SEC v. Pappas, Creative Learning Corp., O'Donnell, and Cote

UNITED ST A TES DISTRICT COURT
FOR THE MIDDLE DISTRICT
OF FLORIDA Ml, A' lt: ') I \ !, 11: 34
JACKSONVILLE DIVISION
1
.,._. -(.. "'
1
UNITED ST A TES SECURITIES AND
EXCHANGE COMMISSION,
Plaintiff,
V.
BRIAN PAPP AS;
CREATIVE LEARNING CORP.;
DANIEL O'DONNELL; and
MICHELLE COTE
Defendants.
r 1 c·"
1
u~ .,,~~-drT C' . .,..
I, 1C~ -·\;-:tic I Gi ,,. _c <. \
' ' J,\r:1i:-0r v ILL':: c .. ;;; 1 .-;.:: ·r
Civil Action No.'3'.\7-oJ --CfSl{-J-~(
JURY TRIAL DEMANDED
COMPLAINT FOR INJUNCTIVE AND OTHER RELIEF
Plaintiff, the  United States Securities and Exchange Commission (" Commission'· o r
"
SEC") alleges as follows:
l. This action a rises from multiple vio lations of the federal securities laws by
Creative Learning Corporation
("CLCN" or " company" ) and three of its fonner officers and
directors: Brian
Pappas  ("Pappas"), who was CLCN's Chief Executive Officer (" CEO") and
President, as well as a
member of the Board of Directors;  Daniel O'Donnell ("O'Donnell"),
formerly
Chief Operating Officer, Vice President of Operations, and a  director; and Michelle
Cote ("Cote"), the creator
of CLCN' s  business concept and a director. Beginning in 2011 and
continuing into
earl y 2015, Pappas and CLCN (thro ugh Pappas' s conduct) engaged in a
fraudulent scheme to build market confidence in CLCN and its  management by making
numerous materially false and misleading statements and omissions, including
misrepresentations and omissions regarding Pappas
's prior business experience, Pappas's

pe rsonal financial hi story, hi s evaluatio n of the company's discl osure  and financial re porting
cont ro ls, and
CLCN's payments to re lated persons. As part o f tha t scheme. Pappas  proposed and
supe rvised a series of trades designed to  manipulate the marke t for CLCN·s shares, increase the
share price, and induce others to trade  in
the company's stock. 0 Donnell and Cote participated
in the market  manipulation, and also joined Pappas in improperly aITanging personal l  oans to
company officers. Further, on multiple  occasions Pappas improperly discl.osed ma terial, non-
public information to se lected
investors w itho ut disclosure to other CLCN investors or the
public. Pappas also signed
false certifications  in filings with the SEC, directed that false entries
be made
in C LCN's books and records, and failed to disclose his  beneficial interest in CLCN in
SEC filings as required.
2. Pa ppas demonstrated a sweep
ing  di sregard for his respons ibilities as the  leader of
a public company. P appas was primarily responsible for the fraudulent scheme and acted
knowing ly or with severe  r
ecklessness.
3.
O'Donnell and Cote knew or sho uld bave known that they were signing false o r
misleading documents filed wi
th the SEC. Additionally, O'Donnell and Cote knowingly joined
in the  effort to manipulate the  price of CLCN shares, and at  l  east recklessly approved imprope r
loans from the company to Pappas and Cote.
4. Pappas was removed as CEO and President
of C LCN in July 2015, but violated
the securities laws again in early 2017 whe n he so ught to regain con trol of the company. While
conducting an unsuccessful proxy contest, Pappas failed to file soliciting  materials  with the SEC
as required.
5. The Commission requests that the  Court enjoin CLCN, Pappas, O'Donnell, and
Cote ("Defendants
") from further securities law violat ions, require that Pappas, O ' D onnell, and
2

Cote (the " Individua l Defendants") disgorge their ill-gotten gains and pay civil penalties, and
enter officer and director bars and penny stock bars again
st the Individual Defendants.
JURISDICTION
6. The Cou
rt bas jurisdi ction over this action pursuant t  o Sections 20 and 22 of the
Securities Act
of 1933 (" Securities Act"), 15 U.S.C. §§ 77t and 77v, and Section 27 of the
Securities Exchange Act
of 1934 ("Exchange Act"), 15 U.S.C. §§ 78aa.
7. Venue is proper in this judicial district pursuant to Section 22(a) of the Securities
Act,
15 U.S.C. § 77v(a), and Section 27 of the Exchange Act,  15 U.S.C. § 78aa, because certain
of the acts and omissions constituting the violations alleged herein occurred in this judicial
district and because Defendants are inhabitants
of, transact business in, or can be found in this
disttict.
8. Defendants made use
of the mails and of the means and instrumentalities of
interstate commerce in connection with the acts,  practices, and courses of business described in
this Complaint.
DEFENDANTS
9. CLCN is a Delaware corporation with its principal offices
in St. Augustine,
Florida.  CLCN is  a franchisor
of children's educational programs. CLCN became a U.S. issuer
in July 2010 through a reverse merger with B2 Health, In
c. (" B2 Health"), a Delaware
corporation.
10. CLCN' s common stock is registered with the Commission pursuant to Section
12(g) of the Exchange Act,  15 U.S.C. § 78/(g), and is traded on the Over-the-Counter Bulletin
Board ("OTCBB") under
the symbol "CLCN."  CLCN' s stock p1ice fell  from nearly $3.00 per
share
in April 2014 to $0.18 per share as of mid-July 2017.
3

11. CLCN offers three educational programs (" Bricks 4 Kidz," " Challe nge Is land,"
and "Sew Fun Studios"), each  franchised  thro ugh a sep arate w holly-ow ned subsidiary of CLCN.
12. CLCN is subject to the reporting, internal controls, and books and records
provisions
of Section 13 of the Exchange Act,  15  U.S.C. § 78m, incl uding the  requirement that
th e
company fi le a Form 10-K (" 10-K")  with the SEC after the  cl ose of each fiscal year, file an
amended Form 10-K ("10-K/A") as  needed, and  file a Form 10-Q (" 10-Q")  after the  cl ose of
each :fiscal quarter. CLCN is a "smaller  reporting company"  under Rule 12b-2 of the Exchange
Act,  17  C.F.R. § 240.12b-2.
13.
CLCN's fiscal year runs from October 1 to September 30.
14. Th e first
CLCN filing  at  i   ssue  is CLCN's I 0-K for fiscal year 2010, which was
filed with the SEC onApril 27, 2011.
15.
In addition to the  on -goin g trading in CLCN's shares o n the OTCBB, CLCN
engaged  in private offerings. In offering  memoranda di stributed by CLCN in connection  with
th
ose private offerings, CLCN directed potential investo rs to the company' s SEC filings as a
so
urce of information relevant to  their investment decis ions. Addition ally , in 2014 and 2015,
CLCN offered  3 million s hares of CLCN stock to a  Chinese investor in exchange for the
purchase
of a  master :franchise agreem ent.
16.
Brian Pappas, age 66, is a  U.S. citizen residing in St.  Augustine, F lorida . He
was CLCN's CEO and President from July  2010 until July 2015, and was a member of the  Board
of Directors  from July 2010 until January  2016. Pappas a lso identified himself as CLCN' s
Principal  Financial
Officer and Principal Accounting Officer. Pappas signed and certified all 10-
Ks, 10-
K/As, and 10-Qs filed by CLCN for fiscal years 2010 through 2014.
4

l 7. Daniel O'Donnell, age 48,  is a U.S. citizen residing in St. Augustine. Fl orida. He
served as CLCN's Vice President of Operations, Chief Operating Officer, and, from 2010 until
April
2016, as a director. O'Donnell s igned all 10-Ks and 10-K/As filed by CLCN for  fiscal
years 20
11 through 2014.
1
8. Michelle Cote, age 48, is a U.S. citi zen residing in St. Augustine, Florida.  Cote
cr
eated the children' s educational program Bricks 4  Kidz, which became the core of CLCN's
franchise business.  She served on the CLCN board from July 2010 until October 2016.
Additionally, Cote  was Pres
ide nt and Secre tary of the compa ny  from July 2015 until May 2017.
She is currently
CLCN's Director of Creative Development. Cote signed all IO-Ks and 10-K/As
filed by  C
LCN for fiscal years 2010 throug h 2014.
OTHER RELEVANT PERSONS AND ENTITIES
19. Audioflix, Inc. (" Audio.fl ix")  is a Florida corporation organized  in 20 I 2  to
provide a udio entertainment to subscriber
s. Pappas is  the Pres ident and a director of A udio fl ix .
and owns approximately 85%
of the Audio.flix  shares. O ' Donnell is a minority share holder a nd
was a director.
20.
Fran Ventures, LLC C'Fran Ventures") is a Florida  limited liability company
created in 2009. Pappas and hi s w
ife are the only  members, and Pappas is  the Managing
Membe
r. Fran Ventures  holds most of the  CLCN shares  beneficially owned by  Pappas and his
wife , and it was  used to r eceive commiss ions and other payments from CLCN to Pappas.
2 1.
Jeffrey  Pappas, age 64, is Brian Pappas's brother. Jeffrey Pappas, who resides
in Las  Vegas, Nevada, was a cons ultant and franchise  broker for the  CLCN programs Bricks 4
K.idz and Challenge Island.
5

