Lawsuit ‘pierces corporate veil’ of John Krohn’s investment companies
Spotlight Innovation lawsuit among numerous complaints against former Principal investment broker
JOE GARDYASZ May 3, 2021 | 5:27 pm
8 min read time1,811 wordsBusiness Record Insider, Culture, Insurance & Investments
Spotlight Innovation, a startup pharmaceutical technology investment firm controlled by two Iowa businessmen — along with several other enterprises launched by the partners over the past several years — is part of a “mere sham” being used to defraud investors in those companies, a former business associate alleges in a lawsuit in Polk County District Court.
The company’s former chief financial officer, John William “Bill” Pim, is suing John Krohn and Michael Kemery, who were officers and directors of Spotlight Innovation and another company, Gooi Global. Pim had worked for Krohn and Kemery for less than a year as chief financial officer of Spotlight Innovation and as an independent contractor with Gooi Global. Spotlight was based in Urbandale, Gooi Global in Des Moines. Krohn and Kemery bought into Spotlight Innovation beginning in December 2016, according to regulatory filings.
Pim alleges in the suit that Spotlight defaulted on his employment contract, which provided for an annual salary of $120,000, paid biweekly. According to the filing, Spotlight failed to pay Pim from June 22 through Oct. 8, 2018, when he resigned from the company, despite Pim performing all conditions under the contract.
Pim also alleges that Gooi Global failed to pay him an agreed-to monthly compensation of $3,500 from April 2017 through October 2018. Additionally, Pim loaned more than $55,000 in total to both companies in exchange for promissory notes. The suit seeks to “pierce the corporate veil” of Spotlight so that Pim can hold Krohn personally liable for the wages and unpaid loans owed.
“Spotlight is merely an alter ego of Krohn in that it is undercapitalized, its finances are intermingled with his own and with other companies owned by him and Kemery, it is used to promote fraud, the corporate formalities are not followed and it is a mere sham,” Pim alleges in court documents.
In a virtual hearing held April 29 in the Pim v. Spotlight Innovation suit, Polk County District Judge Paul Scott entered a default judgment against Krohn, after neither Krohn nor legal representation appeared at the hearing. Scott said he would finalize that judgment in a future hearing as he is awaiting an affidavit of damages to be filed by the plaintiff’s attorney, Matthew Sease. According to Sease, another attorney representing the co-defendants in the case, Kemery and Gooi Global, is negotiating for a possible settlement on their behalf.
Pim declined to comment to the Business Record following the decision. Krohn could not be reached for comment.
Krohn, a Polk County resident, and Kemery, of Union County, are at the same time on opposing sides of a separate lawsuit in which Kemery is suing Krohn’s former investment firm, Principal Securities. Kemery is seeking damages for $28 million in losses. Kemery claims the losses he incurred were a result of Krohn illegally “selling away,” or selling investments in his own firms that he allegedly did not report to his employer.
Spotlight Innovation, founded in 2012 by entrepreneur Cris Grunewald, was profiled in an April 2016 article in the Business Record. At that time, the West Des Moines-based startup company had raised about $5.5 million in capital and reported about 1,200 investors in 35 states. Read the Business Record Insider article on Spotlight Innovation.
The publicly traded company, which Krohn joined the board of in February 2016 and then became president and chief operating officer of in December 2016, specializes in acquiring and developing intellectual property related to pharmaceutical technologies. Krohn became Spotlight Innovation’s interim CEO, president and chairman on May 22, 2017, upon Grunewald’s resignation as CEO. The company is now believed to be in receivership in the state of Nevada, where it is incorporated.
From 2012 to 2016, Spotlight had acquired several platform companies and technologies working toward cancer drugs as well as therapies for various other types of vaccines.
Spotlight Innovation’s last quarterly report, which it filed with the Securities and Exchange Commission in November 2018, documented a struggling early-stage company that had been incurring losses and needed to raise additional capital. As of June 30, 2018, the company reported negative working capital of $3,235,183 and a total stockholders’ deficit of $1,158,404.
Kemery was also a partner with Krohn in K4 Enterprises LLC, a business entity controlled by Krohn and Kemery that had been providing funding to Spotlight Innovation since May 2016 and as of mid-2018 had provided more than $592,000 in cash advances or direct payments of invoices to Spotlight, according to Spotlight’s November 2018 SEC filing.
‘Selling away’ complaints, lawsuits
The lawsuit filed by Pim is one of a number of complaints and pending legal actions against Krohn, according to an Investment News article published in March. The article details investor complaints that center on the former Des Moines investment broker, who was registered with Principal Securities in Des Moines from 1996 to 2017.
Former investors are suing for allegedly being deceived by Krohn in a number of investments on the belief that the investments were being made through his affiliation with Principal. In addition to investments in pharmaceuticals through Spotlight Innovation, investments in separate ventures controlled by Krohn included ownership stakes in a purported CBD manufacturing enterprise as well as a mortgage software startup company.
