Craig Berkman committed fraud when he collected money from people to sell shares that he claimed he owned in Facebook when it was still a private company. He sold memberships in his LLCs organizations, which he told investors would use the funds to buy Facebook shares before the IPO according to VentureBeat. He did similar deals with companies like LinkedIn, Groupon, and Zynga when it was private.
It turns out that Berkman never actually had or bought any Facebook shares, which is why the SEC busted him. Berkman conducted this Ponzi scheme so that he could clean up some of his previous debts and previous fraud.
Back in the 1990’s, Berkman was a candidate for governor in Oregon that was married to a beauty queen. He had told residents in Portland that he was a venture capitalist. However he was caught selling convertible promissory notes without a brokerage license by the Oregon Division of Finance and Securities. After that he was convicted of taking part in fake VC funds, which caused him to receive a $28 million judgement and pursuant bankruptcy.
Berkman spent over $5.4 million in funds from the investors for the pre-IPO companies to make payments in the bankruptcy settlement. Berkman made $4.8 million in Ponzi-style payments to earlier investors in the pre-IPO controversy and told them that they made money on their investment. However he never actually purchased the shares for them. Berkman used another $1.6 million of investor money to make large cash withdrawals to pay for his travel and dining expenses.
Essentially he was committing fraud to pay for his previous fraud. The SEC is going to determine what charges he will face.