Burgers for $5.95 and sandwiches for $4.25. Combo plates, salads, breakfasts… and not a single item over $20. Yet somehow an unknown little restaurant named Hometown Deli in Paulsboro, New Jersey (USA) with only $25,000 in annual revenue, suddenly had a market capitalization of $113 million. The restaurant was to become the latest Wall Street fraud investigated by regulators. The company’s owners had used an unusual technique to artificially inflate its stock market price before they were discovered.
Hometown Deli International began to attract the attention of analysts, investors and the news media around the world in the first half of 2021. What was behind its skyrocketing stock price? The answer was surprising and disturbing – just a lonely little restaurant in New Jersey. “The pastrami must be delicious,” joked the investor who discovered the scam. Actually, pastrami wasn’t even on the menu.
“Small investors who get sucked into these situations are likely to be harmed eventually, yet the regulators – who are supposed to be protecting investors – appear to be neither present nor curious. From a traditional perspective, the market is fractured and possibly in the process of breaking completely,” said David Einhorn, the pastrami jokester and founder of Greenlight Capital, in an April 2021 letter to investors.
The company’s books left little room for doubt. According to the annual report filed with the US Securities and Exchange Commission (SEC) regulatory agency, the company reported sales of $14,000 in 2020 and $25,000 in 2021. Since being listed on the stock market is not cheap, it had losses of about $630,000 in 2020 and $480,000 in 2021. The company claimed to be seeking a merger with another entity. But none of that explained how it was possible for the company to reach its huge valuation on the stock market and a share price that skyrocketed from $1 in October 2019 to $14 in April 2021.
The mystery has now been solved – the company’s owners had artificially inflated the share price with simultaneous purchases and sales of shares, according to the SEC investigation. Not only that, defendants Peter L. Coker, Peter L. Coker Jr. and James T. Patten pulled the same trick with another company, E-Waste Corporation, which drew less attention but also attained a $120 million market capitalization even before trading began. E-Waste’s shares increased in value from $0.10 to $10 for no apparent reason.
According to the SEC, “Defendants artificially inflated the price of these companies’ stock through manipulative trading that Defendants executed through affiliated and nominee accounts they controlled, often using the same IP addresses to execute the trades. In so doing, Defendants artificially raised the price and trading volume of the entities’ common stock, creating the false appearance of active trading and a rising price for the security.”
The Cokers and Patten profited from their scheme by selling the stock of these two companies at artificially inflated values and billing the companies for purported consulting contracts. They owned investment firms and were experienced stockbrokers and financial advisors when they put the fraudulent scheme in motion. Patten has been previously sanctioned by regulators.
The Hometown International partnership was established in 2014 and Your Hometown Deli opened for business in 2015. Patten and the Cokers devised a plan to take the firm public and listed the company on the Pink Open Market (OTC Pink) in October 2019. It’s the lowest and most speculative tier of the three marketplaces for the trading of over-the-counter (OTC) stocks, and is subject to little regulation and oversight. In April 2020, the company raised $2.5 million in a private placement with Hong Kong investors.
To make the leap to a more open OTC market, the defendants filed a misleading prospectus with the SEC and distributed some shares to associates to give the impression that the company had at least 10% floating capital and a minimum of 50 shareholders. The move to another OTC market in October 2020 gave the company more visibility, a veneer of legitimacy and more trading flexibility.
When the company made its initial OTC debut, Patten quickly took control of most of the friend and family shareholder accounts, so he could trade their Hometown International shares. By making “matched trades” between the various accounts he controlled to simulate active trading, and “wash trades” to buy or sell shares resulting in no change of ownership, Patten was able to pump up the share price almost at will.
The SEC alleges that the “Defendants have injured innocent investors who purchased the stock of Hometown International and E-Waste Corp. at artificially inflated prices,” although the SEC does not quantify the financial harm nor the number of investors deceived, which appears to be small, given the little activity in the company’s stock.
“Before the Defendants were able to reap the profits from their schemes… numerous news stories began to be published regarding Hometown International’s potentially inflated stock price,” stated the SEC. Despite this negative press, the SEC says the alleged fraudsters merged Hometown International with another company so that they could change the name, ticker symbol and business operations in order to dump their shares more easily at an artificially inflated price and further profit from their scheme. They made the same maneuver with E-Waste Corporation, which never even got its business off the ground. After reaching a $100 million market capitalization, E-Waste merged with another company and changed its name.
The SEC has filed a civil complaint in a New Jersey federal court charging the defendants with numerous violations of securities laws. It seeks to permanently restrain and enjoin the defendants from engaging in similar activities, disgorgement of the profits from their market manipulation and a monetary fine. The New Jersey Attorney General has also opened a criminal investigation. Peter L. Coker and James T. Patten have been arrested, while Peter Coker Jr. remains at large.
“We allege that the defendants’ brazen schemes resulted in the artificial inflation of the stock price of two publicly traded companies with little to no annual revenues,” said Scott A. Thompson, Associate Director of Enforcement in the SEC’s Philadelphia Regional Office. “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.” But the question remains is how this blatant scheme escaped the SEC’s notice for so long until an investor alerted them. Your Hometown Deli is now closed.