22. Jeffrey Ball ("Ball"), age 30, is  Pappas ' s son-in-law.  Ba ll. who  resid es in
Jac ksonv ille  Beach, Florida, was a CLCN franchise broker from 2011 to  2015. In 2013, he also
became  Director of Franchise Developme nt for C LCN' s Brick s 4  Kid z  p rogram.
23.
MC Logic, LLC (" MC Logic") is a Fl01ida limited liability company owned and
controll
ed by Cote. Cote  used  MC Logic  to receive consulting  fees a nd commissions from
C L
CN in connecti o n with sales of Bricks 4  Kidz  franchises.
FACTU AL ALLEGATIONS
A. Defendants Made Material Misrepres entations and Omissions in SEC Filings
24. Between April 20ll a nd March 2015, CLCN, under Pa ppas' s directi o n, filed ten
10-Ks or
l 0-K/ As conta ining  materially fa lse or  misleading statements or omissions, inc luding,
at various  times, mi
sstateme nts or omissio ns  regardin g (i)  re lated-person transactions, (ii)
manageme
nt' s evalua ti on o f di sclosure controls and procedures ("d isclosure contro ls"), (iii)
ma n
agement"s evaluation of interna l controls  over financ ia l rep o rting ('·interna l contro ls .. ), (i v)
Pappas's personal bankruptcy and (v) the bankruptcy of Pappas' s  fo rmer fran ch ising business.
Pappas signed all ten of these fa lse o r mis leading SEC filings, Cote  s igned  nine, and o·oonnell
signed ei ght. Additiona lly, Papp as made  mate1ial misrepresentations  regarding  his evaluatio n of
CLCN' s disclosure contro ls  in  a t least  15  qua rterl y filings made  by CLCN on Fo1m 10-Q. As
CEO and Preside nt, Pappas exercis ed  ultimate control over  the content of  all CLCN filings.
Undisclosed Related-Person Transactions
25. In 2011, Pappas hired his  brother, Jeffrey Pappas, to  locate and recruit p ote ntia l
fr
anchisees. Jeffrey Pappas, who was referred  to  as a "franchise broke r," worke d as a n
independent contrac tor on a
commission  bas is.
6

26. In 2012. Jeffrey Pappas also began receiving a consulting fee from CLCN for
training new franc
hisees. Jeffrey Pappas·s consulting  fee was $4,000 per month, in additi on to
his commissions as a  franchise broker.
27. In 2013, Jeffrey Pappas began receiving an additional $2,000 monthly consulting
fee in connection with  the Challenge Island education program.
28. The commissio ns and consulting fees CLCN paid
to Jeffrey Pappas were directed
to Bottom
Line Group LLC ("Bottom Line Group"), a Nevada limited liability company Jeffrey
Pappas
owned and controlled.
29. J
effrey Ball is Brian Pappas's son-in-law. In 201 1, Pappas hired Ball as a
franchise broke r t  o be paid on a commission basi
s.
30. Item 404 of Exchange Act Regulation S-K,  17  C.F.R. § 229.404, require~ an
issuer to disclose in its  10-K filings "any transaction .. . in which any related person had or will
have a direct o r indirect material interest. " l 7 C.F.R. § 229.404(a)( I )-(6). For a company such
as CLCN, the disclos ure requireme
nt is trigge red by a ny transaction exceeding " the lesser of
$120,000 or one percent of the average of the ... company" s total assets at year end for the last
two completed
fiscal years. 17 C.F.R. § 229.404(d). The  relevant re lated-person reporting
thresholds
for CLCN were $23,156 at the end of fiscal year 2013 and $36,824 at the end of fiscal
year 20
14.
3.1.
CLCN paid Jeffrey Pappas consulting fees and commissions totali ng $ 163,034 fo r
fiscal year 2013 and $209,284 for fiscal year 2014. CLCN paid Ball consulting fees and
co
mmissions of $98,564 for fiscal year 2013 and $128,393 for fiscal year 2014. These payments
to Jeffrey Pappas and Ball constituted reportable transactions  under Item 404 of Exchange Act
Regulation S-K.
7

32. CLCN's initial 10-K for fiscal year 20 13 and  its  two 10-K/As for fiscal year 2013
failed  to disclose the  transacti o ns w ith Jeffr ey Pappas or  Ball. Although Pa ppas, o·o onnell. and
Cote  were aware
of the paym ents  to Jeffrey Pappas and Ball for fiscal year 2013, they signed the
10-K and
lhe two I 0- K/ As fo r fiscal year 2013 that did not  di sclose those re lated-person
transactions, thus  rend
ering the  CLCN filings materially mis leading.
33.
CLCN's 10-K a nd its first 10-K/A for fiscal year 2014 a lso failed  to d isclose the
transactions  with Jeffrey Pappas
or Ball. Althoug h Brian Pappas, O ' Do nne!L and Cote  were
aware
of th e  fees and commissions  paid to Jeffrey Pappas and Ball for fiscal year 2014, they
signed the  1
0-K and the  firs t  10 -K/A for fiscal year 2014 tha t did not disclose the related-person
transactions, thus  rendering those
CLCN filings materially misleading.
34. Pappas knew that disclosure of re lated-person transactions  was required. In
November 20
11, CLCN's outside auditor to ld  Pappas that " [i]t is critical that all related-party
transactions/
activity be  reported in the  financia l state me nts."
35. Further, in late 2 0 I 3 , CLCN
's controller t  old Pappas that the amounts paid to
Jeffrey Pappas in fiscal
year 2 013 should be included in the  company' s  related-person analysis,
a
nd Pappas replied "got it. "
36.
In late 2014, CLCN's new controller asked Pappas a nd O'Donnell for "help
identi
fyin g the  ' re lated parties' with respect t  o  Franch ise consulting and commissions." The
contro ller
provided a di-aft of the related-person disclosures (whic h did not mention the
transactions  with Jeffrey Pappas or Ball) and aske d that Pappas and O ' Donne ll "let me know if
the re  is anything you think is  missing." The new co ntrolle r was unaware  that the payments to
Bottom Line  Group we re actually to Jeffrey Pappas, and likewise did not know that Ball  was
Brian
Pappas ' s son-in-law.  However, ne ither Pappas nor O ' Donne ll told CLCN's controller that
8

the  payme nts to Jeffrey Pappas (thro ugh  Bono m Line Group) and to  Ball were  payments to
re lated  pe rso ns.
37. During a presentaLion  to  Pappas, 0 Do nnell, a nd Cote  in January 2015, the
compan
y's inde pendent auditors identified related-party transactions as one of t he " most
sensiti ve di sclosures affecting the Compa ny's  financ ial sta te ment s." None theless, the
transactions  with J
effrey Pappas and Ball were o mitted fro m the  I 0-K filed the  next day.
38. CLCN's failure to disclose the related-pe rson  transactio ns  with Jeffrey Pa ppas
and Ball was materi al because a  reasona
ble  in vestor would have considered informati on
regarding
those transac tions  to  be important in determining whether t  o  invest or remai n invested
in CLCN.  Consequently, these
rela ted-person  transactions should have been d isclosed pursuant
to Ite m 404 of Excha nge Act Regulation S-K, 17 C .F.R. § 229.404, a nd in orde r t  o make the
compa ny' s rela ted-perso n di sclos ures no t misleading.
39. The payments to Jeffrey Pappas and Ball were not d isc losed until March 19,
2015, whe n CLCN filed  a Form 8-K ("8-K' ') indicating tha t previously issued financial
state ments sho uld not be  relied  on and d isclosing  that  it " had no t properly  identified and
presented certain related patt y transac
tions [.]" Pappas signed  that 8-K.
40. In a  10-K/A
filed o n March 3 1, 2015, CLCN indicated that  it was restating  its
related-person  disclosur
es fo r fiscal years 2013 and 2014  because it had failed  to properl y
ide nti
fy tra nsactions  with rela ted persons.  CLCN restated  its consolidated  bal ance shee ts  with
regard to  accounts payable,
franchise cons ulting and commissions, and cash flows in light of the
payments  to Jeffrey Pappas and
Ball. Pappas, O ' Donnell, and  Cote signed  that 10-K/A.
9

