Loop Industries founder Daniel Solomita is seen at the company's research facility Friday, April 12, 2019 in Terrebonne, Que. The technology company has created a revolutionary process that decouples plastic from fossil fuels, breaking down waste PET plastic to its base building blocks. These are combined to create virgin-quality PET plastic that can be used in food-grade plastic packaging. THE CANADIAN PRESS/Ryan RemiorzRyan Remiorz/The Canadian Press
Loop Industries Inc. LOOP-Q, a Quebec company that says it has revolutionary technology to recycle plastic, has become ensnared in a U.S. legal action against a group of investors accused of taking part in a “fraudulent scheme” to sell Loop stock in the early days of the business.
The U.S. Securities and Exchange Commission (SEC) last Friday announced charges against Canadian David Stephens and California residents Donald Danks, Jonathan Destler and Robert Lazerus. The men are accused of violating anti-fraud provisions of the U.S. Securities Act and the Securities Exchange Act.
The SEC legal complaint describes Mr. Stephens, 66, only as a Canadian citizen believed to live in Vancouver. Mr. Danks is a former Loop director. Mr. Destler was a consultant to Loop at the time of the alleged activities.
The regulator said Loop’s founder and chief executive officer, Daniel Solomita, and a company he controls received funds from the unlawful acts and should return them. They are not accused of wrongdoing.
“We had no idea any of this was going on,” Mr. Solomita said in an interview on Tuesday. “It’s obviously very disturbing. It’s very unfortunate that we built this amazing technology and this amazing company over the years against all odds.”
The SEC alleges that over several years, Mr. Stephens, Mr. Danks and Mr. Destler “engaged in a deceptive scheme” to sell Loop Industries stock while concealing their own equity stakes in the company and connections to it. It alleges Mr. Lazerus helped increase demand for Loop stock by promoting it and brokering sales to investors, including one who plowed US$7-million into Loop when the group was covertly selling the stock.
The case dates back to 2014, when the SEC alleges Mr. Stephens covertly won control over a publicly traded shell company called First American Group Inc. Mr. Stephens then worked with Mr. Destler, Mr. Danks and Mr. Solomita on the structure for a reverse merger between First American and Loop that would result in the launch of Loop Industries. Loop now has a NASDAQ listing, but at the time, it traded as a penny stock on OTC Link.
The regulator alleges in its complaint that Mr. Stephens obtained control of a large portion of Loop’s stock and engaged in “deceptive conduct to evade disclosure and reporting requirements” under U.S. securities laws and hide the amount he controlled. It alleges that over three years, Mr. Stephens held his Loop shares in the names of various entities to conceal his sizable position.
“Stephens dumped the stock into the public U.S. securities markets to investors who were unaware of his ownership,” the SEC said in a statement announcing the charges. Mr. Stephens also worked with Mr. Danks, who sat on Loop’s board at the time, and Mr. Destler, a consultant to the company, to sell Loop stock in private transactions using entities owned and controlled by Mr. Danks and Mr. Destler, the SEC alleges.
Mr. Danks and Mr. Destler allegedly made material misrepresentations to brokerage firms to conceal their connections to Loop. “Over the relevant period, working together, these defendants generated millions of dollars in proceeds from fraudulently selling Loop stock,” the SEC states.
Mr. Solomita said Loop was an early-stage company without the resources to check the provenance of its financing. He said he will gladly pay back the roughly US$400,000 in proceeds.
“You know, you don’t have a legal team,” Mr. Solomita said. “You don’t have a lot of money to be able to validate where this money is coming from and who the people are that are investing it.”
The Globe and Mail was unable to reach Mr. Stephens or Mr. Lazerus for comment. Mr. Danks and Mr. Destler did not respond to a request for comment.
Loop says it has a proven, patent-protected technology that recycles the polyethylene terephthalate (PET) used in things such as drink bottles into virgin-quality plastic, which is made from materials that have not been previously processed. The company still has no reported revenue and racked up about US$100-million in losses over the past three fiscal years.