Experts question Warren's promises

Material misstatements and omissions of facts in promissory notes generally constitute securities misrepresentation or fraud and could lead to civil and felony criminal charges.
October 21, 2009

Experts question Warren's promises
Jayne O'Donnell, USA Today

In several investors' cases, Kaile Warren of Rent-A-Husband offered investment security by signing promissory notes. On some of the documents, he valued his company using dollar amounts that aren't supported by corporate documents and may not meet the standards for selling securities.

If he did either, he may have raised legal issues, experts say.

Promissory notes, when marketed to many individual investors, "often turn out to be scams," the Securities and Exchange Commission and the North American Securities Administrators Association warn. The red flags? Promises of unusually high returns and claims they're "guaranteed."

A typical promissory note issued by Warren and reviewed by USA TODAY offered timetables for when investors would be paid their money plus 10% to 20% interest, often in a year or less.

Warren says his investors were all knowledgeable enough to understand the investment risks, which were spelled out in the documents.

But at least four investors say they never received supplementary material Warren claims contained cautionary notes about the shaky condition of his business and the riskiness of their investment. One, Shamos Brennan, says when he asked Warren about a document stating that it was a "risky agreement," Warren said his attorney insisted on the language but that he was personally guaranteeing the return.

Joanne Grace says Warren told her his company was worth millions and had good cash flow. Her July 2006 promissory note for her $150,000 investment stated that the company had a "valuation" of $10 million. Warren's tax return for 2005 showed the company brought in $114,000 and showed a loss of almost $300,000.

Joseph Borg, attorney, past president of NASAA and the top securities official in Alabama, says representations of valuations for selling securities need to be made according to industry standards and be based on a company's assets and liabilities, existing business and likelihood that it could continue. It could be a "material misstatement" to tell investors a company is worth $10 million (or $7 million, as another promissory note said and Warren told investors in e-mails) if it isn't, and it could be a "material omission" if Warren didn't tell investors his company was regularly bringing in only about $100,000 a year and losing more than that, Borg says.

Material misstatements and omissions of facts in promissory notes generally constitute securities misrepresentation or fraud and could lead to civil and felony criminal charges.

In interviews, Warren said he maintained Rent-A-Husband was worth millions because of an estimate made by a now-defunct venture-capital fund before it decided to invest in the company in 2000 and the potential it had if a deal with Ace Hardware panned out. Steven Bing, Prosperitas' former director, says the fund's $2.4 million investment was based on its estimates of what the brand's potential was and the additional revenue that could be made, such as through Rent-A-Husband tools.

"It clearly has nothing to do with what it's worth today," Bing says. "Obviously, we were wrong to the tune of having lost our entire investment."

When attorney Kevin Grimes asked when Grace, her mother and sister would get their $256,000 investment back, Grimes says, Warren talked of plans to "get some more investors on board, and we'll pay you back."

Grace says she contacted Maine's Division of Securities a year ago. Maine officials would not comment on the investigation, but Warren says it is "going nicely." State securities administrator Judith Shaw says Warren does not have a license to sell securities in Maine but might not need to. State securities investigators have been interviewing investors since last month.

And paying investors back with new investors' money? Some of Warren's earlier investors say they have gotten some or all of their investments back. Warren twice refused to directly answer the question.

Securities investigators often find company owners "misrepresent the value of the enterprise because sometimes there's no enterprise there," says David Massey, director of the securities division for North Carolina's Department of the Secretary of State, who has not reviewed the Rent-A-Husband case. "You see situations that start off with a scintilla of legitimacy, and bad fortune hits the enterprise, and the promoter starts cutting corners and meeting existing obligations by pulling in new investors."

Warren insists he has a viable and legitimate business: "Right now, Rent-A-Husband is definitely struggling. Hopefully, we can stay with it."

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