SEC Files Another Offering Fraud Action
Offering frauds continue to be the focus of the SEC Enforcement Division. Echoing claims from other recent cases, such as In the Matter of Scuderi Group, Inc., Adm. Proc. File No. 3-15344 (Filed May 30, 2013) (repeated share placements made under a claimed exemption which were one years long unregistered offering) Michael Bartoszek and his controlled entity, Laidlaw Energy Group, Inc., sold company shares in 35 unregistered tranches over a period of four years. In fact the sales were one integrated, illegal offering. SEC v. Laidlaw Energy Group, Inc., Civil Action No 13 Civ 3837 (S.D.N.Y. Filed June 5, 2013).
Laidlaw was founded in 2002 by Mr. Bartoszek. The company intended to build a portfolio of facilities that would produce power by burning wood chips and other organic wastes. It acquired one facility in 2006 which was not viable two years later. Interest in another was acquired and sold in 2010.
From inception Laidlaw only had two sources of revenue. The 2010 sale referenced above and stock sales. While a public relations firm was retained and positive press releases were issued, investors were not told negative facts such as the firm’s lack of a revenue source. Likewise, investors were not told that in 2007 the outside auditors issued a going concern opinion.
Despite the lack of revenue, beginning in 2005 or 2006 the firm developed a relationship with a group identified only as the Purchasing Entities. At the time Laidlaw’s shares were quoted by the OTC Markets Group, Inc., formerly known as the Pink Sheets. Between August 2006 and January 2010 Laidlaw sold approximately 2 billion shares to the Purchasing Entities in 35 unregistered offerings. The firm was paid $1,259,550 in cash for the shares. No registration statement was in effect. While the transactions were purportedly made based on Rule 504(b)(1)(iii), that exemption only applies to limited offers not exceeding $1 million if other conditions are met. Here Laidlaw’s solicitations were, in effect, one continuous offering which exceeded the dollar limitations of the Rule, according to the complaint.
The Purchasing Entities almost immediately resold the shares acquired from the company in the secondary market. Mr. Bartoszek knew that this was the intent of the Purchasing Entities. Nevertheless, in Form 10 registration statement with the Commission in January 2010 for Laidlaw shares the Purchasing Entities were represented as holding over 80% of Laidlaw’s shares. Later the Form 10 was withdrawn before it became effective.
Later that same year Mr. Laidlaw filed a Form S-1 registration statement for Laidlaw with the Commission for a secondary offering of common stock. This registration statement repeated the same false claim as the Form 10 regarding the share ownership of the Purchasing Entities. The misrepresentation was omitted in a subsequent amendment.
In two three month periods between December 2009 and June 2011 Mr. Bartoszek sold shares of the company which constituted over 1% of the float. At the time of the transactions Laidlaw was not a reporting company and, according to the complaint, the market price did not reflect the true condition of the company. This resulted from the fact that the periodic press releases and internet postings of the company rarely disclosed any negative facts. Thus the share price reflected the positive information released by the company.
The complaint alleges registration violations and insider trading, citing Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is in litigation. See also Lit. Rel. No. 22714 (June 5, 2013).
ABA Seminar: Fifth Annual FCPA Update: Protecting Your Business in the Future: Lessons from the New DOJ-SEC FCPA Guide, June 19, 2013 from 1:00 -2:30 p.m. EST. The discussion will focus on building effective compliance systems and conducting M&A due diligence. Co-moderators: Thomas Gorman and Frank Razzano. Panel: John Buretta, Principal Deputy to the Assistant AG, DOJ; Charles Cain, Assistant Director, FCPA Unit, SEC Division of Enforcement; Catherine Razzano, Assistant General Counsel, General Dynamics Corporation; Steve Siegal, Senior Counsel, Northrop Grumman Corporation; Ryan Ong, President, U.S. China Business Counsel. Live in Washington, D.C at 600 14th St. N.W., Penthouse (no charge for ASECA members attending live in Washington who pre-register by sending an e-mail to cvitko.diane@dorsey.com). Webcast nationally by the ABA and available in other Dorsey & Whitney offices. For further information please click here.