Description: New York City, New York criminal defense lawyers representing the Defendants charged with onspiracy, securities fraud, wire fraud, and investment adviser fraud in connection with their management of StraightPath Venture Partners LLC (“SPVP”), StraightPath Management LLC, and nine related StraightPath Funds. They were also charged with conspiracy to obstruct justice and obstruction of justice in connection with their deletion of records that had been subpoenaed by the Securities and Exchange Commission (“SEC”).

Michael Castillero, a/k/a Michael Alejandro, Francine Lanaia, and Brian Martinsen
are accused of fraudulent misrepresentations about the operation of the StraightPath Funds allowed them to raise approximately $386 million from hundreds of investors. Based in large part on the excessive and undisclosed share price markups they charged to investors and their practice of commingling funds in violation of representations made to investors, the defendants were able to divert nearly $75 million in investor funds to themselves over an approximately three-and-a-half-year period.

LANAIA and MARTINSEN were taken into custody earlier today and presented this afternoon before U.S. Magistrate Judge Sarah L. Cave. CASTILLERO is expected to be presented tomorrow. The case has been assigned to U.S. District Judge Jesse M. Furman.

U.S. Attorney Damian Williams said: “As alleged, Michael Castillero, Francine Lanaia, and Brian Martinsen, the founders and former owners of the StraightPath Funds, took advantage of the relative lack of information and lower trading volumes for non-public companies by offering retail investors interests in shares of pre-IPO companies at inflated prices, allowing the defendants to skim off the top without investors realizing they’d been duped. To conceal their fraud, Castillero and Martinsen allegedly then took steps to destroy records that had been subpoenaed as part of an ongoing federal investigation. These exploitative practices in the pre-IPO markets will not be tolerated.”

USPIS Inspector in Charge Daniel B. Brubaker said: “These individuals used the U.S. Mail to facilitate their criminal activities by allegedly devising a fraud scheme designed to swindle innocent investors of their hard-earned money. The U.S. Postal Inspection Service is committed to uncovering investment scams and protecting the public from becoming a victim to these schemes that claim millions of dollars each year. We will be relentless in our efforts to pursue these criminals until justice is served. Postal Inspectors remind investors it is key to educate themselves and ask questions regarding these investments, even more so when they notice undisclosed fees.”

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

From at least in or about 2017 through at least in or about April 2022, CASTILLERO, LANAIA, and MARTINSEN engaged in a scheme to defraud investors in a group of nine related private funds known generally as the “StraightPath Funds.” In particular, the defendants, and others working at their direction, used “boiler room”-style call centers to market the StraightPath Funds, including to individual, non-professional investors, as presenting an opportunity to invest in privately held companies expected to go public in the near future (“pre-IPO companies”). The defendants purported to offer investors the chance to acquire shares in pre-IPO companies at favorable prices in advance of an anticipated public offering, at which time, they claimed, the shares would be worth significantly more.

Although the defendants and their agents represented to existing and prospective investors in the StraightPath Funds that the defendants would earn no upfront fees in connection with the StraightPath Funds’ acquisition of pre-IPO shares, in reality, and contrary to their fiduciary duties, the defendants acquired the shares and then sold them to investors at arbitrarily inflated and excessive prices without disclosing to investors the nature or extent of the markup. The defendants also misled investors regarding the nature of their investments and hid the involvement of CASTILLERO and LANAIA who had been previously barred from the securities industry by the Financial Industry Regulatory Authority (“FINRA”). Moreover, in order to evade detection of their scheme, CASTILLERO and BRIAN MARTINSEN destroyed records and otherwise obstructed the efforts of the SEC to uncover the defendants’ fraud on investors.

In order to generate interest in the StraightPath Funds among retail investors, CASTILLERO, LANAIA, and MARTINSEN used finders, or “referral agents,” to pitch prospective investors and thereafter to serve as the investors’ primary point of contact. In turn, these agents used “boiler room”-style call centers to cold-call potential investors, many of whom were not sophisticated, and give aggressive sales pitches using notes and pitch scripts approved by the defendants. Contrary to the defendants’ claim that they and their agents did not make money unless and until investors received a profit on their investments, SPVP paid referral agents a commission, typically a 10 to 15 percent front-end fee based on the amount of the investment, plus a portion of the carried interest on the back end.

