Additional Missing, False and Misleading SEC Filings by Ubiquity
The New Director
On August 16, 2016, Ubiquity announced that Bola Ajere had been appointed as a new board member. Among other things, the 8-K highlighted Mr. Ajere's employment with Deloitte & Touche (six years), Ernst & Young (10 years), and PricewaterhouseCoopers (three years).
With a background like this, you would expect Mr. Ajere to be scrupulous about complying with the securities laws. And it certainly seems that Ubiquity expected Mr. Ajere to play a central role in updating its SEC filings, having said in a press release of November 21, 2016:
"Ubiquity Inc. appointed Bola Ajere as an independent director to lead Ubiquity's Audit and Governance committee and ensure the company becomes current in its [SEC] filings."
Mr. Ajere received an immediate grant of 250,000 shares of restricted common stock on the execution of the Board of Directors' Retention Agreement dated August 15, 2016. Mr. Ajere's Form 3 was due within 10 days of his becoming a director, but EDGAR shows that he has never filed a Form 3 as required by Exchange Act Rule 16a-3. Ubiquity's stock traded at $.319 on August 15, giving the share grant a market value of almost $80,000. Crediting the restriction on the stock, the grant's value would conservatively be $30,000 to $40,000. In other words, the de minimus exception ($10,000) could not be relied upon by Mr. Ajere - and a Form 5 filing does not cure the delinquency in the filing of (or failure to file) the Form 3. Mundane, I know, but this sets the tone for what's next.
The Form 12b-25s and the Press Release
On November 21, 2016, Ubiquity filed four Form 12b-25s. These forms notified the market and the SEC that Ubiquity would be unable to timely file the Form 10-K for the year ended December 31, 2015, and unable to timely file the Form 10-Qs for the quarters ended March 31, 2016, June 30, 2016, and September 30, 2016. As if this was news...
Lost in a fog of incompetence or ignorance is the fact that Rule 12b-25 states that the Form is due "no later than one business day after the due date for the report." Thus, each 12b-25 was grossly delinquent and the 15-day (Form 10-K) or five-day (Form 10-Q) extension offered by a timely filed 12b-25 was not available to Ubiquity.
The four 12b-25s were filed the same day that Ubiquity released a press release titled, "Ubiquity Inc. Committed to File its Financial Statements." That press release said - no fewer than three times - that Ubiquity:
- "...is doing everything reasonably possible to file its financial statements and become current in its SEC filings"
- "...is working diligently to complete its filings as soon as possible," and
- according to Chris Carmichael, is "doing everything within our means to complete our filings as soon as humanly possible."
I would speculate that during the week of November 14, Ubiquity received an inquiry from the SEC asking why Ubiquity had not filed the 2015 10-K and the three 2016 10-Qs, and if it had plans to do so. I would further speculate that the frenzy of 12b-25 filings and simultaneous press release were intended to do one thing: buy time. Fear of the SEC and the U.S. Attorney is a great motivator, wouldn't you agree?
Misrepresentations and Omissions in Form 12b-25s
Form 12b-25 requires that Ubiquity state "in reasonable detail the reasons why [its Form 10-K or Form 10-Q] could not be filed within the prescribed time period." In response to this requirement, Ubiquity stated only the following in the three 12b-25s related to the 10-Qs:
"The registrant was not, without unreasonable effort or expense, able to file its Quarterly Report on Form 10-Q for the quarter ended [March 31, 2016, June 30, 2016, or September 30, 2016] by [May 16, 2016, August 15, 2016, or November 14, 2016]."
Note: 10-Q due dates are actually May 15 and August 14 of each year, so the Form did not even recite the correct due dates for the first two 10-Qs.
The language in the fourth 12b-25 as to why the Form 10-K could not be timely filed was virtually identical to the three other 12b-25s:
"The registrant was not, without unreasonable effort or expense, able to file its Annual Report on Form 10-K for the fiscal year ended December 31, 2015, by March 30, 2016."
Form 12b-25 is Not a Form to be Trifled With
The following legend appears below the signature and date lines, and accompanying instructions, and above the General Instructions for Form 12b-25:
Intentional misstatements or omissions of fact constitute Federal Criminal Violations (See 18 U.S.C. 1001).
If the U.S. Attorney wants to pile on the pressure, a fairly easy case can be made that the 12b-25s misrepresented and omitted material facts. Among those:
- Ubiquity failed to disclose, if true, that Hall & Company had not been engaged to undertake the audit. See the discussion below for my rationale why the 2015 audit will never be completed.
- Ubiquity's financial records are in disarray and unauditable, if true.
- Ubiquity could not meet the requirement - and its representation - that the delinquent reports would be filed within the 15-day (10-K) or five-day (10-Q) grace periods following the prescribed due dates because the due dates had passed months before.
