Friday, July 30, 2004

The NOT So "Clean" Public Shell

A reverse merger involves buying a company that already has a public listing, folding your company into it and voila! instant IPO on the cheap.

Good in theory. Good in practice IF you have a truly clean shell among other things.

The Pocketpass board was repeatedly assured by Transfund’s representatives (Len Hartkemeier and Harvey Bornstein) that Secure Sign, previously known as YourBankOnline.Com was clean, appropriate and the best vehicle for our proposed reverse merger.

We repeatedly asked Transfund why, if their backers liked Pocketpass and had money to invest, did we need to go the reverse merger route. In addition to the seamy reputation of reverse mergers, it entailed a lot of extra expense and time to accomplish the merger and would entail added time and expenses for a small company to comply with reporting and other requirements for a public company.

We were told that the Transfund backers wanted their investment to be liquid. The plan, Transfund insisted, was to have our reverse-merged company resume trading on Nasdaq's Over-The-Counter Bulletin Board (OTCBB) system rather than the Pink Sheets where Secure Sign had languished since its own demise.

Again, we proceeded despite our negative "gut" feelings about this. After all, we did need the money. Along with this bridge funding was the representation that "Private Merchant Banker" James M. Morse would raise as much as $5 million for the new company. Despite very glowing and positive representations that the money could be raised, the "fine print" made the promises hollow. More about this in future posts.

In future posts, I'll detail some of the frustrations and foot-dragging by Secure Sign and others, but what shocked us as due diligence proceeded was the dirty laundry that would come.

Some of the initial dirty laundry (which Transfund tried its best to explain away, blame others and otherwise imply that the issue was just a misunderstanding) included:

SEC and U.S. Attorney Coordinate Efforts to Crackdown on "Cooking the Books"
See Item 4

Securities and Exchange Commission Litigation Archive Search

Online banking firm hit by SEC


On February 5, the Commission settled cease and desist proceedings previously instituted against Secure Sign, Inc., of Mountlake Terrace, Washington (Secure Sign or the Company).

The Commission instituted proceedings against Secure Sign in September 2000, alleging that the Company - then known as, and previously as Consolidated Data, Inc. - fraudulently inflated the value of its assets in public statements and Commission filings. According to the staff, the Company issued a press release in March 1999 claiming to have purchased the rights to an Internet banking software program for $10 million in cash and stock. This press release, which was followed by additional Company statements touting the software program, caused YourBankOnline's stock price to jump from less than $1 to $32 over a two- week period.

As alleged in the Order, the March 1999 press release greatly overstated the value of the software and misrepresented YourBankOnline's financial strength. The Company (which had less than $200 in cash at the time) had no ability to make any substantial cash payments to acquire the software. In addition, the staff alleges, the Company stock exchanged for the software was worth far less than $10 million. Moreover, the $10 million value was unreasonable in light of the fact that the same software had been purchased for approximately $400,000 in a separate transaction just a few months earlier.

The staff further alleges that the Company also fraudulently inflated the value of the software in financial statements filed with the Commission in August 1999.

In the Order announced today, the Commission found that Secure Sign violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and ordered the Company to cease and desist from committing or causing violations of those provisions. The Commission accepted an offer of settlement submitted by Secure Sign in which the Company, without admitting or denying the Commission's findings, agreed to the entry of the Order.

The proceedings previously instituted by the Commission against the Company's former president, Pakie Plastino, and outside auditor, William L. Butcher, remain pending. (Rel. 34-43923; AAE Rel. 1366; File No. 3- 10313)


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