The former CEO of a struggling energy company allegedly cooked up a scheme to create a short squeeze in his company’s stock in connection with a pending reverse takeover, and then issue stock based on the inflated valuation, the U.S. Securities and Exchange Commission (SEC) alleges.
According to the SEC’s filings, the former CEO of Texas-based Torchlight Energy Resources Inc. devised a plan to manipulate the company’s stock price by declaring a preferred dividend and touting the idea that the dividend would squeeze traders with outstanding short positions, in an effort to drive up the stock ahead of its planned merger.
The resulting company then raised US$137.5 million from investors in an at-the-market offering against the inflated valuation.
“The conduct we allege was a sophisticated yet brazen plan by a public company and its former CEOs to purposely mislead investors in the company’s stock,” said Eric Werner, director of the SEC’s Fort Worth office, in a release.
“This conduct is particularly alarming because it involves public company CEOs who were more concerned with ‘burning the shorts’ than creating long-term value for shareholders,” he said.
The company has agreed to settle the regulator’s charges without admitting or denying the allegations. It agreed to pay a US$1-million penalty to resolve allegations that it violated the anti-fraud, reporting, internal accounting controls, and books and records provisions of the federal securities laws.
The allegations against the former CEOs involved are being litigated and have not been proven.
In its filings, the SEC said the alleged scheme was initially devised by the former CEO of Torchlight Energy, which in 2020 sold off most of its revenue-generating properties, saw its stock price drop below US$1 per share, and was facing delisting by Nasdaq.
The regulator alleged the company’s then CEO, John Brda, devised a plan to find a merger partner that wanted the company’s Nasdaq listing but not its remaining energy assets, and to declare a preferred stock dividend, ostensibly to distribute the proceeds from the sale of its remaining energy assets to shareholders.
However, the SEC alleged the dividend was actually designed to cause a “short squeeze,” and that the company then raised capital against that inflated valuation to finance drilling in its remaining assets.
In June 2021, Torchlight found its merger partner, Metamaterial Inc., a Nova Scotia–based company focused on early-stage applied materials technology research and development, and completed a reverse takeover to create Meta Materials Inc. (Meta II), a Nevada corporation headquartered in Dartmouth, Nova Scotia.
Alongside the reverse takeover, Torchlight issued its preferred dividend to shareholders, and its shares became preferred shares of the resulting company, Meta II.
The regulator alleged that Brda, along with the CEO of Metamaterial Inc., Georgios “George” Palikaras (a Greek citizen and Nova Scotia resident), who became president and CEO of the merged company, misled investors about the preferred dividend, claiming it could be valued at between US$1 and US$20 when its investment bankers valued it at between three cents and 83 cents per share.
The SEC’s complaint, filed in U.S. District Court for the Southern District of New York, alleges that Brda and Palikaras “told certain investors and consultants — and hinted via social media — that the dividend would force short sellers to exit their positions and trigger a ‘short squeeze’ that would artificially raise the price of the company’s common stock.”
The regulator charged that Brda and Palikaras violated the anti-fraud and proxy disclosure provisions of the federal securities laws. It also charged Brda with aiding and abetting Meta II’s violations of the reporting, internal accounting controls, and books and records provisions.
The regulator’s complaint against the former CEOs seeks permanent injunctions, officer-and-director bans and civil penalties, along with disgorgement and prejudgment interest against Brda.