SEC Secures Judgements Against Halitron, Inc. And Its CEO Bernard Findley Following Trial

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

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]
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)]
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)]
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.

Gayatri GuptaApril 17, 2024

Nasdaq Compliance

The Nasdaq Stock Market features three tiers of listed companies, namely: (1) The Nasdaq Global Select Market, (2) The Nasdaq Global Market, and (3) The Nasdaq Capital Market. These tiers are characterized by progressively stringent listing requirements, with the Nasdaq Global Select Market setting the highest standards for initial listings and the Nasdaq Capital Market serving as the entry-level tier, particularly suitable for most small-cap issuers.

To list securities on Nasdaq, a company must fulfill minimum listing requirements, encompassing defined criteria related to financial performance, liquidity, and corporate governance. Nasdaq retains extensive discretion in the listing process and reserves the right to reject an application, even if the technical prerequisites are satisfied, if it deems such denial essential to safeguard the interests of investors and the public.

After securing a listing on Nasdaq, a company is obligated to adhere to ongoing listing standards. To initiate the listing process, a company seeking inclusion on Nasdaq must diligently complete and submit a comprehensive listing application to Nasdaq. This application should include specific documents and information as outlined by Nasdaq's requirements.

Typically, the application process spans a duration of four to six weeks. Once the application is submitted, a Nasdaq analyst is designated as the primary liaison with the company. Within two to three weeks of submission, the company can expect to receive an initial comment letter. The comment and review process persists until a decision is reached on the approval or denial of the application. Similar to filing with the SEC, a meticulously prepared Nasdaq application tends to attract fewer comments and facilitates a more streamlined process. Generally, the company's securities counsel assumes a leading role, serving as the primary contact for preparing the application and engaging in communication with Nasdaq.

Similarly to the SEC review process, Nasdaq conducts a thorough examination of publicly accessible information pertaining to a company. This encompasses, but is not limited to, SEC filings, the company's website, management communications and speeches, as well as press releases. The iterative nature of the review process typically doesn't necessitate a formal protocol, and communication is commonly facilitated through email correspondence and phone calls.

Listing Criteria For Nasdaq
For a company to list its securities on Nasdaq, it must satisfy the following criteria:

Specific Initial Requirements:
- Quantitative Standards: Meeting defined thresholds for both quantitative and qualitative factors.
- Qualitative Standards: Fulfilling certain qualitative benchmarks.
Continuing Requirements:
- Quantitative Criteria: Adhering to ongoing quantitative benchmarks.
- Qualitative Criteria: Maintaining specified qualitative standards.

The initial quantitative thresholds are typically set at a higher level than those required for continued listing. This distinction aims to ensure that companies achieve a sufficient level of maturity before being listed. Additionally, Nasdaq imposes rigorous corporate governance standards that listed companies must adhere to throughout their tenure on the exchange.

Before formally submitting a comprehensive listing application, a company has the option to pursue a preliminary listing eligibility review. In this stage, the Listing Qualifications Staff conducts a thorough examination of the company's public filings to assess its compliance with numerical listing requirements. Additionally, the team evaluates the company's adherence to corporate governance requirements outlined in the Marketplace Rules ("Rules"). This preliminary review provides valuable insights into the company's eligibility for listing on Nasdaq before committing to the full application process.

Upon completion of the preliminary review, the Listing Qualifications Staff will make an assessment regarding whether the company meets the numerical listing criteria. Additionally, any corporate governance or regulatory concerns raised during this phase will be considered to determine their impact on the listing approval. It's important to note that while the preliminary review provides insights, final approval necessitates the submission of a formal listing application. This application undergoes a thorough examination by the NASDAQ Listing Qualifications Staff. Furthermore, the final approval process involves satisfactory compliance with specific qualitative reviews. This includes an examination of the regulatory history of the company's officers, directors, and significant shareholders. Meeting these criteria is integral to obtaining the final approval for listing on Nasdaq.

Financial And Liquidity Requirements

    Requirements

    Equity Standard
    Market Value of Listed Standard
    Net Income Standard

    Listing Rules

    5505(a)
and
5505(b)(1)
    5505(a)
and
5505(b)(2)
    5505(a)
and
5505(b)(3)
    
    Stockholders Equity

    	$5 million
    	$4 million
    	$4 million
    
    The market value of publicly held shares

    $15 million
    $15 million
    $
      5 million
    
    Operating History

    	Two years
    N/A
    N/A
    
    The market value of listed securities

    N/A
    $50 million
    N/A
    
    Net income from continuing operations (in the latest fiscal
a year or in two of the last three
fiscal years)

    N/A
    N/A
    $750,000
    
    Publicly held shares

    	1 million
    	1 million
    	1 million
    
    Bid Price

    	$4
    	$4
    	$4)
    
    Closing Price

    	$3
    	$2
    	$43
    
    Corporate Governance

    Yes
    Yes
    Yes
    
    Total Shareholders

    300
    300
    300

Corporate Governance Requirements

Across all three tiers of the Nasdaq Stock Market, corporate governance requirements remain largely consistent. The categories encompassing corporate governance standards include:

Distribution of Annual or Interim Reports
Independent Directors
Audit Committee
Compensation Committee
Nomination of Directors
Code of Conduct
Annual Meetings
Solicitation of Proxies
Quorum
Conflict of Interest
Shareholder Approval
Voting Rights

These governance elements play a crucial role in ensuring transparency, accountability, and ethical conduct within listed companies, irrespective of the specific tier within the Nasdaq Stock Market.