- Each 12b-25 is false and misleading on its face. In response to Part IV, question 2, each 12b-25 answered as shown below:
Have all other periodic reports required under Section 13 or 15(d) of the Securities
Exchange Act of 1934 or Section 30 of the Investment Company Act of 1940 during
the preceding 12 months or for such shorter period that the registrant was required to file
such report(s) been filed? If answer is no, identify report(s).
|Yes [X] No [|
Ubiquity investors know this is a flat-out lie. Ubiquity has failed to file numerous 8-Ks - see my prior post - and 10-Qs. A further example, if you need one: Ubiquity failed to disclose the entry of the $7.7 million judgment entered against it in October 2016, not to mention additional investor suits.
The misrepresentation about Ubiquity being current in its filings was not just an isolated slip-up. The same misrepresentation is made in all four Form 12b-25s. In criminal law parlance, this is evidence of scienter - intent to mislead.
Mr. Garrison signed all four 12b-25s. As such, I believe the U.S. Attorney has an open-and-shut case against Mr. Garrison for signing an SEC filing that has intentional misstatements and omissions of material fact.
Don't Expect Those Missing Filings To Be Made
Hall & Company became Ubiquity's independent auditor in February 2016 at the time Hall & Company hired seven former partners, employees or owners of Hartley Moore Accountancy Corporation (HMAC). The related Form 8-K filed by Ubiquity is here, and Hall's Form 2 PCAOB report, which reported the hiring on page 18 is here. HMAC is the audit firm that issued the report on Ubiquity's financial statements for the year ended December 31, 2014. That report was dated August 6, 2015.
While it could be coincidence, HMAC ceased to exist approximately six months after issuing the audit report on Ubiquity's financial statements. And on April 28, 2016, approximately two months after HMAC ceased to exist, the PCAOB issued an inspection report covering its July 2015 inspection of HMAC. The PCAOB report was highly critical of HMAC and the report noted a number of audit deficiencies in two issuer audits performed by HMAC. One of these deficiencies, the failure to obtain reasonable assurance about whether the financial statements were free of material misstatements, was a "serious matter" and, in the words of the PCAOB:
"It is a failure to accomplish the essential purpose of the audit, and it means that, based on the audit work performed, the audit opinion should not have been issued."
While the issuer in question is not identified - per PCAOB policy - it is notable that the audit deficiencies cited by the PCAOB included "failure to perform sufficient procedures to identify related parties, evaluate identified related party transactions, and evaluate disclosures concerning those transactions." Whether the inspection report related to Ubiquity or not, the fact is that the very issues cited by the PCAOB as HMAC audit deficiencies - related party transactions - are material and pervasive in Ubiquity.
For Brad Hall, the managing director of Hall & Company, the PCAOB inspection report was undoubtedly an unwelcome reminder of audit quality issues at HMAC. Brad Hall cares because, according to Hall & Company's Form 2 filed with the PCAOB on June 28, 2016, 75% or more of HMAC's partners, owners, principals or employees were "taken on" by Hall & Company. In other words, acquiring 75% or more of the personnel at HMAC may have been a good move for growth, but Hall & Company cannot allow the HMAC audit deficiencies to be repeated.
Knowing his name is on the firm's masthead, Brad Hall will ensure that a Ubiquity audit will involve extensive substantive audit procedures, little reliance on analytics, and nearly no reliance on management representations. With audit red flags abounding at Ubiquity, including
- extensive related party transactions;
- multiple and continuing failures to file required SEC reports;
- recent director resignations;
- the 2016 criminal indictment on fraud charges of Nicholas Mitsakos, Ubiquity's former Interim CEO and co-chair;
- the 2016 filing of civil SEC fraud charges against Mitsakos;
- audit firm turnover, and
- extensive shareholder litigation filed against Ubiquity,
the Ubiquity audit is definitely in the high-risk category.
It is a sure bet that the only way Hall will commit to auditing Ubiquity's 2015 financial statements is if it is compensated for the high audit risk and the budgeted audit hours include time for the performance of extensive substantive audit procedures. And beginning January 31, 2017, the number of hours spent by Hall & Company on the audit will be required disclosure on Form AP, which Hall & Company must file with the PCAOB (and which is public information) within 35 days after the first time its report is included in an SEC filing, i.e., the 2015 10-K.
I sincerely doubt that the audit of Ubiquity's financial statements will ever be completed. The reasons:
- An audit of the 2015 statements will be far more expensive than Connie Jordan Carmichael, Christopher Carmichael, and Brenden Garrison will permit Ubiquity to pay. That assumes, of course, that Ubiquity has the money available to pay for the audit - a highly doubtful proposition following the October 2016 judgment being entered against Ubiquity for $7.7 million (see Orange County Business Journal story here). That judgment was entered by default against Ubiquity, Inc. meaning that Ubiquity did not even have the money available (or the willingness to spend it) on hiring defense counsel. This is telling, to say the least.
