WAYNE M. CARLIN (WC-2114)
Attorney For Plaintiff
SECURITIES AND EXCHANGE COMMISSION
Northeast Regional Office
New York, New York 10279
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
SECURITIES AND EXCHANGE COMMISSION,
- against -
THOMAS FLETCHER & CO. INC,
THOMAS FLETCHER & COMPANY, INC.,
JOHN DONADIO, and
02 Civ. ( )
Plaintiff Securities and Exchange Commission ("Commission"), for its complaint against defendants Thomas Fletcher & Co., Inc. ("Thomas Fletcher"), Thomas Fletcher & Company Inc. ("TFC"), Sergei Voronchenko ("Voronchenko"), Roman Thaker ("Thaker"), Alex Berg ("Berg"), John Donadio ("Donadio"), and Padraig McGlynn ("McGlynn") (collectively, the "Defendants"), alleges as follows:
SUMMARY OF ALLEGATIONS
- The Commission brings this action to stop Defendants from continuing to defraud the investing public through a private offering of convertible, "preferred " stock supposedly issued by Thomas Fletcher (the "Offering"). Since April 2002, Defendants illicitly induced at least 32 persons to invest more than $2.5 million in the Offering through: (a) preparation and distribution of a private placement memorandum (the "Offering Memorandum") that contains material misrepresentations and omitted material facts concerning Thomas Fletcher, including the failure to disclose that Thomas Fletcher was not legally authorized to sell preferred stock at all; and (b) oral misrepresentations by brokers employed at TFC, including false statements concerning a supposedly imminent IPO of Thomas Fletcher stock and false guarantees concerning the price at which investors would be able to resell their stock. Because the Offering is supposed to raise as much as $5.1 million, the Offering represents an ongoing threat to the investing public. Through this action, the Commission seeks to halt the illicit Offering, enjoin Defendants from further violations of the Federal securities laws, require Defendants to disgorge the monies that they illicitly raised from investors, and pay civil penalties.
JURISDICTION AND VENUE
- The Commission brings this action pursuant to authority conferred by Section 20(b) of the Securities Act, 15 U.S.C. § 77t(a), and Section 21(d) of the Exchange Act, 15 U.S.C. § 78u(d), seeking to temporarily restrain, preliminarily enjoin, and permanently enjoin, Defendants from engaging in the wrongful conduct alleged in this complaint. The Commission seeks a final judgment ordering Defendants to pay civil money penalties pursuant to Section 20(d) of the Securities Act, 15 U.S.C. § 77t(d), and Section 21(d) of the Exchange Act, 15 U.S.C. § 78u(d).
- This Court has jurisdiction over this action pursuant to Section 22(a) of the Securities Act, 15 U.S.C. § 77v(a), and Sections 21(d), 21(e) and 27 of the Exchange Act, 15 U.S.C. §§ 78u(d), 77u(e) and 78aa. Defendants directly or indirectly, singly or in concert, have made use of the means or instrumentalities of transportation or communication in, or the instrumentalities of, interstate commerce, or of the mails, in connection with the transactions, acts, practices, and courses of business alleged in this complaint.
- Venue lies 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. Certain of the transactions, acts, practices and courses of business constituting the violations alleged herein occurred within the Southern District of New York.
- Thomas Fletcher was incorporated in New York on October 29, 1999, and maintains its principal place of business at 39 Broadway, New York, New York 10006. Thomas Fletcher is a wholly-owned subsidiary of Thomas Fletcher Holdings, LLC ("Fletcher Holdings"). Fletcher Holdings is owned by Thaker, Voronchenko and Natalia Salygin.
- TFC is a registered broker-dealer incorporated under the laws of Delaware. Like Thomas Fletcher, TFC maintains its principal place of business at 39 Broadway and is a wholly-owned subsidiary of Fletcher Holdings.
- Voronchenko, age 28, resides in Fort Lee, New Jersey. Voronchenko is the President and Director of Thomas Fletcher and an owner of Fletcher Holdings
- Thaker, age 29, resides in Manhattan. Thaker is the Secretary, Treasurer and Director of Thomas Fletcher. Thaker is also the Chief Executive Officer of TFC. He also acted as the incorporator of Thomas Fletcher and is an owner of Fletcher Holdings.
- Berg, age 20, is a resident of Brooklyn, New York. Berg is an employee and a registered representative of TFC.
