JOSE F. SANCHEZ, Cal. Bar No. 161362
Attorneys for Plaintiff
UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA
Plaintiff Securities and Exchange Commission ("Commission") alleges as follows:
JURISDICTION AND VENUE
1. This Court has jurisdiction over this action pursuant to Sections 20(b), 20(d)(1) and 22(a) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77t(b), 77t(d)(1) & 77v(a), and Sections 21(d)(1), 21(d)(3)(A), 21(e) and 27 of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78u(d)(1), 78u(d)(3)(A), 78u(e) & 78aa. Defendants have, directly or indirectly, made use of the means or instrumentalities of interstate commerce, of the mails, or of the facilities of a national securities exchange in connection with the transactions, acts, practices and courses of business alleged in this Complaint.
2. Venue is proper in this district pursuant to Section 22(a) of the Securities Act, 15 U.S.C. § 77v(a), and Section 27 of the Exchange Act, 15 U.S.C. § 78aa, because certain of the transactions, acts, practices and courses of conduct constituting violations of the federal securities laws occurred within this district, and certain of the defendants reside or transact business within this district.
3. This matter involves the unregistered offer and sale of the common stock of two companies by unlicensed broker-dealers Charles Bayne a/k/a Charles Taylor ("Bayne") and Ira Posnansky a/k/a Ira Post ("Posnansky"), acting through Pre-IPO Financial Group, LLC ("Pre-IPO"), a now defunct company jointly owned by Bayne and Posnansky. From February 2000 through July 2001, Bayne and Posnansky, acting with and through Pre-IPO sales agents whom they hired, trained and supervised, offered and sold the stock of IntellectExchange.com, Inc. ("Intellect Exchange") and Medical Online, Inc. ("Medical Online") to almost 150 investors throughout the United States. Pre-IPO sold more than $3.7 million of Intellect Exchange stock and more than $900,000 of Medical Online stock, and made more than $2.4 million in profits. Neither of these offerings were registered with the Commission, nor were Bayne and Posnansky ever registered with the Commission as broker-dealers, as required by the federal securities laws.
4. In the offer and sale of Intellect Exchange securities, Bayne and Pre-IPO sales agents also made material misrepresentations to prospective investors concerning the likelihood that Intellect Exchange would be acquired or would conduct an initial public offering ("IPO"), and the expected value of an acquisition or IPO. Specifically, using a sales script created by Bayne, Pre-IPO sales agents falsely told investors, among other misrepresentations, that Oracle Corporation had offered to acquire Intellect Exchange, that Intellect Exchange had been offered a reverse IPO worth $30 to $100 million, and that Intellect Exchange's stock wasexpected to open at more than $10 per share after the IPO. Bayne knew or was reckless in not knowing that these statements were false or misleading.
5. Bayne and Posnansky, by engaging in the conduct described in this complaint, have violated the registration provisions of Sections 5(a) and 5(c) of the Securities Act, 15 U.S.C. §§ 77e(a) and (c), and the broker-dealer registration provisions of Section 15(a)(1) of the Exchange Act, 15 U.S.C. § 78o(a)(1). Bayne has also violated the antifraud provisions of Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), and Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5. By this complaint, the Commission seeks injunctions and civil penalties against Bayne and Posnansky, as well as disgorgement and prejudgment interest against Bayne.
6. Charles Bayne, age 47, resides in Glendale, California. Bayne was the President and Chief Executive Officer of Pre-IPO as well as a 50% owner of the company. Bayne was responsible for, among other things, training and supervising the sales agents and managers, and creating the sales scripts and written materials used to solicit prospective investors. Bayne has never been registered with the Commission in any capacity.
7. Ira Posnansky, age 56, resides in Los Angeles, California. Posnansky was the Chairman of Pre-IPO as well as a 50% owner of the company. Posnansky was responsible for, among other things, buying investor lead lists, and hiring, training and supervising the sales agents and managers. Posnansky has never been registered with the Commission in any capacity.
THE UNLAWFUL CONDUCT
8. Bayne and Posnansky formed Pre-IPO as a Nevada limited liability corporation headquartered in Los Angeles, California, in February 2000. Pre-IPO ceased operations in the latter half of 2001.
A. Bayne And Posnansky, Through Pre-IPO, Engaged In Various Unregistered Securities Offerings
9. From approximately February 2000 through July 2001, Bayne and Posnansky, acting through Pre-IPO, offered and sold the securities of Medical Online. Pre-IPO sold approximately $906,435 of the securities of Medical Online to about 50 investors throughout the United States.
10. From approximately August 2000 through July 2001, Bayne and Posnansky, acting through Pre-IPO, also offered and sold the securities of Intellect Exchange. Pre-IPO sold a total of $3,742,216 of Intellect Exchange stock to almost 100 investors throughout the United States.
