Even during the heady days of the epic bitcoin bubble in 2017, Long Island Iced Tea Corp.’s pivot to blockchain was a particularly brash ploy to latch onto the crypto hype. More than a year later, court records show that authorities are still digging into what they believe was a sophisticated insider trading operation designed to supercharge the stock’s rise.

The beverage company’s stock skyrocketed nearly 300% when it said it was changing its name to Long Blockchain on Dec. 21, 2017, and indicated that it was “shifting its primary corporate focus” from tea to distributed-ledger technology. Since then, the Farmingdale, New York-based company has been delisted from the Nasdaq stock market and investigated by two US financial regulators, with authorities poring over evidence from recorded phone calls and a hacked iPhone.

According to a search warrant request, the FBI is looking for evidence of insider trading and securities fraud connected to Long Island Iced Tea stock, and has focused on conversations about the company that took place between two men, Oliver Lindsay and Gannon Giguiere, who were arrested for securities fraud in relation to a separate company. Those phone messages about Long Island Iced Tea may also include conversations with a wealthy New Zealander named Eric Watson, who hasn’t been charged with wrongdoing.

The FBI also thinks Long Island Iced Tea stock was the target of a so-called “pump-and-dump” scheme, according to the search warrant document. The way these scams typically work is that promoters buy a cheap stock, start hyping it to investors with eye-catching claims, then sell their own holdings during the resulting mania, hopefully securing a profit before the stock comes crashing down. The FBI says in its warrant that proceeds from these scams can be distributed to accomplices through offshore back channels.

“Anytime there’s a new technology like blockchain, and there’s any kind of mania around it, this is what the fraudsters take advantage of,” said Joshua White, assistant professor of finance at Vanderbilt University. A similar pattern took place amid computer software hype in the 1980s, the internet at the turn of this century, and marijuana stocks more recently.

“It’s a winning formula,” said White, who authored a penny-stock analysis for the Securities and Exchange Commission.

Long Island Iced Tea’s flirtation with bitcoin mania was perhaps too successful. When its stock blasted off amid the crypto bubble’s media frenzy, it caught the attention of journalists, traders, as well as the chairman of the SEC. While scams involving smaller companies are far from uncommon in the US, Long Island Iced Tea was a bigger fish than usual, had had a star-studded executive board, and was trading on the Nasdaq exchange.

The FBI’s search warrant shows a deepening investigation that is uncovering a new layer, and providing more insight into the mechanics of stock manipulation.

iPhone messages

The FBI started out investigating Lindsay and Giguiere for securities fraud in a company called Kelvin Medical, according to the search warrant, which led authorities to arrest them. After seizing their cell phones and extracting evidence, the FBI requested a search warrant related to Long Island Iced Tea. The SEC has a case against Kelvin Medical that appears to be ongoing.

“Very few scammers will be content to have one thing going,” said Dennis Franks, a security consultant who oversaw complex investigations during a 22-year career with the FBI. “They’ll have a lot of other things going, too.”

One of the men arrested, Lindsay, is a Canadian citizen who mainly lived in Georgetown, Cayman Islands, and also ran an offshore brokerage, according to the search warrant. The other, Giguiere, operated TheMoneyStreet.com, a now-defunct website that promoted stocks of small, risky companies, commonly called “penny stocks.” The FBI thinks both of them were engaged in insider trading of Long Island Iced Tea, according to the search warrant.

After Lindsay and Giguiere’s arrests in July 2018, FBI agents were able to hack into Lindsay’s iPhone and extract months of text message conversations, according to the search warrant. (Investigators haven’t been able to get into Giguiere’s device.) The US government is also receiving information about the pair’s alleged market manipulation from an informant, described as “CHS,” who had allegedly earlier conspired to commit securities fraud. This person spoke with Lindsay and Giguiere about a separate alleged fraud involving Kelvin Medical:

The FBI thinks a person named “Eric W” in a series of WhatsApp messages is Eric Watson, who owned around 15% of the shares in Long Island Iced Tea at about the time of the infamous blockchain pivot, according to the search warrant. Watson is a wealthy New Zealander whose liaisons with models, and a bathroom fight with actor Russell Crowe, have been occasional tabloid fodder. He acquired American Apparel along with Jon Ledecky, a wealthy investor and sports team owner, in 2006.

Greg Bowker/New Zealand Herald Long Island Iced Tea shareholder Eric Watson.

Watson has lived in London since about 2002, according to separate court documents in the UK. He came into Long Island Iced Tea in 2015, two years before its blockchain pivot, when it was acquired by Cullen Agriculture Holding, a company he controlled.

Lawyers for Watson, Lindsay, and Giguiere didn’t respond to calls and email requests for comment. Long Blockchain also didn’t respond to calls and an email request for comment.

