Another one of the executives of the now-defunct Kit Digital video management software and service company has been arrested for a combination of conspiracy, securities fraud and wire fraud. He's the seventh person to end up facing criminal charges since Kit Digital went into bankruptcy in 2013.
Investors in the startup company were vastly misled about the company's financial health prior to its bankruptcy. The man arrested in this case conspired with his brother and others in a complicated series of investments and diversion of funds through a series of smaller companies they called investment vehicles.
The smaller companies served as little more than personal piggy banks for the conspirators. To keep investors happy and the scheme going, conspirators used money from new investors to pay redemptions to prior investors. The conspirators then engaged in a plan to help hide the truth of Kit Digitial's financial distress from auditors by claiming that one of the smaller companies was holding significant liquid assets on its parent company's behalf.
Securities fraud is a complex area of law that boils down to some of the most basic issues in business: The need for executives and others who have control of a company's finances to be transparent with their investors. By hiding the company's losses, the people involved in Kit Digital essentially kept investors from making educated choices about what to do with their investments.
While it might have kept the company going a little longer, it still ended in bankruptcy court and investors lost more than they might have if they'd known the truth. The newest investors in the companies, in particular, were essentially deprived of their ability to make an educated choice about investing in the first place—and probably took the worst losses.
High-profile cases like this tend to have a ripple effect because they make even legitimate business owners and officers whose companies are having financial distress worry that they could end up being accused of fraud even though they didn't have any intention of deceiving investors. Even the hint of a securities fraud investigation can damage a promising career and hurt innocent individuals.
If you think that there's any possibility that you could be under investigation for a securities violation, the best thing that you can do is to work with an attorney who handles these types of issues to try to protect yourself and your reputation.
Source: Reuters, "U.S. makes new arrest in fraud probe of bankrupt video tech firm," Nate Raymond, Dec. 05, 2016