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8/16/2018 (
Online Gambling Company Fights Iroquois’ War of Words - Growth CapitalistGrowth Capitalist

Online Gambling Company Fights Iroquois’ War of

By Teri Buhl | June 11, 2014

Iroquois Capital is waging a public battle with an online gaming company, MGT Capital
Investments (MGT), in an attempt to oust the CEO, who believes the hedge fund is not disclosing
all of its investment in the company. Robert Ladd, CEO of New York-based MGT, is suspicious the
firm has violated Section 16 of the Securities Act and claims Iroquois’ pugnacious founder, Josh
Silverman, verbally threatened to drive down the price of the stock of his public company.

Iroquois, a $177 million fund, made a $1 million PIPE investment into MGT
in October 2012. Chardan Capital Markets was the investment bank that
raised $4.5 million for MGT via the PIPE and helped raise an additional $1.3 million via a registered direct offering
sold on the same day the PIPE was issued. The company had no debt or preferred stock outstanding prior to the
PIPE investment.

Iroquois purchased 306,748 shares of convertible preferred stock. The conversion of the preferred stock was subject
Joshua Silverman,
to ‘blocker’ provisions that would not permit a holder of the preferred to convert any preferred to common if such a Iroquois Capital Mgt.
conversion would bring the fund to over 9.99% ownership. Iroquois made the unusual demand to have voting power
with its preferred stock and the company granted it to get the deal closed. The voting rights had no blockers on them and Iroquois could
vote the full amount according to MGT’s CEO Robert Ladd.

On the day the PIPE closed Ladd says he was aware Iroquois also owned 50,000 shares of MGT common stock, which he saw in the form
of stock certificates. Silverman disclosed in SEC filings he used working capital from his Iroquois master fund to make the MGT investment.

Ladd told Growth Capital Investor his banker, Joe Reda at Chardan, told him a large investor from Long Island, N.Y. was buying 200,000
shares of the registered direct offering (RDO) on the same October day the PIPE investment from Iroquois was signed. Transaction
documents and emails seen by Growth Capital Investor show this investor was Jay Spinner of Ellis International. In SEC filings Ellis
International is frequently listed as co-shareholder in Iroquois’ PIPE deals, with an address in the Long Island town of Valley Stream, N.Y.

Ladd latter learned, from another investor in his company familiar with Iroquois’ offices in New York, that Spinner has an office in Josh
Silverman’s Iroquois office at 641 Lexington Avenue in New York City. Ladd believes Spinner rents the space as a consultant and is not an
employee of Iroquois. Josh Silverman and Jay Spinner would not answer questions for Growth Capital Investor regarding the office space
or their working relationship.

Spinner, along with others including Matt Drillman and Andreas Badian, was charged in 2006
( by the SEC for manipulative short selling in the celebrated naked shorting case of involving
the Badian-led Rhino Advisors’ bear raid on microcap software developer Sedona Corp. Badian’s brother Thomas, Rhino’s GP, fled the
country to escape prosecution and was last known to be living in Austria. Andreas, Spinner and Drillman settled the charges in 2011 without
admitting or denying them, and were banned from the industry for six months.

Spinner uses an email address in the MGT stock purchase agreements that is associated with SDC Capital, a firm located in Valley Stream,
N.Y. which lists Drillman as its managing director. Spinner identifies himself as an “LP” of SDC on his LinkedIn profile.

A total of 453,000 shares were sold at $3.01 in the RDO. Ladd claims no other investors, except for insiders of the company, held a block of
stock “even close to 200,000 shares of common.” At the time of the RDO purchase this would have given Spinner a 6.7% share of
ownership in the company. No SEC filings were made to disclose ownership above 4.9% by Spinner’s company.

Through NOBO filings, which are required when an investor holds a large block of stock and wishes to have a non-objecting vote, Ladd
learned 200,000 shares of common were sold to American Capital Management LLC. According to a stockholder list from Broadridge, as
of November 22, 2012, American Capital owned 200,000 shares of MGT common, which was 30 days after Spinner purchased his original
200,000 shares in the RDO offering.

SEC filings show Josh Silverman of Iroquois, and his partner Richard Abbe, have an economic interest in American Capital in which they
share losses and profits. In filings, American Capital uses the same Lexington Avenue address as Iroquois. 1/4
According to Ladd, American CapitalOnline
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also doesn’t know if American Capital still owns the shares or has sold them into the market. Josh Silverman would not answer questions
made by Growth Capital Investor about his economic interest in American Capital.