In 2018, the Financial Industry Regulatory Authority reached a settlement with Krohn in which he was suspended from the industry for three months and was fined $10,000. According to the FINRA settlement, Krohn invested nearly $8 million of clients’ money in up to 10 companies through transactions that were outside the scope of his employment, and did not inform Principal Securities about the transactions.
That suspension and fine followed a FINRA investigation, in which Krohn was found to be violating rules against “selling away,” or conducting outside business activities while handling private securities transactions. The regulator accused Krohn of running four companies as an officer and director, one of which was focused on investing in new or underperforming, high-risk companies.
Among the lawsuits that the Business Record has found involving Krohn’s investment deals is a case filed in January 2020 in Polk County related to investments that Krohn began selling in a purported CBD oil manufacturing company. That company, Flint Sawyer Export Group LLC, is doing business as the OKIA Group.
According to that lawsuit filed by Ryan Odgaard and Laura Dakovich, who had invested $125,000, Krohn was pitching investments in three CBD oil manufacturing plants that would use a “patent-pending process” that would enable the company to generate $80 million of revenue in its initial year. The plaintiffs in the case were awarded a $125,000 judgment in January, plus attorney fees of nearly $4,700 and court costs, plus interest accruing on the amount from Jan. 31 forward, according to a court filing.
The largest of four pending investor complaints filed through FINRA against Krohn — a $28 million claim — was filed by Kemery against Krohn’s former firm, Principal Securities, the brokerage arm of Des Moines-based Principal Financial Group.
A spokesperson for Principal said the company does not comment on pending legal matters.
According to an audited annual financial statement that Principal Securities filed with the Securities and Exchange Commission recently, FINRA has scheduled arbitration panel hearings in August 2021 with Principal Securities regarding Kemery’s complaint.
In that complaint, Kemery is suing Principal for failure to supervise, negligence and other assorted charges, as Investment News recently reported. Although he is not named in the SEC filing, Krohn is the broker at the center of the Kemery claim, according to Andrew Stoltmann, an attorney representing Kemery.
Kemery is also a former business associate of Krohn in Gooi Global, a defunct West Des Moines-based software company. Kemery joined Gooi Global, formerly DomiKnow, in 2014 and was named the company’s acting CEO in March 2016. At that time, the company was operating a mortgage fulfillment services company, Gooi Mortgage, and was in the process of testing an audience modeling platform for banks through another subsidiary called Morelity.
Related: Read about Gooi Global in its early stages in a Business Record Insider article.
In August 2019, the former owner of Gooi Global who sold the business to Krohn, John Stokka, received a summary judgment from a Polk County district judge in a lawsuit seeking to recover payments that Stokka was still owed by Krohn after buying the company. The court awarded a partial summary judgment to Stokka of the balance he was still owed for the company, more than $65,000 plus accruing interest.
According to an investigative report by WHO-13 in December 2019, Kemery was a principal in K-4 Enterprises, an entity partially owned and controlled by Krohn that was the subject of investor complaints. Additionally, the television station reported, a lawsuit filed by Adil Khan, a former Gooi Global executive who led the Morelity business, alleged that Krohn and Kemery were operating a Ponzi scheme and were engaged in fraudulent business practices.
Court filings for Polk County District Court show that a trial in that case, Adil M. Kahn v. Gooi Global Inc. et al., had been scheduled for May 2021, but an order for a continuance was filed in February. A trial date is now scheduled for Sept. 12, 2022.
As reported by the Business Record in December 2016, Morelity said it had contracted with beta customers from small to medium-sized banks and financial institutions in Iowa to test its audience modeling platform, according to Khan.
In the lawsuit filed in June 2019, Khan alleges that Gooi, Morelity and K4 “are mere alter egos of Krohn and Kemery insofar as all three companies are (a) undercapitalized for the nature of the businesses they operate; (b) merely part of a larger ponzi scheme in which Krohn and Kemery obtain investment and credit for Gooi, Morelity and K4 with the specific purpose of funding undisclosed existing liabilities, which liabilities are concealed from subsequent investors, including Plaintiff; (c) among other business entities, are used by Krohn and Kemery to promote fraud; (d) comingle the funds and assets with Krohn and Kemery personally and with other enterprises under the direct control of Kemery and Krohn; and (e) are merely shams.”
The Iowa Securities Bureau of the Iowa Insurance Division is the state regulator that investigates securities fraud. Chance McElhaney, communications director for the agency, said the division cannot comment on whether or not there are any investigations against Krohn. There are currently no administrative filings involving any of Krohn’s or Kemery’s businesses on file with the regulator.
Regarding the FINRA hearing to be held later this year in Kemery’s complaint against Krohn, those proceedings are private arbitration actions between the client and the broker firm, with FINRA providing the forum, McElhaney said. As such, the insurance division is not involved in those types of arbitration hearings, he said. Also, publicly traded companies, even those on the over-the-counter market, aren’t registered with or regulated by the Iowa Securities Bureau, McElhaney said.