US authorities are investigating possible insider trading and securities fraud connected to a company previously associated with expatriate New Zealand businessman Eric Watson and former Lion boss Julian Davidson.
According to a search warrant request, the FBI is focused on apparent conversations that took place about share trading in Long Island Iced Tea Corp (LTEA), a company that gained notoriety for a sudden change from beverage manufacturing to blockchain technology in late 2017.
The rebrand to blockchain initially saw the company's shares soar by 400 per cent on the Nasdaq, but its market value has since fallen from as much as US$95 million (NZ$143m) to less than US$10m.
The warrant request follows the arrest last year of two men, Canadian citizen Oliver Lindsay and Californian stock promoter Gannon Giguiere, who were both charged with securities fraud relating to a separate company called Kelvin Medical.
The FBI suspects Lindsay and Giguiere ran a "pump-and-dump" scheme where investors bought cheap stocks, promoted them, and sold when their value shot up.
Evidence obtained in the Kelvin Medical case led FBI agents to extend their investigation to Long Island Iced Tea and the warrant allows them to access further information from a cell phone used by Lindsay.
The agents identified several encrypted text messages in which Lindsay and other individuals discuss what appeared to the FBI to be confidential information regarding Long Island Iced Tea, according to the warrant request filed in a California District Court in May.
Those messages included a WhatsApp text string starting in September 2017 between Lindsay and a user identified on Lindsay's phone as "Eric W" believed to be Eric Watson, who at the time owned 1.5 million LTEA shares, or about 15.1 per cent of the company's stock.
Watson, who has not been charged with any wrongdoing, could not be contacted via a mobile phone number for comment about the probe. The Herald has also contacted one of Watson's recent legal representatives for comment.
According to the warrant request, one text string contained a continuing discussion of information concerning "tea," "blockchain," and "LTEA," which the FBI agents believed to refer to Long Island Iced Tea Corp.
On September 19, 2017, Watson texted Lindsay: "We seem to have a hold up with tea? Paul saying you need more time? We really should [sic] moving don't you think?"
Lindsay responds, including by stating: "No real delay from me ... Needed all the structure info . . . Got that ... "
On September 20, 2017, Lindsay texted Watson: "Rod can't reach paul to nail down IR contact ... Need that asap." Watson responded: "Tell him to talk to Julian asap. Paul out of action.
The FBI also notes in its search warrant that Lindsay sent a number of WhatsApp messages to a person identified on his phone as Julian Davidson.
Davidson, a former Lion NZ chief executive, was hired by LTEA as its executive chairman as it looked to break into the ready-to-drink alcohol market.
However, when the company became Long Blockchain in December 2018, Davidson left and initiated legal action against the company over the terms of his separation. This action was later settled.
The text messages contained a discussion of information concerning a promotional campaign - often referred to as an "investor relations," or "IR," programme - and funding that Lindsay allegedly provided in connection with LTEA.
On September 26, 2017, Davidson texted Lindsay: "I want to get started on the IR program but I don't have the charges aligned to the contract yet."
On October 2, 2017, Davidson texted Lindsay: "Hi Ollie - I'm getting a little nervous - and will need to delay the close again - any progress on your end? Cheers Julian."
The FBI suspects the IR programme, short for investor relations programme, was actually a stock promotion campaign consistent with a "pump-and-dump" scheme.
Davidson, like Watson, has not been charged with any wrongdoing. He did not return calls seeking comment.
Long Blockchain was delisted from the Nasdaq in April 2018 after concerns it was misleading investors while its market cap fell below what is generally accepted by the stock exchange.
Three months later it was subpoenaed by the US Securities and Exchange Commission, which asked for certain documents, without elaborating publically.
Long Blockchain now trades on the over-the-counter (OTC) "pink sheets" market with a warning flag to investors that says the company may not be making material information publicly available.
The company originally listed in the US through the backdoor of Cullen Agricultural Holding Corp, which had earlier merged with a blank-cheque company started by Watson and business partner Jonathan Ledecky.
The FBI search warrant request says Long Island Iced Tea shares were bought using brokerage accounts in the names of Giguiere and his wife, Lindsay Giguiere on December 20, 2017, the day before the company announced its pivot to blockchain.
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 next day, when the news of the rebrand emerged, the stock briefly hit $14.
The FBI says that on December 21, 2017, between 6.28am and 6.29am, Watson and Lindsay exchanged the following text messages:
Lindsay: Laughing ... Good job getting that done
Watson: Thanks. A f***ing lot of brain damage. When the market sees the Stater deal we may have a $50 stock.
Watson appears to have sold shares a few days later through a company called Brentwood LIIT (NZ) Ltd, according to this SEC filing.
The FBI investigation is the latest in a string of bad news for Watson.
Since becoming a society page fixture in the 2000s with lavish living and relationships with lingerie models, Watson has since faced fallout from the collapse of Hanover Finance and a succession of losses in high-stakes court proceedings against fellow mogul Sir Owen Glenn.
In March, he lost a long-running dispute with Inland Revenue, with a High Court judge ruling companies he owns are liable for $51.5m in back-taxes.
Several months after this article was published, Watson finally responded to request for comment through his lawyers. They delivered this statement:
A Watson spokesperson said the person to whom the warrants and share target relate was contracted to the company to perform marketing services including PR and investor relations. As such there was of course confidential and regular communications to and from them. They were bound by a confidentiality agreement and neither the company or major shareholders had knowledge of their alleged trading in the company's shares, nor are we aware whether they have been formally charged or pleaded guilty to anything regarding LBCC. All the charges known to us are regarding completely unrelated companies e.g. Kelvin Medical. The reference to Watson selling his shares a few days later is incorrect and reported out of context. It was neither Watson or a Watson related entity that sold the LBCC shares. Pursuant to the terms of a Sales and Purchase Agreement dated 3 July 2017, the non-Watson related purchaser executed its right to call the shares of Brentwood LIIT (NZ) Ltd, the company that owned the LIBB shares referred to in the article. This call was exercised on 21st of December 2017 refer this Edgar filing, and the transfer was registered with Companies Office in New Zealand on 23 December 2017.