Good afternoon, Mr. Beswick.  Thank you for spending a few minutes with us today.

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My pleasure.  I'm glad I was able to accommodate you this week.  I know you have been wanting to do this for some time.

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We understand that Tim will not be making any comment or answering any questions about this case or his experience with or opinions of the U.S. SEC at their request.

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Yes, that's correct.  ​

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I would have liked to meet him, but no problem at all.  That seems like it is quite standard in these lawsuits.  I would like to begin with some basic background information on the transaction that started all of this, then dive into some particulars, if that is ok?

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Sure.  However you would like to proceed is fine with me.

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Great.  To begin with, what do you do?

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I am a Founder at Convergence Partners, a firm that Tim and I started in 2009, when he was ready to leave Duff & Phelps.

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And how long have you worked with Mr. Batchelor?

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10 years.

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It seems from reading the regulatory complaint, that this all started with a transaction about a submarine.  Is that correct?

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Yes, basically.  We owned a company called Subsea Engineering, Inc., which was headquartered in Alpharetta, Georgia in the United States.

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And, what is Subsea Engineering?

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SEI was a company that was formed to acquire the intellectual property, as well as some other assets like the vehicle itself, of a submersible craft that was invented some years back.  It operates as both a high-speed surface vessel as well as a submarine.

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Is that something new?  A vessel that is both a speedboat and a submarine?

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Yes.  It's revolutionary.  No craft like this has ever been successfully developed.  For decades, people have attempted to design such a vehicle, but the common thinking was that it could not be done.

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Do you have any experience with submarines?

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Oh, yes.  Going all the way back to the early 1980s, I have been involved with a variety of submarine projects.  I was manufacturing submarines at the very beginning of the tourist submersible industry.  Back when Don Walsh and Jacques Paccard, who went to the bottom of the Mariana Trench back in the 1960s, were speaking at a conference, I flew my company's current submersible over to Monaco.  It received such a strong response, that I found myself at a dinner with them shortly thereafter, where we talked about the future of modern submersibles and the advent of the tourist submarine industry.  It was off to the races from there.

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Wow, ok.  So you saw something in this SEI, is it, submarine that was different or special?

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Yes, very much so.  SEI was just our abbreviation for Subsea Engineering.  The craft that we purchased is one of a kind.

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The SEC seems to suggest there wasn't a submarine, that Mr. Batchelor was setting out to develop one with investor money.  It doesn't sound like that is anything close.  Am I missing something?

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​No, it is nowhere close.  The SEC is just wrong.  Not only is there a submarine, but it had already completed a number of its demonstration dives prior to our acquisition.  We had indications of interest from all over the world.  During the acquisition, SEI had someone from DNV GL, the premier certification firm in the world for submarines, work on the engineering due diligence required on the vessel.  Finance people don’t develop submarines, engineers do.  

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What is SEI going to do with the submarine?  What is the company's purpose?

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SEI purchased the assets with a view toward bringing the latest iteration of the product to a variety of military, law enforcement, and surveillance markets around the world, along with its portfolio of other submersible related projects. 

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That sounds great.  Far from a finance guy wanting to build his own submarine?

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Yah.  You could say that.  Tim holds a variety of positions, but submarine captain is not one of them.​

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[Sound of laughter.]  Great.  So, let's move to the transaction that the SEC complained about.  Did you do a transaction involving SEI?

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Yes.

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The SEC claimed that Mr. Batchelor raised $2.4 million to develop a submarine.  Is that the transaction?

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The SEC complained that the lawyers’ transaction documents didn’t adequately reflect the buyers’ and sellers’ understanding of the transaction.  SEC did not claim that the buyers were unsatisfied with the transaction.  To my knowledge, no one has ever complained about this transaction, even to today.  In fact, when the SEC first complained, the buyers signed a document verifying their consent to the transaction.  The transaction itself is simple.  A lawyer representing a group of buyers approached us wanting to buy our interest in SEI. This attorney knew the transaction structure that he wanted to use, and how much his clients' were willing to pay. Neither Tim nor I ever had a discussion with the buyers before the transaction.  Everything was through the attorneys.  Tim and I couldn’t pick the buyers out of a line-up.  We don’t have any idea what they even look like.  But, at the end of the day, a prior stockholder was selling its holding in SEI to a new stockholder.  If you buy a share of Apple from someone, the seller of that stock receives the money, not Apple.  Our national security related projects can cost hundreds of millions of dollars to develop.  Their notion that $2.4 million was raised to do that is a clear indication of how little they understood about this matter.

