March 29, 2020

High & Low Finance: S.E.C. Charges Company That Filed Under JOBS Act With Fraud

In its prospectus, a penny stock named Caribbean Pacific Marketing proudly described itself as an “emerging growth company” when it began to sell shares to the public this summer.

To someone uninitiated to the Orwellian nature of recent legislation, that phrase might have seemed downright deceptive. As the prospectus made clear, it was not a growth company; it was barely even a company at all. It hoped to start a business with the proceeds from the offering.

But that phrase was enshrined in legislation officially called the JOBS Act, which Congress passed and the president signed this year in an unusual display of bipartisanship.

Now, Caribbean Pacific Marketing — a company without revenue since it was created earlier this year — appears to have become the first “emerging growth company” as defined by the JOBS Act to have prompted charges of securities fraud by the Justice Department and an effort by the Securities and Exchange Commission to halt sales of the stock. The government claims a disbarred lawyer from Boca Raton, Fla., is really behind the company.

Those charges came two months after the S.E.C. allowed the company to begin selling shares under a prospectus that the government now says it knew to be inaccurate.

The Jumpstart Our Business Start-ups Act defined nearly every business in the United States as an “emerging growth company.” No growth was needed to qualify as such a company, only that it must have less than $1 billion in assets, less than $700 million in shares in public hands and less than five years as a public company. Such companies could sell stock to the public with fewer restrictions, and then report less information to their shareholders than was required from normal companies.

The idea was that numerous new companies would get financing, and in that way promote job growth. Critics warned that some provisions might simply make it a lot easier to commit securities fraud. Alternate titles like “Jumpstart Our Bilking of Suckers Act” were suggested.

It is far too soon to pronounce on the act’s success. The S.E.C. has yet to issue some important rules, so innovations like crowdfunding, whereby it becomes legal to market possible offerings to anyone on the Internet before a registration statement has been filed, have yet to get off the ground. Some of the companies that have gone public under the JOBS Act provisions have done well in subsequent trading.

Caribbean Pacific was formed in January, selling 20 million shares of stock to insiders for $30,000. After expenses for things like a Web site saying it plans to sell “the finest all-natural sun care and skin care products,” it had precisely $20 left at the end of June.

The company planned to sell up to one million new shares to the public at 15 cents each, 100 times what the insiders paid. The S.E.C. allowed the offering to begin in August, but it is not clear how many shares have actually been sold. The company said over-the-counter trading would begin as soon as 500,000 shares were sold, something that has not happened. It promised that if the minimum number of shares were not sold within nine months, it would return the money to the buyers.

The strategy may have never actually called for that offering to succeed at all. It appears that some of those insider shares were being sold privately, with the promise that the buyers could earn a quick profit by reselling them as soon as the company went public. Such sales would not be legal.

Last week the Justice Department charged that the disbarred lawyer, William J. Reilly, had been trying to sell shares before the offering became effective. Unfortunately for him, he did sell some shares — at 5 cents each — to a buyer who turned out to be working with the F.B.I. In the complaint filed in Federal District Court in Miami, an F.B.I. agent stated the bureau has been conducting, with the S.E.C., “an ongoing undercover investigation targeting penny stock fraud in Florida.”

The complaint stated that Mr. Reilly claimed to own 9.2 percent of the company’s shares, although the prospectus, in its list of people who owned at least 5 percent, did not mention him. The S.E.C. action, announced this week, claimed that Mr. Reilly secretly controlled the company and asked that an administrative law judge halt the public offering.

Mr. Reilly previously settled — without, of course, admitting or denying he actually violated any laws — an S.E.C. suit claiming he had done something similar at other penny stock companies, allowing insiders to sell restricted shares when they should not have been permitted to do so. He was ordered to comply with the law in the future and barred from practicing as a lawyer before the S.E.C. Last year, the S.E.C. filed another suit, claiming he was continuing to act as a securities lawyer for another penny stock company based in Boca Raton. In March of this year, a federal judge ordered him to comply with the original injunction. In May, he was disbarred for “misappropriating” money held for a different corporate client.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Article source: http://www.nytimes.com/2012/11/02/business/sec-charges-company-that-filed-under-jobs-act-with-fraud.html?partner=rss&emc=rss