SEC Charges Purported Health Food Company and CEO with Issuing False Press Releases in Microcap Fraud
Transfer Agent Also Charged for Missing Red Flags in Unlawful Distribution of Shares Used in Scheme
The Securities and Exchange Commission today charged a Florida-based penny stock company and its CEO with defrauding investors by issuing false and misleading press releases proclaiming large sales and fantastic revenue projections while the purported health food company actually was a failing enterprise.
The SEC alleges that Heathrow Natural Food & Beverage Inc. touted sales of natural health food products that the company had not even manufactured as well as non-existent distribution agreements with major retail chains. Meanwhile, its CEO Michael S. Pagnano was prompting the illegal, unregistered distribution of billions of shares of company stock to several people or entities, including himself. Pagnano profited by more than $150,000 by selling 877 million of his shares into the market as the false press releases were stimulating public demand for Heathrow stock. Pagano also is charged with insider trading because he sold his shares while in possession of material nonpublic information about the falsehood of the press releases.
“Heathrow misled investors by peppering the market with remarkable press releases portraying the sky as the limit for worldwide distribution of huge volumes of its products while about the only thing the company was manufacturing was its sales projections out of thin air,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “CEOs of microcap issuers will be held accountable when they spread misinformation in the marketplace.”
The SEC separately charged New Jersey-based transfer agent Registrar and Transfer Company (R&T) and its CEO Thomas L. Montrone with violating the registration provisions of the federal securities laws and failing to supervise firm employees who enabled Heathrow’s unregistered distribution of billions of purportedly unrestricted shares of its stock. An SEC examination of the firm revealed that R&T repeatedly failed to detect and address blatant red flags in connection with more than 54 share issuance requests from Pagnano, including the fact that none of them were accompanied by legal opinions pertaining to the shares to be issued. In every instance, the shareholder for whom the issuance was requested was not the shareholder covered by the attached opinion letter. R&T issued more than a billion shares to Pagnano directly in spite of the firm’s own written policy against honoring requests by company officers to issue unrestricted shares to themselves. R&T even made special accommodations so the firm could keep track of Heathrow’s unusually large and frequent issuance requests, which totaled 5.6 billion shares in 27 months.
R&T agreed to settle the charges and pay disgorgement of $24,265.86 plus prejudgment interest of $3,401.78 and a penalty of $100,000. Without admitting or denying the findings in the SEC’s order instituting a settled administrative proceeding, R&T agreed to engage an independent consultant and comply with certain undertakings while Montrone agreed to pay a $25,000 penalty and be suspended for 12 months from serving in a supervisory capacity with a transfer agent.
“R&T’s employees were trained to do little more than check boxes on a form, and for a period of more than two years they basically rubber-stamped Pagnano’s repeated unlawful requests to issue stock,” said Michael Paley, Co-Chair of the SEC Enforcement Division’s Microcap Fraud Task Force. “Transfer agents serve a pivotal function in the issuance of securities and their employees must be prepared to catch frauds, not enable them. As we continue our crackdown against those who play central or supporting roles in a microcap scheme, transfer agents must ensure they have appropriate systems in place to detect flagrant red flags and prevent law violations like the ones that occurred with Heathrow.”
The SEC’s complaint filed in U.S. District Court for the Southern District of New York against Heathrow and Pagnano charges them with committing violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(a) and (b) as well as violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933.
The SEC’s investigation was conducted by Michael Paley and Katherine Bromberg in the New York Regional Office, and the litigation against Heathrow and Pagnano will be led by Jack Kaufman. The SEC’s examination of R&T was conducted by Steven Vitulano, Kenneth Liebl, Paul Eberhard, and Hitan Patel in the New York office’s broker-dealer inspection program.