by Mike Caswell
John Bordynuik, the Ontario man facing civil charges from the U.S. Securities and Exchange Commission for overstating the assets of his pink sheets company by $9.99-million, denies that he did anything wrong. (All figures are in U.S. dollars.) He says that the $9.99-million was a credit for print and radio ads the company had bought, and he was told that the credit was worth that much.
The SEC claims that the overstatement occurred in 2009, in the third quarter and annual financials for JBI Inc., a pink sheets listing based in Ontario. The company's only substantial asset at the time was a set of prepaid print and radio ads JBI had acquired for one million shares. Despite recommendations of his accountant to value the ads conservatively, Mr. Bordynuik had them recorded on the company's balance sheet at a value of $9.99-million. The company later wrote the media credit down to nil without giving any substantial reason. The writedown came after the company had raised $8.4-million relying in part on the inflated assets, the SEC said.
In his response to the suit, Mr. Bordynuik says that he bought the credit from another public company, Domark International, which had valued the advertising in past SEC filings at $10-million. He admits that JBI only issued $1-million worth of stock to buy the credit, but says he received assurances from Domark's chief executive officer that the credit was worth $9.99-million and that the valuation had been "cleared with the SEC."
SEC's complaint
The case began on Jan. 4, 2012, when the SEC filed a civil fraud complaint against Mr. Bordynuik in the District of Massachusetts, where JBI once had an office. It listed Mr. Bordynuik, 41, as a resident of Niagara Falls, Ont., and as the CEO of JBI. The other defendants were JBI itself and the company's former chief financial officer, Robert Baldwin of Florida.
The problems with the company's balance sheet, as described by the SEC, came about after Mr. Bordynuik acquired majority control of a shell that would become JBI in April, 2009. The company's primary product was a process that it claimed could convert discarded plastic into oil. In August, 2009, JBI purchased the media credits, issuing one million shares at $1.
The first time that the company had to report the credits was in its third quarter results for 2009. According to the SEC, Mr. Bordynuik told his accountant that he needed the credits to show as a substantial asset. His instructions, recorded in a Skype conversation, were to "get the pro formas as juicy as you can so I can acquire a chemical company for less." The accountant had some reservations, telling him that it would be better to value the credits at the $1-million that the company had paid for them. Despite the advice, Mr. Bordynuik persisted in having the ads listed at the $9.99-million value, the SEC said.
According to the complaint, JBI continued to state the inflated asset values as the company was raising money. Between the fall of 2009 and May, 2010, JBI raised $8.4-million relying in part on materials that represented the company's financial position as including the media credit. The inclusion of the credit presented a "misleadingly strong financial picture" of JBI, the complaint stated. (The company ultimately wrote the credit down to nil, only stating that its previously issued financial results should not be relied upon.)
The SEC also accused Mr. Bordynuik of having an inappropriate level of influence on JBI's auditor, Florida firm Gately & Associates. On Nov. 28, 2009, just months before JBI's year-end financial results were due, the principal of Gately was arrested for violation of probation, drinking and driving, and possession of marijuana. The SEC said that after Mr. Bordynuik learned of the arrest he agreed to pay for a criminal lawyer to defend the auditor and to pay for an alcohol treatment program. This dissolved any notion of independence, according to the complaint.
The SEC said there was also no evidence that anyone at Gately did a proper audit of JBI's annual financials, which included the media credit. No one at JBI was able to contact the auditor for a significant period of time before the company's year-end filing. Despite this, an employee at Gately applied the firm's electronic signature to JBI's Form 10-K, falsely representing that there had been an audit, the SEC claimed.
The complaint sought disgorgement of ill-gotten gains, appropriate civil penalties, and officer and director bans for Mr. Bordynuik and Mr. Baldwin.
Bordynuik denies any wrongdoing
In his answer to the complaint, filed on April 5, Mr. Bordynuik denies that he did anything wrong. He says JBI recorded the media credit using the same methods and reasons that Domark had used in its SEC filings, in which it valued the credit at $10-million. JBI also hired the same bookkeeper who had prepared Domark's financial statements.
According to the answer, Mr. Bordynuik did not instruct JBI's accountant to artificially boost the company's assets. He says the Skype conversation the SEC quoted in its complaint was taken out of context. Moreover, the accountant testified under oath that Mr. Bordynuik had never asked her to "plug numbers" or inflate the balance sheet.
Mr. Bordynuik further denies having any improper influence over JBI's auditor. He says he learned just before Christmas in 2009 that the principal of Gately & Associates had been jailed on alcohol-related issues, but denies that he paid for a defence lawyer. He acknowledges that JBI paid fees to Gately, which may have been used to pay for criminal representation. A colleague of Gately's principal performed audit work on behalf of Gately while the principal was unavailable.
Mr. Bordynuik asks that the court dismiss the case, with costs. The answer was filed by Juan Marcelino of Greenberg Traurig LLP on behalf of both Mr. Bordynuik and JBI. Mr. Marcelino also filed a separate but very similar answer on behalf of Mr. Baldwin. He too denies any wrongdoing, and asks that the case be dismissed.
JBI, which has been as high as $7.45 in the past three years, last traded at $1.20.
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