False Statements Regarding Evaluation of
Internal Controls  and Disclosure Controls
41. In each of the  ten l 0-Ks and 10-K/ As filed by CLCN for fiscal years 20 l 0
thro ugh
2014, Pappas fa lsely sta ted  that he had evalua ted  the effectiveness of the company's
internal contro ls  as required a nd had likewise evaluated CLCN·s disclosure con trols.
42. In each
of those ten l 0-Ks and 10-K/ As, as well as in the quarterly l 0-Qs filed by
CLCN during fiscal years  2010 through 2014, Pa ppas a lso false ly sta ted in paragraph 4( c) of
certific ations submined  purs uant to Sectio n 302 of  the  Sarbanes-Oxley Act ("SOX .. ) that he  had
evaluated
the  effectiveness o f CLCN·s d isclosure contro ls.
4 3. In fact, Pa
ppas n ever e valuated the effectiven ess of CLCN' s interna l controls or
CLCN's disclosLu-e controls.
44. In February 2014 the SEC's Division of Corpo ra tion F in a nce asked Pappas to
addr
ess how he  had evaluated C LCN· s disclosure  controls.  Tha t request was  repeated  in three
su bsequent letters dated  April 28, June  16, and July 3 1 of 2 0 14. but Pappas failed to provide tbe
re
quested info rmation .
4 5. In
June 2014, Pappas was told by  CLCN's controller that an " actua l"  evaluatio n
of  the
company's inte rnal controls was required. The controlle r also provided Pappas a SE C
pamphlet di scussin g interna l contro ls a
nd the evaluat io n of  s uch controls.
4 6.
Even aft e r the SEC inquir ies and the warning  from CLCN's controller, Pap pas did
not
evalua te  CLCN's internal controls o r disclosure controls, but continued  to falsely assert tha t
he  h
ad done so.
4 7. Pappas' s  multip le
false statements regarding the evaluation of CLCN's internal
controls  and disclosure contro ls  were materia l because whe the r  t   hose controls  had been
10

evaluated as required would have bee n considered important by a reasonable investor in
evalu ating whethe r to invest or remain i nvested in CLCN.
Failure to Disclose Pappas's Personal Bankruptcy
48. In October 2003. Pappas tiled for personal bankruptcy under Chapter 7 of the
U.S. Bankruptcy Cod
e. He was granted  a general disc ha rge by the United States Bankruptcy
Court for
the  District of Massachusetts in January 2004.
49. P ursuant to Item 401(f)(l )
of Exchange Act Regulation S-K,  17  C.F.R. §
229.401(£)(1), a personal bankruptcy p etition fil ed during the  prior ten years  by a director or
executi
ve officer of a  reporting company must be d isc losed in the company's l 0-K fil ings if it is
materia l to an eva
luatio n of the director or officer's ability o r i  ntegrity.
50. Pappas became a director and
officer of CLCN on July 7, 2010. Accordingly,
CLCN was required to disclose Pappas's bankruptcy in the  10-Ks and amended 10-Ks filed by
CLCN for
fiscal years 20 IO through 20 l 3.
5
1. Each of CLCN's I 0-K and 10-K/A filings from fiscal year 2010 through the fast
10-K/ A
filed for fiscal year 2014 included a glowing account, written originally  by Pappas and
never changed,
of his experience in the franchising business. Those filings failed to disclose that
Pappas had previous ly
filed for personal  bankruptcy.
52. Because CLCN is an emerging company and Pappas was its CEO, Pres ident, and
dominant
figure, a  reasonable investor  would have considered information regarding Pappas's
earlie r bankruptcy to be important in determining whether to invest or remain invested in CLCN.
Consequently, Papp
as's bankruptcy should have been disclosed  as required by Item 401(£)(1) of
Regulation  S-K and in order to make CLCN's filings no t misleading.
11

53. In its 10-K/ A for fiscal year 2014. filed in March 2015. CLCN admitted that it
had
failed  to make the  required disclosures regarding Pappas ·s  personal bankruptcy.  Pappas,
O' Donnell, and Cote si  gned that filing.
False Statements Regarding Together Development Corp.
54. In each of the ten 10-Ks and 10-K/As filed  by C LCN for fiscal years 2010
thro ugh 20
14, CLCN and Pappas false ly stated that Pappas " sold" his  prior franchising business,
Toge
ther Developme nt Corporation ('"Mr. Pappas sold Togethe r  Development Corporation in
1998").
55. In fact, Together Development Corporation fi led for Chapter
11 bankruptcy in
November 1997.
The Bankruptcy Court subsequently authorized the sale of su bstantially all the
assets
of the estate in order to pay creditors.
56. The statement that Pappas
"sold"
Together Development Corporatio n was written
by Pappas
for inclus ion in CLC1 ··s l 0-K for fiscal year 20 l 0. Pappas subsequently  had multiple
opportunities to revise that m isstatement, but fa
iled to do so. Further, CLCN's investors were
not o
therwise in.formed of the Together Development Corporation bankruptcy.
57. Pa pp
as's fa lse assertion that he "sold" Together Development Corporation was
material. Becau
se CLCN was an emerging company and Pappas was its  CEO, Presid ent, and
dominant figure, a reasonable investor wou
ld have considered info rmation regarding the
bankruptcy
of Pappas's previous company, which had also been a  franchising  business, to  be
impo
rtant in determining  whether to invest or remain invested in CLCN.
Pappas and CLCN Acted With Scienter in Making
lVlisrepresentations and Omissions
in the CLCN Filings
58. When Pappas signed and certified the  ten 10-Ks and amended 10-Ks filed  on
behalf of CLCN fo r fiscal years 2010 through 2014, he  knew, or was severely reckless in not
12

knowing, tha t those SEC filings contai ned the  materi al missta tements and  omissions  identified  in
Paragraphs 2
4-57 above. Pa ppas also failed to exerc ise reasonable care with regard to those
statements  a nd
omissions, a nd thus  knew or should have known that the filings contained
ma teri al mi
sstatements a nd omissio ns.
59. Because P appas was the CEO and Preside nt o f CLCN and exercised ultimate
contro l over the con
tent of all o f CLCN' s filings with the SEC from July 2010 until July 2015,
Pappas' s conduc t with regard to those filings, as well  as Pappas's scien ter and failure to exercise
reasonable care, a re attributable  to CLCN.
Cote and O'Donnell Failed to Exercise
Reasonable Care With Regard
to the CLCN Filings
60. [n signing  nine
ofCLCN' s  10-Ks and  10-K/As fo r fiscal  years 2010  through
2014, Cote
failed  to exercise reasonable care w ith regard  to  whether those filings contained the
material
misstatements a nd o missions  identified in Paragraphs 24-40 and 48-53 above. Cote
kn
ew or sho uld have known that there were  material misstatements  and omissions  in each of
those  filings.
6
1. fn signing eight ofCLCN' s  JO-Ks and amended  10-Ks fo r fiscal years 2011
th.rough 2014, O'Donnell  failed  to exercise reasona ble care  with regard to whether those filings
contai ned  the mate
rial m isstateme nts and omissions identified in Paragraphs 24-40 and 48-53
above.  O ' Donnell
knew or should have known that there were material misstatements and
omissions in each of those filings.
B.
Pappas, O 'Donnell, and Cote E ngaged in a Scheme to Manipulate the Stock Price
62. Throughout 2014, Pappas was focused on  inc reasing CLCN's stock price so that
the  company could be li sted on the NASDAQ stock exchange. l n November 2014, Pappas,
O' Donne
ll, and  Cote engaged in a  mani pulative scheme designed to inflate the price of this
13

lightly-traded penny stock,  build marke tplace confidence in the  company, and induce others to
purch
ase the stock.
63.
On November 5, 2014, Pa ppas proposed  that they "open a n account and buy
CLCN s tock when and if it takes a sizeable dip to prop it up.'· O ' Do nnell and Cote agreed.
64.
On November 13, 2014, O ' Donnell  purchased  2,000 CLCN shares on the open
market
for $ 1.57 per s hare.
65.
That s ame  day, Pappas  purchased  1,000 CLCN shares on the open market for $ 1.80
per share.
Jn the  Form 4 disclosing the  purchase, filed by Pappas  on November 17, 2014, Pappas
listed the price as $ 1.85 p er share, which, if true, would have been above the  market price.
66. Cote  needed to open a  brokerage account to make her  purchases and therefore  it
took
her longer to  buy shares. In a series of e-mails between Novembe r  19  and December 1,
2014,
Pappas  advised Cote to  wait " to buy on the  next dip."
67. Pa ppas d isclosed
the  scheme  to  one re tai l investor, writing that " [ w]e will be
buying  more st
ock  on the dips. Dan o·Donnell bought 2k sha res ... and Mich elle Cote (our
Founder)  will be  buying some too."
68.
1n early Decembe r 2014, Cote made  two purchases for a total of 1,700 CLCN
shares.
6 9. Inste ad
of using  their own funds  to purchase the s tock, Pappas,  O 'Donnell, and
Cote u
sed company funds. Pappas directed CLCN's bookkeeper to write company ch ecks in the
amount of $3,000 each to  O' Donne ll , Cote, and himself (addressed  to  the  legal e ntities each used
to receive funds  fro m CL
CN). Pappas kept the difference b etween the $3,000 that h e issu ed to
himself  and the approximate ly $1,800 he spent on purchasing shares.
14

