SEC Secures Judgments Against Halitron, Inc. and CEO Bernard Findley for Fraudulent Securities Practices

2024-05-05

The SEC obtained a final judgment against the defendants Connecticut-based penny stock company Halitron, Inc. (“Halitron”) and its CEO Bernard Findley (“Findley”) on March 20, 2024. The final judgment followed a trial and a January 17, 2023 jury verdict that held Halitron and Findley responsible for fraudulently issuing misleading press releases aimed at increasing Halitron's stock value to attract financiers to provide funding to Halitron in exchange for Halitron’s discounted stock. The final judgment orders the Defendants to variously pay over $441,000 in disgorgement of ill-gotten gains, prejudgment interest, and civil penalty.

Facts Of The Case 

In 2016, Halitron’s financial statements reported approximately $300,000 in revenue, but by 2017, the company stopped generating any income. During this period, Findley intensified his fundraising efforts for Halitron, often directing funds to himself and using these funds to pay for his expenses.

In fact, from 2017 onward, Halitron's financial activities mainly involved transactions with investors who purchased its alleged debts in exchange for discounted company shares. This strategy allowed Halitron to decrease its debt obligations and obtain cash, with investors subsequently selling Halitron’s discounted shares at higher prices in public markets.

To facilitate these debt financing deals, Halitron and Findley aimed to make the company's stock attractive to financiers, enabling them to sell Halitron’s shares at elevated prices in public markets. Despite Halitron’s declining operations and revenue, Halitron and Findley continued to promote Halitron's stock between 2016 and 2018, resulting in around $555,000 from debt financing transactions. Findley funneled over half of this amount to himself through transfers to his personal bank account and payments towards his wife’s credit card debt.

While at the helm of Halitron, Findley authored and disseminated multiple press releases containing false or misleading information about the company's financial status and operations. These press releases, distributed via Halitron’s website, media channels, and through at least one paid stock promoter, falsely portrayed Halitron as a promising enterprise with growth potential. However, the company lacked substantial operations, full-time employees, revenue, or immediate prospects in reality. 

Each of the inaccuracies detailed below significantly impacted investors by falsely suggesting to them that Halitron possessed value and promising prospects, when, in truth, it did not. Investors relying on this information were misled regarding the company's financial health, operations, and growth potential.

Halitron and Findley’s false and misleading statements about Halitron fell into the following four categories. 

FALSE AND MISLEADING STATEMENTS ABOUT HALITORN’S FINANCING

On July 7, 2016, Halitron and Findley issued a press release announcing that Halitron had finalized arrangements for a debt financing of $300,000 at 6% interest, subject to the achievement of certain stock price milestones by the end of the fiscal quarter ending September 30, 2016. In other words, Halitron would get a loan worth $300,000 on which it would pay 6% interest to the loan provider. 

The press release emphasized the intention to utilize this loan amount to boost Halitron’s sales efforts and kick-start production to achieve sales targets ranging from $3 to $5 million for 2016.

However, this press release omitted to disclose that the actual terms of the note specified a maximum amount of "up to $300,000" rather than a guaranteed sum of $300,000 and that the funding was contingent upon the lender's sole discretion even if the Halitron’s stock price milestones for the quarter ending September 30, 2016, were met. 

Additionally, the stated interest rate of 6% was lower than the actual rate of 8% that Halitron would be obligated to pay. In reality, the lender only disbursed $20,000 to Halitron, a fraction of the $300,000 claimed in the press release. As a result, the press release inaccurately portrayed both the terms and magnitude of the financing, misleading investors regarding Halitron's financial position and prospects. Notably, neither Halitron nor Findley issued any public correction to rectify these erroneous and deceptive statements.

FALSE AND MISLEADING STATEMENTS ABOUT HALITRON’S FINANCIAL AUDIT 

In late 2016, Findley enlisted the services of an accounting firm to conduct an audit of Halitron’s financial statements. By May 2017, Halitron publicly announced that the audit was nearing completion and revealed its intention to transition into a publicly listed company under SEC reporting requirements. However, a subsequent announcement from Halitron disclosed a change in plans. Instead of pursuing SEC reporting status, the company aimed to list its stock on a higher-tiered service on OTC Markets upon completion of the audit.

On December 11, 2017, Halitron and Findley issued a press release indicating that the financial audit was still ongoing. Contrary to this announcement, Halitron had in fact abandoned the audit around this time, partly due to financial constraints that prevented Findley from paying the auditor and partly due to the poor state of Halitron’s financial records. Consequently, no audit was finalized in 2017.

Throughout 2018, Halitron and Findley continued to mislead investors regarding the status of Halitron’s supposed audit. In a press release dated January 16, 2018, they asserted that the audit was nearing completion. Just over a month later, on February 28, 2018, another press release declared that the audit would commence promptly. 

However, by late 2017, Findley had ceased communication with the auditor, effectively halting the audit process. Despite this, on April 25, 2018, Halitron and Findley once again falsely claimed in a press release that the financial audit was in its final stages. Consequently, the series of press releases regarding Halitron’s financial audit were inaccurate and deceptive.

