A recent Securities and Exchange Commission enforcement action filed in the US District Court for the Middle District of Florida aims to hold a director liable for a host of false statements made while he strong-armed the remainder of the board and improperly claimed the company as his own. According to the SEC’s complaint, defendant Michael Borish worked to exclude duly elected board members, including the chairman of the board and president, from the company. Borish was the CEO of Freedom Environmental Services, Inc. when, as part of a reverse merger, it acquired B&P Environmental Services, LLC. When the controllers of the former B&P were elected to the board, and one was elected chairman and president, Borish – now CEO and vice president of the new Freedom entity – refused to release control of the company or recognize the new board members. Borish refused to provide directors with Freedom’s books and records, and operated Freedom as though he was the sole officer and director. After two attempts in Florida state court to have Borish comply with the purchase agreement and election results, the board members filed for voluntary Chapter 11 bankruptcy protection.
The civil litigation proved unsuccessful to resolve the dispute over corporate control and the SEC stepped in, bringing claims against Borish and Freedom, which he was exclusively controlling, under Section 17(a) of the Securities Act of 1933, Sections 10(b), 13(a)-(b), and 14(c) of the Securities Exchange Act of 1934, and SEC Rules 13a-14 and 14c-6. Specifically, the SEC alleged that Borish caused Freedom to file with the SEC numerous reports containing the false statements that Freedom’s board of directors and management did not change after the merger with B&P, and that Borish was the president and sole director of Freedom. Borish and Freedom were also charged with issuing a false press release, claiming that Freedom had acquired a company when in fact the parties to that acquisition had only entered into a letter of intent, and the deal was never closed. The SEC also brought claims against Borish and Freedom’s COO, Michael Ciarlone, for misappropriation of Freedom’s funds into their own personal accounts. SEC v. Freedom Environmental, No. 6:12-cv-01415-JA-DAB (M.D. Fl. Filed Sept. 17, 2012).