(CN) - A federal class action claims the founders of Valley Forge Composite Technologies misled investors about the primary source of the aerospace company's income: illegal exports of military semiconductors to Hong Kong.
Lead plaintiff Robert Neborsky claims the securities fraud came to light in a federal investigation of the Kentucky-based company.
In his lawsuit in San Diego, Neborsky claims the fraud severely damaged people who invested in the company from January 2009 until February this year.
He also sued the company's co-founders, Louis Brothers and Larry Wilhide.
Neborsky claims the defendants lied to investors by telling them that all of the company revenues was "derived from the sale of aerospace devices, called momentum wheels."
A momentum wheel is a flywheel used in spacecraft to change their attitude without having to expend fuel. A typical situation in which this occurs is when scientists are trying to keep a space telescope aimed at a particular star or galaxy.
Neborsky claims in the lawsuit that "in fact [the company's] revenues were largely derived from illegally exporting military semiconductors to Hong Kong. Defendants engaged in this illegal export scheme in order to generate millions of dollars to finance the production and marketing of the company's recently developed counter-terrorism products and to repay loans made to the company by insiders, including Brothers. "The sale of semiconductors to Hong Kong was an excellent source of cash. It drastically reduced (and eventually eliminated) the amount of equity financing the company was required to raise through the issuance of common stock, thus preserving defendant's Wilhide's and Brothers controlling ownership over the company. It also allowed the company to repay thousands of dollars in loans to Brothers following 2009. Defendants misled investors about the source of its revenues in order to hide their illegal conduct from investors and United States officials. In addition, defendants knew that the disclosure of their illegal activity would threaten the existence of Valley Forge and would likely result in the seizure of its bank accounts by the U.S. government."
The Cincinnati Courier reported in March that Valley Forge had been developing technologies with potential cargo screening and airline passenger applications. The same report said the value of the alleged exports was more than $37 million.
An investigation by the U.S. Attorney for the District of Kentucky uncovered enough evidence to warrant the seizure of $1.5 million from Valley Forge's bank accounts in February this year, which caused the price of the company's common stock to plummet by more than 50 percent and resulted in "substantial damage to plaintiff and class," Neborsky says in the complaint.
He seeks damages for securities violations.
He is represented by Vincent Slavens and Eric Benink of Krause Kalfayan, Benink & Slavens of San Diego.
Representatives of Valley Forge could not be reached for comment Thursday.
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