Jury Finds for Commission In Action Centered on Sham Transactions
Last week a jury in the Central District of California found in favor of the Commission in a case that varied significantly from the all too familiar offering fraud actions the agency has focused on recently. In that case the fraudsters did not sell the shares to the unsuspecting public with tales of riches never to be realized. To the contrary, the Commission alleged that the fraudsters actually misappropriate the shares of stock from a company they controlled. What were essentially sham transactions were then used to sell the shares into the open market and route the money back to the COB and his CEO wife. The jury found the defendants liable for violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Sections 10(b) and 20(a). SEC v. Curative Biosciences, Inc., Civil Action No. 18-cv-925 (C.D. Cal. Verdict March 11, 2020).
Curative Biosciences is a microcap issuer with a long and checkered past. The firm’s names included Recent Services, Time Lending, Time Associates, Healthieny, and others. Additional defendants in the action included William Alverson, a securities law recidivist who pleaded guilty in 2015 to criminal violations of Securities Act Section 5 who was sentenced to prison; Stephen Patton, the owner of Charlie Don’t Surf, Inc. and Surfside; and Katherine West Alverson. Mr. Alverson was the Chairman of the Board of Curative Biosciences. Ms. Alverson, the Chairman’s wife, was the CEO of the firm.
In the fall of 2013 Curative Biosciences filed a Form 10-K with the Commission which stated in part that the firm had previously registered and issued 20.5 million under an equity compensation plan on Form S-8. In fact, over 17 million shares were issued to Mr. Patton. He had performed negligible services for the shares. Most of the funds from the sale of the shares were sent to Mr. Patton’s firm, Northeast Capital. Much of the money ended up with Defendant Alverson.
The filings also claimed that Curative Biosciences could issue 19.1 million shares of common stock under Securities Act Section 3(a)(10) with the approval of a reviewing court to discharge $95,000 in claims against the company by a third party and non-party to a legal action filed against the firm. The third party was Mr. Patton’s Surfside. The shares issued had a value of about 18 times the amount of the debt. The shares were sold with most of the funds being routed back to Mr. Alverson.
Months before the Form 10-K filings, the Company, and its COB and CEO sold about 7 million shares of the stock supposedly under Securities Act Section 3(a)(10). The terms and conditions of the issuance that should have been disclosed to a reviewing court when seeking authorization for the issuance. There was no disclosure.
Overall about 33 million shares of Company stock was sold. Most of the proceeds were routed back through Mr. Patton and or his entities to the Chairman and his wife. The jury returned verdicts in favor of the Commission.