A New Jersey sandwich shop with a valuation of $100mn, which became a symbol of stock market exuberance, was at the centre of an international conspiracy that defrauded investors and wrecked the ambitions of two high school teachers, according to an indictment unsealed in federal court on Monday.
Federal agents in North Carolina arrested Peter Coker, 80, and James Patten, 63, on securities fraud charges related to their alleged role in inflating the share price of Hometown International. Coker’s 53-year-old son Peter Coker Jr also faces charges and is still at large.
The deli gained notoriety on Wall Street in April last year after Hometown International was named by hedge fund manager David Einhorn as an example of the “quasi-anarchy” that he said had taken hold in financial markets. “The pastrami must be amazing,” Einhorn quipped at the time.
Hometown’s share price soared from $1 in October 2019 to nearly $14 by April 2021, even as revenue hovered at about $40,000 and lawyers for the company acknowledged that it was having “limited success operating its?.?.?.?delicatessen”.
Prosecutors say the inflated valuation was the result of co-ordinated trades that were designed to create the false impression that there was real market interest in the securities. They added that some of the trades were placed by the defendants themselves, using brokerage accounts belonging to their friends and associates.
On one occasion last January, an account belonging to a Staten Island resident who was an associate of Patten was used to sell shares at a price of $13.99, prosecutors said. The buyer, who lives in New Jersey, turned out to be a close relative of Patten’s romantic partner, they added. Both orders were allegedly traced by law enforcement to an internet connection serving Patten’s home.
Prosecutors claim some of the allegedly manipulative transactions were placed by an unindicted co-conspirator based in Hong Kong. They said Coker Jr also lives in Hong Kong.
The charges filed by New Jersey prosecutors, together with a parallel civil action by the SEC, shed new light on one of the strangest episodes to emerge from the financial frenzy that seized Wall Street during the pandemic.
The saga began in 2014, when two employees at Paulsboro High School began making plans to open a delicatessen in the dusty refinery town. Patten, who had known one of the teachers since his youth, offered to lend a hand, prosecutors alleged.
“Unbeknownst to the deli owner?.?.?.?Patten and his associates began positioning Hometown International as a vehicle for a reverse merger that would yield substantial profit to them,” prosecutors said on Monday.
Shares in Hometown International began changing hands on OTC Marketplace, a trading venue for illiquid small-cap stocks, in October 2019. By last year, shareholders included the endowments of Duke and Vanderbilt universities, two of the most prestigious seats of learning in the US.
The universities invested via a Hong Kong-based hedge fund that saw Hometown as a kind of special purpose acquisition vehicle that would merge with a company seeking a stock market listing, the Financial Times reported last year.
In an email that Coker Jr allegedly sent last January, he seemed to envisage a similar strategy. “The ‘announcement of [a reverse merger] deal’ would lead to a ‘massive’ increase in the trading volume of [Hometown],” prosecutors wrote, summarising the contents of the email.
The surge in trading would allow the co-conspirators “to more easily dump their shares into the market”, the prosecutors added.
“Such manipulative schemes diminish the trust investors must have in the integrity of the markets, and we will pursue those who engage in such wrongdoing,” said Scott Thompson, associate director of enforcement at the SEC’s Philadelphia regional office, in a statement.
Patten is charged with wire fraud and money laundering, which carry a maximum sentence of 20 years. He also faces charges of securities fraud and conspiracy to manipulate securities prices along with the Coker duo. The SEC is separately seeking a court order banning the trio from participating in penny stock offerings.
The defendants could not be reached for comment, and it could not be learned whether they had retained lawyers.
The school workers who founded the Paulsboro deli left the company last year after “rais[ing] significant concerns with Patten regarding the negative news” surrounding its stock market listing, prosecutors said.
Hometown merged with Makamer Holdings, a California-based bioplastics company, in March this year, and ceased operating the deli three months later.