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While I'm on the subject, let me address something that the SEC thought was such a big deal, and that they initially claimed had been constructed after the fact - this loan.  First of all, SEI did not need any financing; its balance sheet didn't require it.  The loan was never for SEI, and it was never to develop a submarine that already exists.  That's just ridiculous.  The buyers' lawyer had created a unique structure for the transaction given the unique characteristics of the SEI assets.  It involved structuring the first proceeds as a loan, so the parties could figure out how to move forward together, a sort of repayable earnest money deposit, if you will.  The second step provided a 270-day plain vanilla option to the buyers granting them the exclusive right to purchase the SEI shares during that period.  The third and final step was to close the sale of transferring the SEI shares from the old stockholders to the new ones, which was to be the actual purchase and sale transaction, completely separate from the loan or option steps prior to it.  This structure was designed by the buyers' lawyer, so that it would give the buyers time to secure financing.  This was back in 2015.  When the buyers began to struggle in pulling the remaining proceeds together for their purchase, do you know what we did with the vast percentage of loan proceeds that we received personally?  We put it into the project, and we did it for one reason.  It gave the prospective buyers more time to arrange their financing.  We had no obligation to do that. We could have just walked away from the table.  We did it because we thought it was the right thing to do. Where did another large percentage go?  To pay the fees of the attorney, who was involved.  Once again, we weren't required to do so, but wanted to be good corporate citizens in moving the transaction along.  At the end of the day, the 270-day option period expired and the SEI assets were sold to an affiliate, Subsea Engineering Partners, to bring to market.  

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Remember what the SEC's complaint was.  They claimed that Tim misappropriated $1.2 million of $2.4 million raised, so that he could go develop a submarine.  A few problems with that.  The submarine already existed, had already completed test dives, engineering due diligence, and a very thorough vetting before we purchased the project initially. Finance people don't develop submarines, engineers do.  Not a single dollar of the transaction was ever advertised to anyone to ever be used to develop this submarine that already exists, let alone any other one that exists solely in the SEC's imagination. SEI wasn't even a party to the transaction that the SEC complained about.  And how they can claim that only $1.2 million was received personally in this loan is beyond anyone's understanding with any knowledge of this transaction.  The entire $2.4 million transaction was structured as a loan to be received personally to bring us to and keep us at the table, which would be closed out at the closing of the actual sale transaction.  The entire transaction was personal in nature. Tim and I owned the shares in SEI.  The buyers wanted to purchase those shares from us.  Their attorney wanted the initial step structured as a loan to us to motivate us to work with them, while they secured the financing to purchase the shares from us.  It doesn't get any more personal than that.  How government math translates that into half of the money was personal is beyond anyone's comprehension.  It's best if you don't think about it too hard. Government math will just give you an aneurysm. 

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We rebuffed the ridiculous claim by the regulators that this claim of a loan was done after the fact.  We provided them with the actual digital documents, whose metadata showed the transaction documents had been created by the buyers' lawyers well in advance of any money changing hands.  The claim was utterly ridiculous.  After providing the SEC with the original digital documents with metadata intact, we then provided the SEC with documents signed by 100 percent of the would-be buyers verifying their prior consent to the transaction, their knowledge that the individual owners of the stock would receive the loan proceeds, and eventual sale proceeds, personally, and showing the common set of facts that the buyers and sellers had agreed to, and were satisfied with.  Think about that for a moment.  This was a transaction so clean that the buyers verified the veracity of the transaction even after their option period had expired. Buyers were happy.  Sellers were happy.  Securities lawyers were happy. Tax lawyers were happy.  The only people unhappy were the regulators, and this was for one simple reason. They didn't understand the transaction, and didn't bother spending the time and effort to learn about it.

