Two Texas brothers, who are CPAs, have been sued by the Securities and Exchange Commission for running what the SEC calls a "shell-factory" scheme that defrauded business owners. The SEC also suspended trading in the stock of four companies controlled by
Charles E. Smith, age 57, operates the firm Charles E. Smith CPA in Rockwall, Texas, while Mark Smith is a self-employed accountant operating under the name the AM Group in Rockwell and Allen, Texas. The SEC action revolves around the Yorkdale Capital, founded by Charles in December 2005. He became a principal in that business in 2006 with his brother joining as a co-principal. Mark Smith's LinkedIn page shows he ceased the role in April.
The agency alleges that since at least 2006 the brothers enticed small business owners to aid them by "renting" their legitimate operating companies by promising them financing to be raised through initial public offerings. The SEC claims that the Smith hid their true purpose from the business they enlisted, which was to sell the public shell companies in reverse mergers.
The deals were structured so the Smiths got most of the money and the small businesses, who were listed as officers and owners of the shell companies, received little benefit as funds raised were largely kept by the shell companies. Funds that were given to the small businesses were recorded as loans from the shell companies.
By "renting" the small businesses, the Smiths created the impression that the shell companies had income from operations while they avoided SEC rules regarding trading in those companies' shares. Charles Smith allegedly structured the deals so that the small businesses' ownership of the shell companies was cancelled, in return for being able to retain ownership of the original operations. The brothers, however, received significant returns on their activities.
Without admitting or denying the allegations, the Smiths consented to an order barring them from violating securities laws and they agreed to pay prejudgment interest of $78,750.52. Charles Smith was assessed a civil penalty of $150,000 and will be barred from serving as officer and director of publicly held companies for five years; Mark Smith for three years. They are also barred from participating in penny stock offerings for the same respective periods.