Risk & Compliance

Microcaps Charged in Capital-Raising Scam

The SEC charges a half-dozen tiny companies, inclduding two CFOs, with dumping billions of improperly registered shares on to the market.
Kate PlourdAugust 7, 2008

The Securities and Exchange Commission charged six microcap companies on Thursday for their roles in an alleged scheme that put billions of improperly registered shares into the public markets. Microcap are the smallest public companies in terms of market capitalization that still meet exchange listing requirements.

The SEC charged that from mid-2002 to mid-2005 Angel Acquisition Corp., Global Materials, NW Tech, Marshall Holdings International, Winstead Holdings, and Zann Corp. used their employees as conduits to illegally raise money by selling shares through employee stock options programs that were improperly registered on Form S-8—the form used to register employee and consultant compensation. The companies, says the SEC, then received most of the proceeds from the shares as payment for the exercise price of the options.

In the complaints filed on August 6, in U.S. District Court for the Central District of California in Orange County, California, the SEC asserts that the scheme functioned like a public offering as companies issued the stock to raise capital with out having to abide by federal securities laws.

The officers charged in the scheme are Mark T. Eillis who served as CEO, CFO, president, secretary, director and controlling shareholder at Winsted Holdings, and two executives from Marshall Holdings — CEO, CFO, president and chairman Richard A. Bailey and chief operating officer and director Florian R. Ternes.

The SEC also charged that Global Materials’ former CEO Stephen J. Owens committed securities fraud when the company issued stock to phony consultants who kicked back more than 60 percent of the share proceeds to Owens and his other businesses after they were sold.

Cease-and-desist orders were also issued by the SEC against San Diego-based investment bank Alexander & Wade Inc., and its agent James Lee, for purportedly abetting the six companies in their sham transactions. The bank and Lee were charged with allegedly introducing the companies to the programs and telling them how to carry out the scheme. Also, the SEC found that Irvine, Calif.-based brokerage Finance 500, Inc. provided services to the companies even though there were significant signs that the stock options programs were being used improperly.

Five of the six companies charged settled with the SEC and consented to be permanently enjoined from future registration violations. Global Materials also consented to be enjoined from future fraud violations. With out admitting or denying guilt, Finance 500 consented to the cease-and-desist orders and agreed to pay $271,484 in disgorgement and $74,015 in prejudgment interest.

Attorneys for each of the companies and officers did not immediately return phone calls seeking comment. The SEC says it is still investigating the matter.