70. At Pappas's direction, these payments were recorded in CLCN·s books and
records as '·consulting"  fees even
tho ugh no consulting services had been  performed. In fact, the
$3,000
payments were made to Pappas, o· Donnell, and Cote solely  to pay them for their stock
purchases as part
of the scheme to manipulate  the market for CLCN·s stock.
C. Pappas Directed Improper Loans to Himself and Cote
71. Exchange Act Section 13(k), 15 U.S.C. § 78m(k). makes it illegal for an issuer to
directly or indirectly extend or mainta in credit in the fo rm of a personal loan to a director or
executive office r
of that issuer, s  ubject to exceptions not applica ble here.
The Audio.flix Loan
72. Pappas was the CEO, a director, and the co ntrolling shareholder of Audioflix, an
entity he created to  provide audio entertainme
nt to monthly subscribers. O'Donnell was a
minority sha reholde r and dir
ector. In June 20 I 3, Pappas arra nged for CLCN, through its wholly-
owned subsidiary BFK Franc
hise Company LLC (" BFK"), to loan $70,000 to Audioflix. The
$70,000 loan was for 24 mon
ths and carried simple interest of 6%.  Pappas signed the note on
behalf of  Audioflix and personally gua ra
nteed the loan.
73. On June
13, 2013, Cote and O' Donnell, acting on behalf ofCLCN, approved the
$70,000 loan to Audiotlix.  Cote and O' Donnell knew when they approved this loan that Pappas
was an officer and controlling shareholder
of Audioflix.  O'Donnell also knew that he personally
held an ownership interest in Audiofli
x.
74. Neithe r CLCN nor its subsidiary BFK was in the business of making loans. The
loan to Audioflix was made because
of Pappas's ownership in and control of Audiotlix.  Pappas
negotiated
the  terms of the loan on behalf of both BFK and Audioflix.
15

75. In  Decem ber  2013, C LCN's independe nt audjtor raised concerns regarding " the
SEC's vie\. s a bout l  oans  to officers." Similarly. during a  presentation to the  C LCN d irectors in
January 2015, othe r auditors  noted that the Audioflix loan ·' may be a vio lation of Sarbanes-
Oxley Section 402(a) re lat
ing  to loans to offi cers.'· Nevertheless, Pappas, o·oonnell. and Cote
took no action
in response to these warrungs .
76. After the end
of the loan term, CLCN demanded repayment. Audi o fl ix repaid the
$70,000 loan on August  12, 201
5.
The MC Logic Loan
77. Cote owns a nd controls M C Logic, which receives payments from C LCN in
connec
tion with the sale of " Bric ks 4 Kidz" franchises.
78. In October 2013, Cote  asked Pa ppas and O ' D onnell  for a $125,000 loan fro m
C LCN to MC Logic so that she could purchase a recreational vehicle .  Cote agreed to personally
guarantee the  loan and to make repayment with funds  to be generated from a
private sale of he r
CLCN stock.
79. Co
te and O ' Donnell sig ned  a resolution on behalf of CLCN approving the  loan to
MC Logic.  Pappas drafted the  requisite  loan documents.
80. On October 23, 2013,
MC Log ic and  CLCN's subsidiary BFK e ntered  into  a
promissory note providing for a  l
oan of $ 125,000 to MC Logic at 2% inte rest  to be  re paid by
December 1, 2013.
8
1. MC Logic re paid the loan on D ecember 30, 2013, without interest.
D. Pappas Selectively Disclosed Material, Non-Public Information
82 . Reg111ation FD, 17 C.F.R. § 243.100 et seq, provides that  i  f an  issue r di scloses
ma te
rial, non-public info rmation regarding  the  iss uer or its secmities to , inter alia, a shareholder
16

under circumstances indicating  that it  is  reasonably  foreseeable tha t the  s hare holder w ill trade  on
the  basis
of that informatio n. the issuer must also disclose the in formatio n to the  public.
83. Pa ppas repeatedl y di sclosed  materia l, non-public  informa
tion regarding CLCN's
antic ipated earnings to a  hedge fund manager ("Fund Manager"), w hose fund was one of
C LCN ' s  largest outside  investors. On November 4, 2013, Pappas  told the Fund Manager that
CLCN ex pected to announce
fiscal year 2013 revenue of $4.8 million, a 4 1 % increase from the
prior year. Pa ppas  also r
evealed to the Fund Manager tha t CLCN expecte d to announce
$900,000 in net income, an  increase
of more than 56% from the  prior  year. The Fund Manager
purchased 40,000 shares
of C LCN stock for his fund between November 13 and Decembe r 3 1,
2013.
84.
On January 3 , 20 l 4,  Pappas told the  Fund Manager that for fiscal year 2013
CLCN would
"show a pre-tax profit of around $930k on revenue of $4.8 million." The Fund
Manager purchased a n additional 28,000 s hares
of C LCN stock  for his  fund between January 3
and January 10, 20 14.
85. The material, non-public informati on di sclosed to the  Fund
Manager on
November 4, 2013, and January· 3, 2014, was not clisclosed to  CLCN s  oth e r investors or t  o  the
public until CLCN fil ed a  10-K on January  14, 2014.
86. On March
20, 2014, Pappas told the Fund Manager that CLCN's gross revenue
for the  second quarter
of fiscal year 2014 "sh ould come in very close to $2M[,]" which
represented an  increase
of approximately $925 ,000 (85%) from the p revi.ous year' s second
quart e
r. The Fund Manager purchased  I 0,000 shares  for his fund o n March 20, 2014 and
another 3,200 s hares on  March 2 1, 2014. The mate rial, non-public  information disclosed to th e
17

Fund Manager on March 20. 2014. was not disclosed to CLCN's o th e r investors or to the  public
unt
il CLCN issued a  press  re lease on  March 27, 2014 .
87.
On August 14, 2014, Pappas to ld the Fund Manager that CLCN anticipated
reporting a
$1.55 million profit for the  firs t three qua11ers of fiscal year 2014. This  would have
been an increase
of more  than $899,000 (138%) fro m the  previous year's first three quarters.
CLCN's actua l profit for the  firs t three quarters of fiscal year 2014 was not disclosed  to CLCN's
other investors or t  o  the public until CLCN filed a  l 0-Q o n A ugust 18, 2014.
88.
On December 17, 2014, Pappas to ld  the Fund Manager that CLCN would be
initiating a  stock buyback ··ASAP."
On January 20, 2015, Pappas disclosed to the Fund Manager
that the Board
of Directors had voted to repurchase l 00,000 s hares of CLCN stock. This
material, non-public information regarding the  buyback plan was not disclosed to CLCN's other
investors
or to the public w1til CLCN filed an 8-K o n January 26, 2015.
89. In an e-mail on December 18.2014. Pappas made  the f und Manager aware of a
potential CLCN acquisi
tion referred  to as the' China Dea1:· which involved the sale of a  mas ter
franchise agreement to a  Chinese investor, who
would be issued three million shares of CLCN
stock and agree to
purchase a nother one million s hares on the  open market. The issuance of
three million s hares would have increased CLCN' s  outs tanding shares by more than 25%. On
January
2, 2015, Pappas forwarded to the  Fund Manager a n e-ma il indicating th at the deal
"appears to be still alive" and informed  the Fund Manager that the like ly price for  the three
million shares would be
$ 1.50. This material, non-public in formation regarding the C hina  Deal
was not disclo
sed to CLCN's other investors or to  the  public.
90. On January 14, 2015, C LCN fi led its 10-K for fiscal year 2014. The next day
Pappas  re
vealed to the Fund Manager that CLCN had made th at filing without its  independent
18

