The co-founder of a Chicago-based investment firm was charged Tuesday by the Securities & Exchange Commission with misleading investors in two private equity offerings. The SEC has also charged the other co-founder with supervisory failures related to the offerings.
Advanced Equities Inc. -- a broker-dealer and investment advisory firm -- and co-founders Dwight O. Badger, 42, of Lake Forest, Ill., and Keith G. Daubenspeck, 49, of Chicago, were charged in connection with private offerings in 2009 and 2010 on behalf of an alternative energy company in Silicon Valley, Calif., which was not identified by name in the SEC's administrative proceeding.
Badger led the sales effort for the offerings and made false statements about the unnamed Silicon Valley-based energy company's finances that Daubenspeck did not dispute, thus failing to reasonably supervise Badger, the SEC says. Daubenspeck co-founded Advanced Equities with Badger and was the former chief executive of its parent company. Daubenspeck is the chairman of the parent company's board.
Advanced Equities, Badger and Daubenspeck agreed to settle the SEC charges and consented to the entry of a cease-and-desist order without admitting or denying the charges. Advanced Equities agreed to pay a $1 million penalty. The firm also agreed to hire an independent consultant to review its sales policies and procedures. Badger agreed to pay a $100,000 penalty and be barred for one year from associating with any broker, dealer, investment advisor, municipal securities dealer or transfer agent. Daubenspeck agreed to pay a $50,000 penalty and to a one-year supervisory suspension.
The SEC charged that Badger claimed in the company's 2009 offering claimed that the energy company had more than $2 billion of order backlogs when the backlog never exceeded $42 million. He also said it had a $1 billion order from a national grocery store chain even though the store only had placed a $2 million order and signed a non-binding letter of intent for future purchases. Badger said that the company had been granted a U.S. Department of Energy loan exceeding $250 million when it had applied for a $96.8 million loan, and he again misstated the information about the loan application during the follow-up offering in 2010, the SEC claimed.
SEC officials allege that Daubenspeck participated in at least two internal sales calls with Advanced Equities brokers during the 2009 offering and remained silent after he heard Badger lie about the company's order backlog, grocery store order, and Department of Energy loan application. Despite the red flags raised by the misstatements and the risk that false information would be repeated to investors, Daubenspeck didn't correct the misstatements failing to supervise Badger.