You may have heard the term catfish to describe someone who pretends to be someone who he or she is not by creating an online profile with a false identity, generally to pursue deceptive online romances. In the Securities and Exchange Commission’s (SEC) latest enforcement action, the defendant takes catfish to a new level by creating a pseudo-company and seeking investments on top of romance through representing anything but the truth.
Last week the SEC filed a complaint in Connecticut against the CEO of a medical products company accused of misleading people into investing in his company and using the invested funds for personal use. His target investors — women he met though an online dating website. Collectively, the victims invested over $2.3 million into the defendant’s company, Safety Tech. Among the relief sought, the SEC is seeking a temporary restraining order against the defendant and his company, as well as an emergency asset freeze to preserve any assets necessary to satisfy a future judgment.
Safety Tech was founded in 2006 by a chemical engineer that the defendant teamed up with but who has since passed. Safety Tech’s offering materials reflected its goal to seek a patent and commercialize a cut and puncture resistant surgical glove. The glove project is Safety Tech’s only one to date; yet, Safety Tech has obtained no patents and has not licensed any products or intellectual property during its ten years of business. Instead, Safety Tech, in the defendant’s sole control for the last 8 years, maintained its operational status through the money it raised from investors.
The defendant influenced prospective investors with claims about the success of the glove project and by representing inflated returns of an investment in Safety Tech. Included in the defendant’s promotional materials was a private placement memorandum (PPM) that had not been updated since 2008. As for the patent applications reflected in that PPM, at least two have been rejected by the U.S. Patent and Trademark Office. The defendant also made outlandish and untrue representations to potential investors, including “What I would really like to emphasize is that we are an open book company meaning that any investor can look at the books at any time. No Bernie Madof’s [sic] here!” The defendant, however, maintained no current or accurate books for Safety Tech.
Of Safety Tech’s 55 investors, six are women the defendant met through a well-known online dating service and 14 are family members or friends of those six women. As a result, over a third of Safety Tech’s investors and over half of the money he raised relate back to the defendant’s online dating activities. The defendant spent only about 7% of the money raised from investors on research and development of the company’s purported technology while over 50% of the invested funds have gone to the defendant directly or on personal and non-business expenses, including purchasing a car.
This action joins the list of creative frauds on trusting investors in 2016, including four individuals (three former registered representatives and one disbarred attorney) who purportedly solicited seniors through “free dinner” investment seminars in Florida and a financial adviser who allegedly lied and produced false deal documents that he created in a failed attempt to hide from his professional athlete clients his misconduct, namely investing in movie projects and making Ponzi-like payments. These actions provide a lesson to investors and financial clients to perform adequate due diligence and hold their respective broker-dealers and advisers accountable, while warning those on the other side of the table that if they are up to some old or even new tricks, the SEC will come knocking.