The SEC’s (Nearly Unprecedented) Denial of Wave2Wave: Reading the Tea Leaves
As was first reported right here in blogmosaic — and only later by Reuters, the New York Times, the Wall Street Journal, Bloomberg, and others — on February 24 the Securities and Exchange Commission made the highly unusual move of denying a registrant’s formal application to withdraw its previously filed registration statement. That filer was Wave2Wave Communications, an internet and telecom startup, which sought to rescind the paperwork it had filed two weeks earlier for its initial public offering.
The salient background facts are, first, that Wave2Wave’s road to going public had been exceptionally rocky, as investors repeatedly balked at the company’s ever-declining asking price. (No doubt the company’s heavy losses, massive debt burden, and pending litigation with Verizon have contributed to that reluctance.) Second, any successful deal by Wave2Wave would include what amounts to a golden parachute for company co-founder Andrew Bressman — who once served 18 months’ prison time for defrauding investors.
Those are the cards that have been laid face-up on the table. But what remains is a quagmire of unanswered questions: Why did Wave2Wave want to bail on its IPO? Why did the SEC block that move? (Its Order Denying Withdrawal was pretty reticent on that point.) And just how unusual is such an action? Finally, what is next for Wave2Wave?
In the absence of much concrete information — since the news broke nearly two weeks ago, both Wave2Wave and the SEC have been silent — commentators have been reduced to “read[ing] the tea leaves,” in the words of Davis Polk attorney Richard D. Truesdell Jr. (quoted in the WSJ article). There is some conjecture that Wave2Wave probably hoped to restructure its IPO as a private placement offering. Aside from that, there is only the vague consensus that something fishy is going on. As the Wall Street Journal noted, “Generally, the SEC’s corporate finance staff won’t grant a withdrawal request if there is an open enforcement matter involving a company without first getting agreement from the enforcement division.”
Ah, but that qualifier “Generally” belies one more important fact. And that is that there is virtually no precedent for the SEC’s move. Since 2000 anyway, it had happened only once before. So any “generalization” to be made is really just an observation — of a single prior event.
And what did happen, exactly? The filer was Maximum Dynamics, Inc., and the filing was a form SB-2 registering the offering of common stock by certain stockholders (not, it should be noted, an IPO situation). As we mentioned in our previous post on the topic, the SEC cited “false and misleading information” furnished by Maximum as one of the main reasons it handed down its Order Denying Withdrawal, in October 2004.
Below is a time line of what unfolded subsequently. It isn’t pretty.
February 24, 2005. The SEC imposes a temporary trading suspension on Maximum Dynamics, “because of questions regarding the accuracy of assertions to investors by Maximum in its most recent periodic filing.”
April 5, 2005. Maximum files an 8-K positively bursting at the seams with bad news. In it, the company reports:
- It was experiencing severe cash flow problems, in part due to the trading suspension, and thus “has been forced to undergo a rapid and major downsizing across the board.”
- It had been the target of a conspiracy of “internet attacks” – an “excessive number of negative rumors floating on the internet regarding the condition of the company and its officers,” designed to discredit them and sabotage the company.
- The official company website would be down for a while. Emails from shareholder might not be replied to in a timely manner, if at all.
- Unable to keep up with its lease payments, the company had closed its U.S. offices; also, it had found itself “locked out of its network operation center.”
- The company’s legal counsel had jumped ship.
July 27, 2005. In an 8-K, the last SEC filing it would make, the company announces its liquidation plan.
November 1, 2007. The SEC begins enforcement proceedings against Maximum for failing to make required filings.
November 26, 2007. The SEC charges the company’s former CEO and CFO with the fraudulent and unregistered sale of the company’s securities.
Fast forward to today. That former CEO, Eric Majors, is now behind bars — as we reported in blogmosaic last summer. He is serving five years for conspiring to defraud the SEC and the Internal Revenue Service. (Additional details of the case can be found in the Findings of Fact section of Administrative Law Judge Robert Mahoney’s recent Initial Decision barring Majors from associating with any investment advisor.)
So in the case of Maximum Dynamics, the SEC’s Order was only the tip of the iceberg. Shareholders of Wave2Wave looking for positive signs in the tea leaves won’t find any there. They can only cling to the notion that a single previous occurrence is not exactly a strong precedent.