Securities

Former Adjunct Business School Professor, His Firm, the Placement Broker and Its Managing Partner Named in SEC Offering Fraud Actions

 The Commission instituted administrative proceedings centered on an offering fraud orchestrated by a former adjunct Professor at Columbia Business School who taught, and previously specialized in, turning around troubled companies, along with his firm. Related actions were instituted naming the broker-dealer that served as placement agent its managing partner who was in charge of the relationship. In the Matter of Navagate, Inc., Adm. Proc. File No 3-16118 (October 31, 2014); In the Matter of Gregory Osborn, Adm. Proc. File No. 3-16229 (October 31, 2014); In the Matter of Middlebury Securities, LLC,Adm. Proc. File No. 3-16227 (October 31, 2014).

Navagate claimed to be a New York based creator and seller of computer software that provided sales force automation to financial services organizations. Respondent Gregory Rorke is the co-founder of the firm. Since1989 Mr. Rorke specialized in turning around companies facing financial difficulties and building new businesses. From 1997 through 2012 he served as an adjunct professor at Columbia Business School where he taught turnaround management, bankruptcy and restructuring in the MBA program.

Mr. Rorke formed the predecessor to Navagate in 2000. The firm developed software into a program known as Agility Source Platform which claimed to provide customer relations management and sales force automation software.

In October 2009 Navagate retained Middlebury Securities LLC, a FINRA registered broker dealer, as placement agent. Its managing partner who handled the account was Gregory Osborn. The plan was to sell Notes with a six month maturity that paid an annual rate of 12%. The rate increased in the event of a default. The Notes were planned as bridge financing to raise between $2 and $2.5 million – later increased to $3.25 million — to an eventual IPO. Between December 2009 and April 2011 Middlebury and Mr. Osborn sold about $3.2 million in Notes.

Key to the sale of the Notes was the personal guarantee of Mr. Rorke. The initial drafts of offering documents, prepared in November 2009, contained a general personal guarantee from Mr. Rorke. A request for a similar guarantee by Mr. Rorke’s wife from aa potential investor was refused, although Mr. Rorke did agree to provide more a more detailed financial statement.

In April 2010 Middlebury’s attorneys inserted the Personal Guarantee in the Offering Documents along with a Personal Financial Statement signed by Mr. Rorke. The documents represented that he had no liabilities except those disclosed and that the listed assets were in his name only. The assets included cash, marketable securities, real estate, shares of Navagate and illiquid investment that totaled over $12 million.

For the most part, the assets pledged as collateral did not belong to Mr. Rorke. Most of the assets were titled or belonged to his wife. She did not execute a guarantee. The value of the assets was also inflated while the claim that Mr. Rorke did not have any liabilities omitted the over $1 million in taxes owed to the IRS.

In January 2010 Middlebury and its lawyers uncovered approximately $543,000 of outstanding tax liens. Mr. Rorke and his firm represented that the tax liabilities would be extinguished within two weeks without disclosing that they were substantially more than those discovered by the broker and its lawyers. The tax liabilities were not paid down. To the contrary, the broker and its lawyers discovered more. The liabilities also increased, reaching about $1.8 million.

Mr. Rorke agreed to amend the offering documents after being confronted. While many investors were given amended disclose documents, those materials failed to include all of the tax liabilities. Some investors requested that their funds be held in escrow until Mr. Rorke paid certain sums to the IRS. Mr. Rorke told Middlebury’s attorneys that he had paid $350,000 to the IRS by check and executed an affidavit to that effect to secure the release of $100,000 in investor funds. The funds were released. The affidavit, however, was false. Mr. Rorke had not paid the IRS.

Navagate began defaulting on the Notes in June 2010. Nevertheless, the firm and its founder continued to sell more Notes, raising an additional $2.2 million following the first default. By early 2014 Navagate owed about $1.25 million in principal and about $1.4 million in interest on the Notes.

The Order in the Navagate proceeding alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The proceeding will be set for hearing.

The Osborn proceeding alleges violations of the same Sections. Mr. Osborn partially resolved that action, consenting to the entry of a cease and desist order based on the Sections cited in the Order and to the entry of an order barring him from the securities business. A hearing will be held to determine the amount of the disgorgement, prejudgment interest and civil penalties.

The Middlebury proceeding alleges violations of the same Sections as the other two actions. The firm partially resolved the matter by consenting to the entry of a cease and desist order based on those Sections and to a censure. Like the Osborn action, a hearing will be held to determine the amount of disgorgement, prejudgment interest and civil penalties.

 For more news and commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.

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