Investing

SEC Issues Fraud Charges Against Shell Factory Operators

Chris Lange

Published: May 16, 2016 12:50 pm

Last Updated: January 13, 2020 7:59 am

The U.S. Securities and Exchange Commission (SEC) recently announced fraud charges against a California stock promoter and a New Jersey lawyer who allegedly were creating sham companies and selling them until the SEC put an end to it.

In its report, the SEC alleged that Imran Husain and Gregg Evan Jaclin operated a shell factory enterprise by filing registration statements to form various startup companies and misleading potential investors to believe each company would be operating and profitable.

The agency further alleged that their secret objective all along was merely to make money for themselves by selling the companies as empty shells rather than actually implementing business plans and following through on their representations to investors.

In an effort to move quickly to protect investors based on evidence collected even before its investigation was complete, the SEC issued stop orders and suspended the registration statements of the last two created companies — Counseling International and Comp Services — before investors could be harmed and the companies could be sold.

Michele Wein Layne, director of the SEC’s Los Angeles Regional Office, commented:

Issuers of securities offerings must make truthful disclosures about the company and its business operations so investors know what they’re getting into when they buy the stock. We allege that Husain drummed up false business plans and created a mirage of initial shareholders while Jaclin developed false paperwork to depict emerging companies that later sold as just empty shells.

According to the SEC’s complaint filed in federal court in Los Angeles:

• Husain and Jaclin created nine shell companies and sold seven using essentially the same pattern.
• Husain created a business plan for each company that would not be implemented beyond a few initial steps, and then convinced a friend, relative, or acquaintance to become a puppet CEO who approved and signed corporate documents at Husain’s direction.
• Jaclin supplied bogus legal documents that Husain used to conduct sham private sales of a company’s shares of stock to “straw shareholders” who were recruited and given cash to pay for the stock they purchased plus a commission.  Some of the recorded shareholders were not even real people.
• Husain and Jaclin filed registration statements for initial public offerings and falsely claimed that a particular business plan would be implemented.  Deliberately omitted from the registration statements were any mention of Husain starting and controlling the company.
• Husain and Jaclin filed misleading quarterly and annual reports once a company became registered publicly, providing much of the same false information depicted in the registration statements.
• Husain obtained about $2.25 million in total proceeds when the empty shell companies were sold, and Jaclin and his firm received nearly $225,000 for their legal services.