 

The closest analogy that I can draw is if the government sued one of the SEC's employees, claiming that he or she was using US Treasury funds to pay their home mortgage.  The claim sounds horrible, and that's what plays well in the public.  It generates readers and clicks on news sites, and makes the SEC seem to the unsuspecting public that they are doing their jobs.  But, when the professionals take over and look at the funds flow in this example, they would find this hypothetical employee is paid by the US Treasury in the scope of their employment for the SEC.  So, yes, that hypothetical SEC employee used funds that originated in the US Treasury to pay their mortgage, but it was completely justified since the monies were actually paid to their employee as salary, who can choose to spend his or her money on any legal purpose.  It makes for a great headline, but professionals delve deeper to find out what really happened.

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Sorry, that's probably more than you wanted to know.

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Not at all.  That's great. The SEC complaint never looked right to me. So, I want to know what actually happened.  That's why I'm here.  Let's get back to it.  So, you two never spoke with the buyers prior to becoming partners with them in SEI?

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No, not once.  It was such a tiny transaction, our standard practice is to simply let the lawyers handle it.  

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So, the lawyers put the whole deal together?

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Yes.

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Ok.  Let's get into the particulars.  Who were the parties to the transaction?

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Besides ourselves, there was a group of four buyers represented by an attorney who later took a position in the transaction, himself, in order to manage the buyers’ interest.​​​

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Is this the transaction that the SEC describes as Mr. Batchelor raising money from several wealthy individuals and one institutional investor?  Is it all the same transaction?

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[Sound of laughter.]  Sorry, I still think that’s funny.  SEC mischaracterized it, but yes, we’re talking about the same thing.  There were no institutions involved in this transaction.  What the SEC calls an institution was a little LLC controlled by the buyers’ lawyer.  That’s a great example of the poetic license that the SEC takes as they feebly try to justify their actions.  The individuals were the lawyer’s clients.  Tim has great relationships with many billionaires and countless institutions, none of whom were involved in this tiny $2.4 million transaction.

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So, the buyers' lawyer participated in the transaction as well?

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Yes.

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I know you spoke about this a moment ago, but I just want to make sure that I understand.  The SEC claimed that these buyers did not know that money was going to be received by individuals...

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Complete nonsense.  The buyers' lawyer structured the transaction, prepared all the documents and disclosures, and handled all the money.  The SEC cost the buyers an obscene amount of money and lost profits for bureaucratic nonsense that they just concocted. ​ To say that the buyers didn’t know that the sellers were receiving the money is just ridiculous.  The buyers’ lawyer listed himself as the transaction executive on the agreement, not Tim, not me, but him, which was entirely appropriate given the level of control that he had over the transaction.  As I said, when the SEC made the claim, the buyers happily verified in writing that they were fully aware of how the proceeds of the sale were handled.

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Unfortunately, we’re not the first ones to fall prey to hollow SEC claims.  The so-called investigator assigned to our case had the last case that we know of that she worked on dismissed for what one of the SEC’s own judges said was a complete absence of evidence of any wrongdoing.  The case is called SEC v. Hill.  Go look it up.  Did she learn from that?  Of course not, and here we are.

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Going back to what you said, so, if Mr. Batchelor never spoke to these individuals, how could he have misled them into even thinking he was going to develop a submarine?

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Exactly.  Welcome to the party that is today's SEC.  I'm sure that they intend to find the truth as they rack up regulatory fines, aka scalps, but their investigative capabilities are just so lacking at this level that they end up bringing cases with no merit and no evidence as they did in the Hill case.  They just have such a poor understanding of private transactions that they unintentionally run off half-cocked holding everything to a public market standard.  Ours is a great example.  They just understood so little about the transaction that their complaint demonstrated their ready, fire, aim strategy.  When you strip away all of the hyperbole, basically, the SEC is saying that the lawyers' document didn’t adequately cover what the buyers and sellers understood the transaction to be.  Therefore, the sellers aren’t entitled to keep the loan money and the buyers aren't entitled to keep the option interest.  We disagreed.

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While I'm on the subject, let me say this, so it's completely clear.  Tim isn't allowed to say this because of how the SEC has written their own rules.  But, I certainly can say it.  Tim did not do a single thing wrong in this transaction.  I have seen him in situations where he clearly could have taken advantage of someone or a situation, and you know what?  He never has.  Not once.  

