U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 23914 / August 22, 2017

Securities and Exchange Commission v. Brian Pappas, et al., No. 3:17-cv-00954-TJC-JRK (M.D. Fl. filed Aug. 21, 2017)

SEC Charges Florida-Based Franchising Company and its Former CEO With Fraud

The Securities and Exchange Commission today announced fraud charges against a Florida-based franchisor of children's educational programs and its former CEO. The SEC announced additional charges against two of the company's former officers and directors.

According to the SEC's complaint, for almost four years, Brian Pappas, the former CEO of Creative Learning Corp., made numerous false statements concerning payments to Pappas's family members, his business experience and personal financial history, and his evaluation of the company's disclosure and financial reporting controls. The complaint alleges that:

  • Under Pappas's watch, Creative Learning failed to disclose nearly $600,000 in fees and commissions paid to his brother and son-in-law.
     
  • Pappas signed 10-Ks and 10-K/As which stated that he had evaluated the effectiveness of Creative Learning's internal and disclosure controls when he did not do so.
     
  • The account of Pappas's experience in the franchising business, which he wrote for inclusion in Creative Learning's annual reports, failed to mention that he had filed for bankruptcy in 2003 and received a general discharge in 2004, or that his previous franchising business had filed for bankruptcy in 1997.
     
  • Pappas, Daniel O'Donnell, Creative Learning's former COO, and Michelle Cote, Creative Learning's founder, engaged in manipulative trading to inflate Creative Learning's stock price in an attempt to improve its chances of becoming a NASDAQ-listed company.
     
  • Pappas, O'Donnell and Cote caused Creative Learning to extend prohibited personal loans to companies owned by Pappas and Cote.
     
  • Pappas repeatedly told one of Creative Learnings' largest outside investors about the company's anticipated earnings before they were publicly reported.

The SEC's complaint further charges Pappas with failing to timely report information about holdings and transactions in securities of publicly-traded companies that he beneficially owned, and failing to file proxy materials as part of an effort to regain control of Creative Learning following his ouster. The complaint also alleges that O'Donnell and Cote signed annual reports they knew, or should have known, contained false representations concerning the fees and commissions paid to Pappas's relatives and Pappas's previous personal bankruptcy.

The SEC's complaint, filed on August 21, 2017 in the U.S. District Court for the Middle District of Florida, charges Creative Learning and Pappas with violating, or aiding and abetting violations of, Section 17(a) of the Securities Act of 1933, Sections 10(b), 13(a), 13(b)(2), 13(k) of the Securities Exchange Act of 1934, Rules 10b-5, 12b-20, 13a-1, 13a-13, and 13a-15 thereunder, and Regulation FD. Additionally, Pappas is charged with violating, or aiding and abetting violations of, Sections 9(a)(2), 13(d), 14(a), and 16(a) of the Exchange Act and Rules13a-14, 13b2-1, 13d-1, 14a-6(b), 16a-2, and 16a-3 thereunder. The complaint also alleges that O'Donnell and Cote violated Sections 17(a)(2) and (3) of the Securities Act and Section 9(a)(2) of the Exchange Act, and aided and abetted violations of Section 13(k) of the Exchange Act.

Without admitting or denying the SEC's allegations, Creative Learning, O'Donnell, and Cote agreed to the entry of final judgments that permanently enjoin them from violating the charged sections of the federal securities laws, impose ten-year officer-and-director and penny stock bars on O'Donnell and Cote, and require O'Donnell and Cote to pay approximately $71,000 in disgorgement, interest, and penalties. The SEC is litigating against Pappas.

The SEC's investigation was conducted by Matt Reilly with assistance from Bert Braganza, and was supervised by Antonia Chion, Melissa Hodgman, Kevin Guerrero, and Peter Rosario. The SEC's litigation against Pappas will be handled by H. Michael Semler and Mr. Reilly, and will be supervised by Cheryl L. Crumpton.

SEC Complaint