- Donadio, age 26, is a resident of Staten Island, New York. Donadio is an employee and a registered representative of TFC.
- McGlynn, age 26, is a resident of Maspeth, New York. McGlynn is an employee and a registered representative of TFC.
- According to the Offering Memorandum, Thomas Fletcher is a management company. Its business operations consist primarily of providing management services for TFC, including furnishing TFC with fully equipped offices, support facilities and certain administrative staff. According to the Offering Memorandum, TFC purportedly pays a $350 hourly fee for the services rendered by Thomas Fletcher pursuant to a management agreement. Thomas Fletcher also purportedly owns 33% of Algosoft Corporation ("Algosoft"), which was also incorporated by Thaker. According to the Offering Memorandum, Algosoft is a start-up company, engaged in the development of software for the brokerage industry. Thomas Fletcher purportedly received its 33% ownership interest in Algosoft in exchange for providing office space and administrative services.
- As of April 2002, neither TFC nor Algosoft was commercially viable. The Offering Memorandum describes Algosoft as "a recently formed entity which has only a limited history of operations and no earnings." The Offering Memorandum describes TFC as "newly established" and not yet commercially viable.
- The Offering Memorandum included Thomas Fletcher financial statements for the year ended December 31, 2001. In those financial statements, Thomas Fletcher reported no revenue and realized a net operating loss of $1,373,578.
- Through the Offering, Thomas Fletcher seeks to raise $5,100,000 by issuing 510,000 shares of "10% Convertible, Redeemable Preferred Stock" at $10 per share (the "Thomas Fletcher Stock"). According to the Offering Memorandum, Thomas Fletcher intends to use the proceeds from the Offering, among other things: (1) to provide a subordinated loan to TFC to provide expanded operating capital, including an increase in TFC's net capital in order to allow it to make markets in NASDAQ and OTC Bulletin Board securities and otherwise expand its business, and (2) to acquire the remaining 67% of Algosoft, thereby making Algosoft a wholly-owned subsidiary of Thomas Fletcher. The Offering is not registered with the Commission, but rather is purportedly made pursuant to an exemption from the registration provisions afforded by Rule 506 of Regulation D of the Securities Act.
- The Offering Memorandum indicates that the Thomas Fletcher Stock would be offered by Thomas Fletcher through its officers and directors, but could also be sold by broker-dealers. Thomas Fletcher determined to use TFC, its sister company and an intended beneficiary of the Offering, to serve as broker-dealer on the Offering.
Material Misrepresentations in the Offering Memorandum
- Voronchenko and Thaker participated in the drafting of the Offering Memorandum. The Offering Memorandum contains several misrepresentations and omissions of material fact. Voronchenko and Thaker knew, or recklessly disregarded, that the Offering Memorandum contained material misrepresentations and omitted material facts.
Authority to Issue Shares
- Thomas Fletcher's certificate of incorporation states that "[t]he total number of shares, which the corporation shall have authority to issue, is 2,000,000 of $0.01 par value." The certificate of incorporation does not authorize the issuance of preferred shares nor does it authorize the issuance of any convertible or redeemable shares.
- According to the Offering Memorandum, prior to the current offering, Fletcher Holdings already held 2,040,000 shares of Thomas Fletcher, or 100% of the issued and outstanding shares. Moreover, the Offering Memorandum indicated that after the offering, and assuming that all shares were sold, Fletcher Holdings would still hold 80% of all issued and outstanding shares of Thomas Fletcher.
- The Offering Memorandum failed to disclose to the investors that Thomas Fletcher was not lawfully authorized to sell the "10% Convertible, Redeemable Preferred Stock" purportedly sold in the Offering. Similarly, the Offering Memorandum failed to disclose that Thomas Fletcher had already issued more than the 2,000,000 shares it was authorized to issue pursuant to its own certificate of incorporation.
Use of Proceeds
- According to the Offering Memorandum, one of the primary purposes of the Offering was to enable Thomas Fletcher to make a subordinated loan to TFC. Specifically, the Offering Memorandum provided that a portion of the proceeds will be used to provide a subordinated loan to TFC, ranging from $120,000 (if the minimum amount of $200,000 was raised in the Offering) to $1,000,000 if the maximum offering amount is raised. The stated purpose of that subordinated loan was to add net capital to TFC so that TFC could expand its operations.