Companies seeking listing on Nasdaq must adhere to specific corporate governance standards, including the following:

Compensation Committee with Independent Directors:
- The company is required to establish a compensation committee comprised of independent directors.
- The committee must consist of at least two members.
- Rule 5605(d)(2)(A) introduces an additional independence test for compensation committee members.
Responsibility for Executive Compensation:
- The compensation committee is tasked with determining or recommending to the entire board the compensation of the chief executive officer (CEO) and all other executive officers.

These standards are designed to ensure a level of independence and scrutiny in the decision-making processes related to executive compensation within the company.

The Application And Documents

The Nasdaq application package encompasses several key components:

Symbol Reservation Form:
- Used to request the reservation of a specific trading symbol for the company.
Listing Application:
- Requires supplemental documents and details about the company's financials, operations, and other pertinent information.
Listing Agreement:
- A formal agreement outlining the terms and conditions of the listing on Nasdaq.
Corporate Governance Certification:
- A certification affirming the company's commitment to meeting Nasdaq's corporate governance standards.
Initial Application Fee:
- Payable via check or wire transfer, this fee is a prerequisite for initiating the listing process.
Logo Submission Form:
- Used for submitting the company's logo for use in Nasdaq's materials.

These application forms are completed through the Nasdaq website listing center, utilizing the online platform to facilitate the submission of supplemental and supporting documents. It is advisable to thoroughly review all required paperwork in advance, ensuring that the necessary information is readily available before initiating the application process.

Symbol Reservation Form

The symbol reservation form is a concise, one-page electronic form where applicants input information for Nasdaq's consideration. Nasdaq symbols, limited to 1-5 characters, adhere to guidelines established by the Intermarket Symbols Reservation Authority (ISRA). The ISRA system is designed to organize symbols efficiently, prevent duplication, and reduce programming and operational complexities. The ISRA operates within the framework of the NMS Symbology Plan, a plan utilized by Nasdaq.

Key details about the symbol reservation process:

Symbol Choices:
- The form allows applicants to propose three symbol choices in order of preference.
- While Nasdaq generally honors the first choice if available, it retains the authority to assign, rescind, or reassign a trading symbol at its discretion.
ISRA and Nasdaq Authority:
- The ISRA and Nasdaq have overarching authority in managing the assignment of symbols.
Additional Information:
- The form captures essential details about the issuer and the planned public offering.
- Information may include the name of the attorney, lead underwriter (if applicable), CEO and CFO names, yearly revenues, company website, and the sector in which the company operates.

Completion of this symbol reservation form initiates the process of securing a trading symbol on Nasdaq, and it's essential to provide accurate and comprehensive information to facilitate this stage of the listing application.

The Application

The Nasdaq listing application process is comprehensive and varies based on the circumstances surrounding the listing sought. There are twelve distinct listing applications catering to different situations, including changes of control, switches from other exchanges or markets, spin-offs, and initial public offerings (IPOs). Each application, spanning approximately seven pages, collects detailed information about the company, covering areas such as address, contact and billing details, securities attorney and auditor information, transfer agent particulars, and the company's officers and directors. Specific information on the company's securities, including type, par value, and cusip number, is also required.

Furthermore, the application mandates disclosure of legal proceedings involving the company, its officers or directors, or significant shareholders over the past ten years. This encompasses inquiries, investigations, lawsuits, litigation, arbitrations, and other legal and administrative proceedings. Documents supporting the backup and final disposition of these matters must be provided.

Regarding private offerings within the prior six months, including bridge financings, shelf registrations, and Regulation S offerings, the company is required to disclose such activities. Additionally, the application delves into the company's background, posing questions to ensure compliance with seasoning rules.

While Nasdaq retains the right to request relevant supporting documents, specific documents are mandatory based on the application type. For an uplisting from an existing U.S. market, the application must include letters from three market makers confirming their commitment to making a market in the subject securities. Other required documents include a listing agreement, a logo submission form, a corporate governance certification form, regulatory correspondence over the past 12 months, and shareholder confirmation documents. Nasdaq often seeks confirmation from the company's transfer agent regarding the eligibility of the security for the direct registration program (DRS).

