© 2016 The Texas Lawbook.
By Mark Curriden
(Sept. 27) – The U.S. Securities and Exchange Commission announced Tuesday that it has charged and settled allegations that a Pasadena, Texas-based bio fuels company and its former chief executive officer failed to disclose to investors essential financial assumptions that were critical to the company’s viability.
In a federal lawsuit filed in Houston, the SEC’s Fort Worth Regional Office claims that Mard Inc., which was known as KiOR, Inc. before it declared bankruptcy in November 2014, and CEO Fred Cannon provided investors with a “rosy view” without also providing appropriate caveats that put the company’s financials in an accurate state.
The SEC states that KiOR failed to disclose important assumptions about the yield that KiOR had claimed to have achieved through the company’s proprietary process of converting wood and other biomass into crude oil – a key metric that was critical to KiOR’s viability.
The SEC’s lawsuit claims that KiOR, starting with its filing of a registration statement for its initial public offering in April 2011 told investors that the company had “achieved” a yield of 67 gallons of fuel per ton of biomass.
But company officials, especially Cannon, did not disclose that this yield was based on significant assumptions about technologies that remained under development. Absent these assumptions, internal KiOR documents reflected test results with yields of approximately 18-30 percent less than the disclosed yield.
Cannon signed and approved the registration statement and subsequent filings that continued to tout the 67-gallon yield figure without disclosing the underlying assumptions, the SEC states.
“Investors in technology companies like KiOR deserve an accurate and complete picture of what the technology actually can do,” Shipchandler said. “We allege that KiOR and Cannon gave investors a particularly rosy view of the company’s technology without the caveats necessary to put those disclosures in the proper perspective.”
KiOR and Cannon agreed to settle the claims against them. Both agreed to the final judgment permanently enjoining them from violating Section 17(a)(2) and (3) of the Securities Act of 1933. Cannon agreed to pay a $100,000 fine. The settlement is pending final approval by the court.
The SEC’s investigation was conducted by Kathleen Galloway, Michael Umayam, and Keith Hunter, and the case was supervised by Jessica Magee, Eric Werner, and David L. Peavler in the SEC’s Fort Worth Regional Office. The SEC’s litigation was led by Timothy Evans.
Jones Day securities litigation partner Scott Fletcher in Houston represents Cannon. Peter Klovos at Wilmer Hale in Boston represents KiOR.
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