| David Schottenstein, the Florida man charged for an insider trading scheme that included Ontario's Aphria Inc., has pleaded guilty to criminal charges in Boston. He has admitted to a scheme in which the government said that he and others used inside information to generate at least $4-million in profits, with more than half of the money coming from Aphria trades. (All figures are in U.S. dollars.) The trading came ahead of a takeover bid that Mr. Schottenstein had learned of through an insider, prosecutors claimed. Mr. Schottenstein, 38, entered the plea in an appearance before Judge Douglas Woodlock on Tuesday, Feb. 1. The charge to which he pleaded guilty is conspiracy to commit securities fraud. It carries a maximum term of 20 years, but Mr. Schottenstein is likely to receive a far lesser sentence. Federal sentencing guidelines produce a term of about five years, with prosecutors to recommend something at the lower end. Mr. Schottenstein has also agreed to forfeit $634,893. The final decision rests with the judge, of course. It is not clear from Mr. Schottenstein's plea agreement if he has agreed to testify against his co-accused, but prosecutors did previously refer to him as a co-operating witness. The other defendants include Kris Bortnovsky, a Florida fund manager. He has yet to enter a plea. Also yet to enter a plea is Ryan Shapiro, the founder of Fynd Technologies Inc. and JPay. (Fynd manufactured personal tracking devices and JPay offered money transfer services to inmates.) Mr. Schottenstein's guilty plea comes just weeks after the government first unveiled charges against him and the others. Details of the case are set out in a parallel civil complaint that the U.S. Securities and Exchange Commission filed on Jan. 6, 2022, in federal court in Boston. The complaint identified the men as a group of friends from an area north of Miami. The government said that the men bought Aphria and two other stocks based on tips they received from an insider. With Aphria, the men learned in advance that Green Growth Brands Ltd. (a U.S. retailer listed on the Canadian Securities Exchange) was planning to make a hostile takeover bid. Green Growth started discussing the possibility of acquiring Aphria on Dec. 5, 2018 (the day after a short-seller's report caused Aphria to drop). According to the SEC, Mr. Schottenstein learned that the deal could be in the works the same day. He exchanged text messages and had a phone call with an insider, according to the complaint. He later met with that insider in Las Vegas. During the same period, Mr. Schottenstein bought shares of Aphria, the SEC said. He also spoke with Mr. Bortnovsky and Mr. Shapiro, who bought shares as well, according to the complaint. On top of that, Mr. Bortnovsky purchased call options through a fund that he controlled, the SEC said. The options, as described in the complaint, were risky. They expired in weeks and required Aphria's share price to rise by 40 per cent to be profitable. The SEC claimed that Mr. Schottenstein continued to have access to inside information right up until the date that the bid became public, even obtaining a draft copy of a news release on the deal. On the morning of Dec. 27, 2018, he asked the insider if he could join him at his house to listen in on a Green Growth presentation to Aphria's board, the SEC said. Mr. Schottenstein later sent Mr. Shapiro a message that read "Call1111 me," the SEC claimed. That same day, Green Growth disclosed that it was making a hostile takeover for Aphria. Once news of the bid became public, Aphria rose above $7. Mr. Bortnovsky's fund, which had purchased options with a $5 strike price, earned $2.1-million from its Aphria trades, the SEC claimed. The SEC also listed two other stocks that the men traded, with those being DSW Inc. and Rite Aid Corp. In all, the scheme generated $4-million in gains over a period of about four years, the government said. Most of those alleged gains went to Mr. Bortnovsky's fund. Authorities arrested Mr. Bortnovsky, 40, and Mr. Shapiro, 44, in Florida on Dec. 8, 2021. They have since appeared before a judge, with the judge releasing the men on $500,000 appearance bonds. Mr. Schottenstein remains free on bond as well. With his guilty plea, the judge continued a $10,000 bond order. The judge also imposed release conditions that include surrendering his passport and restricting his travel. On top of that, he must undergo an evaluation for alcohol and substance abuse. As for Aphria, the hostile bid from Green Growth ultimately went nowhere, with the company rejecting the all-share offer. Aphria later merged with Tilray Inc. in a deal that resulted in Aphria shareholders owning 62 per cent of the combined company. Tilray closed at $5.98 on the Nasdaq Tuesday, well off the $15.90 it traded at upon closing of the Aphria deal. |