First JOBS Act Fraud Case Reveals Weaknesses of JOBS Act and SEC

A new case filed by the Justice Department calls into question the risks of the JOBS Act and the efficacy of the Securities and Exchange Commission in protecting investors.

The DOJ alleged in the case that Caribbean Pacific Marketing, which described itself as an “emerging growth company” as per the JOBS Act in its prospectus, was in fact run by a disbarred lawyer perpetrating penny stock fraud on unknowing investors. The SEC has issued a stop sales request.

But the SEC’s request comes two months after the commission “allowed the company to begin selling shares under a prospectus that the government now says it knew to be inaccurate,” reports Floyd Norris at the New York Times.

The timeline of the case, as represented in the DOJ’s filing, reveals that in July 2012, the FBI met with William J. Reilly, a Boca Raton lawyer disbarred for past penny stock fraud and for disobeying a past SEC injunction. In that meeting, which took place in a Denny’s (really?), Mr. Reilly allegedly admitted to breaking the law in his sales of Caribbean Pacific stock.

But somehow, the stock’s public offering was allowed to go forward. Norris reports:

In late August, Randall Lanham, a California lawyer representing Caribbean Pacific, sent two letters to the S.E.C., asking that it allow the company to begin selling shares on Aug. 29. In the second of those letters, Mr. Lanham said the company understood that allowing the sale would “not foreclose the commission from taking any action with respect to the filing.” The commission granted the request, and the company was allowed to begin marketing shares under a prospectus that the government knew was inaccurate.

It took another two months for the government to file the actions.

Asked why the S.E.C.’s division of corporation finance allowed the offering to proceed, John Nester, an S.E.C. spokesman, said, “As is always the case, Enforcement and Corporation Finance staff closely and appropriately coordinated their efforts in this case. As soon as staff had the necessary and required evidence to support the pending action in this case, we filed the case.”

Did the SEC get bogged down in bureaucratic protocol and leave investors in the lurch as a result? What do you think?

About Beth Connolly

Beth Connolly is Head Editor, Writer, and Marketing Coordinator at the Compliance Exchange and the Wall Street Job Report. She tweets @Bethconnolly and shares her love of the good writing life at her blog, When Nutmeg Met Basil. A graduate of Middlebury College in Vermont, she works in Manhattan and calls Astoria home.

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