SEC Continues to Focus on Microcap Fraud

by Dorsey & Whitney LLP
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Microcap fraud is a continuing enforcement priority for the SEC. Last week, for example, the Commission brought an action centered on what would have been a pump and dump scheme but for the fact that the shell company was controlled by an FBI informant and the SEC stepped in at the last moment and suspended trading.

Now the agency has brought an action centered on microcap fraud schemes tied to a repeated fraudster, SEC v. Plummer, Civil Action No. 14 CV 5441 (S.D.N.Y. Filed July 18, 2014). The action names as defendants: Christopher Plummer, the CEO of Franklin Energy and Madison & Wall Investments, LLC, who has two prior convictions for fraud based offenses and is currently serving 51 months in prison following his guilty plea to fraud charges in another, unrelated case; Lex Cowset, the CEO of CytoGenix, Inc., a microcap pharmaceutical company; and GyroGenix.

The first scheme centers on Company A and Mr. Plummer. Company A portrayed itself as a security company that used technology such as encryption software and video surveillance systems for actionable surveillance and intelligence monitoring.

In 2009 Company A announced that it would focus on renewable energy and medical testing using nanotechnology. Subsequently, the firm announced that it was also developing solar energy farms through a joint venture with Franklin Energy, a subsidiary of Franklin Power & Light LLC, a retail electricity provider purportedly operated by Mr. Plummer. The joint venture was to build, own and operate solar energy farms across the United States beginning as early as the latter part of 2010.

A series of press releases and web site postings were made touting Company A and the potential of the joint venture. In fact neither Franklin nor Company A had the resources that were claimed in the press releases. There were no resources to implement the plans of the joint venture. Nevertheless, the press releases and web postings had a significant market impact, according to the complaint.

A second scheme involved CytoGenix. Prior to its affiliation with Mr. Plummer the company held it self out to be a developer of biotechnology derived products for vaccines and therapeutic applications for human, agricultural and veterinary markets. In 2010 Mr. Plumber approached the firm about a partnership with Franklin. After Mr. Cowsert agreed a press release dated August 16, 2010 was issued. It announced the formation of a company subsidiary called BioEnergy that would operate as a joint venture partner with Franklin. The venture would be run by Mr. Plumber. Its purpose was to identify, evaluate and develop biologically based technologies for energy production.

In the Fall of 2010 CytoGenix sold private placement shares tied to its partnership with Franklin. About $330,000 was raised through this offering. Investors were told the funds would be used to help develop the joint venture.

In fact the claims about the venture and the entities were false. CytoGenix was financially distressed, having lost all its intellectual property in an earlier litigation, contrary to representations made in press releases about the firm. Franklin was essentially a sham, also contrary to representations made about the company. And, the proceedings of the offering were not used for the purpose told to investors. Indeed, no shares were ever issued to investors and Messrs. Plummer and Cowsert misappropriated the funds. The Commission suspended trading in the shares of CytoGenix in 2011.

The complaint alleges violations of Exchange Act Sections 10(b) and 20(b) and Securities Act Section 17(a). The case is in litigation. See Lit. Rel. No. 23047 (July 18, 2014).

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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