“Let’s get going”

Non-alcoholic iced tea wasn’t especially popular in September 2017, but bitcoin was. The original crypto asset had tripled in value since the beginning of the year. News stories were bouncing around the internet about people who had made millions betting on bitcoin, which would climb to its zenith that December.

By the time Long Island Iced Tea’s stock blasted off in December 2017, Watson had been having conversations about the company with Lindsay for at least three months, according to the search warrant:

Another name that comes up in the search warrant is Julian Davidson. The document doesn’t definitively link the conversations to Long Island Iced Tea’s executive chairman, but it stretches the imagination to think it was anyone else. The FBI notes in its search warrant that Lindsay sent a text file with the contact information for a person named Julian Davidson, described as Executive Chairman of LTEA, the ticker for Long Island Iced Tea. Lindsay also sent a number of WhatsApp messages to a person identified on his phone as Julian Davidson.

Davidson became Long Island Iced Tea’s executive chairman in 2016, and had been with the company since the year before as a consultant. He had industry experience, having been an executive in New Zealand for the Lion Nathan beverage company. Davidson hasn’t been charged with wrongdoing by authorities, and, potentially notably, he resigned from the board a few days before the blockchain pivot was announced on Dec. 21, 2017, according to filings. He didn’t respond to attempts to reach him by email and phone through his attorney.

Steven McNicholl/New Zealand Herald Photograph Long Island Iced Tea executive chairman Julian Davidson.

The US suspects that the “IR program,” short for investor relations program, was really a stock promotion campaign. The FBI search warrant also contains other details that it says are consistent with a so-called “pump-and-dump” scheme.

In addition, in October 2017, government authorities allege that Lindsay sent documentation of a $681,625 wire transfer between an asset management company and Long Island Brand Beverages to a person named Julian Davidson, according to the warrant. The FBI document says this and other evidence provides context for an insider-trading conspiracy, and identifies other possible conspirators.

A chunk of Long Island Iced Tea stock changed hands the following the month as well. The FBI search warrant says an insider trading investigation by the Financial Industry Regulatory Authority found that 332,500 shares of Long Island Iced Tea were acquired by CMGT Inc. on Nov. 20, 2017. The shares weren’t purchased in the open market market, but came directly from the beverage company in connection to an offering, according to the search warrant. SEC court documents (pdf) have linked Lindsay to a broker in the Cayman Islands called CMGT Capital Management.

The following message involving “Eric W,” according to the search warrant, detailing advertising spending on Yahoo and Facebook, as well as payments to a blogger, trader, call center, and so on, are common elements of a pump-and-dump scheme. To be exact, the FBI thinks it refers to the “pump” part of the campaign, the search warrant shows:

The penny stock problem child

The US market for stocks with small- and micro-size capitalizations has been a problem area for regulators for decades. It attracts sensational misbehavior: Jordan Belfort, whose boiler room exploits in pumping up dodgy stocks became the basis of the movie Wolf of Wall Street, is the best known, but there are many others each year. The victims are mostly small-time retail investors who get duped.

This puts the SEC in a difficult spot. Authorities want small American companies to be able to raise money from ordinary investors. There may be bad apples, but it’s understandable why watchdogs are reluctant to throw out the entire bunch. Policing thousands of penny stocks, however, is beyond their reach.

It gets more complicated, because small-time traders themselves play a vital role in perpetuating scams. For many of them, the penny stock market is like a lottery. They know some stocks are rigged, and in fact research shows that they seek them out. The idea is to find the stocks with buzz, ride the wave, and then jump out before the whole thing collapses. It usually doesn’t work, but they keep looking for that gambling-fueled dopamine hit.

Postings on InvestorsHub, a website for retail investors, show that small-time traders sensed there was something fishy about Long Island Iced Tea’s pivot: “This such a fraud…. stay away,” a person wrote the day the press release went out. Based on the reaction of shares, investors gambled on it anyway. Stock scams, like the pump-and-dump scheme detailed in the FBI search warrant, wouldn’t work without these supporters.

Kiwi rich list

Watson, 60, took a winding path to Long Island Iced Tea, and he has been involved in a range of industries over the years. He became executive chairman of Cullen Investment, a private investment company, in 1995, according to SEC filings. Its portfolio included Bendon, a marketer of women’s lingerie that included licenses to brands like Elle MacPherson Intimates and Stella McCartney, with representation from model Heidi Klum. Its investments also included the New Zealand Warriors rugby team.

“I think of myself as an entrepreneur that is focused on creating value, joining the dots, bringing one and one and one together and hopefully equalling more than three,” Watson told the Otago Daily Times in 2012.

