SEC Charges Microcap Companies & Individuals for Improperly Raising Capital While Harming Investors - www.lawfuel.com - Aug. 7 2008

SEC Charges Microcap Companies & Individuals for Improperly Raising Capital While Harming Investors

Posted on Thursday, August 07, 2008

Washington, D.C., Aug. 7, 2008 (LAWFUEL) – The Securities and Exchange
Commission has charged six microcap companies, four company officers
and several market professionals for their roles in a scheme to raise
millions of dollars in capital through improperly registered stocks to
fund the companies’ struggling businesses.

In
four separate enforcement actions, the SEC alleged that these public
offerings dumped billions of shares on the market through so-called
employee stock option programs. These share offerings were improperly
registered on Form S-8, which is a simplified registration statement
used for compensating employees and consultants. In fact, the programs
functioned as public offerings in which the companies used their
employees as conduits to the market so that they could raise capital
without complying with the securities laws. They then received at least
85% of the proceeds from the shares’ sales as payment for the options’
exercise price. The SEC further alleged that one of the companies,
Global Materials & Services, Inc., and its former officer, Stephen
J. Owens, committed securities fraud when they issued shares to sham
consultants who then kicked back over 60% of the shares’ sales proceeds
to Owens and his other businesses.

“In bringing these charges,
the Commission is sending the clear message that it will not only
aggressively pursue companies that violate the registration provisions,
but also the gatekeepers who provide a roadmap for violating these
provisions,” said George Curtis, Deputy Director of the SEC’s Division
of Enforcement.

Merri Jo Gillette, Regional Director of the
Chicago Regional Office, added, “Form S-8 offerings, when used
legitimately, give companies a streamlined method of compensating
employees with stock. The Commission’s actions allege that the
defendants abused this offering process to sell stock to the general
public without providing necessary disclosures.”

According to
two SEC complaints filed on August 6 in federal district court in
Orange County, Calif., Global Materials and five other companies –
Angel Acquisition Corp., Marshall Holdings International Inc., NW Tech
Capital Inc., Winsted Holdings Inc., and Zann Corp. – improperly
registered shares issued under their employee stock option programs on
SEC Form S-8 registration statements. The Commission also charged
Marshall Holdings’ officers Richard A. Bailey and Florian R. Ternes and
Winsted Holdings’ former officer Mark T. Ellis with implementing and
administering their companies’ employee stock option programs.

Form
S-8 statements may be used to register shares issued to compensate
employees and consultants and have abbreviated disclosure requirements
as compared to statements registering shares used to raise capital. The
SEC alleges, however, that the programs violated the registration
requirements of the Securities Act of 1933 by functioning as public
offerings that raised capital.

The SEC’s complaints further
alleged that the companies’ programs had features that, taken together,
virtually guaranteed that the options would be exercised and the
underlying shares simultaneously sold to the public at or near the time
the options were granted. First, the options’ exercise price, which was
typically set at 85 percent of the sale proceeds from the options’
underlying shares, floated with the market value of a company’s stock
at the time of exercise. Second, the options vested immediately,
meaning that no conditions needed to be met before the options could be
exercised. Third, a cashless exercise method was used so that the
exercise price was paid from the sale proceeds of the underlying shares
rather than directly by the employees. Other than opening brokerage
accounts and signing blank letters of authorization, the companies’
employees made no decisions regarding the options’ exercise or the sale
of the underlying shares during the course of the programs.

The
Commission today instituted cease-and-desist proceedings against
Alexander & Wade, Inc. (AWI), a San Diego investment banking firm,
and its agent James Lee for causing the registration violations. AWI
and Lee allegedly introduced the programs to the companies and advised
them on how to implement and administer the programs.

The
Commission also instituted administrative and cease-and-desist
proceedings against Finance 500, Inc., a brokerage firm located in
Irvine, Calif. The Commission found that Finance 500 provided the
brokerage services for the employee stock option programs despite red
flags indicating that the employees were being used as conduits.
Finance 500, without admitting or denying the SEC’s findings, consented
to the issuance of an order censuring it, ordering it to cease and
desist from committing or causing future registration violations, and
requiring payment of $271,484 in disgorgement and $74,015 in
prejudgment interest.

Five companies charged – Angel
Acquisition Corp., Global Materials, NW Tech, Winsted Holdings, and
Zann Corp. – settled the SEC’s charges without admitting or denying the
allegations. They all consented to being permanently enjoined from
future registration violations, and Global Materials also consented to
being permanently enjoined from future fraud violations based on the
SEC’s allegations that it fraudulently used Form S-8 to enrich Owens
through the use of sham consultants.

The Commission’s investigation is continuing.