During the review of an up listing application, Nasdaq may request additional information, such as a Broadridge share range analysis and NOBO list, a certified shareholder list, details about mitigating any going concerns or opinions, income statement and/or balance sheet projections for the next 12 months, and confirmation of Sarbanes Oxley Section 302 and 906 certifications by the company, among other inquiries related to compliance and financial matters.

The Listing Agreement

The Listing Agreement is a concise document, spanning two pages, serving as a formal affirmation of the company's commitment to adhere to all rules and regulations set forth by the Nasdaq Stock Market. It includes provisions for indemnifying and holding Nasdaq harmless from liability. Notable points in the agreement include:

Compliance Assurance:
- The company explicitly agrees to comply with all rules and regulations stipulated by the Nasdaq Stock Market.
Indemnification Clause:
- The company indemnifies Nasdaq, meaning it undertakes to compensate or reimburse Nasdaq for any losses or damages incurred. This includes harm resulting from third-party trademark infringement claims related to the company's symbol and logo, as well as Nasdaq's use of the same.
Disclaimer of Warranty and Liability:
- The agreement contains a disclaimer of warranty and liability against Nasdaq for trading issues, with the exception of those resulting from gross negligence or willful misconduct.

This agreement establishes a clear framework for the relationship between the listed company and Nasdaq, emphasizing the company's commitment to regulatory compliance while providing indemnification for certain specified matters and delineating the scope of Nasdaq's liability.

Corporate Governance Certification Form

The corporate governance certification form certifies compliance with the governance requirements related to an audit committee, director nomination process, compensation committee, board composition, executive sessions, quorum, and codes of conduct. Where an exemption applies, the form requires specification of the exemption terms. The document specifies the different rules and exceptions in a check-the-box format.

Logo Submission Form

The logo submission form contains the guidelines for the logo and affirms Nasdaq’s rights to use the same. Nasdaq uses company logos in its marketing materials, on the MarketSite Video Wall and Tower, and websites.

Fees

Entry fees are based upon the aggregate number of shares to be listed at the time of initial listing, regardless of class, with a maximum cap of $75,000. Fees are assessed on the entry date in The Nasdaq Capital Market, except for $5,000, representing a non-refundable application fee. This fee must be submitted with the company’s application.

Nasdaq does not charge application or entry fees for any securities transferred from a national securities exchange.

Benefits Of Trading On An Exchange

There are many benefits to trading on an exchange instead of the OTC Markets. The most significant benefits to a business are the ability to attract analyst coverage and institutional investors and the corresponding increase in liquidity that comes with both. Stocks that trade on Nasdaq tend to have a lower bid/offer spread — again encouraging trading volume and liquidity. Exchange-traded securities are exempt from the penny stock definition, allowing more market maker and broker-dealer participation. As further explained below, a broker-dealer cannot recommend a penny stock transaction to its retail clients. Therefore, no analysts, financial advisors, or institutional investors make recommendations for purchases of penny stocks.

As an aside, this is one of the reasons that OTC Markets created the OTCQX market tier, which does not list penny stocks. It is also why the small-cap industry is pushing for a supported valid venture exchange (for further reading.

In today’s world, depositing stock and/or trade-in non-exchange traded securities is increasingly difficult. Despite the congressional efforts and SEC rulemaking in support of small-cap capital formation (for example, the JOBS Act, including the emerging growth company regulations, new Regulation A+ and Title III Crowdfunding and the new FAST Act), through enforcement and investigative proceedings, both the SEC and FINRA continue to apply pressure on broker-dealers, clearing firms and transfer agents to reduce the secondary trading and free flow of penny stocks. For more information on difficulties in depositing stocks.

Further On Penny Stocks

NASDAQ and NYSE MKT traded securities are exempted from the definition of a “penny stock” due to the initial and ongoing listing standards. Penny stock rules focus on broker-dealers’ activity in effectuating trades in penny stocks. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 (the “Penny Stock Act”) prohibits broker-dealers from effecting transactions in penny stocks unless they comply with the requirements of Section 15(h) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The rules promulgated thereunder, particularly Exchange Act rules 15g-1 through 15g-100 (the “penny stock rules”).

Section 15(h) of the Exchange Act provides that no broker or dealer may effectuate a customer’s purchase or sale of any penny stock unless such broker or dealer.

Approves the customer for the specific penny stock transaction and receives a written agreement to the transaction from the customer.
Furnishes the customer a risk disclosure document describing the risks of investing in penny stocks.
Discloses to the customer the current market quotation, if any, for the penny stock, including the bid and ask prices and the number of shares that apply to such bid and ask prices.
Discloses to the customer the amount of compensation the firm and its broker will receive for the trade.

In addition, after executing the sale, a broker-dealer must send its customer monthly account statements showing the market value of each penny stock held in the customer’s account.

Moreover, brokers and dealers subject to the penny stock rules are subject to additional disclosure requirements outlined in Rules 15g-2 through 15g-9. For my information on penny stocks and the rules affecting broker-dealer activity.

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