A group of companies in Ohio that raised nearly $10 million from investors for oil and natural gas development projects has filed for bankruptcy and has agreed to pay the U.S. Securities and Exchange Commission (SEC) a $4.5 million judgment.
The SEC filed a lawsuit against Preferred Financial Holdings Co. LLC, four subsidiaries and its founder and former CFO, Michael Bodanza, on July 27, alleging they defrauded investors from 2007 to 2010. The companies filed for Chapter 11 bankruptcy protection in U.S. Bankruptcy Court of the Northern District of Ohio on the same day.
According to SEC documents filed in U.S. District Court for the Northern District of Ohio, the SEC alleges that from June 2007 to August 2010, Bodanza and Preferred Holdings raised $6,769,635 from at least 61 investors through the unregistered sale of promissory notes with Preferred Holdings.
“During this period, Preferred Holdings experienced through its operating subsidiaries a series of material operational problems and suffered significant losses, including net losses of $1.0 million in 2007, $2.2 million in 2008, $1.8 million in 2009, and $1.3 million in 2010, according to consolidated financial statements prepared in 2011,” the SEC said. “Bodanza nonetheless depicted Preferred Holdings’ oil and gas operations in a positive light and failed to disclose to most investors that the company had suffered significant losses from 2007 through 2010.”
The SEC also accused Bodanza of failing to disclose that Preferred Holdings removed one of its founding members and COO in early 2008, then filed suit against him, a move that caused the company losses of between $3 million and $4 million. Bodanza also allegedly failed to disclose that:
“Bodanza also failed to disclose to at least three individuals who purchased promissory notes in 2010 that their investment proceeds would be used to make payments to other investors,” the SEC said. The commission further alleged that Preferred Holdings “has failed to repay most of the investors whose notes have already come due and likely will default on a significant number of additional notes which come due in 2012.”
The other three subsidiaries named in the complaint are Preferred Financial Investment Co. LLC, Preferred Financial Leasing Co. LLC and Preferred Well Management Co. LLC.
Under the terms of the settlement, Bodanza and the companies agree to the SEC’s final judgment without admitting or denying the allegations in the commission’s complaint. Bodanza is liable for $410,207, while Preferred Holdings is on the hook for $4,485,647.
The penalties may provide little consolation to the investors the SEC accuses Bodanza and Preferred Holdings of defrauding; according to the commission, the defendants are broke.
“Preferred Holdings currently has approximately $2.5 million in assets, but $7.4 million in liabilities, very few ongoing operations, limited income streams, and almost no cash on hand,” the SEC said. “Many of the later notes are already overdue, and all of the notes purchased in the initial offering will come due in 2012. Preferred Holdings is not in a position to meet these obligations.”
The case is SEC v. Michael Bodanza et al (Case No. 1:12-CV-1954).
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