SEC issues cease-and-desist order against split-cycle engine developer Scuderi Group for violations of Securities Act
The US Securities and Exchange Commission (SEC) has issued a cease-and desist order against split-cycle engine developer Scuderi Group (earlier post) and its president, Salvatore Scuderi, as well as a $100,000-fine against Salvatore Scuderi for violations of the Securities Act including unregistered stock offerings and “misleading disclosures regarding the use of offerings proceeds.”
The Scuderi Engine is a split-cycle design that divides the four strokes of a conventional combustion cycle over two paired cylinders. Intake air is compressed in the compression cylinder and transferred to the power cylinder for combustion. The engine has two crossover passages that connect the two cylinders, which separate the four strokes of the pistons. The combination of discrete, asymmetrically sized cylinders and fully variable valvetrain promises the ability to vary displacement ratios, bore-stroke ratios, compression-expansion ratios, compression-expansion phasing, and gas transfer phasing for engine optimization—i.e., a more efficient internal combustion engine.
The family-owned company, which was formed in 2002, has, in conjunction with Southwest Research Institute (SwRI), designed, modeled and prototyped a range of implementations of the Scuderi architecture, including naturally aspirated, air hybrid, Millerized and turbocharged versions. (Earlier post.)
Scuderi’s business plan is to develop, to patent, and to license its engine technology to OEMs and engine manufacturers. The company has no publicly announced licensing deals for its technology as yet.
In its order, the SEC noted that between 2004 and 2011, Scuderi Group sold more than $80 million worth of securities through offerings that were not registered with the Commission and did not qualify for any of the exemptions from the Securities Act’s registration requirement.
The company’s private placement memoranda informed investors that Scuderi Group intended to use the proceeds from its offerings for “general corporate purposes, including working capital.” In fact, the company was making significant payments to Scuderi family members for non-corporate purposes, including, large, ad hoc bonus payments to Scuderi family employees to cover personal expenses; payments to family members who provided no services to Scuderi; loans to Scuderi family members that were undocumented, with no written interest and repayment terms; large loans to fund $20 million personal insurance policies for six of the Scuderi siblings for which the company has not been, and will not be, repaid; and personal estate planning services for the Scuderi family. Between 2008 and 2011, a period when Scuderi Group sold more than $75 million in securities despite not obtaining any revenue, Mr. Scuderi authorized more than $3.2 million in Scuderi Group spending on such purposes.—SEC order (Release Nº 33-9407)
The SEC said that Scuderi raised the $80 million from individual investors and investment clubs from 2002 to 2012 through at least six offerings in which it sold “preferred units” to at least 415 investors.
Scuderi never registered any of the offerings with the SEC, claiming that the offerings were exempt under Securities Act Section 4(2) and/or the Regulation D Rule 504 or 506 safe harbors. In fact, the SEC charged, Scuderi Group’s offerings failed to qualify for the registration exemptions because Scuderi Group made offerings that substantially exceeded the Regulation D investor limits; failed to provide investors audited financial statements; and, at the direction of Sal Scuderi, engaged in a plan to evade the registration requirements.
To sell the offerings, the SEC said, Scuderi Group distributed more than 3,000 private placement memoranda (PPMs) to potential investors, directly and through third parties. Scuderi Group found these potential investors by, among other things, conducting hundreds of roadshows across the US; hiring a registered broker-dealer to find investors; and paying numerous intermediaries to encourage people to attend meetings that Scuderi Group arranged for potential investors.
Although ostensibly comprised of discrete offerings, Scuderi Group’s offers and sales of securities constituted one integrated offering. Scuderi Group conducted, in essence, one continuous offering for over eight years, from January 2004 through July 2012.—SEC order (Release Nº 33-9407)
With more than 90 of the company’s investors being non-accredited investors (Reg D Rule 506 sets a limit of 35 non-accredited investors when the offerings are integrated), the Scuderi Group engaged in several practices that improperly reduced the number of non-accredited investors recorded on its books, the SEC charged.
As one instance cited by the SEC in its order, Scuderi Group sold more than $3.8 million in preferred units to three non-accredited “Air Hybrid Investment” clubs the operating agreements of which said they were “organized to invest in the Scuderi Group” and provided a “one to one equivalency between a unit in [the club] and a [Scuderi Group] unit. . .” Scuderi Group tallied only the three non-accredited clubs on its shareholder list, even though more than 140 individual investors purchased company preferred units through the clubs, the SEC said.
In PPMs dated December 21, 2007 and January 25, 2010 that Mr. Scuderi prepared, Scuderi Group said that it planned to use the net proceeds from the offerings “for general corporate purposes, including working capital.” The PPMs provided that Scuderi Group could pay management bonuses at the discretion of its Board of Directors. Scuderi Group sold securities pursuant to these PPMs from 2008 to 2012, raising approximately $75 million. Scuderi Group’s disclosures gave investors the misleading impression that the company would use the offering proceeds only for the direct benefit of the company. Instead, at Mr. Scuderi’s direction, Scuderi Group used a material portion of the proceeds for the direct benefit of the Scuderi family.
Scuderi Group’s disclosures were materially misleading because they failed to inform investors that the company, at Mr. Scuderi’s direction, had been, and was planning to continue, using a significant portion of the proceeds from securities offerings to make large, ad hoc bonus payments to Scuderi family employees to cover personal expenses; payments to family members who provided no services to the company; loans to Scuderi family members, without documented interest or repayment terms; large loans to fund $20 million personal “split-dollar” insurance policies for six of the Scuderi siblings for which the company has not been, and will not be, repaid; and personal estate planning services for the Scuderi family. Scuderi Group did not have a Board of Directors; all payments were made at Mr. Scuderi’s sole direction. In total, from 2008 to 2011, Scuderi Group, at Mr. Scuderi’s direction, used $3.2 million, or 4.3% percent, of the offering proceeds to personally benefit the Scuderi family over and above the usual compensation that the Scuderi family employees received.—SEC order (Release Nº 33-9407)
The Scuderi Group agreed to a number of undertakings as a result of the SEC order, including:
To disclose to potential investors all compensation or payments made to any known Scuderi family member in the preceding calendar year in connection with any future offerings.
To inform every known holder of Scuderi Group securities of the settlement between the Commission, Scuderi Group, and Mr. Scuderi within 15 days of the date of the order and to and provide them with a URL where they can review a copy of the order.
In connection with all loans provided by Scuderi Group to any known Scuderi family member, to memorialize in writing all loan terms including the amount, duration, interest rate, repayment terms, and recourse or collateral available to Scuderi Group in the event of non-payment.
To certify, in writing, compliance with the above undertakings.
The SEC orders that Scuderi Group and Salvatore Scuderi shall “cease and desist from committing or causing any violations and any future violations of Sections 5(a), 5(c) and 17(a)(2) of the Securities Act” and that Sal Scuderi shall pay a $100,000 civil money penalty.
Scuderi Group attorney Ian Roffman told Long Island Business News that “The company is pleased to be able to put the matter behind it and put the technology first. The settlement doesn’t prevent the company from moving forward with its future plans.”
In a post on its Air-Hybrid blog on 31 May, the company makes a brief argument for the use of Miller overexpansion without the need for variable valves to control intake timing—enabled by the Scuderi design—to deliver efficiency and power density.
Order Instituting Cease-And-Desist Proceedings Pursuant To Section 8A Of The Securities Act Of 1933, Making Findings, And Imposing Remedial Sanctions And A Cease- And-Desist Order (Release Nº 33-9407)