- These representations were materially false and misleading. As of October 29, 2002, the Offering has raised at least $2.5 million. Despite having raised more than the minimum offering amount, Thomas Fletcher has made no subordinated loan to TFC. Moreover, TFC never sought or obtained the required approval of the National Association of Securities Dealers, Inc. ("NASD") for any subordinated loan from Thomas Fletcher.
Management Agreement Between Thomas Fletcher and TFC
- According to the Offering Memorandum, Thomas Fletcher "provides various management and administrative services for a fee" to TFC. The Offering Memorandum further represents that, pursuant to a management agreement between Thomas Fletcher and TFC (the "Management Agreement"), Thomas Fletcher was required to provide TFC with "fully equipped offices, support facilities and permitted administrative staff" as well as "finance and accounting services, including administrative support in connection with the preparation of forms and reports required to be filed with federal, state and regulatory agencies, and all computer systems including technical support." In exchange for all these services, Thomas Fletcher was supposed to receive compensation from TFC "at a rate of $350 per hour for all time devoted to such functions by [Thomas Fletcher] employees."
- The Offering Memorandum failed to disclose material facts concerning the existence and collectability of Thomas Fletcher's revenues under the Management Agreement, the amount of Thomas Fletcher's expenses under the Management Agreement and Thomas Fletcher's ability to pay those expenses. The Offering Memorandum failed to disclose that, at the time the Offering Memorandum was prepared, TFC had made no payments to Thomas Fletcher under the Management Agreement and that TFC had not accrued any debt to Thomas Fletcher for services rendered pursuant to the Management Agreement. The Offering Memorandum also failed to disclose that the cost of Thomas Fletcher performing its obligations under the Management Agreement included rent payments of approximately $240,000 per year at a time when Thomas Fetcher's current total assets were approximately $71,000.
The Fraudulent Sales Campaign
- Beginning in or around April 2002, Defendants began a fraudulent sales campaign to sell shares of Thomas Fletcher Stock. Thomas Fletcher retained TFC to sell Thomas Fletcher Stock to the public. In soliciting investors, Berg, Donadio and McGlynn made material misrepresentations to induce investors to purchase Thomas Fletcher Stock. In his dual roles as senior officer of both Thomas Fletcher and TFC, Thaker knew of the misrepresentations made in order to sell Thomas Fletcher Stock to the public.
Material Misrepresentations Regarding an IPO
- Berg, Donadio and McGlynn all falsely represented to investors that Thomas Fletcher would conduct an IPO in the near future, each giving investors different target dates. In April 2002, for example, Donadio told an investor that the IPO paperwork was "in the works" and that the IPO would be completed by December 2002. In May 2002, McGlynn told an investor that there would be an IPO in "two to three months." In July 2002, Berg told an investor that an IPO would take place in mid-October.
- These representations were materially false and misleading. At the time the representations were made, Thomas Fletcher had no specific plans to go public and, in fact, had not taken any concrete steps to go public. To date, Thomas Fletcher has not filed a registration statement or even begun preparation of any documentation required to conduct an IPO.
Baseless After-Market Price and Profit Predictions
- In soliciting investors, Berg, Donadio and McGlynn also all made baseless predictions about the price at which investors would be able to resell their Thomas Fletcher Stock. Berg, for example, told an investor who invested $500,000 in July 2002 that the investor would be able to resell his shares in mid-October for $20-$25 per share, 100%-150% above the $10 per share offering price. Berg told a different investor that he would be able to sell his shares for $18 per share before the end of 2002. Donadio told an investor in April 2002 that the Thomas Fletcher Stock would trade at $30 to $40 per share following the IPO. McGlynn told an investor in May 2002 that the share price would double or triple after the IPO.
- These representations were materially false and misleading. Berg, Donadio and McGlynn had no reasonable basis in fact for the predictions they made regarding the price at which investors would be able to resell their Thomas Fletcher Stock. There was no plan to conduct an IPO. In addition, there has never been a public market for Thomas Fletcher securities, and the Offering Memorandum indicates that the company expected no such market to develop following the Offering. Moreover, according to Thomas Fletcher's financial statements, for the fiscal year ending December 2001, Thomas Fletcher had no revenue in 2001 and reported an operating loss of more than $1.3 million.
