SEC Charges Chicago-Based Investment Firm with Misleading Investors in Private Equity Offerings
The Securities and Exchange Commission today charged the co-founder of a Chicago-based investment firm with misleading investors in two private equity offerings, and charged the other co-founder with supervisory failures related to the offerings.
Advanced Equities Inc. — a broker-dealer and investment advisory firm - and co-founders Dwight O. Badger and Keith G. Daubenspeck were charged in connection with private offerings in 2009 and 2010 on behalf of an alternative energy company in Silicon Valley, Calif., which was not identified by name in the SEC's administrative proceeding. Badger led the sales effort for the offerings and made misstatements about the energy company's finances that Daubenspeck did not correct, thus failing to reasonably supervise Badger. Daubenspeck co-founded Advanced Equities with Badger and was the former chief executive of its parent company. Daubenspeck is the chairman of the parent company's board.
Badger, Daubenspeck, and their firm agreed to settle the SEC's charges.
According to the SEC's order, Badger said in the 2009 offering that the energy company had more than $2 billion of order backlogs when the backlog never exceeded $42 million. He also said it had a $1 billion order from a national grocery store chain even though the store only had placed a $2 million order and signed a non-binding letter of intent for future purchases. Badger said that the company had been granted a U.S. Department of Energy loan exceeding $250 million when it had applied for a $96.8 million loan, and he again misstated the information about the loan application during the follow-up offering in 2010.
"Dwight Badger misled investors by embellishing key facts about the energy company's sales orders and its loan application to the Department of Energy," said Merri Jo Gillette, Director of the SEC's Chicago Regional Office. "The SEC will continue to be vigilant in uncovering fraud in private securities offerings and holding registered securities professionals accountable."
According to the SEC's order, Daubenspeck participated in at least two internal sales calls with Advanced Equities brokers during the 2009 offering and remained silent after he heard Badger make misstatements about the company's order backlog, grocery store order, and Department of Energy loan application. Despite the red flags raised by the misstatements and the obvious risk that false information would be repeated to investors, Daubenspeck did not take reasonable steps to correct the misstatements and thus failed reasonably to supervise Badger.
Advanced Equities agreed to pay a $1 million penalty, and agreed to be censured and to cease and desist from committing or causing any future violations of the securities laws it was found to have violated. The firm also agreed to numerous undertakings including hiring an independent consultant to review its sales policies and procedures. Badger agreed to pay a $100,000 penalty and be barred for one year from association with any broker, dealer, investment adviser, municipal securities dealer or transfer agent. Daubenspeck agreed to pay a $50,000 penalty and a one-year supervisory suspension. Advanced Equities, Badger, and Daubenspeck consented to the entry of the cease-and-desist order without admitting or denying the SEC's charges.
The SEC's investigation was conducted in the Chicago Regional Office by investigative attorneys Richard Stoltz and Anne McKinley and litigation counsel Steven Seeger and John Birkenheier with assistance from Jennifer Gladfelter, Christopher Caprio, George Jacobus, and Dan Gregus of the broker-dealer examinations staff and Daryl Hartman, Anne Salvador, Magdaline Gavas, Erik Lillya, Andrew Schuster, and David Mueller of the investment management examinations staff.