In addition to misleading prospective investors about the compensation paid to referral agents, CASTILLERO, LANAIA, and MARTINSEN defrauded investors in the StraightPath Funds, for which they acted as fiduciaries, by (i) charging investors excessive and undisclosed markups on share prices of pre-IPO companies, which benefited the defendants and their associates at the expense of investors and the StraightPath Funds; (ii) routinely overstating to investors the number of pre-IPO shares that backed the interests in StraightPath Funds they sold; (iii) falsely representing that investors were investing in a specific “Series” within a specific StraightPath Fund and that their contributions correlated to specific shares of specific pre-IPO companies, when, in actuality, investor funds were commingled across Series and Funds and used for purposes not disclosed to investors, including to pay out other investors and to compensate the defendants and their associates; (iv) falsely representing that a particular individual (“Fund Manager-1”) acted as manager of each of the StraightPath Funds and the SP Adviser when, in actuality, CASTILLERO, LANAIA, and MARTINSEN performed the functions ascribed to Fund Manager-1 in StraightPath’s offering documents including, among other things, using an email address in the name of Fund Manager-1 to correspond with investors; and (v) otherwise actively taking steps to prevent investors from learning about LANAIA’s and CASTILLERO’s leadership roles in light of the fact that both had been suspended and later permanently barred from involvement in the securities industry by FINRA.

Throughout the StraightPath Funds’ operation, CASTILLERO, LANAIA, and MARTINSEN actively took steps to conceal the true nature of SPVP’s operations not only from investors but also from regulatory bodies, including FINRA and the SEC. For example, MARTINSEN, CASTILLERO, and LANAIA discussed making Fund Manager-1 the scapegoat with the SEC, in the event the SEC identified any problems with StraightPath’s operations. MARTINSEN then added, “Fran [LANAIA] is going to wamboosle the sec lady tomorrow. They will talk weather for 45 min and the lady will forget what she’s looking for.”

In early May 2021, MARTINSEN and CASTILLERO agreed to and did delete certain email records that had been called for by an SEC subpoena and then falsely represented to SEC staff that the emails had never existed.

The StraightPath entities and StraightPath Funds are no longer operational and are under the control of a court-appointed Receiver tasked with taking possession of StraightPath’s assets and recommending a plan to return value to investors.

* * *

A chart containing the names, ages, residences, charges, and maximum penalties for the defendants is attached. The maximum potential sentences in this case are prescribed by Congress and are provided here for informational purposes only, as any sentencing of the defendants will be determined by a judge.

Mr. Williams praised the outstanding work of the USPIS. Mr. Williams further thanked the SEC, which previously filed separate civil charges against CASTILLERO, LANAIA, MARTINSEN, and others in connection with the operation of the StraightPath Funds in SEC v. Straightpath Venture Partners LLC et al., 22 Civ. 3897 (LAK) and SEC v. Hollender et al., 23 Civ. 2456 (LAK).

This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys Allison Nichols, Adam Hobson, and Jason Richman are in charge of the prosecution.

CONSPIRACY TO COMMIT SECURITIES FRAUD, WIRE FRAUD, INVESTMENT ADVISER FRAUD
(1)
15:78J.F MANIPULATIVE AND DECEPTIVE DEVICES (SECURITIES FRAUD)
(2)
18:1343.F FRAUD BY WIRE, RADIO, OR TELEVISION
(3)
15:80B.F DISCLOSURE OF INFORMATION BY COMMISSION (INVESTMENT ADVISER FRAUD)
(4)
18:371.F CONSPIRACY TO OBSTRUCT JUSTICE
(5)
18:1519.F DESTRUCTION, ALTERATION OR FALSIFICATION OF RECORDS IN FEDERAL INVESTIGATIONS (OBSTRUCTION OF JUSTICE)
(6)

Outcome: The charges contained in the Indictment are merely accusations, and the defendants are presumed innocent unless and until proven guilty.

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