Ladd believes the timing of these stock purchases gave Silverman an ownership of over 10%. If this was true and Silverman sold any of his
MGT stock or warrants for a profit, during the time he allegedly owned more than 10% of the company, he may have violated the short-
swing insider trading prohibition on Section 16 of the Securities Exchange Act of 1934. Ladd told Growth Capital Investor he thinks
Silverman is short his company but can not get access to records that would show this short position. In emails from Ladd to Silverman
seen by Growth Capital Investor, Ladd asked Silverman if he was short his stock. Silverman did not answer the question.

While unwilling to address specifics about the fund’s short positions to executives of the issuers in which Iroquois invests, Silverman makes
no bones about using short positions to enhance the returns from his PIPE investments in SEC filings. In a recent filings describing the
potential risks to investors in the fund, Silverman states:

“[A] significant part of our investment strategy utilizes short sales to capture arbitrage spreads, including in private investments in public
equity, and to trade around the optionality of convertible instruments, such as warrants…. While typically the possible loss from a short sale
is unlimited because the potential appreciation of a security is unlimited, the risk is extremely low for our ICM Hedge Fund as we rarely
engage in a short sale where we don’t have a security that can be converted into common stock to cover the replacement obligation.”

Iroquois, frequently in partnership with active PIPE investor Hudson Bay Capital, has focused much of its recent emerging growth
company investment on companies that owned, or sought to acquire, valuable patents and intellectual property (IP). The fund has been a
significant investor in several companies created through reverse mergers or major structurings – including Finjan Holdings (FHJN),
VirnetX Holding Corp. (VHC), Vringo (VRNG) and Spherix (SPEX) – to acquire and enforce patent rights via licensing and litigation. The
companies are often derisively referred to as “patent trolls.”

MGT Capital owns a technology patent related to gaming that according to shareholder letters filed by Iroquois is an asset it finds valuable.
The ownership of the patent is currently in litigation – of which Silverman has been highly critical of MGT’s legal strategy. MGT has online
slot machines and a billiards game that accepts cash wagers, and recently partnered with Vegas Insider to sell research for betting on
sports events.

After Iroquois made its PIPE investment in 2012, a press release campaign was launched to highlight MGT’s patent as a valuable economic
asset. The stock went up to $7 and Iroquois was able to sell some of its stock for a profit.

MGT’s stock started to drop in mid-2013. The slide has continued and MGT now trades around $1.20. Iroquois, known to issue vociferous
public critiques of the performance of CEOs in its portfolio companies, took an aggressive activist stance against Ladd in January. He called
Ladd and his CFO, Robert Traversa into his Manhattan office on Lexington Avenue.

According to Ladd and Traversa, Silverman pushed Ladd to allow some of “his people” on the board of MGT, and suggested a plan for Ladd
to step down as CEO, offering a financial incentive if he did. At the time of the January 15 meeting, MGT stock was trading near $3. Ladd
refused Silverman’s offer to step down or allow any of Silverman’s people on the board of his company. Ladd and Traversa say Silverman
then got verbally aggressive and told Ladd to his face, “I am going to crush you and drive your stock to 50 cents.” Silverman declined to
comment on the episode.

Silverman’s threat, if it was made, was not an empty one, given the close working relationship between Silverman, Spinner and Drillman.
According wiretap recordings acquired by the SEC in the Rhino Advisors case, Andreas Badian, the brother of Rhino’s general partner Tom
Badian, used Spinner and Drillman to crush the stock price of Sedona Corp through massive illegal short sales. According to the agency,

“…illegally directed defendants Spinner, Drillman and Graham to sell short massive amounts of Sedona stock with ‘unbridled levels of
aggression,’ intending to ‘clobber’ Sedona's stock price until it ‘collapsed.’ These three individuals concealed Amro's [Badian’s fund] identity
from the market, which permitted them to create the false appearance that individual investors were selling large amounts of Sedona's
stock. During March 2001, Badian directed trading in Sedona that comprised approximately 40% of all trading in the stock. During that
period, Sedona's share price dropped from an average of $1.43 a share before March 1, 2001, to an average of $.75 per share by March
23, 2001. “[PDF ( ]

In the recordings obtained by the SEC, Spinner is quoted as telling a colleague, “Want to short something illegally for twelve months? You
got my number.” 2/4
In February Ladd filed an 8-K announcing
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about Silverman’s “vague” offer and the board had declined it. Silverman responded shortly after, filing a lengthy public letter
( detailing his thoughts on Ladd’s “dismal” track record as CEO, citing “leadership incompetence, poor
governance, and poorly executed acquisitions.” He also expressed frustration with Ladd’s compensation.