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Ok, that’s messed up.  I'm starting to understand.  Do you mind if we turn to a couple complaint particulars now?  I'd like to get a better understanding.

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Sure, no problem.

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Great.  First, the SEC says that the money was put into an unregistered fund.  Is that true?

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Yes, that’s true.  That was part of the structure set up by the buyers' lawyer. He actually set those entities up himself to handle the transaction.

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Ok.  Anything that you would like to add to that?

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Sure.  The SEC likes to portray unregistered funds as evil doers.  It helps them with their press releases that they like to do to try to shame you into settlement.  But, here’s the thing.  We were unregistered because the SEC provides for an exemption to registration.  We qualified for it, so we were unregistered.  At all times, we were and are in compliance with all applicable laws.  But, they don’t talk about that.  Even in the complaint, they don’t accuse us of not being in compliance on that issue.  But, they say it as if it is a bad thing.  Then, they turn around and do a press release stating a conclusion that hasn’t been reached.  They try to use their six ounces of muscle to rack up regulatory fines with, in our case, reckless disregard of the actual facts.

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So, is it still an unregistered fund?​

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Actually, we have made the conscious decision not to pursue U.S. projects anymore.  The onerous regulatory environment coupled with the reckless manner in which it is enforced is bad enough.  But, combine that with the fact that the SEC has been allowed to create its own court system that, surprise surprise, universally sides with them, and it is simply no longer cost effective to pursue U.S. projects.  Given the portfolio of products that we offer related to national security and law enforcement, it's truly unfortunate that those are the personnel that will suffer because of the regulatory environment. ​​

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Were there other national security related projects, as the SEC claimed?

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Yes, definitely.  We have a whole host of other projects unrelated to that company.​​

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So, the case is closed?

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Oh yes, it's all done.  

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It sounds like you would have won if you litigated the case instead of settling it where nobody won?

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We absolutely believe that we would have.  How could we not.  But it just comes down to dollars and cents.  After having already spent over $1 million in legal fees, we would have incurred millions in additional legal expenses to successfully defend an action that would just cause distraction for another two to three years.  At the end of the day, it was just a regulatory matter.  It's just not worth the time or effort.  But, that’s part of their strategy.

 

How did the case end?

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How these cases usually end.  Neither side admits or denies anything, you just hand them a check to go away.  A check, by the way, that coincidentally equals about half of what your legal expenses would be to win the case.  Just another cost of doing business in the United States.

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So, the SEC wasn't successful in blocking the Subsea Engineering transaction?

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No. No.  Tim would not have agreed to that because that would have hurt the actual buyers and lenders.  Not only did SEC not successfully block the initial transaction, but SEI's assets have been sold to an affiliate, which represents a 76x return on the original project.  That was the last of our US projects.  We no longer operate in the United States.  As I said before, the onerous regulatory environment just isn't worth it.

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Wow.  That’s great.  So, I have to ask.  Would you do anything differently in the future?

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With only a small team assigned to this transaction, we employed a full-time in-house securities lawyer and a full-time in-house tax lawyer working exclusively on this transaction alongside a major Wall Street law firm, and yet somehow the SEC chose to ignore their entire work product in their dispute -- probably because it obliterated their theory.  We always comply with all applicable laws, but, unfortunately, you can’t always protect your stakeholders from regulatory overreach.

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Lastly, did the SEC lawsuit have any effect on your business?  Then, I will let you get back to work.

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Absolutely, but not the way SEC would like.  Billionaires and institutional investors have all taken their turn being harassed by the SEC.  It’s just what the SEC does these days – maybe that will change in the future, maybe not.  But, this episode has only served to strengthen our partnership with these folks.  They have a lot of respect for Tim, seeing him tested under fire.  He protected the people that were actually important in this transaction, the stakeholders, while swatting away the bureaucratic nuisance.

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Well, thank you very much for your time today.  It was very helpful.  It's a completely different story when you understand the facts.  I can't say thank you enough.  May I keep these documents?

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Sure.  My pleasure.  I'm glad I could work it in this week.

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Cheers.