auditor' s  permiss ion a nd was contempla ting  giv ing notice that the  financial statement s in the 1 O-
K could not be relied upo n.  On January 16.2015, Pa ppas  told the Fund Manager that the
company would
file an  a me nded 10-K. The facts that CLCN' s  10-K had been filed without the
independent auditor
·s a uthorization a nd that the  company would fil e an amended 10-K were not
disclosed to CLCN' s other  investors orto the  public  until January 2 1,.2015. An amended 10-K.
with revised fina ncial sta tements, was
filed on  February 2, 2015.
91. Pappas' s disclosures of material, non-publ ic  information  to the Fund Manager
were  made under circumstances in
which it  was reasonably foreseeable that the  Fund Manager
would trade in CLCN shar
es o n the  basis of that information. As noted, on at l  east three
occasions the  Fund Manager traded  in CLCN sha res after Pappas provided him with ma teria l,
non-public  information a nd prior t  o public disclosure
of that information.
92. In March 2015, Pappas disclosed material, non-public  information to two CLCN
shareho lders
(''Shareholder A'' a nd ·'Sha re holder B'') by copyin g them o n a  confidential internal
e-ma
il about a potential acquisition target. This  material. non-public  information was  not
disclosed
to CLCN' s othe r shareholde rs or to the  public.
93. On June 3, 2015, Pappas again disclosed material, non-public information to
Shareholder A and Shareholder
B by  copying them o n a confidential internal e-mail di scussing
CLCN
's anticipated  losses. In tha t e-mail,  Pappas stated that "as of the end of May we' re
looking at no Jess than a
$60k Joss and  possibl y a much greate r loss as of the end of the quarter."
The anticipated loss represented
a reversa l from the  previo us quarter' s profit of$ I 38,239.
94. Pappas' s disclosures of m aterial, non-public informa6on to Shareho lder A and
Shareholder
B were made under circumstances making it  reasonably  foreseeable that they would
trade in CLCN shares on the  basis
of that info rmation. Shareho lder A made at least two trades in
19

CLCN s hares between receiving Pappas's e-mail on Jw1e 3 and C LCN's di sclosure of its actual
profit
figures for May 2015 and the third quarter of fiscal year 20 l 5 on August 19, 2015.
95. The non-public information that Pappas disclosed to th e fund Manager,
Shareho
lder A, and Shareholder B was material because a reasonable  investor would have
cons
idered it  important in deciding whether to invest or remain ~nvested in CLCN.
96. Pappas
knew, or was reckless in not knowing, that the information he  provided to
the  Fund Manager, Sharehold
er A, and S hareholder B was material and non-public.
97. When Pappas disclo
sed  material, non-public information to th e Fund Manager,
Sharehold
er A, and Shareholder B, he was CLCN' s CEO and President, as well as a board
member, and
was acting on CLCN's behalf. Consequently, Pappas's misconduct in making
those selective disclosures, while failing to disclose the same information to the public, is
attributable to CLCN.
98.
By disclosing materia l, non-public information  to  the Fund Manager, Sha reholder
A, and Shareholder B while failing to discl ose the same information to  the public, Pappas
knowingly
or recklessly provided substantial assistance in CLCN' s violations.
E. Pappas Failed to Make Timely Disclosure of His
Beneficial Ownership of, and His Transactions in, CLCN Shares
Failure
to File a Schedule 13D for Six Years
99. Pursuant to Section 13(d) of the Exchange Act,  15 U.S.C. § 78m(d), and the
regulations thereunder, any person  who has acquired beneficial ownership
of more than 5% of,
inter alia, a cla
ss of an equity security  registered under Section 12 of the Exchange Act, 15
U .S.C. § 78!, must within 10 days  file a  Schedule  13D with the SEC to  disclose that beneficial
ownership.
20

100. As of July 7, 2010. Pap pas (through FranVentures ) had acquired 2,599,000 shares
of common s
toc k of  B2  Health. which soon c hanged  its  name  to  CLCN. Pappas's beneficial
ownership constituted a pproximately 26.5% of B2 H ealth' s common stock. Pappas failed  to file
a Schedule  13D following that transactio n.  ln fact, despite  beneficially owning m ore tha n 5% of
the  common stock o f C LCN at all re levant times s ince July 2010, Pa ppas did not fil e a Schedule
13 D until October 27, 20 I 6.
101. A  be ne
ficial o wner o f mo re  than 5% of a class of an equity secU1ity registered
unde r Sectio n  12 of the  Exchange Act  must also fil e a Schedule  13 D to disclose material cha nges
in the  beneficial o wner
's interest. On September  13, 20 13, Pappas d isposed of  150,000 shares o f
CLCN common stoc k, which  was approx imately 6.3% of
the sha res Pa ppas ow ned, and his sale
of
those shares constituted  a  ma teria l change. Nevertheless, Pa ppas did not file  a Schedule  13 D
in connection with tha t transaction.
102. For more than six years. from July 2010 until October 20 16. Pappas was in
continuous viola
tion of Section  13(d) and the regulations there under. Pappas first filed a Schedule
13D on  October 27, 2
016.
Failure to File Forms 4 and 5 to Report Transactions
103. As an officer, director, and beneficial owner of more than 10% of CLCN's
outstanding shares, Pappas was required by Section  l 6(a) of the  Exchange Act and the rules
there unde r to file a Form 4  with the SEC by the end of the second business day after any change
in his  bene
ficial ownershi p.
104. B eginning in 2
012 and continuing through most of 2014, Pappas solicited
investme
nts in Audiof1ix  by offering investors one of his CLCN shares for every three shares of
2 1

Audioflix purchased by a n investor. T hrough Fran Ventures, Pappas dis posed of 363,333 CLCN
shares in eight such transactions from August 2012 to  September 20
14:
Date N umber of S hares
08/ 13/2012
50,000
07/23/2013
10.000
10/ 18/2013
33,333
11/03/2013
I 05,000
12/
06/2013 15,000
03/ 18/2014 50.000
08/13
/2014 50,000
09/ 16/2014
50.000
Each
of these transactions changed Pappas's beneficial ownership of CLCN. Nevertheless,
Pappas
failed to file a timely Form 4 in connection with any of these transactions.
105. Pursuant to Exchange Act Section 16(a),  15  U.S.C. § 78p(a), and the rules
thereunder, Pappas was required to file a  Form 5 by  the end
of any CLCN fiscal year in which
hi s  beneficial ownership  in CLCN changed, but the tran
sactions resulting in that change  had not
previously  been reported. Pappas failed to file a  Form 5 as required after the close
of CLCN·s
fiscal years 2012 and 201
3.
l 06. The eig ht transactions identified in Paragraph I 04 and the corresponding changes
in Pappas's beneficial ownership of CLCN, were not d isclosed until Pappas filed a Fonn 4 on
November 17, 2014.
F. Compensation and Fiscal Year 2014 Bonuses
I 07. Although at  its peak CLCN bad only $4.4 milli on in assets, CLCN paid  Pappas
approximately $
1.52 million between 2010 and 2015, including salary, a bonus of$35,000 in
2014, commissions, and consulti ng fees.
108. O' Donnell received a salary consulting fees bonuses (totaling $85 000), and
stock options fo r hi s work as an officer and director
of CLCN from 20 IO through 2015.
22

109. Cote received  commissions and consulting fees  for her work as an  officer and
director
ofCLCN from 2010  through 2015. S he also rece ived a $35.000 bonus for fiscal 2014
and was  paid a s alary  in fi
scal years  2014 through 2016.
G.
Pappas Failed to File Proxy Solicitation Materia ls  as Required
110. In December 2016, Pappas initia ted a  proxy contest in which he sought to remove
certain members of CLCN's Board of Directors  and replace the m with his own nominees. On
December 9, 2016, Pappas  and his  wife, thro ugh  Fran Ventures and along with the  individuals
being  nomin
ated  to the  Boa rd of Directors, filed  a Preliminary Consent Statement on Schedule
1
4A announcing the effort to replace  certain members of the board. The proxy statement became
a Definitive Consent Statement on December 22, 2016.
11 l. Purs uant to Section 14(a) of the Exchange Act, 15  U.S.C. § 78n (a), and rules
there unde r, soliciting  materials  provided  to s hareho lders as part of a  proxy contest must be fil ed
with the  SEC.
112. Between  Decembe r 27, 2 0 I 6, a nd January 28, 2017, Pappas sent at least thirteen
e-ma
ils regarding  the  proxy contest Lo  two CLCN shareholders. Many of these e-mai ls
commented on  the existing CLCN management and board,  predicted that the company would
soon  be  bankrupt if  the
board was not replaced, and urged the  two CLCN s hareholders  to s upport
the effort lo replace the existing board .  None of these e- mail s  were fi led with the SEC.
1 13.
On January 11, 2017 , Pa ppas sent a  memo  to  Shareholder A, along  with the
CLCN Definitive Consent Statement and Consent Card, urging  Shareholder A to support  the
effort to  repla
ce members of CLCN' s  Board of Directors. In that mem o, Pappas made
r
epresentations regarding a  proposed bus iness plan, claimed  that CLCN would be worthless if
23

