Pump and dump operations don't come much bigger than Langbar, the biggest fraud ever to hit AIM.
The Alternative Investment Market (AIM) is often criticised for its less stringent regulations compared to the main London Stock Exchange (LSE). That is part of its reason for existence, of course -- more regulation costs more money, and AIM is cheaper for small startup companies to list on. But the associated risks do occasionally bite, as investors in Langbar International found out, after they became victims to the biggest share fraud ever perpetrated on AIM.
Share placing
Langbar started life as Crown Corporation, listed in AIM in 2003. After struggling though a number of failed deals, Crown's founder, Mariusz Ryback, brought in corporate financier Stuart Pearson. In 2005 the company was renamed after the eponymous Yorkshire village, and subsequently raised £4m through a new share placing.
Institutional investors, including giants like Merrill Lynch and Gartmore, were amongst the new investors, attracted by what was effectively a cash shell -- Langbar had little business, but was sitting on around £370m in cash in Brazilian and Dutch banks. Or so it seemed.
Suspension
On 12th October 2005, at the request of the company, trading in Langbar shares was suspended, and on 25 November, Langbar issued a statement via the LSE's Regulatory News Service, stating that it couldn't find the £370m that shareholders thought they owned. The money was supposed to have been on deposit with ABN Amro BV and Banco do Brasil, but there was no sign of its existence, or of the company's entitlement to any such sum. In fact, no trace could be found of the company having had rights to any such assets at any time in its history.
The City of London police were alerted, and they took a quick look and promptly called in the Serious Fraud Office (SFO). It was looking like Langbar was a massive pump-and-dump operation, with founder Ryback having sold over 4 million shares shortly ahead of the suspension, at prices between 55p and 64p, raising almost £2.5m.
Pump and dump
Pump-and-dump scams are common, and most of us have probably been subjected to them via our email inboxes or, worse, by a cold-calling boiler room. That's the "pump" part of the operation, when we're told that a great company is about to fly, and if we fill our boots we'll become overnight millionaires. Then, when enough gullible punters have bought enough shares to push up the price, comes the dump, when the scammers sell their own shares on the rising price and leave the mugs to suffer the inevitable collapse.
In this case, the suspicion was that Langbar had inflated the company's valuation by fraudulently claiming rights to the non-existent assets, and then sold new shares based on that faked valuation. And this might have dated back to the original flotation of Crown.
Legal action
At the time its shares were suspended, Langbar had a market capitalisation of £87m, but by February 2006, new chairman David Buchler announced at a shareholders meeting that the company had just £3m in cash. The following month, in an attempt to recoup shareholders' losses estimated at £100m, the new management started High Court proceedings against Mariusz Ryback and several others, including Jen-Pierre Regli, Abraham Arad Hochman, and Lambert Financial Investments (one of the company's main subscribers at its initial flotation).
In 2008, Ryback agreed to pay the company £30m to settle a civil suit for recovery of funds, with the deal including a requirement for him to sell his Monaco home. And in January this year, after a request from the SFO, police in Spain arrested six men in connection with the suspected fraud, including Hochman, who has been claimed to have been the brains behind the scheme.
Efforts continue to recover assets on behalf of defrauded shareholders, and the current position is tracked on the company's web site.
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