our stupid mistake

[AAK]

Over a year ago, we decided to buy some stock in this company. We were buying from a key person in the company not through a stock brokerage firm. We knew some primary people and were hoping to earn a bit from a business and support their business at the same time. We bought $10,000 worth. The plan was to sell within six months--if it was going up, we would just sell to reclaim our 10K and leave the rest to "make or break". If it was going down, we were just going to get out while we could.

Well, turned out that a month or two after we bough it, the guy we bought from turned out to be heavily involved in stealing from the company, etc. He was dealt with (I guess) but we had never received our stock cert. So, we contacted the people we knew, sent them copies of our paperwork, and they said they would take care of it. Well, this proved to be quite a hassle, they had to do something with federal regulators because of this. We finally got some paper work a couple months ago, but now (of course) the business is really failing. Our paperwork acknowledged our purchase but apparantly we weren't allowed to sell the stock. It was "frozen".

Does anyone know if we have any legal recourse and who would we even go after? I realize (and fully did before we sent away 10K) that we could lose the money. But, I also thought we would get a stock certificate within 6 weeks and be allowed to sell it whenever we wanted. FWIW, for the first 9 months after we "bought" it the stock was valued at greater than what we paid. Now, it looks like the company will fold.

Amy

[karkli]

That's such a shame.

A similar thing happened to my parents a few years ago. The principal of the company who they (thought they) knew well and were dealing with was prosecuted, but the investors were simply SOL.

Because they were unable to recover their investment, they were able to write it off on their taxes. I'm not sure of the details of this, but someone else with more knowledge on the subject might weigh in. In any case, it's something to look into if you will not be able to recover your money.

I'm sorry you're in this situation!

[MeepyCat]

The thing you're talking about - with the stock being frozen for a period of time - is a very typical arrangement for early stage venture capital investors, particularly those who buy stock before the IPO. It's intended to prevent the stock price from crashing in the first few days of trading. The only way you can sell stock immediately, legally, is if the stock is already publicly traded when you buy it.

I have some - not a ton, but some - professional expertise with this, and I'm sorry, it sounds like you were taken for a ride. I am not sure if what happened meets the criteria for fraud or not. IMO, you need to speak to a lawyer. Depending on how things went down, you may be able to file civil or criminal charges, but I don't know that you could get your money back. Filing a civil suit might eat up ten grand and get you nothing. OTOH, there is some virtue to criminal charges in that they'd become public record and hopefully prevent this guy from fleecing more people. You need to talk to a lawyer.

You should probably also have a chat with an accountant about taking a tax write off for your losses. You probably can't take the loss until you cash out, or until the company folds - if you still have the shares, you can't write off the loss on them yet. But an accountant will be able to advise you about how to cash out for maximum tax advantage, and how to file your tax return reporting it.

[zebra15]

You need to speak with a licensed broker but the frozen assets are typical when dealing with this type of 'trade'. Obviously your trade was done outside the norm, not saying there is anything wrong with this however, you need to find out if your shares are frozen pending investigation for insider trading, a waiting period, being a corporate officers shares, or other reason.

You need to find a licensed broker, financial attorney or other professional to locate some info for you.

[AAK]

Thanks, I feel like such an idiot! I will contact a broker, a lawyer, and an accountant to find the best course for us!

Amy

[honeybunmom]

I'm also guessing that, since this is a privately held company, that the stock was not registered. If that is the case, the sale had to be pursuant to an exemption from the securities laws. The exemptions (and my recollection on this is admittedly shaky) are based on either the number of investors, the size of the investment and the sophistication of the investors. Or some combination of those factors. The Securities and Exchange Commission regulates sales of securities and the body of law was developed to protect investors from sham deals. I'd call the SEC tomorrow morning and/or your state regulator (check your state's home page) of securities to see what you can do.

Good luck. Not having a stock certificate shouldn't be a death knell to your claim. Having fully executed (by seller and purchaser) purchase documents will be most helpful.