The pre-IPO market in which shares of emerging companies are often available has been a key focus in recent months. Congress, for example, passed the JOBS Act earlier this year which, of course, has little to do directly with jobs and a lot to do with easing the private placement rules, authorizing crowd funding and facilitating IPOs for emerging enterprises. While facilitating the sale of these securities may clearly have merit, the action brought by the Commission against a broker-dealer and investment advisory firm and its co-founders should serve as a reminder of what can happen even to sophisticated investors when little information is available. In the Matter of Advanced Equities, Inc., Adm. Proc. File No. 3-15031 (Sept. 18, 2012).
The focus of Advanced Equities is the sale of private placement shares in Company A by Advanced Equities, Inc., Dwight O. Badger and Keith G. Daubenspeck. Company A is a Silicon Valley based manufacturer of a device that uses proprietary technology to produce power on a clean and efficient basis. The Respondents in the proceeding are Advanced Equities, Inc., a Chicago based registered broker-dealer and investment adviser and its two co-founders, Messrs. Badger and Daubenspeck.
Following a successful private placement, the co-founders of Advanced Equities were permitted to observe board meetings of Company A. Through their attendance at these meetings, beginning in 2006, Messrs. Badger and Daubenspeck learned confidential information about Company A which included its finances and current and prospective customers as well as its future plans.
In 2009 Company A was operating in "stealth mode," that is, very little information was available about it. Early in the year Messrs. Badger and Daubenspeck began soliciting investors for investments in the company as part of a $150 million "Series F" offering. The purpose of the offering was to provide working capital and permit the company to make a contribution to a proposed arrangement which would ultimately facilitate the sale of electricity.
Consistent with its "stealth mode" status, restrictions were placed on the type of information Advanced Equities could make available. The firm was to focus its sales pitch on the potential of the technology, the management team and the progress Company A had made. Only very general information about company finances would be made available. Customer names and other proprietary information was not to be disclosed.
As plans for the solicitation moved forward, in early January 2009 Mr. Daubenspeck and a small number of brokers and investment bankers from the firm attended a meeting at the offices of Company A. During the presentation Company A reviewed its current financial condition, including its current order backlog.
In the first quarter of 2009 Advanced Equities raised about $122 million. During presentations to investors and firm employees Mr. Badger made a series of misrepresentations, according to the Order, claiming:
Keith Daubenspeck supervised Mr. Badger, the firm's investment bankers and had final approval for all management decisions within the firm. During internal sales calls Mr. Daubenspeck remained silent while Mr. Badger made misrepresentations about the order backlog of Company A, the DOE contract and the grocery store chain arrangements. After hearing the misrepresentations he failed to take reasonable steps to prevent their dissemination, according to the Order.
The Order alleges violations of Securities Act Sections 17(a)(2) and (3) as well as a failure to reasonably supervise under Exchange Act Section 15(b)(4)(E).
Each Respondent settled. The firm consented to the entry of a cease and desist order based on the Securities Act Sections cited in the Order as well as a censure. It also agreed to pay a civil money penalty of $1 million and implement a series of undertakings. Mr. Badger consented to the entry of a cease and desist order on the same basis and agreed to be barred from the securities business with a right to reapply after one year. He also agreed to pay a civil penalty of $100,000. Mr. Daubenspeck agreed to be suspended from the securities business in a supervisory capacity for twelve months and, in addition, will pay a civil penalty of $50,000.
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