A penny-stock company under investigation by the Securities and Exchange Commission for market manipulation in connection with a 300% jump in its shares two years ago got a $3.1 million loan from the government’s coronavirus relief fund for small businesses.
Two other recipients of PPP funds,
The ability of these publicly traded companies to secure loans while many other small businesses couldn’t demonstrates the haphazard nature of the relief program. Loan applications ask only whether a business or owner is bankrupt, engaged in illegal activity, or if a principal or senior executive has been indicted or convicted in the past seven years, or is on parole. There are no questions about a company’s history with law enforcement or other regulatory bodies.
“The Trump Administration should have a plan in place to prioritize scarce PPP funds so that real small businesses get priority, not large publicly traded firms and companies that are under active investigation for fraud,” Democratic Senator
Several large, public companies generated public criticism for securing PPP loans. Some, such as
MiMedx, which won approval for a $10 million PPP loan, spent the past three years dealing with federal investigations into accounting fraud and allegations that it bilked U.S. Department of Veterans Affairs. Once a promising small-cap company with a market value of $1.2 billion, MiMedx was delisted from Nasdaq in 2018 after its board uncovered accounting irregularities, announced the need for a multiyear earnings restatement and ousted the company’s top executives.
MiMedx’s fortunes hit bottom in November, when former Chief Executive Officer
Under a new CEO hired last year, MiMedx secured $75 million in financing from Blue Torch Finance LLC. And in March, the company published restated earnings through 2018, reflecting an overstatement of at least $70 million in revenue over several years. Its report for 2019 has been delayed.
MiMedx entered into an agreement with the Justice Department on April 6 to settle a civil investigation into claims that it defrauded the government by overcharging for skin-graft products. Combined with its $1.5 million SEC settlement five months earlier, the company has agreed to pay $8 million to resolve claims of bad behavior.
On April 21, the same day MiMedx disclosed it had received the loan, it announced it renegotiated several covenants from its Blue Torch credit facility, allowing the company to reduce the amount of liquidity it needed on hand to $20 million from $40 million. The amended agreement cost MiMedx $725,000 in fees, which were added to the principal, and the interest rate of the loan increased.
MiMedx said in an emailed statement that the PPP funds would be used for their intended purpose, to keep its
“We need operating funds on hand at a time when we cannot access the public markets, owing to our financial restatement process,” the company said. “These funds are being used as designed –- to fund payroll. We are in compliance with the PPP program as it stands.”
Cool Holdings is under investigation for fraud by the SEC, which has asked for documents tied to its shares rallying 300% in September 2018. Two early investors in the Miami-based company, Barry Honig and John O’Rourke, were sued by the regulator that same month for their roles in orchestrating market manipulation in the shares of other penny stocks.
The SEC alleged that the two participated in pump-and-dump schemes, where insiders buy shares of cheap stocks, push them higher through promotions and then sell. Both men settled with the SEC without admitting or denying the allegations and were banned from penny stock companies. O’Rourke agreed in March to pay a $1.2 million penalty.
Vern LoForti, senior vice president of Cool Holdings, said the company is cooperating with the SEC and that Honig and O’Rourke haven’t been investors since September 2018. He said Cool Holdings met all the SBA requirements for a loan and that the money would be used for payroll costs, rent and utilities at its 44 U.S. stores.
“While we do have public shareholders,” LoForti said, “we are a ‘small employer’ and the kind of small business specifically targeted by Congress for assistance.”
CV Sciences, which sells oils extracted from cannabis plants, received a $2.9 million PPP loan. In a case filed by the SEC in 2017, the San Diego-based company agreed to pay a $150,000 penalty to resolve claims it overstated its assets. CEO
The company and its former CEO didn’t respond to requests for comment.
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