- With the investor lawsuits piling up, as described in my prior post, Ubiquity is going to find it harder and harder to obtain new investors - previously the lifeblood of Ubiquity's existence.
Former Ubiquity Interim CEO and Co-Chair Out on Bail
On October 4, 2016, Nicholas Mitsakos, the former Interim CEO and Co-Chairman of Ubiquity, entered a not guilty plea to three charges in a federal indictment for conspiracy to commit securities and wire fraud, wire fraud and securities fraud. The criminal case is United States v. Mitsakos, U.S. District Court, Southern District of New York, Case No. 16-mag-04997. The charges relate to activities engaged in by Mitsakos at Matrix Capital, and feature allegations of:
- lying to investors about funds under management and portfolio holdings
- misappropriation of investor funds for personal use, and
- misrepresentations concerning audited financial statements for the fund
At the October 4 hearing, the judge reduced Mitsakos' bail from $500,000 to $200,000 (secured by equity in his mother's home), so Mitsakos could retain a defense lawyer instead of a federal defender. On November 12, 2016, Eric M. Creizman of Creizman PLLC entered an appearance as criminal defense counsel to Mitsakos. Since that time, Mr. Creizman has filed a motion for a bill of particulars seeking, among other things, the identities of Mitsakos' co-conspirators and the identities of his victims.
According to the press release issued on August 11, 2016, by the U.S. Attorney's office for the Southern District of New York, the criminal charges against Mitsakos carry the following penalties: "The conspiracy charge carries a maximum term of five years in prison. The securities and wire fraud charges each carry a maximum term of 20 years in prison."
What Will Mitsakos Do?
Facing a long stay in Club Fed - albeit far shorter than the maximum based on the federal sentencing guidelines - I know what I would recommend if I were Mr. Creizman: let's make a "proffer" to the U.S. Attorney, offering to give the Department of Justice "chapter and verse" on Connie Jordan Carmichael, Christopher Carmichael, and Brenden Garrison. As noted on federalcrimefaq.com:
"One frequently-used way of getting a reduced sentence in a federal case is for the defendant to provide substantial assistance to the [Assistant] United States Attorney...assistance often consists of providing incriminating information about other defendants in the same case or about other crimes that the defendant has knowledge of." [Emphasis added]
Mr. Creizman knows that the most serious charges against his client feature allegations that Mitsakos misappropriated approximately $800,000 in investor monies for personal and business expenses.
Now let's assume, for a moment, that Mitsakos knows where some of the Ubiquity "bodies are buried," and that his knowledge would enable the U.S. Attorney to build a fraud case for misappropriation of investor funds that would involve much more than $800,000.
If you or I were Mr. Creizman, we would advise our client to make a proffer about his knowledge of wrongdoing at Ubiquity in order to obtain leniency at his (Mitsakos') sentencing. If Mr. Creizman hasn't already had this conversation with Mitsakos, you can be sure it will be teed up shortly.
And if you were the U.S. Attorney for the Southern District of New York, a "small potatoes" securities fraud case involving $800,000 is nearly (not quite, of course) a waste of time given that this office prosecutes securities fraud cases involving hundreds of millions or billions of dollars. What this says is that the U.S. Attorney probably has something else in mind by pursuing Mitsakos over a paltry $800,000.
The Complaint in the case in which a judgment for $7.7 million was awarded in favor of Gerald D.W. North (whose consulting company is North & Associates) against Ubiquity had some interesting allegations that I quote below:
"14. While providing advisory services to Ubiquity Holdings, North & Associates uncovered previously undisclosed bankruptcies as well as lawsuits alleging fraud against Ubiquity Holdings, Connie Jordan and Chris Carmichael, the two Ubiquity Holdings principals, for soliciting funds from elderly members of a religious congregation by false representation.
15. Upon discovering the existence of these lawsuits alleging claims for fraud, North & Associates, so advised Ubiquity Holdings' Board and recommended that the Board investigate the allegations.
16. On February 28, 2007, almost immediately after North & Associate's report to the Board, Ubiquity Holdings terminated North & Associate's Agreement without explanation or cause." [Emphasis added]
I am not a U.S. Attorney, not an employee of the SEC, and not counsel to Mitsakos, so understand that my speculation about where Ubiquity is headed is just that - speculation. However, I think the building blocks are present that will allow the U.S. Attorney to pursue bigger fish than Mitsakos - and I'll bet Mr. Creizman knows it. I don't believe Ubiquity investors will ever see the 2015 audited financial statements (much less the quarterly or annual 2016 statements), and I don't believe Hall & Company has been or will be engaged to do this work.
As one of my good friends says, "It's all over but the cryin'." However, I think Ubiquity investors may have a few things coming their way - in the form of news about Connie Jordan Carmichael, Christopher Carmichael, and Brenden Garrison - that will at least allocate responsibility for Ubiquity where it belongs. Club Fed, anyone?
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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