Four Ohio men appeared to have a winner on their hands with an innovative product that would fill a need in the medical field.
It was a hypodermic needle destruction device that I will call Product X. Before it could be sold and delivered to users in the United States, Product X required premarket approval from the U.S. Food and Drug Administration.
The men formed a business entity to develop and market the product. Among the progress they made was submitting a provisional application for a patent on the device followed by an actual patent application and a premarket approval application.
Selling unregistered securities
All well and good so far. Then the four men took a turn into uncharted territory and got involved in the unregistered sale of securities. According to an indictment, they sought out investors to buy private shares of stock, but those shares were not registered with the Securities and Exchange Commission.
They are accused of making bogus and fraudulent misrepresentations about their company and Product X in their sales pitch.
Among the charges: They said that the FDA had approved Product X and that it was market ready and set for mass production when in fact it was not.
The defendants allegedly took prospective investors to a “research facility” where they displayed a few assembled Product X’s surrounded by a large number of empty Product X boxes.
Investors in Product X dropped a combined total of $7 million. The money was used, according to the indictment, to cover miscellaneous unrelated expenses, including a $3.3 million gambling debt at a casino.
Federal indictment brought
The Internal Revenue Service’s criminal investigations division got involved along with other agencies and came down hard on the four businessmen. A federal indictment accuses them of defrauding investors.
They allegedly left considerable financial hardship in their wake and caused considerable loss to investors. They face severe punishment if they are convicted in court.
It is worth repeating that potential investors should do their due diligence before writing a check. That includes thoroughly checking out the management team and making sure that the shares being offered for sale comply with legal requirements.
A sound investment involves more than a good idea. It also must include honest people who have the potential to make a profit.