Was USFF a Scam lead by Rob Schwartz
Phantom X raised the question of whether USFF was a scam and whether shareholders should pursue some form of legal action. Rather than state an opinion or provide a recommendation, I thought I would respond by providing some informational ‘dots’ which shareholders can connect as you see fit and raise some questions to which shareholders may want answers. This post is not intended to be an all inclusive list of informational dots or questions; this is just some of the information available from public sources.
If, after reviewing this post, there are shareholders who are interested in more information regarding USFF, including non-public information, retain an attorney and have that attorney contact me.
Consider the USFF SEC filing, made on August 21, 2012, regarding a Stock Purchase Agreement (SPA) with G & A Capital and available online at [url]www.sec.gov/Archives/edgar/data/1116112/000139834412002707/fp0005402_8k.htm:
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Item 1.01 Entry into a Material Definitive Agreement
On 10 June 2011, the board of directors ratified a Stock Purchase Agreement entered into between G&A Capital Development, LLC and Nuclear Solutions, Inc. on 12 May 2011. Under the terms of the Stock Purchase Agreement, G&A Capital paid Six Hundred Sixty-Two Thousand Five Hundred Forty Dollars And Thirty Seven Cents (US $662,540.37) for One Hundred Sixty-Four Million Four Hundred Two Thousand Seventy-Six (164,402,076) common shares.
To facilitate the transaction contemplated by the Stock Purchase Agreement, the board modified the corporate Articles of Incorporation and Bylaws, including the following resolution:
RESOLVED, that the corporation will have authority to issue Eight Hundred Fifty Million (850,000,000) shares of stock in the aggregate. These shares will be divided into two classes. The number of authorized common shares in the Articles of Incorporation is changed to 800,000,000 (Eight Hundred Million) shares authorized with a par value of $.0001, and the number of preferred shares is changed to 50,000,000 (Fifty Million) shares authorized with a par value of $.001
Under the terms of the Stock Purchase Agreement, the $662,540.37 was placed in escrow and used to retire in excess of 75% of the outstanding corporate debt.
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The ‘facts’ in the last sentence of this filing are inconsistent with ‘facts’ in other USFF SEC filings and other public information: there never was a lump sum of $662,540.37, there never was an escrow and 75% of the USFF corporate debt was NOT retired.
The assertion that USFF conducted a transaction with G & A Capital Development contradicts the records of the NJ Secretary of State; there is no evidence that G&A Capital Development ever existed as a NJ limited liability company. Visit https://www.njportal.com/DOR/businessrecords/EntityDocs/BusinessStatCopies.aspx and conduct a business name search for a New Jersey LLC named “G & A Capital Development”; the search will return no records.
An edited version of the G & A Stock Purchase Agreement (SPA) was filed with the SEC in 2013 and is available online at http://www.sec.gov/Archives/edgar/data/1116112/000114420413042758/v351020_ex10-1.htm.
Examine the language in paragraph 1 and the dates of the ‘investments’ listed in attachment 1 to the SPA. If Attachment 1 is accurate, there could never have been a lump sum of $662,540.37 to put into escrow in May 2011 when the SPA was executed unless the $90,000 from March 10, 2010 and the $155,000 from April 13, 2010 was held, unused for over a year until the SPA was signed in May 2011.
Note that paragraph 1 of the SPA identifies an ‘Escrow Agreement’ which is purportedly attached to the SPA as Attachment 2. There is no Attachment 2 to the copy of the SPA USFF filed with the SEC, perhaps because, like G & A Capital itself, Attachment 2 never existed and there never was an escrow of any funds.
Note that paragraph 2(f) of the SPA calls for issuance of a warrant to purchase additional shares for an aggregate price of $2,000,000. While paragraph 2(f) recites that a form of warrant was included as Attachment 3 to the SPA, the copy of the SPA USFF filed with the SEC does not include an Attachment 3, perhaps because, like G & A Capital itself and Attachment 2 (the Escrow Agreement), Attachment 3 never existed.