the  proxy contest was unsuccessful, and urged S hareholde r A to support the effort t  o  replace the
board. Pappas never
filed that memo w ith the SEC.
FIRST CLAIM FOR RELIEF
Pappas a
nd CLCN Made Material Misstatements and
Omissions and Engaged
in a Fraudulent Scheme in
Violation
of Section lO(b) and Rule lOb-5 of the Exchange Act
114. T hrough the conduct described  in Paragraphs 24-59 and 62-70 above, in
connection
with  the  purchase or sale of securities and by the use of instrumentalities of interstate
commerce or the  mails,  CLCN and Pappas (a) e mployed devices, schemes, and
artifi ces to
defraud, (b) made untrue statements
of material facts or omitted material facts  necessary to make
the statements made  not
mis leading, and (c) e ngaged in acts, practices, and courses of business
which operated o r would operale as a fraud or deceit.
115. Pappas and CLCN e ngaged in this conduct with the intent to deceive, manipulate
or defraud, or with severe  recklessness.
116. B y reason o f this conduct, Pappas and CLCN violated, and, unless enjoined, are
likely to continue  to  violate, Exchan ge Act Section I0(b), 15 U.S.C. § 78j(b). and Exchange Act
Rule  lOb-5,
17 C.F.R. § 240.l 0b-5.
SECOND CLAIM FOR RELIEF
Pappas and CLCN Made Material Misstatements a
nd
Omissions and Engaged in a Fraudulent Scheme in
Violation
of Section 17(a) of the Securities Act
117. Through the conduct described in Paragraphs 9-15, 24-59, 62-70, and 107 above,
in
the offer or sale of securities and using instruments of interstate commerce or the  mail s,
CLCN and Pappas (a) e mployed a device, scheme, or artifice
to defraud, (b) obtained money or
property  by means
of untrue statements of materia l fact or the omission of material facts
24

necessary  to  make the  stateme nt s made not misleading, and (c) e ngaged  in transactions.
practices, and co urses
of business w hich o perate d or would operate  as  a fra ud or de ceit upon th e
purc hasers of C LCN s hares.
118. CLCN and Pappas e nga
ged in this conduct with the intent to deceive, manipulate
or defraud, or w ith severe  reckl essness. C LCN and Pa ppas al so failed  to exercise reasonable
care  with regard to  th e ir conduc t and c
onsequently were  negligent.
l I 9. By reason o f the  foregoing, Pappas and C LCN violated. and, unless enjoine d, are
like ly to continue  to  vio la te, Sec
tio n l7(a) of the Securities Act,  15  U.S. C. §§ 7 7q(a).
THIRD CLAIM FOR RELIEF
O'Donnell, and Cote Violated Sections l 7(a)(2) and
17(a)(3)
of the Securities Act
120. Th.ro ugh the conduct described  in Paragraphs 9-15, 24-40. 48-53, 60-70, a nd I 08-
109 ab
ove, in the  offe r o r sale  o f securities and using  instrume nts of interstate  co mme rce or th e
ma
ils, O'Do nne11 and Cote (a) obtained money or prope11y by means of untrue  statements of
materi a l fact or th e omiss ion of ma teria l facts necessary  to  make  the s tatements  made  not
misleading and
(b) engaged in transacti ons, practices and courses of business which o perated or
would operate  as a fraud o r deceit
upon the  purchasers of s uc h securities.
12
1. O ' Donnell and Cote faile d to exerc ise reasonable  care with regard to trus conduc t
and consequently were negligent.
122. B y reason of the
foregoing, O ' Donnell an d  Cote  vio lated , and, unless enjoined,
are  likely to continue to vio late, Sections  l 7(a)(2)
and l 7(a)(3) of th e  Securities Act,  15 U.S.C.
§§ 77q(a)(2), (3).
25

FOURTH CLAJM FOR RELIEF
Pappas, O'Donnell, and Cote
Engaged  in Market
Manipulation
in Violation of Section 9(a) of the Exchange Act
123. Through the conduc t d escri bed in Paragraphs 62-70 a bove and by the  use of
instrumental.ities of  interstate commerce  or the  mails, Pappas O'Donnell, and Cote effected a
series of transactions in CLCN shares creating actual or appare nt trading  in those securities, or
rais ing o r de pressing the price of those securities. for the  purpose of inducing the purchase or
sa le of those securities by others.
124.
By virtue of the fo regoing, Pappas O ' Donnell, a nd Cote  violated, a nd, unless
e
njo ined, are  likely to continue to violate, Sectio n 9(a)(2) of the  Excha nge Act, 15 U.S.C. §
78i(a)(2).
FIFTH CLAJM FOR RELIEF
CLCN, Aided and Abetted by Pappas, O 'Donnell, and
Cote, Made
Loans to Pappas and Cote
in Violation of Section 13(k) of the Exchange Act
125. T hrough  the conduct described in Paragraphs 71-81 above, CLCN violated
Section  13(k)
of the Exchange Act,  15  U.S.C. § 78m(k), by  making personal loans to Pappas and
Cote, both
of whom were executive officers of CLCN and members of CLCN' s  Board of
Directors.
126. B y reason of the  fo regoing, CLCN violated, and, unless enjoined, is likely to
continue  to  vio late, Exc
hange Act Section  13(k).
127. Through the conduc t described in Paragraphs 7
1-8 l above, Pappas, 0 ' Donnell,
and Cote  at least r  ecklessly  provided  substantia l assistance to CLCN in connectio n with C LCN's
loans to Pappas and Cote.
26

128. By reason of the foregoing, Pappas, Cote, and O ' Donnell  aided and a betted, and,
unless enjoined, are likely to continue to aid and abet, CLCN's vio latio ns of Section l 3(k) of the
Exchange Act.
SIXTH CLAIM FOR RELIEF
CLCN,
Aided and Abetted by Pappas, Violated Regulation FD and
Section 13(a)
of the Exchange Act
129. Through the conduct described in Paragraphs  82-98 a bove, CLCN, acting  through
Pappas, intentionally disclo
sed  material, non-public  information  regarding CLCN to ce1tain
CLCN shareholders  without simultaneously disclosing that
information to other investors or the
public.
130.
If an issuer violates Regulation FD, l 7 C.F.R. § 243.100 et seq, by making
selective disclosure of mate1ial, non-public information  regarding the issuer without making a
simultaneous  public disclosUJe
of that information, the issuer also violates Section  l 3(a), l 5
U.S.C. § 78m(a).
13
1. By reason of the fo regoing. CLCN violated, and, unless enjoined, is likely to
continue
to violate, Regulation FD and Exchange Act Section 13(a).
132. Through the conduct described  in Paragraphs  82-98 above, Pappas knowingly
or
recklessly provided  substantial assistance in CLCN's violations of Regula tion FD and Section
l 3(a).
133. By reason
of the foregoing, Pappas aided and abetted, and, unless enjoined,  is
likely to continue to aid and a bet, violations
of Regulation FD and Section  13(a).
27

SEVENTH CLAIM FOR RELIEF
CLCN and Pappas Failed to Evaluate
CLCN,s Internal Controls and
Disclosure Controls
in Violation of Exchange Act Rules 13a-15(b) and (c)
134. As describe d in Paragraphs 41-47 above. during  fiscal years 2010 through 2014.
CLCN and Pappas failed
at the end of each fiscal quarter t  o  evaluate CLCN's disclosure controls
a
nd failed at the e nd of each fiscal year to  evaluate CLcN·s internal controls over  financial
reportin g. thereby repeated 1 y violating Exchange Act Rules  l 3a- l   5(b) and  l 3a-l 5( c ), 17 C.F.R.
§§ 240.13a-15(b), (c).
135. By reason of the foregoing, CLCN and Pappas v io lated, and, unless enjoined, are
likely to continue to violate, Exchange Act Rules 13a-15(b) and 1
3a-15(c).
EIGHTH CLAIM FOR RELIEF
Pappas Signed False Certifications in
Violation
of Exchange Act Rule 13a-14
136. As desc ribed in P aragraphs 41-47 above, Pappas falsely stated in  the certifications
submitted wi
th th e  ten 10-Ks and 10- K/As fil ed by C LCN for fiscal years 2010  throug h 2014 as
well
as in th e certifications s ubmitte d with the  10-Qs s ubmitted by C LCN d uring  those fiscal
years, that he  had evaluated  CLCN's disclosure controls.
137. By reason
of those false certifications, Pappas  repeatedly violated, and, unless
enjoined, is  likely to continue to violate, Exchange Act Rule  13a-14,  17  C.F.R.
§ 240.13a-14.
NINTH CLAIM FOR RELIEF
Pappas Failed
to Report His Beneficial Ownership on Schedule 13D in
Violation
of Exchange Act§ 13(d) and Rule 13d-1
138. As the beneficia l owner of more than 5% of CLCN's common stock a t all relevant
times after July
2010, Pappas was required by  Section 13(d) of th e  Exchange Act, 15 U.S.C. §
28

