Xybernaut Stock Sold Like Its Computers Didn't

By Jerry Knight
Monday, May 2, 2005

As a maker of "wearable computers," Xybernaut Corp. of Fairfax has been far more successful at selling stock than selling computers.

Xybernaut has sold fewer than 10,000 of its purse-size computers, but more than 200 million shares of its penny-priced stock.

Losing money quarter after quarter -- $162 million since 1990 -- Xybernaut has been able to stay in business largely by printing and selling more stock whenever its bank account runs low.

Now the stock-printing press is effectively shut down and authorities are investigating.

Criminal charges have been filed in New York against three men accused of defrauding investors out of $16.8 million in the sale of Xybernaut stock.

The chief target of the 64-count federal indictment is John Marciano, a former Long Island stockbroker who was the chief executive of the brokerage firm that managed Xybernaut's initial public offering in 1996.

Xybernaut is not a defendant in the New York criminal case, nor are any of its past or present officers. Law enforcement sources and Xybernaut officers would not discuss whether there are connections between the New York case and two current investigations of Xybernaut. Xybernaut disclosed recently that the Securities and Exchange Commission has subpoenaed company records, including those of securities sales, and that the U.S. attorney in Alexandria is conducting a separate inquiry.

Xybernaut said in a news release on April 19 that chairman and chief executive Edward G. Newman "improperly used substantial Company funds for personal expenses," that members of his family were "hired and evaluated/not evaluated in direct violation of the Company's anti-nepotism policy" and that major "transactions were entered into by certain members of senior management in violation of Company internal controls." Edward Newman and his brother Steven A. Newman, the president and chief operating officer, were fired by the board of directors.

The company remains in turmoil. It laid off half its staff. Its auditor, Grant Thornton LLP, quit. And Xybernaut warned in an SEC filing that it faces "a severe liquidity crisis and possible insolvency."

In the New York case, Marciano is accused of securities fraud, conspiracy to commit securities fraud, conspiracy to commit money laundering and money laundering involving a series of Xybernaut stock transactions that began before the company went public and allegedly continued for several years thereafter.

Marciano and his two co-defendants were indicted in secret last summer by a federal grand jury in Brooklyn. The indictment was kept sealed until December and went unnoticed until it was reported recently by Newsday, the Long Island newspaper.

The indictment was initially kept under wraps because the case is part of an ongoing investigation, said a spokesman for Roslynn R. Mauskopf, the U.S. attorney for the Eastern District of New York, which includes Brooklyn, Queens and Long Island. The spokesman would not comment on why the case has become public now, just as other investigations of Xybernaut are being disclosed.

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