U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20194 / July 12, 2007
Securities and Exchange Commission v. Tasty Fries, Inc., Edward C. Kelly and Louis M. Kelly, Civil Action No. 07-CV-2857(E.D. Pa.)
SEC Files Settled Charges Against Tasty Fries, Inc. and Its President And Chief Executive Officer, Edward Kelly, For Fraud, Unregistered Sales of Securities, And Reporting, Record Keeping, and Internal Controls Violations
Tasty Fries' Former Operations Manager and Counsel, Louis Kelly, Also Settles Charges Relating to The Unregistered Sales of Securities
On July 12, 2007, the Securities and Exchange Commission (Commission) filed a complaint against Tasty Fries, Inc. (Tasty Fries), located in Blue Bell, Pennsylvania, and its President and Chief Executive Officer, Edward C. Kelly, in the United States District Court for the Eastern District of Pennsylvania alleging that they unlawfully: issued Tasty Fries stock without proper authorization; issued and filed with the Commission false and misleading financial statements; made false and misleading statements in press releases and Commission filings; and, together with Edward Kelly's son, Louis M. Kelly, engaged in the unregistered sale of Tasty Fries securities. Tasty Fries, aided and abetted by Edward Kelly, also committed reporting, record keeping and internal control violations.
The Commission's complaint alleges that between 2001 and 2005, Edward Kelly, on four occasions, improperly attempted to increase the number of authorized shares of Tasty Fries stock. As a result, since 2001, the company issued over 78 million more shares of common stock than its articles of incorporation authorized, and incorrectly accounted for its issuances of common stock in its financial statements. Since January 2002, all of the company's financial statements filed with its annual and periodic reports are materially misstated. The complaint further alleges that between 2002 and 2004, Tasty Fries and Edward Kelly also made materially false and misleading statements in press releases and in Commission filings relating to the development and production status of a French fry vending machine that Tasty Fries was developing. Edward Kelly improperly profited by $32,925 from such statements as the result of improper trading in Tasty Fries stock. The complaint alleges that this conduct violated Section 17(a) of the Securities Act of 1933 (Securities Act), and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder.
The Commission's complaint also alleges that Tasty Fries, Edward Kelly, and Louis Kelly engaged in improper unregistered offers and sales of Tasty Fries common stock by compensating advisors and consultants with common stock in sales that the company did not effectively register. Tasty Fries used this stock to pay consultants and advisors who either did not provide bona fide services to Tasty Fries or provided promotional and investor relations services. In three such instances, Louis Kelly, an attorney licensed in Pennsylvania, authored the legal opinions that the company filed with its ineffective registration statements. The complaint further alleges that Tasty Fries and Edward Kelly also engaged in improper unregistered sales of Tasty Fries common stock by engaging in so-called "gypsy swaps" in which they arranged for shareholders to sell purportedly nonrestricted Tasty Fries stock to others, in exchange for which Tasty Fries ultimately received all or some of the stock purchase price, and the selling shareholders received from the company new restricted shares, which sometimes included extra bonus shares provided as an inducement for the shareholders to sell their purportedly nonrestricted stock. The complaint alleges that this conduct violated Sections 5(a) and 5(c) of the Securities Act.
The Commission's complaint further alleges that Tasty Fries, aided and abetted by Edward Kelly, has failed to make filings with the Commission of required annual, quarterly and current reports; to make and keep books, records, and accounts that accurately and fairly reflect Tasty Fries' transactions and dispositions of Tasty Fries' assets; and to devise and maintain an adequate system of internal accounting controls. As a result, Tasty Fries, aided and abetted by Edward Kelly, violated Sections 13(b)(2)(A), 13(b)(2)(B), and 15(d) of the Exchange Act and Rules 15d-1, 15d-11, 15d-13, and 12b-20, promulgated thereunder. The complaint further alleges that Edward Kelly violated Rule 15d-14 under the Exchange Act by filing certifications of Tasty Fries' required Commission filings that contained false or misleading statements and did not satisfy the Rule's requirements.
Without admitting or denying the allegations in the complaint, Tasty Fries consented to the entry of a final judgment, subject to the court's approval, in which it is permanently enjoined from further violations of Sections 5(a), 5(c) and 17(a) of the Securities Act and Sections 10(b), 13(b)(2)(A), 13(b)(2)(B), and 15(d) of the Exchange Act and Rules 10b-5, 12b-20, 15d-1, 15d-11, and 15d-13 thereunder. Without admitting or denying the allegations in the complaint, Edward Kelly consented to the entry of a final judgment, subject to the court's approval, in which he is: (i) permanently enjoined from further violations of Sections 5(a), 5(c), and 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rules 10b-5 and 15d-14 thereunder, and from aiding and abetting violations of Sections 13(b)(2)(A), 13(b)(2)(B), and 15(d) of the Exchange Act and Rules 12b-20, 15d-1, 15d-11, and 15d-13 thereunder; (ii) barred from acting as an officer or director of a public company; (iii) ordered to pay disgorgement of his trading profits, plus prejudgment interest, totaling $39,245; and (iv) ordered to tender 3,115,165 shares of Tasty Fries stock for cancellation. Without admitting or denying the allegations of the complaint, Louis Kelly consented to the entry of a final judgment, subject to the court's approval, in which he: (i) is permanently enjoined from further violations of Sections 5(a) and 5(c) of the Securities Act; and (ii) ordered to pay a civil penalty of $19,500.