Bulgarian Man Arrested And Charged In Manhattan Federal Court With $400 Million Market Manipulation Scheme Involving Avon Stock, As Well As Market Manipulation And Insider Trading Of Two Other Securities

Preet Bharara, the United States Attorney for the Southern District of New York, and Diego Rodriguez, the Assistant Director-in-Charge of the New York Field Office of the Federal Bureau of Investigation (“FBI”), announced the arrest and unsealing of an eight-count indictment charging NEDKO NEDEV, 38, a citizen of Bulgaria and the United States, with various crimes related to market manipulation, insider trading, and aggravated identity theft for devising and carrying out a series of schemes (1) to manipulate the public market for two securities – Rocky Mountain Chocolate Factory, Inc. (“Rocky Mountain”), and Avon Products, Inc. (“Avon”) – through sham tender offers filed publicly with the Securities and Exchange Commission (the “SEC”), and (2) to trade on material, nonpublic information about an impending tender offer by Bulgarian company Euroins Insurance Group AD (“Euroins”) for U.S.-based insurer Tower Group International Ltd. (“Tower Group”), which NEDEV knew about because of his role advising the proposed acquirer.  The sham offer for Avon, a company with more than 400 million shares outstanding, caused a 400-percent increase over the average per-day trading volume, resulting in a manipulation of the market by hundreds of millions of dollars, and caused the New York Stock Exchange (“NYSE”) to halt trading three times in Avon shares in the half-hour period following the sham offer.  NEDEV was arrested in Bulgaria and his extradition to the U.S. will be sought.  The case has been assigned to Judge Kimba M. Wood.

In a separate action, the SEC previously filed civil charges against NEDEV for market manipulation in June 2015.

U.S. Attorney Preet Bharara said: “As alleged, Nedko Nedev engaged in elaborate schemes to manipulate the market in various publicly traded securities.  His alleged lies caused massive swings in share prices and trading volume, including a sham tender offer that required the New York Stock Exchange to halt trading in Avon shares.  Nedev’s alleged securities fraud schemes also involved purchasing shares of a U.S. insurance company he knew, through inside information, to be the acquisition target of a European company he was advising.  If you manipulate the U.S. securities markets with disinformation and deception, whether from New York or from Bulgaria, as Nedev is alleged to have done, you will be held to account.”

FBI Assistant Director-in-Charge Diego Rodriguez said:  “As alleged, Nedko Nedev created and carried out a market manipulation scheme not once but twice to profit himself.  Today, he faces charges for those schemes as well as identity theft and insider trading. The FBI will continue to work with our partners in an effort at ensuring that our financial markets are legal, fair, and equitable.”

According to the allegations in the Indictment unsealed today in Manhattan federal court:[1]

From at least in or about January 2012 through at least in or about December 2012, NEDEV devised and carried out a scheme to manipulate the public market for Rocky Mountain stock, enrich himself, and mitigate trading losses.  In furtherance of the scheme, NEDEV artificially inflated the share price and trading volume of Rocky Mountain through a sham tender offer he caused to be filed on December 18, 2012, on EDGAR, the Electronic Data Gathering, Analysis and Retrieval System, which is the means by which companies and others file public documents with the SEC (the “Rocky Mountain Offer”). 

Three years later, from at least in or about April 2015 through at least in or about May 2015, NEDEV devised and carried out a similar scheme to manipulate the public market for Avon stock, enrich himself, and mitigate trading losses.  In furtherance of the scheme, NEDEV inflated the share price and trading volume of Avon stock through a sham tender offer he caused to be filed on EDGAR (the “Avon Offer”).  In making the Avon Offer, NEDEV used nearly identical means and methods to those used in the Rocky Mountain Offer filed on EDGAR in 2012.  Unlike the Rocky Mountain Offer, however, the Avon Offer was filed early in the trading day, causing a significant impact on Avon’s trading volume and share price and permitting NEDEV to sell a portion of his Avon holdings for a profit.