11. With respect to Intellect Exchange, Pre-IPO was involved in two offerings of this company's securities. The first offering sought to raise $10,125,000 through the sale of 7,500,000 shares of Series B convertible preferred stock. The second offering sought to raise $1,162,500 through the sale of 750,000 shares of common stock.
12. Pre-IPO entered into at least two written agreements with Intellect Exchange one dated July 31, 2000, and the other dated January 8, 2001 pursuant to which Pre-IPO agreed to introduce Intellect Exchange to potential investors and to help it raise capital.
13. Bayne and Posnansky jointly determined the price at which the stock of Intellect Exchange and Medical Online would be offered for sale, and sold, to the public.
14. Posnansky purchased investor lead lists from lead brokers. The lead lists contained the names of individuals who lived throughout the United States. Pre-IPO sales agents used these lead lists to contact prospective investors by telephone in several states. Pre-IPO sales agents mailed private placement memoranda and other written materials to interested prospective investors.
15. During Pre-IPO's telephone solicitations, some sales agents failed to determine if prospective investors were accredited. Pre-IPO did not provide audited financial statements to unaccredited investors.
16. Upon receipt of payment from investors for either Intellect Exchange or Medical Online shares, Pre-IPO purchased the appropriate number of shares directly from the issuer. Intellect Exchange and Medical Online each issued their stock certificates in Pre-IPO's name. Pre-IPO then forwarded the stock certificates to investors, who signed the certificates and retained custody of them.
17. During the period of Pre-IPO's offerings to the public, there was no registration statement filed or in effect with respect to any offering of securities of Intellect Exchange or Medical Online.
B. Bayne And Posnansky, Through Pre-IPO, Operated As Unlicensed Broker-Dealers
18. As part of Pre-IPO's agreements with Intellect Exchange and Medical Online, Bayne and Posnansky also agreed to purchase directly from Intellect Exchange and Medical Online, for their own account, as many shares of each company's stock as were available, and then offer these same shares to prospective investors.
19. Bayne and Posnansky made their money by selling the shares that Pre-IPO purchased from Intellect Exchange and Medical Online at a price higher than what Pre-IPO had agreed to pay for them. Pre-IPO purchased Intellect Exchange's preferred stock at $0.70 per share and sold it to investors at $1.35 per share. Pre-IPO purchased Intellect Exchange's common stock at $0.80 per share and sold it to investors at $1.55 per share. Pre-IPO purchased Medical Online's common stock at $1 per share and sold it to investors at $1.95 per share. Pre-IPO made$1,910,288 from its sale of Intellect Exchange stock, and $491,807 from its sale of Medical Online stock.
20. By engaging in the business of buying and selling securities, Bayne and Posnansky acted as broker-dealers and, as such, needed to be registered with the Commission. Neither Bayne, Posnansky, nor Pre-IPO has ever been registered as a broker-dealer with the Commission.
C. Bayne and Pre-IPO Sales Agents Made Fraudulent Misrepresentations In Connection With The Intellect Exchange Offerings
21. During Pre-IPO's offer and sale of Intellect Exchange securities, Bayne and the sales agents he controlled made material misrepresentations concerning the prospects for an acquisition of or an IPO by Intellect Exchange, and the expected value of an acquisition or IPO.
22. Bayne created a sales script used by Pre-IPO's sales agents to solicit prospective investors that contains at least two material misrepresentations. This sales script states in relevant part that: "Oracle wanted to buy Intellect Exchange and was turned down." This statement is false. Oracle never offered to buy Intellect Exchange and, because such an offer had never been made, Intellect Exchange never had the opportunity to accept or decline Oracle's purported offer. Bayne knew or was reckless in not knowing that this statement was false or misleading.
23. The sales script further states that: "Intellect Exchange has already been offered a reverse IPO worth $30 to $100 million. They turned it down." This statement also is false. Intellect Exchange was never offered a reverse IPO worth $30 to $100 million and, because such an offer had never been made, Intellect Exchange never had the opportunity to accept or decline the purported offer. Bayne knew or was reckless in not knowing that this statement was false or misleading.
24. In addition, the sales script contains at least two statements concerningIntellect Exchange that Bayne had no reasonable basis to believe were true or accurate. The sales script states in relevant part that: "The stock [of Intellect Exchange] is expected to open above $10 a share and is projected to go considerably higher." The sales script also states: "We are excited to have a company to fund [i.e., Intellect Exchange] as strong as eBay." Neither of these statements had any basis in fact. Indeed, neither Bayne nor anyone else from Pre-IPO ever consulted with Intellect Exchange or any third-party analyst to attempt to verify the accuracy or reasonableness of these statements.
25. Pre-IPO sales agents also misled prospective investors to believe that Intellect Exchange was soon going public. Bayne himself told at least one investor in July 2002 that she would triple her money when Intellect Exchange went public. Intellect Exchange, however, was never in a position to go public. Intellect Exchange has never filed an S-1 registration statement with the Commission, which is a requirement for an IPO.
FIRST CLAIM FOR RELIEF
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