Ladd told Growth Capital Investor after Silverman filed his letter of “doom and gloom” he did not receive any phone calls or emails from
Silverman to discuss some of the changes he suggested in his letter.

Last week Growth Capital Investor notified Silverman, Spinner, and the investment bank involved in the sale of the PIPE and RDO that the
private placements were being scrutinized, and asked each questions arising from the document trail of stock purchases, including
American Capital’s affiliation with Iroquois and Spinner. None responded.

On Monday, Silverman filed a 13-D stating his beneficial ownership of MGT is still only 9.99%. His common stock ownership increased by
52,962 shares and his warrants (for a strike price of $3) decreased by 23,590 shares. Silverman also filed another activist letter
( , repeating many of his earlier accusations against Ladd
and MGT management, this time adding his dismay that MGT would “resort to a ‘smear’ campaign” against Iroquois rather than address his
concerns directly.

“While our 13D amendment filing earlier this morning reflects an increased stake in the Company, our increased economic stake in MGT
should in no way be confused, or taken, as a vote of confidence in the Company’s management or board of director. On the contrary, it
continues to be our view that your track record in management, acquisitions and corporate governance is among the worst we have
witnessed in our investment career,” Silverman wrote.

Silverman states in the letter he is deeply troubled by the lack of response from senior management or the Board in the four months since
they last issued a public letter outlining their serious concerns at MGT. Ladd told Growth Capital Investor he found it odd Silverman is
calling for a response but has made no attempts to contact him in four months.

The letter points out MGT’s 2013 10-K disclosed dismal income with revenues down year over year and cost of revenues rising 200%.
Silverman writes, “A particularly scary fact is that the 2013 year end operating net loss (excluding all non-cash items) of $9.5 million is equal
to nearly 83% of MGT’s current market capitalization.”

Silverman doesn’t detail what the “smear campaign” is in his most recent letter but says, “These threats reek of desperation and illustrate
management’s attempts to entrench itself and avoid accountability for years of underperformance. Rest assured, we are not going away.”

Ladd says he thinks the letter was a public relations tactic because Silverman knew he was speaking to this reporter about Iroquois’
possible Section 16 violations. He says he has told Silverman he plans to go to regulators with his allegations and wants him to go to jail.

Demetrius Xistris, partner at Xistris & Associates, who has worked on PIPE transactions, told Growth Capital Investor, “Section 16
triggers off of beneficial ownership and there are complicated rules when there are common control issues at stake, but it’s unlikely that a
defense involving ‘lack of intention’ will be successful to defend a disgorgement case in the eyes of the SEC.”

For Ladd to have a successful Section 16 violation case he has to prove Iroquois, via its preferred stock voting rights and its economic
interest in American Capital Management, could have had “group control” with over 10% ownership of the stock. Xistris points out Ladd
wouldn’t need emails showing collusion to control a vote between Silverman, Spinner, or American Capital, just evidence of ownership.

Ladd’s legal hurdle is that Iroquois built blockers into the PIPE deal that prevent the fund from converting its preferred stock if total
ownership exceeds 9.99%. There is little case law regarding whether preferred stock that carries voting rights regardless of conversion
would count as ownership for the purposes of Section 16. If Ladd can also prove Iroquois was shorting the stock while holding more than
10% ownership it would be a serious violation of the law but right now he says he only has speculation.

As of June 9 SEC filings show Iroquois holds 765,196 shares, 9,273 convertible series A preferred shares, 155,446 warrants (exercise
price $3), which in aggregate represent 9.99% of the company’s fully diluted issued and outstanding common shares, without including any
of the 200,000 shares held by Iroquois’ American Capital affiliate. The hedge fund states its total economic interest in MGT is $1,025,833.

Richard Abbe, Silverman’s partner in the hedge fund, did not sign the recent 13D as he did in the previous quarter nor is he listed as a
beneficial owner any longer. Previous SEC filings show Richard Abbe has an economic interest in American Capital Management.

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