Former CEO Of Cosmetic Company Charged With Defrauding Public Company And Its Shareholders

United States Attorney for the Southern District of New York, Jay Clayton, and the Inspector in Charge of the New York Office of the U.S. Postal Inspection Service ("USPIS"), Ketty Larco-Ward, announced today the unsealing of an indictment charging JAIME CASTLE, former Chief Executive Officer ("CEO") of Obagi Cosmeceuticals LLC ("Obagi") with conspiracy, securities fraud, wire fraud, and false statements to auditors and improperly influencing an audit. CASTLE led a scheme to fraudulently inflate Obagi's purported sales of cosmetic products to give the false impression that Obagi was a growing company. CASTLE used that fraudulently inflated revenue to deceive a public company that acquired Obagi, called Waldencast Plc ("Waldencast"), and its shareholders, obtaining a $2 million cash bonus for arranging the acquisition. Once her scheme was uncovered, Waldencast had to restate its revenue by more than $50 million as a result of Castle's fraud.

CASTLE was presented Tuesday before Judge Lehrburger. The case has been assigned to the Honorable John G. Koeltl.

"Jaime Castle allegedly defrauded a public company and its shareholders by ginning up fake revenue to suggest growth that did not exist," said U.S. Attorney Jay Clayton. "Castle then lied to auditors to try to keep her scheme from being uncovered. Today's indictment is a reminder that this Office and our law enforcement partners will not hesitate to go to the C-suite to root out fraud and false statements in our business community."

"Ms. Castle allegedly used the U.S. Mail to facilitate her criminal activity, swindling her unsuspecting investors by providing them false information about her company," said USPIS Inspector in Charge Ketty Larco-Ward. "The U.S. Postal Inspection Service will work tirelessly to expose these investment scams and protect the public from individuals, who use deceptive tactics to make a profit."

According to the allegations in the Indictment unsealed on Tuesday in Manhattan federal court:[1]

From at least in or about 2021 through at least in or about 2023, CASTLE orchestrated a scheme to enrich herself by fraudulently inflating Obagi's revenue and financial performance in order to defraud Waldencast and its shareholders. CASTLE, the CEO of Obagi, created the illusion that Obagi was a growing company by artificially inflating purported sales of cosmetic products to a Vietnamese distributor ("Distributor-1"), even though CASTLE knew that Distributor-1 could not pay for and, in many cases, had no need for those products. This illusion of growth made Obagi appear to be an attractive acquisition target for Waldencast and for Waldencast's shareholders, who voted to approve a merger with Obagi in July 2022. CASTLE received a bonus of over $2 million for the successful completion of that merger. She then continued to lie to Waldencast's management, shareholders, and auditors about Obagi's sales and revenue, in the hopes of receiving additional bonuses and to conceal her scheme. When Waldencast discovered CASTLE's scheme, it restated Obagi's revenue for 2021 and 2022, showing that more than $50 million in revenue had been fraudulently reported based on CASTLE's lies.

Despite the fact that Distributor-1 had a long history of failing to pay amounts owed for Obagi products, routinely violated the provision of her distribution agreement with Obagi requiring timely payment, and was holding a backlog of unsold product, CASTLE pushed ever greater quantities of product to Distributor-1, which Distributor-1 did not need and could not sell or pay for, to create the appearance that Obagi was a growing company.

CASTLE's lies caused Waldencast to file publicly and with the SEC financial information about Obagi that was not true, including-shortly before Waldencast's shareholders voted to approve the merger with Obagi- that Obagi had "[o]ver-delivered on topline" in 2021 and had "[s]trong momentum" in 2022 "with Q1 outperforming versus budget and last year." Meanwhile, in private messages CASTLE acknowledged the exact opposite, writing in text messages that Obagi was "getting almost no payments [and] it's becoming a massive issue for us" and that she had "been trying to keep how bad the account standing [is] under wraps." She also acknowledged that "[Distributor-1] has a ton of inventory" and that CASTLE was "not sure how to handle [the situation] without sounding every alarm and scar[]ing everyone in the company."

After Waldencast's shareholders approved the merger with Obagi, CASTLE continued to lie about the company's financial situation to Waldencast executives and its auditors. But eventually her scheme was uncovered. Between January and March 2024, Waldencast issued multiple restatements to financial reports that it issued in 2021 and 2022. Those restatements had the effect of, among other things, reducing revenue from Obagi's sales to Distributor-1 by over $14 million for 2021 and by over $40 million for 2022.

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CASTLE, 46, of Conroe, Texas, is charged with conspiracy to commit securities fraud, wire fraud, make false filings, and false statements to auditors, which carries a maximum sentence of 5 years in prison; securities fraud, which carries a maximum sentence of 20 years in prison; false statements to auditors and improperly influencing the conduct of audits, which carries a maximum sentence of 20 years in prison; and wire fraud, which carries a maximum sentence of 20 years in prison.

The minimum and maximum potential sentences in this case are prescribed by Congress and provided here for informational purposes only, as any sentencing of the defendants will be determined by the judge.

Mr. Clayton praised the outstanding work of the U.S. Postal Inspection Service. Mr. Clayton further thanked the U.S. Securities and Exchange Commission.

This case is being handled by the Office's Securities and Commodities Fraud Task Force. Assistant United States Attorneys Thomas Burnett, Courtney Heavey, and Allison Nichols are in charge of the prosecution.

The charges contained in the Indictment are merely accusations, and the defendants are presumed innocent unless and until proven guilty.