SEC Charges Penny Stock Financiers, 2 Public Companies with Illegal Unregistered Stock Distributions
The Securities and Exchange Commission filed a civil injunctive action in the United States District Court for the Middle District of Florida against Mark A. Lefkowitz, Compass Capital Group, Inc., Mark A. Lopez, Unico, Inc., Steven R. Peacock, Shane H. Traveller, and Advanced Cell Technology, Inc., alleging that they violated the federal securities laws in connection with the unregistered distribution of billions of shares of penny stocks through the repeated misuse of the exemption from registration contained in Section 3(a)(10) of the Securities Act of 1933.
Section 3(a)(10) provides an exemption from registration that permits a company to issue common stock to public investors “in exchange for one or more bona fide outstanding securities, claims or property interests” without having to file a registration statement “where the terms and conditions of such issuance and exchange are approved after a hearing upon the fairness of such terms and conditions” by any court or any governmental authority “expressly authorized by law to grant such approval.” The Complaint alleges that the Section 3(a)(10) exemption was not available for any of the stock offerings at issue because the terms and conditions of the exchanges – including the fact that the issuers were raising capital through such exchanges – were not fully disclosed to the court.
According to the Commission’s Complaint, in or about early 2006, Lefkowitz, a penny stock financier, devised a strategy for penny stock issuers to pay off past due debts while, at the same time, improperly raising additional capital in reliance upon Section 3(a)(10). According to the Complaint, Lefkowitz executed his illegal strategy with Lopez, the chief executive officer of Unico, a penny stock issuer based in California, and William Caldwell IV, the chief executive officer of Advanced Cell Technology, a penny stock issuer based in Massachusetts. The Complaint further alleges that Peacock and Traveller, two penny stock financiers who learned of the illegal strategy from Lefkowitz, executed the strategy with Unico and other penny stock issuers.
The Complaint alleges that from September 9, 2006 through January 29, 2009, in order to satisfy the fairness hearing requirement of Section 3(a)(10), more than fifty pre-settled lawsuits were filed in a Florida state court purportedly to settle past due debts owed by Unico, Advanced Cell, or other penny stock issuers (collectively, the “Penny Stock Issuers”) to Compass Capital Group and several offshore financing entities affiliated with Lefkowitz, and Sequoia International, Inc., an entity affiliated with Peacock and Traveller (collectively, the “Financiers”). The Complaint further alleges that in each case, one of the Penny Stock Issuers entered into a written settlement agreement with one or more of the Financiers whereby the Penny Stock Issuer agreed to issue unrestricted common stock to the Financiers at a substantial discount to the prevailing market price, purportedly to retire the past due debt. The settlement shares allegedly were worth multiple times more than the debt that was to be extinguished and the Financiers agreed to remit monies to the Penny Stock Issuer following the sale of the settlement shares to the public on the open market. According to the Complaint, none of the settlement agreements submitted to the court for approval, disclosed, nor did the parties ever apprise the presiding judges of, the existence of the side agreements, that the market value of the shares to be issued greatly exceeded the debts that were to be extinguished, or that significant sums of monies would be remitted to the Penny Stock Issuers as a result of the Section 3(a)(10) settlements.
According to the Complaint, at the conclusion of each of the hearings, the Florida state court granted a Section 3(a)(10) exemption from registration and, thereafter, unrestricted shares were issued to the Financiers, who quickly sold the shares on the open market to public investors unaware of the dilutive effects of the new stock issuances. Also according to the Complaint, the Financiers subsequently remitted millions of dollars to the Penny Stock Issuers, either directly or through an intermediary, as financing, making it an improper capital raising transaction for the Penny Stock Issuers.
The Complaint alleges that Unico extinguished approximately $4.0 million in past due debts but separately raised more than $9.2 million as a result of monies later remitted to it by the Financiers. Advanced Cell allegedly extinguished $1.1 million in debts while separately raising more than $3.5 million through monies later remitted by or on behalf of the Financiers. The Other Penny Stock Issuers allegedly collectively extinguished approximately $1 million in debts while separately raising more than $1.2 million. The Complaint also alleges that Lefkowitz and his affiliated entities profited by at least $1.7 million from these transactions and that Peacock and Traveller profited by at least $455,000.
The Complaint alleges that Unico filed false and misleading disclosures with the Commission concerning the monies it received from the Financiers and that Unico and Advanced Cell failed to timely disclose the settlement agreements and issuance of over 9 billion and 260 million unregistered shares of their respective common stocks in connection with the Section 3(a)(10) settlements. In addition, the complaint further alleges that Peacock, aided and abetted by Traveller, failed to report his beneficial ownership of more than five percent of the outstanding shares of Unico common stock in December 2006.
The Complaint charges all of the defendants with violations of the securities offering registration provisions, Unico and Advanced Cell with periodic reporting violations, Lopez for aiding and abetting Unico’s periodic reporting violations, Peacock with beneficial ownership reporting violations, and Traveller for aiding and abetting Peacock’s ownership reporting violations. The Commission seeks permanent injunctions, disgorgement of illegal profits with prejudgment interest, and civil penalties as to Unico, Advanced Cell, Peacock, and Traveller; a permanent injunction and a civil penalty as to Lopez; disgorgement of illegal profits with prejudgment interest and civil penalties as to Lefkowitz and Compass Capital; and an order barring Lefkowitz, Compass Capital, Lopez, Peacock, and Traveller from participating in any future offerings of penny stock.