Chandler man illegally sold securities, owes more than $1.5 million, officials say SanTan Sun News

Chandler man illegally sold securities, owes more than $1.5 million, officials say

July 2nd, 2017 | by SanTan Sun News
Chandler man illegally sold securities, owes more than $1.5 million, officials say
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By Wayne Schutsky

A Chandler resident is on the hook for nearly $1.5 million in restitution and $50,000 in penalties after the Arizona Corporation Commission found he illegally sold securities in a beverage company and failed to pay back investors.

The commission found that Lucio George Martinez of Chandler and Samuel A. Jones sold $2.14 million in unregistered securities in their company Shadow Beverages and Snacks. Neither individual was registered as a securities dealer or salesman, a violation of Arizona statutes.

Shadow Beverages and Snacks also failed in at least four cases to determine whether investors’ net worth or income would qualify them as accredited investors. In order to be considered an accredited investor, the SEC requires an individual to have a net worth of at least $1 million or earn $200,000 annually.

The Arizona Corporation Commission found that the company solicited a total of 16 promissory notes and one investment contract and also failed to repay investors when those investments came due. The company eventually paid a total of $552,500 to repay five of those investments.

The company ceased operations in 2015 and currently is in Chapter 7 bankruptcy.

In a previous decision, the ACC ordered Jones to pay $95,000 in restitution and a $15,000 administrative penalty. He has since done so.

The responsibility for the bulk of the restitution falls to Martinez, whom the commission ordered to pay $1,492,500 in restitution along with a $50,000 administrative penalty.

If Martinez fails to satisfy those obligations, they will go to the Attorney General’s Office, acting as a collections agency, said Wendy Coy, director of enforcement in Arizona Corporation Commission’s Securities Division.

The agency began investigating the company after receiving investor complaints, Coy said.

Martinez denied a request to comment on the decision, though internal ACC documents do offer a glimpse into his side of the story.

Martinez claims in a document filed with the ACC that former Shadow Beverages and Snacks executive Rick Peterson initiated the investigation for personal gain with help from an ACC employee who is Peterson’s personal friend. Peterson misrepresented himself as a licensed broker when Shadow Beverages hired him, Martinez says.

Furthermore, Martinez states that “the majority of lawsuits and complaints now come from (Peterson) and the investors he brought to Shadow.”

The ACC’s Recommended Opinion & Order from the Hearing Division filed by Administrative Law Judge Mark Preny found that Peterson had a direct role in at least six of the 17 investments in question.

The documents do not provide, beyond Martinez’s testimony, further evidence of collusion between Peterson and an ACC employee.

According to documents filed with the ACC by Martinez, all company funds were used to pay employees involved in day-to-day operations and to build the business. These documents also stated that “five executives worked at the company without pay throughout the life of the company.” However, another section of the document states that “the officers of the company were not on the payroll 80 percent of the time and never had a salary of more than $80,000 on a yearly basis.”

Martinez also argues, via these documents, that “at all times, investors knew that the company had debt, some past due, but the company was also working on larger financial deals tied to the distribution agreements or product agreements.”

The investors ranged from experienced securities and investor professionals to a former CEO of Ironclad Performance Wear. The pool also contained several personal friends and a cousin of Martinez. Investments and loans solicited by Martinez and Jones ranged from $25,000 to $500,000.

Other investors included a Buckeye resident who owns a construction management company, a married couple who work as real estate agents in the Valley, and another husband and wife who live in Arizona and are an oncologist and corporate attorney, respectively.

The investments carried a range of terms, interest agreements and repayment timelines that went unfulfilled.

The ACC documents contain testimony from a variety of investors who claim that this situation caused them financial hardship, including a Gilbert resident and her partner who invested $75,000 over the course of two investments.

To complicate matters further, nutrition and fitness retail chain GNC received a $1.4 million judgment against Shadow Beverages and Snacks in 2014.

According to Corporation Commission filings, the company did not disclose this judgment to potential investors.

American Outdoorsman Inc. also won a judgment against Shadow in 2014 worth between $5 million and $6 million stemming from a commercial licensing agreement dispute. Shadow licensed the American Outdoorsman brand to sell food products but failed to make agreed-upon payments to the media company, according to a press release from attorney Arthur D. Goldman, who represented American Outdoorsman.

In the ACC filings, Martinez claimed that the company sold its largest asset, the No Fear drink brand, to Mix 1 Life Inc. in March 2015 for $12.2 million in cash and stocks with the intention of paying creditors with the proceeds. However, he stated that Mix 1 Life took possession of the No Fear brand but did not follow through in paying for the transaction and “their business dealings have caused the stock price to decline…”

Coy would not comment on whether or not the ACC is referring the case to another agency for criminal charges. She did state that any potential future criminal charges could be pursued by the U.S. District Attorney, Arizona Attorney General or Maricopa County Attorney.

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