Spinning Debt Into Profits Yields SEC Fraud Charges
A miller claimed his daughter could spin straw into gold, according to the fable by the Brothers Grimm. And so she did – with a little help from a secret deal with Rumpelstiltskin. A turnaround artist hired by two underwater companies claimed he could transform financial statements with losses into ones with profits. So he did — with a little help from a friend. The friend was not Rumpelstilstkin and worse – the SEC claimed fraud. SEC v. Fuselier, Civil Action No. 1:17-cv-04240 (S.D.N.Y. Filed June 6, 2017).
David Fuselier is president of Fueslier and Company which provides capital and strategic guidance to firms with revenues under $300 million, according to its advertisements. His friend and co-defendant Roy Erwin was the chairman and CEO of Oncologix Tech, Inc., a firm that specializes in surgical and medical instruments and apparatus.
In 2012 Mr. Fueslier became the Chairman, COO and CFO of defendant Integrated Freight Corporation and New Leaf Brands, Inc. The former is a holding company that provides long haul, regional and local motor freight services through two operating subsidiaries, Morris Transportation, Inc. and Smith Systems Transportation, Inc. Its shares, registered with the Commission, are quoted on OTC Link. New Leaf at one time claimed to be a diversified beverage company whose shares were also quoted on OTC Link. Its state of incorporation has revoked the firm’s charter. The Commission has revoked its registration.
Mr. Fueslier began planning the restructuring of New Leaf and Integrated Freight shortly after assuming his responsibilities at each firm. He crafted a plan to improve the appearance of each firm’s financial condition by selling their non-operating subsidiaries to a purchaser that would assume each firm’s liabilities and furnish an indemnification to each parent company. The key to achieving this goal was to find a buyer for the subsidiaries despite the fact that they had no operations, no unencumbered assets and substantial liabilities.
Enter Mr. Erwin. Mr. Fueslier had his business associate work with Mr. Erwin to form Deep South LLC, a Louisiana limited liability company, in early 2012. Deep South had no assets. It would become a willing buyer – the firm had nothing to lose.
By April 9, 2012 New Leaf completed the sale of subsidiary Nutritional Specialties, Inc. to the newly formed entity. Under the terms of the deal, disclosed in filings made with the Commission, Deep South paid $1.00 and assumed certain liabilities. New Leaf also issued the firm 6,000,000 shares of stock. The transaction reduced New Leaf’s liabilities by $1 million. Deep South also agreed to indemnify and hold New Leaf harmless for any liability arising out of the transaction. As of June 30, 2012 Integrated completed a similar deal.
The deals did more than just significantly reduced the liabilities – straw became gold. New Leaf’s anemic financial statements took on new vigor. A June 30, 2012 a New Leaf filing reported a net loss from continuing operations of $758,490. The firm had a gain, however, on the disposal of discontinued operations which offset the loss. New Leaf had net income of $218,562.
Integrated also transformed its financial statements. In a filing made at the end of March 2013 the firm reported net income from continuing operations of just over $451,000. That amount increased after including a gain on the disposal of discontinued operations to over $4,800,000.
The disclosures about the transactions involving New Leaf, Integrated and Deep South did not mention the fact that New South was a shell firm and had no ability to assume the liabilities transferred in the deals. The disclosures also did not reveal that New South had no ability to honor the guarantees given in each transaction. Likewise the filings did not mention the fact that the deals were related party transactions in view of Mr. Fuselier’s role or, in essence, shams. Nevertheless, Mr. Fuselier executed all of the filings for each company as well at the required SOX certifications.
The Commission’s complaint alleges violations of each subsection of Securities Act Section 17(a), Section 15(b) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 20(e) and Rules 13b2-2 and 13a-14a. Mr. Erwin settled with the Commission, agreeing to be barred from serving as an officer or director for three years and to a penny stock bar. He will also pay a penalty of $25,000. See Lit. Rel. No 23855 (June 8, 2017).