In between the Rocky Mountain Offer and the Avon Offer, from in or about October 2013 through at least in or about May 2014, NEDEV carried out a scheme to enrich himself by trading on material, nonpublic information concerning an offer by Euroins to acquire Tower Group, which NEDEV obtained from the Chairman of Euroins’ parent company, Eurohold (the “Eurohold Chairman”) and which he understood was nonpublic at the time, and which he was duty-bound not to misappropriate for his own personal benefit.  In May 2014, after Euroins publicly offered to acquire Tower Group, NEDEV sold a portion of his shares of Tower Group for a profit.

Nedev’s Brokerage Accounts

Between in or about June 2008 and in or about at least June 2015, NEDEV traded equities, options, and Contracts for Difference of publicly traded companies through U.S.-based online broker-dealers at which NEDEV maintained certain accounts, including: (a) Strategic Wealth Investments Inc. (the “Strategic Wealth Account”); (b) SWIP Capital Partners, Inc. (the “SWIP Account”); (c) Strategic Capital Partners Muster Limited (the “Strategic Capital Account”); and (d) Strategic Capital Partners Muster Limited CFD Account (the “Strategic Capital CFD Account,” collectively with the Strategic Capital Account, the “Strategic Capital Accounts”).

The Rocky Mountain Market Manipulation

From at least in or about December 2008, NEDEV caused the Strategic Accounts to hold shares of Rocky Mountain stock.  When NEDEV opened the Strategic Capital Account in July 2012, Rocky Mountain was the first stock purchased.  As of August 2012, the Strategic Accounts held shares of Rocky Mountain valued at more than $1.1 million.  After reaching a peak share price of almost $14.00 per share in August 2012, Rocky Mountain’s share price began to decline steadily.  By November 2012, the price had dropped to approximately $10.36 per share.  By that time, NEDEV’s Rocky Mountain holdings in the Strategic Accounts had accumulated a total of approximately $250,000 in unrealized losses as well as approximately $278,000 in realized losses.

To effectuate the scheme to manipulate the market in Rocky Mountain, NEDEV created a fictitious entity to make a sham tender offer for Rocky Mountain.  Previously, on or about January 28, 2012, NEDEV had registered the email account balifamilyoffice@gmail.com (the “Bali Email Account”) at a U.S.-based email provider (the “Provider”).  Between January 2012 and May 2015, NEDEV used the Bali Email Account to send and receive emails in the name of “Peter Bali,” a name he used in the course of the scheme, as well as other names.  On or about November 21, 2012, NEDEV caused Rocky Mountain to receive a voicemail from an individual who purported to be named “Peter Bali.”  The voicemail indicated that Bali had mailed a tender offer to purchase Rocky Mountain on behalf of a company purportedly called “PST Capital Group” (“PST”).  One week later, on or about November 28, 2012, NEDEV caused Rocky Mountain to receive a letter of intent from PST (the “PST Letter of Intent”), which identified Bali as the “Chairman” of PST and indicated that PST was based in London, England.  The PST Letter of Intent offered, among other things, to purchase all outstanding shares of Rocky Mountain at a price of $13.50 per share.  On or about December 6, 2012, NEDEV caused Rocky Mountain to receive another voicemail from the individual purporting to be Bali asking if Rocky Mountain had received the PST Letter of Intent.  In truth and in fact, PST did not exist, as it had been invented for the purpose of effecting the market manipulation scheme. 

Approximately two weeks later, on or about December 13, 2012, NEDEV caused a Form ID (the “PST Form ID”) to be filed with the SEC from Bulgaria.  The PST Form ID, which requested that PST be allowed to file documents on EDGAR, indicated that PST was based in London, England, and contained a notary stamp purporting to be associated with a particular California-based registered notary (the “PST Notary”).  In truth and in fact, the stamp was forged, as the PST Notary neither notarized the PST Form ID, nor authorized anyone to use the PST Notary’s name or notary credentials to do so, as NEDEV well knew. 