78m(d), and Rule  13d-1 thereunder, 17 C.F.R. § 240. l 3d-  l. to file a Schedule  13D in July 2010
and again whenever there  was a  mate rial change to hi s  beneficial ownership.
139. As described in Paragraphs 99-102 above, Pappas
failed throughout the period from
July 2010 until October 2016 to disclose his beneficial ownership, or the changes the reto, by filing
a
Schedule  13D. Pappas thereby violated, and, unless enjoined, is likely to continue to violate,
Sec
tio n 13(d) of the  Exchange Act and Rule  13d-l.
TENTH CLAIM FOR RELIEF
Pappas Failed to File Form 4s and 5s in
Violation of Exchange Act§ l 6(a), and Rules J 6a-2 and 16a-3
140. As an officer, director, and beneficial owner of more than 10% of CLCN' s
outstanding shares, Pappas was required to file a Form 4  within two business days after any
change in
his beneficial ownership. He was also required to file a Form 5  by the end of any
CLCN
fiscal year in which hi s  beneficial ownership changed but tha t change had not previously
been reported.
141. As described in Paragraphs l 03-106 above, beginning in August 2012  and
continuing into  September 2014, Pappas on eight  occasions di sposed of CLCN shares, thereby
changing
his beneficial ownership of CLCN. However, he failed to report any of those
transactions contemporaneously on Form 4.
He also failed to report any of the transactions in
fiscal years 2012 and 2013 on Form 5 after the close of those fiscal years.
142. By reason
of the foregoing, Pappas violated, and, w1less e njoined, is likely to
continue to viola te,  Exchange Act Section 16(a), 15 U.S.C. § 78p(a), and Rules l 6a-2  and 16a-3,
17 C.F.R. §§ 240.16a-2, 240.l 6a-3.
29

ELEVENTH CLAIM FOR RELIEF
CLCN, Aided and Abetted by Pappas, Violated Exchange Act
Section 13(a) and Rules 12b-20,
13a-l, and Ba-13 by  Filing Incomplete and
Inaccurate 10-Qs, 10-Ks, and 10-K/As
143. Purs uant to  Secti on  13(a) o f the  Excha nge Act.  15 U.S.C. § 78m(a). and Rules
l 2b-20,  l 3a-l, and I 3a-13, th ere unde r, 17 C. F.R. §§ 240.12 b-20, 240. I Ja-1, and 240. 1 Ja-13,
CL
CN was require d to file complete and accurate annua l r  eports  on  Form l 0-K, Lo  s ubmit
comple te  and accurate
ame ndments  on Form l 0-K/ A when c irc umstances required , and to file
comple te  and ac
curate quarterl y  reports on  Fonn I 0-Q.  CLCN was obligated  to  include in these
filings any ma terial information needed to  ma ke  the re quire d s tatements not misleading.
144. As d
escribed in Paragraphs  24-40 above, CLCN failed to  make required related-
person disclosures in its 10-Ks and 10-K/As
for fiscal year 2013 and  in its  10-K and firs t  10-K/A
for fisca l year 2014, making those filings incomple te and inaccurate in v iolation of Exchange Act
Section
l 3(a) an d Exchange Act Rules I 2b-20 and I 3a-l.
145. As described in Paragraphs 4 1-47 above, the  10-K s a nd  10-K/As filed by CLCN
for fiscal years 2010  through 2014 as well as the 10-Qs fil ed by CLCN during those fiscal year s,
conta ined  fal
se or mis leading s tatem e nts  regarding  Pappas's e valuation of CLCN's intern a l
controls
and discl osw-e controls,  making those filings incomple te and inaccurate in violation o f
Exchange Act  Section  13(a) and E
xchange Act Rules 12b-20, 13a-1, an d  13a-13.
146. As described in Paragraphs 48-53 a bove, C LCN fa
iled to di scl.ose in its I 0-Ks and
10-K/As for
fiscal years 2010 through 2013 and in its 10-K and first  10-K/A for fiscal year 2014
that Pap
pas had fil ed  for ba nkruptcy in Octobe r 2 003, making those filings incomplete and
inaccurate in violati on of Exchange Act Secti o n 13(a) and Exchange Act Rules 12b-20 and l Ja-1.
30

147. As described in Paragraphs 54-57 above, CLCN·s I 0-Ks and 10-K/As for fiscal
years
20 IO through 2014 contained false or mis leading stateme nts regarding the '·sale" of
Togeth er Development Corporation, making those filings incomplete an d inaccurate in vio latio n
of Exchange Act Section IJ(a) and Exchange Act Rules l 2b-20 a nd  13a-I.
148. By reason of the foregoing, CLCN violated, and, unless enjoined, is like ly to continue
to  vio late Exchange Act Section 13(a) and Excha nge Act Rules 12b-
20.  13a-l , and 13a-13.
149. As described  in Paragraphs 24-59 above,
Pappas a ided and abetted CLCN' s
violati ons
of Exchange Act Section 13(a)  and Rules  I 2b-20, I 3a-l, a nd 13a-l 3  by knowingly or
reckl essly providing subs tantial assistance in those violations,  and, unless e njoined,  is  likely to
continue to aid and
abet s uch  violations.
TWELFTH CLAIM FOR RELIEF
Pappas Violated Exchange Rule 13b2-1
150. Exchange Act Rule  13b2-L 17 C.F.R. § 240. 13b2-l. provides  that no  person shall
directly
or indirectly  falsify or cause  to be falsified, a ny book, record or account that is subject
to Exchan ge
Act Sectio n  13(b)(2)(A),  15 U.S.C. § 78m(b)(2)(A).
15
1. As desciibed in Paragraphs 62-70 above, in November 20 l 4, Pappas directed
CLCN' s  bookkeeper to e nter materially false information in CLCN
's books and records.  Pappas
thereby violated, and, unless enjoined, is likely to continue to  violate, Exchange Act Rule l
3b2 -l.
THIRTEENTH CLAIM FOR RELIEF
CLCN, Aided and Abetted by Pappas, Violated
of
Sections 13(b )(2)(A) and 13(b )(2)(B) of the Exchange Act
152. Pursuant to Exchange Act Sections  13(b)(2)(A) and (B), 15  U.S .C. §§
78m(b)(2)(A) and (B), every issuer  havi ng  a class of securities registered  pursuant to Secti on  12
of the Exchange Act must (a) make and keep books and records which accurat e ly and fairl y
3 1

reflect it s  transactions and the dispos itions of its  assets, and (b) maintain a  system of internal
accounting conLro ls sufficient to provide  reasonable assurance that,  inter alia, transactions are
r
ecorded as necessary  to pennit preparation of financial statements in conformity with generall y
accepted accounting principles.
153. As
desc ribed in Paragraphs 62-70 above,  in November 2014 CLCN failed to
accurately  r
ecord the payments CLCN made to Pappas, O'Donne ll, and Cote in connection the
m
anipulation of the market fo r CLCN' s s hares, thereby failing  to make and keep accurate books
and records and t o maintain an adequate system of internal accounting controls. CLCN thus
violated, and, unless enjoined,  is  like ly to continue to violate, Exchange Act Sections
l 3(b )(2)(A) and (B ).
154.
As described  in Paragraphs 62-70 above, Pappas knowingly or recklessly
provided substantial assistance to CLCN in CLCN' s  violations of Exchange Act Sections
13(b)(2)(A) and (B) and, unless enjoined. is  likely  to  continue to  aid and abet violations of those
prov1s 1ons.
FOURTEENTH CLAIM FOR RELIEF
Pappas's Failure
to File Solicitation Materials Violated
Section 14(a) and
Rule 14a-6(b), Thereunder
155. Pursuant to Section 14(a) of the Exchange Act, 15 U.S.C. §78n(a). and Rule 14a-
6(b ), 17 C.F.R. §§ 240. l 4a-6(b ), soli c iting materials as defined in Rule  14a-l ([), 17 C.F.R. §
240. l 4a-1 ([), that are provided to shareholders as part of a  proxy contest must be filed with  the
SEC.
156.
As described  in Paragraphs 110- 113 above,  in December 2016 and January 2017 ,
Pappas sent CLCN shareho lders soli citing  materials  that were never fi led with  the SEC. Pappas
32