In 2007, Watson and Ledecky formed a blank check company—meaning it raised funds for acquisitions and investments without having identified a target—called Triplecrown. Triplecrown had a star-studded board of directors that included a NetJet executive, a founder of the Carlyle Group private equity firm, and Kerry Kennedy, a human rights activist and daughter of congressman Robert Kennedy. In September 2009, Triplecrown merged with Cullen Agriculture Holdings (CAH), a dairy company that Watson controlled.

In January 2015, CAH said it was merging with Long Island Brand Beverages, whose non-alcoholic teas and other drinks were sold around the Northeast US, and the combined company became known as Long Island Iced Tea Corp. Kennedy resigned from Long Island Iced Tea’s board on September 21, 2017. She didn’t respond to a request for comment through her foundation.

Some of Watson’s previous business ventures didn’t end well. He and several associates settled in 2015 with New Zealand’s financial regulator (pdf), which investigated Watson and others over misleading disclosures regarding a property investment vehicle during the subprime crisis. The watchdog said in its settlement document that while it believed disclosure breaches had occurred, none of the defendants had admitted any liability as part of the settlement. Watson settled in 2001 with the US SEC, which alleged that he withheld trading information during acquisition discussions. He neither admitted nor denied the findings in the SEC’s settlement document.

Courts in recent months have said that he owes millions of dollars in taxes and also owes millions in legal obligations as part of a dispute brought against him by a business associate. A judge reviewing the case said Watson “resorted to deliberate deception,” according to a court document.

“This release drops today, correct?”

The FBI alleges that Lindsey and Giguiere were conspiring to manipulate at least two stocks in late 2017, including Long Island Iced Tea, with the aim of cashing in on the blockchain mania, according to the search warrant document. One possibility was a deal or merger with a company called Stater Blockchain, according to the document, a company that said it was developing blockchain technology for financial markets. There are no allegations of wrongdoing by Stater.

Lindsay told “CHS” that “Eric” was having discussions with shareholders that month, according to the search warrant. He said some of those details, even though they contained inside information, were expected to leak out ahead of a letter of intent (LOI), the document shows:

In December 2017, the search warrant shows that Lindsay and Giguiere were exchanging emails related to LTEA—Long Island Iced Tea’s stock ticker at the time—and its “Crypto transaction.” On Dec. 19 and 20, the days before the company’s bombshell press release, Watson was exchanging encrypted document attachments with Lindsay with the words “LIIT Press Release_Block Chain” in the title, the document shows. Several versions of what appeared to be a press release about blockchain changed hands between Lindsay and Watson.

The FBI search warrant says Giguiere and Lindsay exchanged this encrypted text message sometime before the press release hit the wire:

In the meantime, the FBI says account statements show that Long Island Iced Tea shares were bought using brokerage accounts in the names of Giguiere and his wife, Lindsay Giguiere, according to the search warrant. On Dec. 20, 2017, Giguiere’s Robinhood account showed purchases of 17,500 shares, worth about $42,350, at $2.42 per share. His wife’s Scottrade brokerage account showed purchases of the same amount of shares, the document shows.

The beverage-company-cum-blockchain-startup issued its press release the next day:

Long Island Iced Tea Corp. to Rebrand as ‘Long Blockchain Corp.’: Corporate Focus to Shift Towards Opportunities Strategic to Blockchain technologies.

The stock briefly surpassed $14 when the news hit. The FBI says Watson and Lindsay exchanged this message a little after the press release went public, according to the search warrant:

Giguiere and his wife unloaded all the stock they had bought the day before at an average price of around $7 per share, producing gross profits of more than $162,000, according to the FBI’s warrant.

Watson also appears to have sold shares a few days later, according to an SEC filing.

Blockchain-R-Us

Long Island Iced Tea’s blockchain-based success didn’t last very long.

In late January 2018, alluding to companies that change their name to something like “Blockchain-R-Us,” SEC chairman Jay Clayton said in a speech that the agency was “looking closely at the disclosures of public companies that shift their business models to capitalize on the perceived promise of distributed ledger technology.”

Long Blockchain was given notice from Nasdaq shortly after that it would be delisted, which finally took place in April 2018, according to filings. Davidson, the board’s former executive chairman, also filed an action against the company in March of that year. The SEC subpoenaed Long Blockchain in July 2018, and Lindsay and Giguiere were arrested that month, according to court documents.

Long Blockchain’s market capitalization crested at more than $60 million during its crypto flirtation, but it has dropped since and is valued at around $9 million. The company has since started a subsidiary for gift cards and loyalty programs. Financial filings show that Long Blockchain has continued posting losses.

The FBI, meanwhile, is still digging. Court records show that FBI special agent Stephanie Schuld filed a follow-on search warrant in May to go through Lindsay’s iPhone again, seeking communications during a broader range of dates, which she thinks will uncover more evidence of securities fraud.