To further effectuate the market manipulation scheme, NEDEV caused the Rocky Mountain Offer to be filed on EDGAR on or about December 18, 2012, after the close of the trading day.  As with the PST Form ID, the Rocky Mountain Offer was filed from Bulgaria.  As with the PST Letter of Intent, the Rocky Mountain Offer was made in the name of PST, listed Bali as PST’s Chairman, and proposed to acquire all of Rocky Mountain’s stock at $13.50 per share, which represented an approximately 27 percent premium above the stock’s closing price as of December 18, 2012.  The Rocky Mountain Offer also contained certain specific language regarding certain terms of the Rocky Mountain Offer.

Rocky Mountain’s share price was approximately $10.60 when the market closed at 4:00 p.m. on December 18, 2012.  As intended by NEDEV, Rocky Mountain’s share price began to increase following the release of the Rocky Mountain Offer. 

Before the markets opened on December 19, 2012, Rocky Mountain issued a press release publicly filed on EDGAR as a Form 8-K (the “Rocky Mountain Press Release”) indicating that the Rocky Mountain Offer appeared to be fake.  Rocky Mountain’s share price opened at approximately $11.00 per share.  Although the Rocky Mountain Press Release diminished the impact of the Rocky Mountain Offer, inasmuch as the release was issued before the trading day began, the stock price nonetheless rose approximately 4.6 percent during market hours on December 19, 2012, to a high of $11.09 per share, and the trading volume increased approximately 1,775 percent on that day. 

NEDEV did not cause any shares of Rocky Mountain to be sold from the Strategic Accounts on December 19, 2012.

The Avon Market Manipulation

From at least in or about February 2012, the Strategic Accounts held Avon stock and Avon derivatives, specifically options and CFDs.  As of April 2015, NEDEV caused the Strategic Accounts to hold positions in Avon valued at more than $225,000.  After reaching a share price of $15.28 per share in April 2014, Avon’s share price began to decline steadily.  By April 2015, the share price had dropped to $8.17 per share.  By that time, NEDEV had suffered a total of approximately $46,000 in unrealized losses on his Avon holdings.

To effectuate the scheme to manipulate the market in Avon, NEDEV created a fictitious entity to make a sham tender offer for Avon.  Thus, on or about April 16, 2015, NEDEV caused the email account ptgcapitalpartners@activist.com (the “PTG Email Account”) to be registered with the Provider.  The PTG Email Account was registered in the name “Steve Kohe.” 

Five days later, on April 21, 2015, NEDEV caused a Form ID (the “PTG Form ID”) to be filed with the SEC requesting access to file documents on EDGAR on behalf of the purported entity PTG Capital Partners Ltd. (“PTG”).  The PTG Form ID provided the PTG Email Account and listed “Steve Kohe,” a name NEDEV used to execute the scheme, as PTG’s Chief Compliance Officer.  In truth and in fact, PTG did not exist, as it had been invented by NEDEV for the purpose of effecting his market manipulation scheme.  Like the PST Form ID, the PTG Form ID indicated that PTG operated in London, England.  Also like the PST Form ID, the PTG Form ID contained a notary stamp purporting to be associated with another California-based registered notary (the “PTG Notary”).  In truth and in fact, the PTG Notary neither notarized the PTG Form ID, nor authorized anyone to use the PTG Notary’s name or notary credentials to do so, as NEDEV well knew. 

To further effectuate the market manipulation scheme, NEDEV caused the Avon Offer to be filed on EDGAR on May 14, 2015, at approximately 11:34 a.m., in the first half of the trading day.  The Avon Offer proposed to acquire all of Avon’s stock at $18.75 per share, which represented an approximately 181 percent premium above the stock’s closing price on May 13, 2015.  As with the Rocky Mountain Offer, the Avon Offer was filed from Bulgaria.  In addition, the Avon Offer contained nearly identical language as was contained in the Rocky Mountain Offer. 

