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Are Emerging Growth Companies more likely to be crooked?

November 7, 2012

Photo from shutterstock.com. Some rights reserved.

To the list of skeptics on the JOBS Act Emerging Growth Company (“EGC”) provision, add The New York Times’ Chief Financial Correspondent.  In a recent article, Floyd Norris profiles the case of Caribbean Pacific Marketing, a startup claiming EGC status that a few months later found itself the target of securities fraud allegations by the SEC.  Although he makes clear that the “JOBS Act should not be blamed for Caribbean Pacific Marketing,” still, by interweaving the fraud and EGC threads, Norris gestures at least rhetorically to a kind of guilt by association.

And if you think about it, there is in fact an underlying logic in the insinuation.  After all, companies that do shady things would seem more likely to embrace and exploit a status designed precisely to let them fly below the radar, would they not?

Be that as it may, Norris writes that Caribbean Pacific Marketing “appears to have become the first ‘emerging growth company’ as defined by the JOBS Act to have prompted charges of securities fraud.”  But Caribbean Pacific is not the first.  Back in September, the SEC filed a Complaint against a Florida-based wastewater management company called Freedom Environmental Services, Inc., which first declared EGC status in its 10-K filed in May.  The 29-page Complaint is a tour de force of allegations, including false statements, false reporting with the Commission, misappropriation of funds, and fraud.

So that’s two and counting.  We’ll keep an eye on things to see if additional EGCs run afoul of the Feds.

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