|SEC Wins Case against Hair Removal Scammers |
By Aaron Seward
April 14, 2008
A federal court has entered final judgments against two men for their part in a fraudulent securities deal involving a hair-removal company that raised $11 million from 65 investors.
The SEC originally charged Jeffrey Schmidt and Gary Gelnette in 2005. Its complaint claimed the men lied to investors while raising money for Skin Nuvo International, a skin care and laser hair removal company they co-owned. Skin Nuvo was a retail chain that operated in shopping malls throughout California, Nevada, and the Pacific Northwest.
The court gave Schmidt and Gelnette ten days to pay disgorgement plus prejudgment interest of $11,061,855. In addition, the court ordered Schmidt to pay $1,000,000 and Gelnette to pay $500,000 in civil penalties. The final judgments follow an order entered by the court on July 16, 2007, granting the SEC’s motion for summary judgment against the two men.
The Commission’s complaint alleges that between 2002 and 2004, Schmidt and Gelnette sold interests in approximately 36 Skin Nuvo stores, offering investors profits of between 30% and 40%, and claiming they would reap their profits in 12 to 14 months. Investors believed the money put up would be used to build new retail locations and investors would reap a percentage of each store’s profits, the complaint claims.
But those were all lies, said the SEC. And according to the complaint, Schmidt and Gelnette used the money invested not to build new stores, but to prop up their failing business.
While the sales pitch stated that investors were putting their money in particular stores, Schmidt and Gelnette actually used it to pay the operating costs of their existing locations. By September 2004, Nuvo had raised approximately $4 million from investors whose stores were never built, said the SEC.
The SEC said that Schmidt acted as Skin Nuvo’s primary executive and sales man, but Gelnette also got involved in the deceptive selling. For example, Gelnette, a former pastor, helped raise $1.35 million from a former parishioner. He also sold Skin Nuvo securities to his ex-wife.
Schmidt and Gelnette also operated their business like a Ponzi scheme, paying earlier investors returns with money from new investors. The duo also allegedly falsified investment reports. When a statement did not meet projections, claimed the complaint, Schmidt and Gelnette would simply change it.
Even while their company was going down the drain Schmidt and Gelnette continued to conduct business as though everything was fine. They did not tell investors about Skin Nuvo’s dire financial condition and Schmidt managed to pay himself more than $680,000 and Gelnette approximately $260,000.
In order to hide what was happening from investors, stated the complaint, Skin Nuvo maintained 51% interest in each store and thus remained in control of management and operation. In fact, said the SEC, Schmidt and Gelnette sought out passive investors and discouraged them from getting involved in the stores.
Skin Nuvo went bankrupt in 2005. Goldin Capital Management, L.P., a New York-based private equity firm, acquired the company’s assets in a $15-million bankruptcy auction and re-branded the skin care salons as Lumity(TM).
The Commission’s original complaint also implicated Norman Valine, Skin Nuvo’s Chief Operating Officer, in the offering scheme. The court did not, however, name Valine in its final judgments.
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