PledgeMusic Majority Shareholder Charged With $25M Penny Stock Fraud
The charges are unrelated to the crowdfunding platform, which has been facing scrutiny recently over late and missing payments to artists.
PledgeMusic majority shareholder Joshua Sason, founder and owner of Magna Group, has been charged with orchestrating $25 million in stock frauds, the Securities and Exchange Commission (SEC) announced on Friday. The charges are unrelated to his involvement with PledgeMusic.
Sason, 31, has been member of the PledgeMusic board of directors since 2014. That same year, Magna reportedly invested $3 million into PledgeMusic and Magna Entertainment vice president Russell Rieger -- a former exec with Maverick Records and London Records, who is not being charged by the SEC -- was also appointed as a director to PledgeMusic's board. In 2016, it was reported Magna Entertainment acquired a major position in PledgeMusic, but deal terms were not publicly announced. Sason is currently the only director listed as a person with significant control in PledgeMusic, according to the U.K.'s Company's House.
The SEC's charges are against Magna Group, Sason and three other individuals and related businesses. In Sason's alleged schemes, he and his company claimed to be buying companies' existing debt and then settling them for stock. But the SEC says the debts were faked so that the companies could justify issuing the shares, in turn driving down the price of company shares. As a result, the companies' existing investors' shares were also watered down.
In total, it is believed Sason and Magna Group's illegal transactions resulted in more than $25 million in proceeds.
“As alleged in our complaint, Magna Group and its co-defendants used fake debt instruments to unlawfully obtain shares in microcap companies, which they then dumped on unsuspecting retail investors,” said Sanjay Wadhwa, senior associate director of the SEC’s New York Regional Office, in a statement. “This action demonstrates the resolve of the SEC in pursuing fraudsters who use elaborate financing schemes to engage in securities fraud.”
The term microcap stock refers to the stock of public companies with a market capitalization of roughly $50 million to $300 million. Magna's former head of research and due diligence is also named in the charges, along with the heads of a holding company that allegedly participated in the scheme by issuing Magna a fake promissory note.
Sason was lauded in his 20s for, as a 2015 Bloomberg article put it, making "millions riding the death spiral of penny stocks." During his rise, he profited off lending failing companies money, obtaining shares at big discounts in return. Since, he has expanded Magna's operations as a worldwide investment brand with three divisions, holdings on six continents and offices in New York and Sydney.
The news comes at a precarious time for PledgeMusic. Over the past year, PledgeMusic has had problems paying artists on time, if at all. That led to a management overhaul last fall with promises to create "a more rigorous infrastructure to underpin the company's growth initiatives," but by recent accounts the problem has only worsened. Now, dozens of artists claim PledgeMusic still owes them anywhere from $50-$100,000 from finished campaigns on the website. Last month, PledgeMusic co-founder Benji Rogers announced his return on a short-term basis as a volunteer strategic advisor and observer to the board and the company has asked for "patience" as it explores potential partnerships or acquisitions that it says would help bring accounts current by the end of April. PledgeMusic is no longer accepting new campaigns or fan pledges, and by artist accounts the company has said they will not issue any new payments for the time being.
PledgeMusic has not explained why it can't pay artists the money it owes them and did not respond to Billboard's direct questions on the matter. But a former employee who asked to remain anonymous says the company does not hold funds "on account for the artist," as the website's terms and conditions say. Instead, the ex-employee alleges, PledgeMusic uses that money for ongoing operations and invests it in growing the company.
In a statement, a PledgeMusic spokesperson said, "Josh's issues are completely unrelated to PledgeMusic."