This raises at least three questions:
1. What due diligence did USFF officers and directors conduct regarding G & A Capital Development?
2. Did Bagot sign and implement an incomplete agreement in May 2011?
3. Did Drinkwater, Bagot and Chady approve an incomplete agreement in June 2011?
Applying simple math to the provisions of paragraph 2(f) of the SPA establishes a share price of $0.004 per share ($2,000,000 to purchase 496,277,915 shares of stock). Using this valuation, 300,851,000 shares should cost $1,212,429, yet in multiple SEC filings, USFF asserts that G & A Capital obtained 300,851,000 shares by exercising a ‘cashless warrant’.
Note that paragraph 4.4 of the SPA omits the address for notices to G & A Capital Development, LLC. The address included in the actual SPA but intentionally deleted from the copy of the SPA filed with the SEC, was:
G & A Capital
One Miss America Way
Atlantic City, NJ 08401
That address is the address of the Atlantic City Convention Center and a phone call to the convention center will reveal that G & A never had an office there. Perhaps the address was intentionally omitted to avoid revealing a material fact that might raise questions about the existence of G & A Capital and the validity of the SPA.
Enquiring minds may want to look at corporate governance, specifically how the board that approved the G & A Capital SPA was ‘elected’ and maintained in power, supposedly acting as fiduciaries for you as a shareholder. Before you review the following, ask yourself:
• Do you recall ever receiving a notice of a USFF annual meeting?
• Did you ever attend a USFF annual meeting?
• Do you recall ever being asked to send, or actually sending, your proxy to vote in the board elections conducted at a USFF annual meeting?
Now consider one sentence regarding annual meetings and board elections that is repeated verbatim in multiple USFF SEC filings: “Each director is elected at our annual meeting of shareholders and holds office until the next annual meeting of shareholders, or until his successor is elected and qualified.”
(http://www.sec.gov/Archives/edgar/data/1116112/000114420413042758/v351020_10k.htm), at page F-20 of the 2010 10K;
(http://www.sec.gov/Archives/edgar/data/1116112/000114420413047620/v353019_10k.htm, at page 20 of the 2011 10K ;
(http://www.sec.gov/Archives/edgar/data/1116112/000114420413067721/v362810_10k.htm) at page 35 of the 2012 10K;
(http://www.sec.gov/Archives/edgar/data/1116112/000114420414009810/v368506_10-12g.htm) at page 10 of the Form 10 filed in 2014.
This statement regarding annual meetings and board elections was certified by Bagot in all of the 10Ks and Form 10s; Chady certified the statement in the 2010, 2011 and 2012 10Ks. One of the 10K certifications can be seen for Bagot at http://www.sec.gov/Archives/edgar/data/1116112/000114420413042758/v351020_ex31-1.htm and for Chady at http://www.sec.gov/Archives/edgar/data/1116112/000114420413042758/v351020_ex31-2.htm.
As you will see, the certification language includes, in part, that:
“(2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;”
This raises at least two questions:
1. If there was no annual meeting and no board election in 2010, 2011, 2012, 2013 and 2013, is certifying that an election was conducted at an annual meeting in each of those years an untrue statement of a material fact?
2. Is it possible that the CEO (Bagot) and the CFO (Chady) did not know that there was no annual meeting and no board election in 2010, 2011, 2012, 2013 or 2014?
Review the articles of incorporation and bylaws USFF filed with the SEC at http://www.sec.gov/Archives/edgar/data/1116112/000114420413042758/v351020_ex3-1.htm and http://www.sec.gov/Archives/edgar/data/1116112/000114420413042758/v351020_ex3-2.htm, respectively and then ask yourself at least two questions:
1. Is there any provision in the articles of incorporation or bylaws that provides an exemption from the requirement for an annual meeting and an election of directors?
2. If the board had a secret agreement to forego annual meetings and board elections, would failure to inform shareholders of that fact in SEC filings be an omission of a material fact that should have been disclosed in order to ensure that a filing was not misleading?
