U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 23124 / October 31, 2014
Securities and Exchange Commission v. Charles E. Smith, CPA and Mark Smith, CPA, Civil Action No. 3:14-CV-03874-D (NDTX) (October 31, 2014)
SEC Charges Texas Brothers in Fraudulent "Shell-Factory" Scheme and Suspends Trading in Four Companies They Controlled
On October 31, 2014, the Securities and Exchange Commission filed suit in United States District Court in Dallas, Texas against brothers Charles and Mark Smith. According to the Commission's complaint, since at least 2006, Defendants have engaged in a fraudulent "shell factory" scheme through which they formed and promoted at least eight public shell companies, four of which they have sold in reverse merger transactions and four of which remained under the control of the Smiths during the course of their scheme. Simultaneously with filing the complaint, the Commission has issued an order that temporarily suspends trading in the four companies they continued to control.
The SEC alleges that the Smiths carried out the scheme by "renting" legitimate operating companies from small business owners in exchange for the promise of additional financing through an initial public offering (a/k/a an "IPO"). The Smiths then installed the small business owners as nominal officers and directors of the public shell companies that they secretly controlled. They funded the IPOs by soliciting their friends, family and affiliates to buy shares in the now-public shell companies. However, contrary to promises made by the Smiths to the small business owners and to information disclosed to the public, most of the money raised in the IPOs was retained by the public shell companies instead of being used to finance the operating companies. The SEC also alleges that to further their scheme, the Smiths caused the small business owners to submit materially false and misleading registration statements and periodic reports to the SEC. These false documents gave the public companies the appearance of legitimacy, which allowed the Smiths to sell the public shells for a higher value in the reverse merger transaction. The Smiths received significant cash proceeds and stock from these reverse merger transactions, while the small business owners were left with little or no benefit from their association with the Smiths.
The SEC's complaint charges Charles Smith with violating Section 17(a) of the Securities Act of 1933 (the "Securities Act") and Sections 10(b), 13(b)(5) and 15(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rules 10b-5 and 13b2-1 thereunder, and with aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 15(d) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, 13a-13, 13b2-2, 15d-1, and 15d-13 thereunder. The SEC's complaint also charges Mark Smith with violating Section 17(a)(2) and (3) of the Securities Act and Exchange Act Rule 13b2-1, and with aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 15(d) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, 13a-13, 13b2-2, 15d-1, and 15d-13 thereunder.
Without admitting or denying the allegations in the Commission's complaint, the Smiths have consented to the entry of a final judgment that permanently enjoins them from future violations of the applicable provisions of the federal securities laws, orders them to pay disgorgement plus prejudgment interest totaling $78,750.52, orders that Charles Smith pay a civil penalty of $150,000 and be subject to five-year officer and director and penny stock bars, and orders that Mark Smith pay a civil penalty of $50,000 and be subject to a three-year penny stock bar. The settlement remains subject to court approval.
Simultaneously with filing its Complaint, the Commission has issued an order temporarily suspended trading in the securities of the four public shell companies the Smiths have not sold in reverse merger transactions-(Hall Tees, Inc. (HTEE), Phoenix Medical Software, Inc. (PHXMF), Surface Coatings, Inc. (SCTZ) and Flint Int'l Services, Inc. (FNTSF))-because of concerns regarding the accuracy of information contained in the companies' SEC filings, including information concerning the individuals who control the companies and their future intentions with respect to the companies. See Securities Act Rel. No. 73481.
The SEC's investigation was conducted by Tamara McCreary, Mark Pittman, Laura Bennett, and Ty Martinez, under the supervision of Jonathan P. Scott, all of the Fort Worth Regional Office. The SEC's litigation will be handled by Chris Davis.