14 Jul REAL‐LIFE CONSEQUENCES AND SOLUTIONS FOR BUSINESS BROKERS WHEN THE PARTIES CONVERT AN ASSET SALE TO A STOCK SALE- Part 1 of 2
The following is a true account of events that actually happened in the spring of 2011. While business brokers have been “theoretically” at risk when a transaction is concluded through the transfer of equity in the selling entity to a buyer, I actually lived this nightmare. As a result, I thought I would let everyone learn from the experience. All the major documents referred to herein will be linked to in future blog postings, for your review.
Civil Suit Pending Against Krick in Federal Court:
I am still battling a major civil suit, filed in Federal Court, brought by a former client who is accusing me of among other baseless claims, “unjust enrichment” because I received commission for selling the equity he personally owned in his business entity after he and the Buyer decided to convert the $5,450,000 transaction from an “asset” sale to a “stock” sale in August 2006. Their contention is that I was not licensed to sell securities, and, therefore, violated securities laws by receiving a $343,000 commission. Meanwhile, both parties signed my “Stock Sale Acknowledgement, Notification, and Disclaimer” agreement, as soon as I was notified that the parties had decided to convert the transaction.
Resolution of Investigation of Krick by Nevada State Securities Division for Securities Violations:
As a result of that civil action, some anonymous broker‐dealer from the Las Vegas area, who, evidently [does not like] business brokers, used it to file a complaint with the Nevada State Securities Division. Most of you are aware of this. This resulted in the Division issuing a subpoena for all my records since January 1, 2006. They picked a 5‐year look‐back because, under the Nevada Real Estate laws, l am required to keep the records for five years. We produced approximately 200,000 pages of documents and 2,700 electronic files in our response.
I retained Sherwood Cook, to represent me. Sherwood is one of the top securities attorneys in Nevada, was involved in writing the state’s securities Laws, and served as Chief Legal Counsel for the Nevada Securities Division for five years. He was also the mentor for the attorney who, as Chief of Enforcement for the Division, had signed my subpoena. When he spoke with her after I was served, she made the remark that,
- She was “going to nail your client’s hide to the wall, to set an example for all other business brokers in Nevada.” This not exactly what you want to hear from your State Securities Law enforcement official.
- She was aware of the SEC’s 2006 “CBI” No‐action letter and had informed the SEC’s San Francisco office that the Nevada docs does not recognize the relevance, or applicability, of their no‐action letter.
- That the state agrees with the State of Utah’s position which that state expressed in its May 7, 2009, letter to business brokers.
- She indicated, at that point, that the Nevada Division was going to seek a criminal indictment against me based on facts of the August 2006 transaction, and
- That the only purpose for the subpoena was to see how many other violations there were.
Time passed without any further contact with the Division. However, they were aware that I was involved in another relatively large, high profile transaction in Las Vegas that, for income tax purposes (seller was a C‐corp.), had turned into a “stock” transaction. Both my client and the public company, which was purchasing the stock from the stockholder, signed the stock sale agreement. In fact the father of the Chief of Enforcement (Ms. Nail your client’s hide to the wall) was directly involved in the transaction as a “consultant” and was asking for part of my commission; he has neither real estate nor securities license.
Meanwhile, we prepared and submitted a “Position Paper” to the Securities Division. After realizing that her father was potentially involved, the Chief of Enforcement instructed me, through my attorney, to:
- convert my “listing agreement” into a “consulting agreement,” and
- bill my client for the actual time I had spent, at my “standard rate”.
The payment needed to be made at that time and not contingent upon the “success” of the transaction. I guess she thought that would sort of comply with the SEC’s definition of a “finder.” As we all know, this is a “non‐starter” for business brokers:
- we don’t have “standard rates” (like attorneys or CPA’s),
- we don’t keep time logs (our listing requires us to “perform” by selling the business),
- our clients are not going to pay us and hope that the transaction closes escrow,
- they typically need the proceeds they received at closing to pay us, and
- the business broker no longer has a listing if the Buyer doesn’t close escrow or, during due diligence, terminates the offer.
Another disturbing thing is that our listing agreement is an engagement to sell the assets of the business. Our client is the entity which owns the assets, not the shareholder. If the shareholder sells their stock/equity to the Buyer, then the business broker has NOT PERFORMED; that is, we did not sell the assets for our client. Thus, we are not entitled to a commission. As you will see later, we have incorporated some new language in our listing agreement to cover that issue.
As a result, I had my attorney draft an “Amendment to the Listing Agreement”. My client told me over the telephone that he would sign anything I sent over, that he was very happy with my work, and he intended to pay me. Most business brokers probably would not have established a standard rate. However, I had assisted U.S. Playing Cards with a transaction on a “Consulting basis,” where I had billed them for actual time at $350 per hour.
However, after we sent this “Amendment” to my client, his attorney would not allow him to sign it unless we could either provide the citation in Nevada Securities Law providing for this conversion or a letter from the State allowing this conversion. Also, because I had to “back away” from the deal, three things happened:
- My client wanted a $52,500 discount from the full commission.
- He wouldn’t pay until the deal closed.
- The deal started to get into major trouble, and I was powerless to step in and assist my client.
Another problem, with conversion from a listing agreement to a consulting agreement, is that it may, or may not, be in compliance with Federal SEC regulations. So, I think there may be some exposure there for the business broker.
Tomorrow’s posting will contain the remainder of Len’s letter where he will begin by telling what happened to the transaction.