FALSE AND MISLEADING STATEMENTS ABOUT HALITRON’S STOCK BUYBACK PROGRAM

Between 2017 and 2018, Halitron and Findley promoted Halitron’s stock by suggesting that the company intended to initiate a stock buyback plan to buy back shares from its shareholders. On October 30, 2017, a press release issued by Halitron and Findley announced that the company’s management and board of directors had approved a stock buyback program to enhance shareholder value. However, despite Findley holding the sole position on the board and being an officer of Halitron, no concrete plan for a stock buyback program had been devised. The April 25, 2018 press release from Halitron reiterated the false claim about a stock buyback program, yet there was no significant repurchase of stock from shareholders around the time of these press releases. Consequently, the press releases were deceptive and inaccurate, as they falsely implied that Halitron had formulated or was actively pursuing a stock buyback program for the benefit of investors.

FALSE AND MISLEADING STATEMENTS ABOUT HALITRON’S ASSETS 

As Halitron's business activities declined, Halitron and Findley made deceptive statements regarding the company's asset value. On July 18, 2017, the Defendants issued a press release regarding an anticipated stock transaction with Company X, a firm partly owned and controlled by Findley. The release claimed that Company X would acquire a supposed asset from Halitron valued at over $3 million in exchange for Company X stock of the same amount. However, this deal was grossly overstated as the asset held little value, and Company X, being a new entity with minimal funding and no revenue, couldn't justify such a valuation.

On December 4, 2017, another press release reiterated Halitron's purported ownership of $3 million worth of Company X stock, alongside unspecified "goodwill" associated with other companies Halitron allegedly owned, estimated by Findley at $1.4 million. However, some of these referenced companies had minimal operations, and Halitron didn't even possess ownership in one of them. None of these companies had substantial operations to support the claimed valuation.

About two weeks later, on December 14, 2017, another press release boasted of Halitron's ownership of Company X stock, claiming entitlement to a $3 million dividend payment in 2020. However, considering Company X's lack of revenue and limited operations, such a payment was unlikely, a fact Findley, as co-owner and "chairman" of Company X, would have known.

These misrepresentations about Halitron's supposed $3 million stake in Company X persisted into 2018. On January 22, 2018, a press release stated that Halitron received a $3 million promissory note from Company X at a 4% interest rate. However, this release failed to mention that Findley executed the note on behalf of both companies without the consent of Company X's other owner, leading to a dispute over its validity. Additionally, Company X had minimal operations and no foreseeable means to repay such a significant amount to Halitron.

Charges Against The Defendants 

FRAUD WITH REGARDS TO THE OFFER/ SALE OF SECURITIES

Based on the above actions, the Defendants knowingly or recklessly used tactics, schemes, and strategies to deceive in the offer or sale of securities. They acquired funds and property via false statements about material facts and omission of material information to make the statements not misleading. Also, the Defendants engaged in activities deemed as fraud upon purchasers and sellers of securities. By doing so, the Defendants violated Sections 17(a) [15 U.S.C. § 77q(a)] of the Securities Act. 

FRAUD WITH REGARDS TO PURCHASE/ SALE OF SECURITIES

Based on the actions mentioned above, the Defendants knowingly or recklessly concerning the purchase or sale of securities used tactics, schemes, and strategies to deceive in the offer or sale of securities. They acquired funds and property via false statements about material facts and omission of material information to make the statements not misleading. Also, the Defendants engaged in activities deemed as fraud upon purchasers and sellers of securities. By doing so, the Defendants violated Sections 10(b) [15 U.S.C. § 78j(b)] Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder. 

Final Judgement Obtained By The SEC Against The Defendants 

  1. The SEC obtained the final judgment from the District Court of Connecticut permanently prohibiting and restraining the Defendants, along with their officers, agents, employees, and legal representatives, and anyone else cooperating with them who becomes aware of the injunction through personal service or other means, from violating Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)], as well as Section 10(b) of the Exchange Act [15 U.S.C. 78j(b)] and Rule 10b-5 under it [17 C.F.R. 240.10b-5]
  3. Further, it directed the Defendants to disgorge their unjust gains, along with prejudgment interest, resulting from the illegal activities outlined in this Complaint. Additionally, the court required the Defendants to individually pay civil penalties as per Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)] and Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)]
  5. The court also issued an order following Section 21(d)(2) of the Exchange Act [15 U.S.C. § 78u(d)(2)], to prevent Findley from serving as an officer or director of any entity with securities registered under Section 12 of the Exchange Act [15 U.S.C. § 78l] or obligated to file reports under Section 15(d) of the Exchange Act [15 U.S.C. § 78o(d)]
  7. Finally, the District Court of Connecticut imposed a ban on Findley's involvement in any penny stock offerings under Section 20(g) of the Securities Act [15 U.S.C. § 77t(g)], and Section 21(d)(6) of the Exchange Act [15 U.S.C. § 78u(d)(6)]

Key Takeaways For The Investors  

Reasonable investors will always go through the company’s financial statements, and annual and quarterly reports to know the company’s financial health and whose equity stocks they intend to purchase. As regards this case, a thorough due diligence on the part of investors involving understanding Halitron’s business, operations, future prospects would have given them a fair understanding that the statements made by Findley about Halitron’s financial position, its use of debt funds to kickstart factory operations, etc were all untrue and misleading.