The Avon Offer significantly affected the share price and trading volume of Avon, a company with more than 400 million publicly trading shares.  Approximately half an hour after the Avon Offer was publicly filed at 11:34 a.m., Bloomberg released an article (the “Bloomberg Article”) indicating that Avon had stated the Avon Offer was fake.  During the approximate half hour after the public release of the Avon Offer but before the Bloomberg Article, the share price of Avon increased to a high of $8.00 per share from a low of $6.60 per share, the effect of which was to manipulate the market by hundreds of millions of dollars.  The total trading volume during just this approximate half-hour period was more than 17 million shares, more than the average per-day trading volume for the three-month period before the Avon Offer.  In total, the trading volume on the day of the Avon Offer was more than 69 million shares, an increase of more than 400 percent over the average per-day trading volume for the three-month period before the Avon Offer.  As a result of this significant increase in the volume of trading, the NYSE halted trading three times in Avon shares in the half-hour period following the Avon Offer. 

Approximately 25 minutes after the Avon Offer was filed on EDGAR, NEDEV sold a portion of his Avon holdings at the artificially inflated price.  Through these sales, NEDEV earned profits in the Strategic Capital Accounts.  The Avon Offer also caused the value of his unsold Avon positions to increase significantly during the time period of the manipulation.

Despite the release of the Bloomberg Article reporting that the Avon Offer was a sham, the unusually high trading volume continued as the market adjusted to the news, including as certain individuals who purchased shares at an artificial price as a result of the Avon Offer sought to unwind those positions.

The Insider Trading Scheme

In or about October 2013, through a pre-existing relationship with the Eurohold Chairman, NEDEV learned that Euroins was interested in acquiring a U.S.-based insurance company and that Tower Group was one of the target companies under consideration.  NEDEV encouraged the Eurohold Chairman to make an offer for Tower Group and offered to act as an external consultant to help bring the deal to fruition.  NEDEV and the Eurohold Chairman agreed that NEDEV would act as an external consultant and that NEDEV would be compensated if a deal were consummated. 

In or about October 2013, possessing the Inside Information that Euroins was considering a business combination with Tower Group, NEDEV began purchasing Tower Group stock in the Strategic Accounts. 

On or about January 6, 2014, Tower Group announced that it had entered into a merger agreement in which Tower Group was to be acquired by another insurer, ACP Re, for $3.00 per share. Because NEDEV believed the price of Tower Group stock would increase if a competing offer by Euroins were made at a higher price, he took steps to prevent the merger with ACP Re from being consummated so that an offer from Euroins would be viable.  To further effectuate his insider trading scheme, NEDEV participated in numerous emails and phone calls to encourage Euroins to continue to pursue an offer for Tower Group, notwithstanding Tower Group’s announcement of a different deal.

Between January and May 2014, NEDEV continued to accumulate Tower Group stock in the Strategic Accounts.  By May 13, 2014, the Strategic Accounts held more than 385,000 shares of Tower Group stock valued at approximately $863,000, which represented the second largest position by value in the Strategic Accounts.  At that time, the Tower Group position also represented an unrealized loss of approximately $258,000, as the share price of Tower Group had declined from a high of approximately $2.98 per share on January 6, 2014, to a low of $1.67 per share on May 7, 2014.

Between May 8, 2014, and May 13, 2014, NEDEV took specific steps to encourage Euroins to make a tender offer for Tower Group, despite NEDEV’s knowledge, which he acquired during the scheme, that Euroins’s proposed offer lacked certain detail considered essential in such a transaction, such as information about how Euroins would finance any offer for Tower Group stock.  On or about May 13, 2014, at the direction of NEDEV, Euroins sent a letter of intent (the “Euroins Letter of Intent”) to Tower Group offering to acquire all of Tower Group’s outstanding stock for $3.75 per share (the “Tower Group Offer”).  The Tower Group Offer represented a premium of approximately 67 percent over the then-current Tower Group share price and a premium of $.75 per share over the pending ACP Re offer. 

