State securities regulators allege that principals of Omnicity Corp. goaded a 19-year-old to invest $100,000 from his inheritance into the wireless broadband firm so that it could clinch the purchase of an Ohio carrier in 2010.
Tanner Byall, now 23, is still awaiting the return of his principal, plus 8-percent interest, along with $28,000 he alleges the company promised to reimburse him for the tax consequences of cashing out the bulk of his 401(k) inheritance just months after his father died.
The Indiana Securities Division has filed an administrative complaint seeking answers from Omnicity’s former chairman and big investor, Richard Beltzhoover of Carmel, along with former CEO Greg Jarman and former Chief Operating Officer David A. Bradford.
Jarman and Bradford were retained at Rushville-based Omnicity when its assets were purchased out of bankruptcy last December by locally based Broadband Networks Inc.
Unsecured creditors in the bankruptcy say they’re owed more than $3.9 million. By some accounts, investors had plowed $6.7 million into Omnicity since its founding in 2003.
For Byall, the investment loss is doubly heart-wrenching.
“That’s all my dad left me with and I gave it all up, pretty much,” he said of the $155,000 inheritance from his father, Doug Byall.
Beltzhoover, one of the three former Omnicity principals named in the complaint, blames Jarman and Bradford, saying they misled him and Byall about the condition of the company.
“They basically lied to him,” Beltzhoover told IBJ.
State alleges fraud
The state’s complaint, filed Aug. 9, says that Byall in 2009 was introduced to Jarman, Beltzhoover and Bradford by his mother, Laurie Byall, of Hartford City, who was a human resources employee at Omnicity.
Investigators say the three Omnicity principals offered the teen an opportunity to invest in a note that could be redeemed at the end of two years—or converted to Omnicity stock at 35 cents a share.
The state alleges Jarman told Byall the company’s stock price “would dramatically increase” in the months ahead, as Omnicity continued acquiring other rural wireless carriers. Tanner Byall said he walked away thinking his $100,000 could be worth $300,000 if all went according to projections.
The teen was told his investment would help Omnicity complete the acquisition of Ohio-based Lightspeed Network Solutions, which would become the 10th company Omnicity acquired over 14 months.
The deal was important to Omnicity because it was to add $1.5 million in annual revenue and another 3,600 subscribers. At the time, Omnicity had about 8,400 subscribers and $1.7 million in revenue.
“In April 2010, Jarman told Tanner that Omnicity was very close to the acquisition of Lightspeed … and needed Tanner’s … investment to complete the transaction,” the securities division said.
With the teen reluctant to take a tax hit from cashing in the 401(k) he inherited, the Omnicity principals promised to reimburse him for the $28,000 tax bill, the state’s complaint alleges.
The complaint says Byall never received a formal note, and that interest payments were paid only during the first year, then ceased.
The note came due on April 2012 but never was repaid.
The Securities Division is seeking return of Byall’s investment, the promised $28,000 in tax reimbursement, and 8 percent interest.
It also proposes civil penalties against Jarman, Beltzhoover and Bradford of $10,000 for each of six alleged violations of state securities laws, which include fraud, misrepresentation and acting as unregistered brokers.
Messages left with Jarman and Bradford at Omnicity successor Broadband Networks were not returned.
The Securities Division has given the three former principals 15 days to respond and is set to conduct an administrative hearing this month.
Other investors burned
The solicitation from a teenager who’d just lost his father is one of many issues still swirling around the once-fast-growing Omnicity and, by default, its successor, Broadband Networks.
Former board chairman Beltzhoover, along with David Weddell, the company’s former vice president of business development, told IBJ they grew increasingly alarmed about the way Omnicity was being managed and about its growing financial losses.
Weddell said that, in early 2011, he met with Beltzhoover and other investors, including Carmel resident Richard Reahard, about their concerns.
“What they were being told at the board meetings was fabrication,” Weddell said.
He noted that Omnicity management around that time ceased filing financial reports with the Securities and Exchange Commission. Weddell alleges management concluded the consequences of failing to make required filings were less dire than the consequences of coming clean about Omnicity’s bleak finances.
Beltzhoover and Reahard that summer wrote a letter to the board recommending that Jarman and Bradford be terminated, Weddell said.
Instead, Beltzhoover was removed from the board, and Weddell said he was terminated.
Beltzhoover said that at one point he had a handshake deal to sell Omnicity to one of the partners in the group that later bought it out of bankruptcy at a far lower price. He alleges the deal in bankruptcy was prearranged by top Omnicity executives, noting that Jarman and Bradford stayed on after Broadband Networks took over.
Beltzhoover figured he’d helped raise around $5 million for the company over the years and said he’s owed at least $500,000. Reahard, meanwhile, says he’s out $2.9 million.
In recent years, owners of wireless broadband firms that sold to Omnicity also sued the company, claiming they, too, were burned on notes that were not repaid.
Reahard said he was told by Omnicity management that the goal was to grow the company through acquisition and that he’d eventually receive a return when the company was sold to a bigger player. He said management told him Omnicity even had discussions about providing wireless broadband service to Ivy Tech Community College campuses around the state.
“You’d get to a certain critical mass and then a big player would be interested in buying you,” he said of the exit strategy.
After Omnicity collapsed, Beltzhoover was forced to file bankruptcy in 2011 and now relies on his Social Security income. “I’ve lost my house and my car and about everything else in my life.”
Weddell said he was fired in retaliation for his meetings with Beltzhoover and Reahard in an attempt to have Jarman and Bradford booted. Also fired was Tanner Byall’s mother, Laurie.
She, Weddell and Beltzhoover tried to interest the FBI in pursuing fraud allegations but without success. Beltzhoover said he has 21 notebooks of company records.
“Unfortunately, we’re out of money to even hire an attorney,” said Weddell, who added that the bankrupt company owes him $65,000 in commissions for his work.
If the state prevails in its claims against former Omnicity principals, it’s unclear whether there are assets to make Byall whole or whether there might be implications for successor Broadband Networks.
Jeff King, a former executive vice president of Time Warner Cable and former president of Road Runner High Speed Online, who was named CEO of Broadband Networks in January, declined to say whether Jarman or Bradford still work for the company or to discuss allegations in the complaint.
“I cannot comment on any act of a party prior to November 2012,” when Broadband Networks acquired assets, he said.
As for Tanner Byall, the loss of his inheritance didn’t derail his postsecondary education. He recently graduated with an engineering degree from a school in Tennessee. He said his deceased father’s former employer, Weaver Popcorn, and its employees put together a fund to help him with educational expenses.
At the same time, his mother worries that his credit will be ruined, saying the Internal Revenue Service has been leaning on him regarding the $28,000 tax penalty for cashing in his inheritance.
“It’s a pathetic story,” Beltzhoover said, “about trusting people.”•