Baseless Assurances as to Safety
- The TFC representatives also falsely assured investors that even if Thomas Fletcher did not go public, the investors would be able to resell their investment at the original purchase price plus a premium. For example, Berg told one investor that the "worst-case" scenario was that Thomas Fletcher would buy back his shares at a price 25% above the initial purchase price. Berg assured another investor that if Thomas Fletcher did not go public, the investor would recoup his investment, with 10% interest. One investor who was solicited by Berg received a telephone call from someone who falsely claimed that he was calling from Goldman Sachs and was willing to purchase that investor's shares in Thomas Fletcher Stock for $25 (versus the Offering price of $10 per share). When the investor mentioned the call to Berg, Berg told the investor that the call was further proof of the strength of the investment. Similarly, Donadio assured an investor who had told him that he did not want his money tied up for too long that under the "worst case scenario," the investor would have his initial investment plus 10% returned to him within one year of his initial investment.
- These representations were materially false and misleading. There was no basis to assure investors that the investment was safe and they would recoup their principal with a premium. There has never been a public market for Thomas Fletcher securities and Thomas Fletcher's past financial performance provided no basis for making any representation as to future value.
CLAIM FOR RELIEF
Violations of Section 17(a) of the Securities Act,
Section 10(b) of the Exchange Act and Rule 10b-5
- The Commission repeats and realleges the allegations contained in paragraphs 1 through 31 by reference as if fully set forth herein.
- Defendants, directly and indirectly, singly and in concert, knowingly or recklessly, by the use of the means or instruments of transportation or communication in, and the means or instrumentalities of, interstate commerce, or by the use of the mails, in the offer or sale, and in connection with the purchase or sale, of securities, have: (a) employed devices, schemes or artifices to defraud; (b) obtained money or property by means of, or otherwise made untrue statements of material fact, or omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading; and (c) engaged in transactions, acts, practices and courses of business which operated or would operate as a fraud or deceit upon purchasers of securities or other persons.
- As part of and in furtherance of this violative conduct, Thomas Fletcher, Voronchenko and Thaker made misrepresentations and omitted material facts as alleged above in paragraphs 17-24.
- As part of and in furtherance of this violative conduct, TFC, Thaker, Berg, Donadio and McGlynn made misrepresentations and omitted material facts as alleged above in paragraphs 25-30.
- The misrepresentations and omitted facts described above were material.
- Thomas Fletcher, TFC, Voronchenko, Thaker, Berg, Donadio and McGlynn knew, or were reckless in not knowing, that these material misrepresentations were false or misleading.
- By reason of the acts, omissions, practices, and courses of business set forth in this complaint, Thomas Fletcher, TFC, Voronchenko, Thaker, Berg, Donadio and McGlynn have violated, are violating, are about to violate, and, unless restrained and enjoined, will continue violating, Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5.
PRAYER FOR RELIEF
WHEREFORE, Plaintiff Commission respectfully requests that this Court issue:
Orders temporarily and preliminarily, and Final Judgments permanently, restraining and enjoining each of the Defendants, their agents, servants, employees, attorneys in-fact, and all persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, and each of them, from violating Sections 17(a) of the Securities Act and Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder.
An Order directing that all assets of Thomas Fletcher and TFC be frozen.
An Order directing each of the Defendants to file with this Court and serve upon the Commission, within five business days, or within such extension of time as the Commission agrees in writing or as otherwise ordered by the Court, verified written accountings, signed by each of them under penalty of perjury.
An Order directing Thomas Fletcher and TFC to direct Simone V. Palazzolo to provide an accounting.
An Order permitting expedited discovery.
An Order enjoining and restraining each of the Defendants, and any person or entity acting at their direction or on their behalf, from destroying, altering, concealing, or otherwise interfering with the access of the Commission to relevant documents, books and records.
An Order enjoining and restraining each of the Defendants, and any person or entity acting at their direction or on their behalf, from witness tampering, suborning perjury or otherwise impeding discovery or the prosecution of this case.
A Final Judgment requiring each of the Defendants to disgorge their ill-gotten gains from the violative conduct alleged in this complaint, and to pay prejudgment interest thereon.
A Final Judgment imposing civil monetary penalties pursuant to Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange Act against each of the Defendants.
Such other and further relief as the Court deems appropriate.
||New York, New York|
||November 22, 2002|
WAYNE M. CARLIN
Mark K. Schonfeld (MS-2798)
Securities and Exchange Commission
New York, New York 10279
Wayne M. Carlin
Timothy G. Hansen
George G. Demos (Law Clerk)