"The complaint also cites Mr. Bordynuik for using an auditor who was in jail when the company's year-end arrived. On Nov. 28, 2009, just months before the year-end financials were due, the auditor (a principal of Florida firm Gately & Associates) was arrested for violation of probation, drinking and driving, and possession of marijuana. According to the SEC, when Mr. Bordynuik learned of the arrest he not only insisted on continuing to use the auditor, he also agreed to pay for the auditor's criminal lawyer and for an alcohol treatment program. The SEC says this dissolved any notion of independence between the auditor and Mr. Bordynuik."
SEC charges Bordynuik for overstating assets
2012-01-04 20:57 ET - Street Wire Also Street Wire (U-*SEC) U.S. Securities and Exchange Commission Also Street Wire (U-JBII) JBI Inc
The U.S. Securities and Exchange Commission has filed a civil fraud case against Canadian John Bordynuik for overstating the assets of pink sheets listing JBI Inc. by $9.99-million. (All figures are in U.S. dollars.) The figure comprised almost all of JBI's assets, and was used to help the company raise $8.4-million.
The case is a setback for JBI, which has for years been promoting a product that purportedly converts waste plastic into fuel. The process, which the company calls Plastic2Oil, was touted as a solution to the problem of plastics entering landfills. The stock has been as high as $7.45 in the last three years, but it closed at 86 cents on Wednesday, falling $1.49 in late day trading after the SEC announced the charges.
The SEC says that in 2009 Mr. Bordynuik overstated the value of a media credit the company had acquired for one million shares, listing it on the balance sheet as being worth $9.99-million despite recommendations from his accountant. According to the SEC, the credit should have been valued far more conservatively, initially at $1-million and later at nil. Shortly after raising $8.4-million, the company reported that its financials could no longer be relied upon and wrote the value of the media credit down to nil.
While JBI has not responded to the lawsuit in court, it did issue a brief news release on Wednesday saying it was "profoundly disappointed" with the SEC's "erroneous allegations" of fraud. It says that its officers acted in good faith in valuing the media credit and, after learning of problems with that valuation, immediately took appropriate steps.
SEC's complaint
The SEC filed the case on Wednesday, Jan. 4, in the District of Massachusetts, where JBI once had its office. It lists Mr. Bordynuik, 41, as a Canadian citizen residing in Niagara Falls, Ont., who serves as the company's chief executive officer. The other defendants are JBI itself and the company's former chief financial officer, Ronald Baldwin, 52.
The complaint traces the scheme back to 2005, when Mr. Bordynuik claimed to have discovered a catalyst that could be used to break down unwashed mixed plastics into liquid hydrocarbons, or oil. He said that he had discovered the formula while compiling a massive archive of old scientific data. He placed the idea into a public company in April, 2009, when he acquired majority ownership of an OTC Bulletin Board shell that later became JBI.
The balance sheet problems, as described by the complaint, stemmed from a transaction that Mr. Bordynuik negotiated just months after acquiring the shell. In August, 2009, JBI purchased media credits that purportedly represented $9.99-million worth of prepaid print and radio ads. The company issued one million shares in consideration, which it valued at $1 per share.
When it came to reporting the credits in JBI's third quarter results, Mr. Bordynuik had his in-house accountant record them at the $9.99-million value. He told her in a Skype conversation to "please get the pro formas as juicy as you can so I can acquire a chemical company for less." The overstated value carried over into the actual Form 10-Q that the company later filed with the SEC.
Although Mr. Bordynuik said the credits were "audit proof," the accountant had some concerns, the SEC says. She told him that it would be better to value them at the $1-million that the company had paid for them. A business consultant that JBI had hired also expressed the same view, pointing out that one day prior to the transaction the company had no assets and the very next day it had nearly $10-million.
According to the complaint, Mr. Bordynuik did not follow through on the advice of either the consultant or his accountant, and had the credits listed on the balance sheet for $9.99-million. In reality, the credits had no value, "and certainly not the grossly overstated value" the company reported, the SEC says.
The complaint also cites Mr. Bordynuik for using an auditor who was in jail when the company's year-end arrived. On Nov. 28, 2009, just months before the year-end financials were due, the auditor (a principal of Florida firm Gately & Associates) was arrested for violation of probation, drinking and driving, and possession of marijuana. According to the SEC, when Mr. Bordynuik learned of the arrest he not only insisted on continuing to use the auditor, he also agreed to pay for the auditor's criminal lawyer and for an alcohol treatment program. The SEC says this dissolved any notion of independence between the auditor and Mr. Bordynuik.
While JBI claimed that another auditor at Gately worked on its 2009 annual financials, there is no evidence that anyone at Gately actually did a proper audit, the complaint states. Mr. Bordynuik did not consult with anybody at Gately about the media credit and no one at JBI was able to contact the auditor for a significant period of time before the company's year-end filing. Despite this, an employee at Gately applied the firm's electronic signature to JBI's Form 10-K, falsely representing that there had been an audit, the SEC claims. (The Public Company Accounting Oversight Board has since barred the firm from performing audits, citing matters unrelated to JBI.)
In addition to the allegations against Mr. Bordynuik, the SEC claims that the company's chief financial officer, Mr. Baldwin, did little to question the value of the credits. After taking over as CFO on Jan. 1, 2010, he saw that they were the largest single asset on the company's balance sheet. Despite that, he did nothing to learn about their value beyond some discussions with Mr. Bordynuik, the complaint states.
On May 21, 2010, JBI issued a news release stating that its previously issued financial results should not be relied upon. It later restated the results, writing down the value of the media credits to nil.
The SEC is seeking disgorgement of ill-gotten gains, appropriate civil penalties, and officer and director bans for Mr. Bordynuik and Mr. Baldwin.
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