CEO & Attorney Accused of Taking Kickbacks

FAIRFAX, Va. (CN) - Two Israeli men secretly gained control of Xybernaut Corp., a maker of "wearable computers," and profited from short sales in its stock, while paying millions of dollars in kickbacks to CEO Steven Newman and Xybernaut's director and "outside general counsel" Martin Weisberg, the company claims in Fairfax County Court.

Xybernaut declared bankruptcy in 2005. It sued as a reorganized debtor in possession, seeking money to be distributed "to satisfy administrative claims and professional fee claims, general unsecured creditor claims, and allowed equity interests."

Xybernaut claims that its "wearable computers" have military applications.

It claims that from 2001 to 2005, Israeli investors Zev Saltsman and Menachem Eitan invested $67 million in Xybernaut in PIPE transactions (private investment in public equity). In doing do, they gained control of 85% of Xybernaut shares issued during the period, and far more than the 5% control that triggered requirements that they declare this interest with the SEC, which they failed to do, according to the complaint.

Citing SEC filings, Xybernaut claims that Saltsman and Eitan made "illicit profits of approximately $39 million" in Xybernaut trades, including short sales.

"To ensure access to future PIPE deals and maintain control over Xybernaut, Saltsman and Eitan paid undisclosed kickback bribes to defendants Weisberg and Newman," the complaint states. Newman allegedly was paid $2.4 million in 2003-04, and Weisberg $1.7 million in that time.

Xybernaut demands $50 million in damages.

It also sued Troutman Sanders LLP, Krieger & Prager LLP, and Pond Securities Corp. dba Pond Equities Corp.

Weisberg became a partner in Troutman Sanders on April 1, 2005, and that firm hired many of the attorneys from Weisberg's former firm, Jenkens & Gilchrist Parker Chapin, the New York branch of the Texas-based law firm Jenkens & Gilchrist, according to the complaint.

Krieger & Prager allegedly "represented investors in numerous PIPE transactions with Xybernaut."

Pond Equities "is a registered broker-dealer who directed the transfer of Xybernaut share and PIPE funds on behalf of its clients who invested millions of dollars in Xybernaut," according to the complaint.

Xybernaut is represented by Philip J. Walsh & Associates of McLean, Va.

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