SEC Charges Massachusetts-Based Corporation and Senior Officers in $26 Million Fraudulent Securities Offering
On September 10, 2012, the Securities and Exchange Commission filed an enforcement action in federal court in Boston charging Massachusetts-based Bio Defense Corporation and others for their roles in a fraudulent offering of unregistered Bio Defense securities. The defendants are charged with defrauding investors through various misrepresentations and schemes while raising at least $26 million in investor funds.
In addition to Bio Defense, the Commission’s complaint charges Michael Lu of Lexington, Massachusetts, the founder and former CEO and Chairman of Bio Defense; Jonathan Morrone of Newton, Massachusetts, a former Senior Executive Vice President of Bio Defense; Z. Paul Jurberg of Brookline, Massachusetts, a senior officer of Bio Defense and most recently a Senior Vice President of Sales and Marketing; Anthony Orth of Tustin, California, a former Vice President of Marketing for Bio Defense; and Brett Hamburger of Delray Beach, Florida, a consultant to Bio Defense who raised investor funds for the company. The Commission also named May’s International Corporation, an entity controlled by Michael Lu, as a relief defendant based on its receipt of investor funds.
According to the Commission’s complaint, filed in the United States District Court for the District of Massachusetts, Bio Defense, which purports to develop, manufacture and sell a machine for combating the use of dangerous biological agents through the mails, and its principals began engaging in unregistered offers and sales of securities to investors in the United States by at least 2004 and, after attracting the attention of various domestic state regulators in 2008, began utilizing "boiler room" firms to assist in selling shares of Bio Defense securities to overseas investors primarily in the United Kingdom.
The Commission’s complaint alleges that, while making unregistered offers and sales of securities to US investors from at least 2004 through August 2008, Lu, Morrone, and Jurberg made false claims to investors that Bio Defense was not paying financial compensation to its employees and officers. The complaint further alleges that these individuals gave potential investors the false impression that Bio Defense preserved its cash assets by having employees who worked for no, or very little, pay, suggesting that these employees were working solely or primarily for "sweat equity" shares, which might later become valuable when the company became profitable or underwent an initial public offering of stock. In fact, Bio Defense’s largest expense during those years was the money it paid to Lu, Morrone, and Jurberg and other employees from funds raised from investors; in 2004 alone, Bio Defense paid approximately $1 million in compensation to its officers and employees.
The Commission’s complaint further alleges that, as Bio Defense began raising money overseas in August 2008, the defendants transformed the company into a deceptive and fraudulent device designed to enrich its principals while also paying as much as 75% of investor proceeds as commissions to its overseas boiler room fundraisers. From August 2008 through approximately July 2010, Bio Defense’s most substantial source of cash generation and most significant expense was not manufacturing and selling machines, but instead was its securities promotion and sales activities. Bio Defense and its representatives did not tell investors that 75% of funds received from them would be going straight to boiler room operators.
The Commission alleges that all defendants violated Section 17(a) of the Securities Act of 1933 ("Securities Act") and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder; that Bio Defense, Lu, Morrone, Jurberg and Orth violated Sections 5(a) and 5(c) of the Securities Act; and that Lu, Morrone, Jurberg, Hamburger and Orth violated Section 15(a)(1) of the Exchange Act. The Commission also alleges, in the alternative, that Lu and Morrone are liable under Section 20(a) of the Exchange Act as control persons of Bio Defense for Bio Defense’s violations of Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5 thereunder. The SEC seeks in its action permanent injunctions, disgorgement plus prejudgment interest, civil penalties, and, against Lu, Morrone, Jurberg and Orth, officer and director bars.
The Commission acknowledges the assistance of the Massachusetts Securities Division, the UK Financial Services Authority and the City of London Police in this matter.
