Yet another Nashville-area financial venture is being accused of defrauding investors out of millions.
The Securities and Exchange Commission today filed suit against Franklin-based J.C. Reed & Co. Inc., its affiliate J.C. Reed Advisory Group Inc., company officer Barron A. Mathis and the estate of founder John C. Reed, who died of cancer last June at the age of 45.
The stock market regulator accuses the defendants of floating an unregistered offering of securities and engaging in "fraudulent conduct" by selling more than $11 million of Reed & Co. stock in to more than 100 investors in several states.
The companies, both of which are now under bankruptcy protection, and their principals misled shareholders about financial results, the SEC claims. In truth, Reed & Co. "has raised and spent more than $11 million in investor funds, but has generated only about $386,000 in gross revenues," the complaint states.
When the parent Reed & Co. filed a Chapter 11 petition in late October, its attorney – Bill Norton of Boult, Cummings, Conners & Berry – explained that Reed Advisory Group and the other main Reed & Co. operating unit, mortgage lender J.C. Reed Mortgage Co., were both in need of funding at a time when the parent company was "running out of money."
Norton has said the Reed companies' troubles are unrelated to Reed's death. But the lawsuit accuses the defendants of misleading investors about a key man life insurance policy the company had on Reed, as it failed to disclose a shareholder agreement obligating Reed & Co. to use up to $1 million of the $1.5 million policy to redeem Reed's shares in the event of his death.
Efforts to reach Norton for this story have been unsuccessful. The person who answered the telephone at Reed & Co.'s office, when asked whether anyone wished to comment on behalf of the company, answered: "Not at this time." NashvillePost.com will update the article with any comment received today.
The lawsuit names Lana Reed, widow of John Reed, a defendant as executor of his estate. It identifies Mathis as the president of Reed Advisory Group.
The action, filed in Nashville's federal court and available at this link, seeks "disgorgement of all ill-gotten gains" by Mathis and by Reed's estate. Normally, claims against the companies would be held in abeyance while they are in bankruptcy. However, enforcement actions by the SEC are not subject to the automatic stay that applies to most actions against a party that is in bankruptcy, and the agency will be able to proceed against the companies.
In bankruptcy court, the parent company has declared that it has assets of $4.7 million, versus debts of only $491,000. Its filings in that case make no mention of outside investors having purchased its stock.
Just two years ago, Reed & Co. announced ambitious plans to launch a $100 million real estate investment trust to develop residential properties in rural Tennessee, building on its mortgage brokerage business. Company officials also said they anticipated an initial public stock offering at some point in the future.
Correction: As originally posted, this story erroneously stated that the SEC's claims against the two Reed companies would be stayed while the firms were in bankruptcy. In fact, the SEC enforcement actions are not subject to the usual stay, as is now explained above.
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