Look again at the G & A SPA; that transaction was proposed by Schwartz and approved by Drinkwater, Bagot and Chady. G & A obtained a total of 465,253,076 shares of USFF stock, 164,402,076 shares of stock from the SPA itself and another 300,851,000 shares from the ‘cashless warrant’.
If your brain did not explode the first time you tried, pause here and take another shot at reconciling a cashless warrant for 300,851,000 shares with paragraph 2(f) of the SPA setting a share price of $0.004 ($2,000,000 for 496,277,915 shares).
Tracing the stock is important, for now just consider what the SEC filings show: 190,432,576 shares – over 40% - of the G & A shares went to parties involved in proposing and approving the transaction. After the G & A SPA was approved by Drinkwater, Bagot and Chady, Drinkwater received 76,050,000 shares, Bagot received 33,000,000 shares, Chady received 10,000,000 shares and Reyna & Associates, a company controlled by Rob Schwartz, received 71,382,576 shares. See, for example, pages 5, 39 and 40 of the USFF 2012 10K at http://www.sec.gov/Archives/edgar/data/1116112/000114420413067721/v362810_10k.htm.
Enquiring minds may want to identify the source of the funds described in Attachment 1 of the SPA and ask at least three questions –
1. What was the source of the $662,540.37 referenced in the SPA?
2. How much of the alleged $662,540.37 from the SPA was provided by Schwartz, Drinkwater, Bagot or Chady?
3. How often does an investor put money into a company so that stock can be issued to a third party?
Enquiring minds may also want to dig a little deeper to examine shareholder lists and track stock holdings and transfers, with a special focus on shareholder last names and family affiliations.
Phantom X said “I think we were all scammed” and that Rob Schwartz was the ringleader. If by “scammed” Phantom X meant being victimized by a scheme to make money by dishonest means, perhaps shareholders should consider conducting some basic background checking. This could include
1. Reviewing a February 21, 2014 article on Rob Schwartz available at http://www.nj.com/gloucester-county/index.ssf/2014/02/washington_township_man_gets_5_years_probation_for_stealing_in-laws_mortgage_money.html . Here is a portion of that article:
Schwartz — an entrepreneur who studied financial management at Drexel University — pleaded guilty in October [2013] to theft by deception. He admitted to stealing funds meant to pay the mortgage on the Gloucester Township home his sister-in-law, Karen Giosa, shares with her husband, Frank Giosa and their two children.
Frank Giosa said Schwartz took $175,000 from him and his wife in 2007, having agreed to use it to pay the mortgage. After some time, he stopped making the payments. But he didn’t tell the Giosas, Frank said.
“We didn’t know what was going on until we got a foreclosure notice,” he explained after Friday’s sentencing. That foreclosure notice came in 2009.
2. Scrutinizing the timing of Rob Schwartz’ ‘resignation’ from the USFF executive committee in August 2012 (http://www.sec.gov/Archives/edgar/data/1116112/000139834412002954/fp0005501_8k.htm) and his indictment for theft by deception in October 2012 (http://www.nj.com/gloucester-county/index.ssf/2012/10/gloucester_county_indicts_30_s.html).
3. Reviewing Civil Action No. 09-CI-00931, Franklin Circuit Court, Commonwealth of Kentucky; the end result is that a USFF investor obtained a $728,677.60 judgment against Schwartz for breach of contract relating to a USFF investment.
4. Investigating the facts behind the ‘settlement’ with Larry Harris referenced in SEC filings.
5. Examining the filings made in the USFF Chapter 7 bankruptcy, pending in the US Bankruptcy Court in the Eastern District of New Jersey, Case Number 14-35701-GMB – US.
So there is no misunderstanding, I have no intention of engaging in an endless debate on this forum regarding anything and will not communicate with people who keep their identity hidden behind a forum pseudonym.
On the other hand, if a shareholder or a group of shareholders decide to investigate USFF, retain an attorney and have that attorney contact me; I am prepared to share what I have with your attorney.
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