At approximately 12:26 p.m. on May 13, 2014, Euroins issued a press release (the “Euroins Press Release”) through a U.S.-based newswire service stating that Euroins had submitted an acquisition offer to Tower Group.  The language contained in the Euroins Press Release was nearly identical to the language contained in the December 2012 Rocky Mountain Offer, which would later be included in the Avon Offer.

Almost immediately after the Euroins Press Release was issued at approximately 12:26 p.m. on May 13, 2014, Tower Group’s share price increased to $2.91 per share.  At approximately 12:50 p.m., NEDEV received email confirmation that the Euroins Press Release had been released and immediately began selling shares of Tower Group held in the Strategic Accounts.  In total, on or about May 13, 2014, NEDEV caused the Strategic Accounts to sell approximately 90,000 shares of Tower Group for a gain of approximately $26,100.  When Euroins received questions from investors on the day the Euroins Press Release was released, the questions were routed to NEDEV via email.  NEDEV did not advise the Eurohold Chairman or anyone at Euroins that he sold Tower Group stock after the Tower Offer was made.

Two days later, on or about May 15, 2014, Tower Group issued a press release acknowledging receipt of the Euroins Letter of Intent but announcing that Tower Group’s Board of Directors had unanimously determined that Euroins’s proposal “[did] not constitute and could not reasonably be expected to lead to a superior proposal” to the contemplated merger with the other insurer.

Finally, in or about June 2015, following media reports that the SEC and the FBI were investigating NEDEV in connection with the Rocky Mountain, Avon, and Tower Group Offers, the Eurohold Chairman met with NEDEV in Sofia, Bulgaria.  During their meeting, the Eurohold Chairman confronted NEDEV about his stock holdings in Tower Group at the time NEDEV was advising on a potential acquisition of Tower Group by Euroins.  NEDEV acknowledged that he had owned Tower Group stock at the time of the Tower Group Offer and apologized.  

*                      *                      *

NEDEV, 38, is charged in eight counts.  In connection with the Rocky Mountain market manipulation scheme, NEDEV is charged with one count of securities fraud (Count One), one count of wire fraud (Count Two), and one count of aggravated identity theft (Count Three).  In connection with the Avon market manipulation scheme, NEDEV is also charged with one count of securities fraud (Count Four), one count of wire fraud (Count Five), and one count of aggravated identity theft (Count Six).  In connection with the Tower Group insider trading scheme, NEDEV is charged with one count of fraud in connection with a tender offer (Count Seven) and one count of securities fraud (Count Eight).  Counts One, Two, Four, Five, Seven, and Eight each carry a maximum sentence of 20 years in prison.  Counts Three and Six, the aggravated identity theft charges, carry a mandatory sentence of two years each, that must be imposed in addition to the sentence imposed on other counts.  The charges also carry a maximum fine of $5 million, or twice the gross gain or loss from the offense.

The maximum potential sentences in this case are prescribed by Congress and are provided here for informational purposes only, as any sentencing of the defendant will be determined by the judge.

Mr. Bharara praised the work of the FBI, and thanked the SEC Division of Enforcement and Office of Inspector General for their assistance.  Mr. Bharara also thanked the Office of International Affairs and Bulgarian law enforcement for their assistance in the arrest and apprehension of NEDEV.

The charges were brought in connection with the President’s Financial Fraud Enforcement Task Force.  The task force was established to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes.  With more than 20 federal agencies, 94 U.S. attorneys’ offices, and state and local partners, it is the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud.  Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state and local authorities; addressing discrimination in the lending and financial markets; and conducting outreach to the public, victims, financial institutions and other organizations.  Since fiscal year 2009, the Justice Department has filed over 18,000 financial fraud cases against more than 25,000 defendants.  For more information on the task force, please visit www.StopFraud.gov.

This case is being handled by the Office’s Securities and Commodities Fraud Task Force.  Assistant U.S. Attorney Andrea M. Griswold is in charge of the prosecution. 

The allegations contained in the Indictment are merely accusations, and the defendant is presumed innocent unless and until proven guilty.