U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19284 / June 24, 2005
Securities and Exchange Commission vs. Patrick A. Grotto, Mark B. Leffers and Jon M. Bloodworth., Civil Action No. 05-CV-5880 (GEL) (S.D.N.Y.)
SEC SUES FORMER TOP OFFICERS OF BUSYBOX.COM FOR IPO FRAUD
The Securities and Exchange Commission today filed a complaint in the United States District Court for the Southern District of New York charging Patrick A. Grotto, Mark B. Leffers and Jon M. Bloodworth with fraud in connection with the June 2000 initial public offering of Busybox.com, Inc. At the time of the fraudulent IPO, Grotto was chief executive officer and chairman of Busybox's board of directors, Leffers was chief financial officer, Bloodworth was general counsel and a director. Grotto, 53, is a resident of New York City and Easton, Maryland; Leffers, 40, is a resident of Queenstown, Maryland; Bloodworth, 44, is a resident of Santa Fe, New Mexico.
The Commission's complaint alleges:
The defendants learned that Barron Chase Securities Inc., which had agreed to underwrite a $12.8 million firm commitment IPO for Busybox, could not sell all of the IPO securities to bona fide investors. The defendants then knowingly or recklessly participated in a scheme to close the IPO.
The defendants purchased unsold IPO securities using undisclosed and unearned bonuses which they caused Busybox to pay to themselves. In addition, the defendants paid Busybox's lawyer an inflated and undisclosed legal fee using unsold IPO securities. Barron Chase financed these transactions and, during the IPO closing, the defendants caused Busybox to repay Barron Chase out of the proceeds of the offering. As a result, the defendants and others received almost 20% of the securities offered in the IPO, which reduced the proceeds available to Busybox by over $2.1 million.
The defendants knew, or were reckless in not knowing, that the IPO registration statement did not disclose the insider transactions, the inflated legal fee, Barron Chase's financing or the repayment to Barron Chase using IPO proceeds. In the week following the close of the IPO, the defendants spent a further 30% of the IPO proceeds ($2.9 million) on items that were not disclosed in the registration statement.
The Commission alleges that the defendants thereby violated the antifraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission seeks permanent injunctions, disgorgement of ill-gotten gains, prejudgment interest, civil monetary penalties and orders barring all three defendants from acting as an officer or director of a public company.
This is the second enforcement action taken by the commission based on its investigation of the Busybox IPO. Previously, the Commission had sued Thomas Prousalis, Busybox's lawyer, and Robert Kirk, the president of Barron Chase, for their roles in the IPO. On March 21, 2005, the Honorable Gerard E. Lynch, U.S. District Judge for the Southern District of New York entered final judgments, enjoining Prousalis and Kirk from violations of the antifraud provisions of the federal securities laws and ordering payment of disgorgement and interest, and imposing a penalty on Prousalis. (Lit. Rel. No. 18533, Jan. 7, 2004, and Lit. Rel. No. 19150, Mar. 22, 2005)
The Commission thanks the United States Attorney's Office for the Southern District of New York and NASD Regulation for their cooperation in this matter.
