for personal bankruptcy in 2002 and didn’t emerge for seven years, prosecutors said. Meanwhile, he garnered more than $15 million from the stock scheme, money that bought him a $3 million house he’s since sold in Southampton, N.Y., and his $2.5 million home in Palm Beach Gardens, Fla., according to prosecutors.

He also endowed a baseball coaching post and underwrote a practice field for Yale, his alma mater, which praised his “incredible generosity” in a 2009 item on the team’s website. Prosecutors said he gave the university $1.5 million in Industrial Enterprises stock. The university didn’t immediately return a call.

Margulies, 45, gleaned more than $6 million from the scam and used the money for such luxuries as a $350,000 diamond ring for his wife from posh jeweler Harry Winston, prosecutors said.

Investors eventually began raising questions and filing lawsuits. Mazzuto and Margulies resigned within about a month of one another in 2008.

The company filed for bankruptcy last year, Securities and Exchange Commission and court records show. The new management has cooperated with prosecutors, company lawyer Allen L. Finkelstein said.

If convicted, Margulies and Mazzuto could face up to 25 years in prison.