Federal regulators filed fraud charges in Massachusetts this week against BioDefense Corporation and a number of the Boston biotechnology company’s executives. The defendants are charged with defrauding investors through various misrepresentations and schemes while raising at least $26 million in investor funds.
In court documents, the Securities and Exchange Commission (SEC) stated that BioDefense Corporation misled investors when 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 BioDefense securities to overseas investors primarily in the United Kingdom.
The SEC complaint alleges that executives made false claims to investors that BioDefense 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, the company’s largest expense during those years was the money it paid to company executives from funds raised from investors; in 2004 alone, BioDefense paid approximately $1 million in compensation to its officers and employees.
The Commission’s complaint further alleges that, as BioDefense 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, BioDefense’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. BioDefense Corporation and its representatives did not tell investors that 75% of funds received from them would be going straight to boiler room operators.
The full SEC motion is available here (pdf).