thereby violated. and, unless enj oi ned, is likely  to continue to  violate. Section 14(a) of the
Exchange Act a nd Rules l 4a-6(b)
thereunder.
PRAYER FOR RELIEF
WHEREFORE. th e  Commission respectfully requests  tha t the Comt enter the following
relief:
A.
[njunctive Relie f
Permanently enjoin C LCN from (i)  viola ting Exchan
ge Act Section  1 0(b ),  Exchange Act
Rule 1
0b-5, or Securities Act Section l 7(a) by, directly o r indirectl y, making any false or
mis leading statement , or dissemina ting any false or misleading docume nts,  materials, or
information, conce rning  ma tt ers  re lating to a deci sion  by a n  investor or pros pective  investo r to
buy o r se
ll securities  of any company or by engaging in a scheme to defra ud involving the entry
of false or misleading information in CLCN' s books  and records; or (ii) vio lating any o ther
sta tutory  provision  or r
egulation CLCN is  found to have v io lated;
Permanently enjo
in Pappas from (i) vio la ting  Exchange Act Section l 0(b), Exchange Act
Rule l
0b-5, or Securities Act Section l 7(a) by, directly or indirectly, making any false or
misleading statem ent,
or djsseminating any false or misleading documents, materials, or
information, concerning matters re la ting  to a decision by an investor
or prospecti ve investor to
buy
or sell securities of any company or by engaging in a scheme to defraud involving the entry
of false o r misleading information in CLCN ' s  boo ks and records or the manipulation of the
market for any security; (ii) violating any o the r statutory provision or regulation CLCN is found
to have viola ted; or (iii) aiding and abetting the  v io lation
of any statutory prov ision or regulation
the viola tion
of which Pappas is found to  have aid ed and abetted; and
..,..,
.) .)

Pe1111anently enjo in O'Donnell and Cote  from : (  i) vio la ting Securities Act Sections
l 7(a)(2) and (a)(3) by, d irec
tly o r indirectly, making any false or misleading sta tement, or
disseminating any false o r misleading docume nts, ma teria ls, o r i  nformation, concerning matters
relating  to  a decis ion by an in vesto r o r prospective in vesto r t  o  buy o r sell secmities of any
co
mpany; (ii)  vio la ting  Section 9(a)(2) of the  Exchange Act. 15 U.S.C. § 78i(a)(2), by engaging
in marke t manipulation through the  purc hase o r sa le of a security for the purpose of inducing the
purchase or sale of such security  by othe rs: o r (iii ) ai ding and a betting an issuer's vio latio n of
Section  l 3(k) of the Exchange Act,  15  U.S.C. § 78m(k), by providing substantial assistance in
making  pe rsonal loans to  an officer or director
of that issuer.
B. Disgorgement
O
rder Pa ppas, O ' Donnell, and  Cote  to  disgorge the  ill-gotten gains obtained as a result of
their vio lations, with prejudgment interest, purs ua nt to  Sectio n 2 1 (cl)(5) of the  Exchange Act,  15
U.S.C.
§ 78u(d)(5);
C. Civil Pe nalties
O rder
Pappas, O ' Donnell, and Cote  to pay civil money penalties pursua nt to  Section
20(d) of the Securities Act,  15  U.S.C. § 77t(d), and Section 2 l (d)(3) of the Exchange Act,  15
U.S .C. § 78u(d)(3);
D. Officer and Director Bars
Bar Pappas p ursuant to  Section 21 ( d)(2) of the  Excha nge Act,  15  U.S. C. § 78u( d)(2),
from serving as an officer  or directo r
of any issuer that  has a  class of securities registered
purs u
ant  t  o Section  12 of the Exchange Act,  15 U.S.C. § 781, or that  is required to file reports
purs uant to Section  15(d)
of th e Exchange Act, 15  U.S.C. § 78o(d);
34

Bar O'Donnell and Cote purs uant to Section 2 1(d)(5) of the Exchange Act, 15 U.S.C. §
78u( d)(5), from serving  as officers or directors of any issuer that has a class of securities
registered  purs uant to Section 12 of the Exchange Act or is required to file  reports pursuant to
Sectio n  l 5(d) of the Exchange Act:
E. Pe nny Stock Bars
Bar Pappas, O ' Do nne
ll, a nd Cole pursuant to Section 2 l (d)(6) of the Exchange Act. 15
U.S.C. § 78u(d)(6), a nd Section 20(g) of the Securities Act, 15 U.S.C. § 77t(g), from
participa ting in a ny offering of any penny stock; and
f. Grant s uch further relief as  the Court m ay deem just and appropriate.
Da te: August
18, 20 17
Of counsel :
Antonia C
hion
Melissa R. H odgma n
Kevin Guerrero
Securities and Exchange Commissio n
1
00 F S treet, N.E.
Washing ton, D C 20549- 5
041
Respectfu
lly submitted,
u.~s;.wk
H. Mic hael  Semler, Trial Counsel
District
of Columbia Bar No. 162479
202-55
1-4429
semle
[email protected]
Matt  Reil ly
New York Ba r No. 5 130935
202-
551-5478
rei
11 y [email protected]
Divis
ion of Enforcement
Securities and Exchange Commi
ssion
100
F Street, N .E.
Washington, D C 20549
A ttorneys
for P laintiff
35

Case 3:17-cv-00954-TJC-JRK Document 1 Filed 08/21/17 Page 1 of 35 PageID 1 

UNITED ST A TES DISTRICT COURT 
FOR THE MIDDLE DISTRICT OF FLORIDA Ml , A' lt: ') I \ !, 11: 34 

JACKSONVILLE DIVISION 1 .,._. - (.. "' 
1 

UNITED ST A TES SECURITIES AND 
EXCHANGE COMMISSION, 

Plaintiff, 

V. 

BRIAN PAPP AS; 
CREATIVE LEARNING CORP.; 
DANIEL O'DONNELL; and 
MICHELLE COTE 

Defendants. 

r1 c ·"1 u~ .,,~~-drT C' . .,.. 
I, 1C~ -·\;-:tic I Gi ,,. _c <. \ 
' ' J,\r:1i:-0r v ILL':: c .. ;;; 1 .-;.:: ·r 

Civil Action No.'3'.\7-oJ --CfSl{-J-~( 

JURY TRIAL DEMANDED 

COMPLAINT FOR INJUNCTIVE AND OTHER RELIEF 

Plaintiff, the United States Securities and Exchange Commission ("Commission'· or 

"SEC") alleges as follows: 

l. This action arises from multiple violations of the federal securities laws by 

Creative Learning Corporation ("CLCN" or "company") and three of its fonner officers and 

directors: Brian Pappas ("Pappas"), who was CLCN's Chief Executive Officer ("CEO") and 

President, as well as a member of the Board of Directors; Daniel O'Donnell ("O'Donnell"), 

formerly Chief Operating Officer, Vice President of Operations, and a director; and Michelle 

Cote ("Cote"), the creator of CLCN's business concept and a director. Beginning in 201 1 and 

continuing into early 2015, Pappas and CLCN (through Pappas' s conduct) engaged in a 

fraudulent scheme to build market confidence in CLCN and its management by making 

numerous materially false and misleading statements and omissions, including 

misrepresentations and omissions regarding Pappas's prior business experience, Pappas's 



Case 3:17-cv-00954-TJC-JRK Document 1 Filed 08/21/17 Page 2 of 35 PageID 2 

personal financial history, his evaluation of the company's disclosure and fi nancial reporting 

controls, and CLCN's payments to re lated persons. As part of that scheme. Pappas proposed and 

supervised a series of trades designed to manipulate the market for CLCN·s shares, increase the 

share price, and induce others to trade in the company's stock. 0 Donnell and Cote participated 

in the market manipulation, and also joined Pappas in improperly aITanging personal loans to 

company officers. Further, on multiple occasions Pappas improperly discl.osed material , non­

public information to selected investors without disclosure to other CLCN investors or the 

public. Pappas also signed false certifications in filings with the SEC, directed that false entries 

be made in CLCN's books and records, and fai led to disclose his beneficial interest in CLCN in 

SEC filings as required. 

2. Pappas demonstrated a sweeping disregard for his responsibilities as the leader of 

a public company. Pappas was primarily responsible for the fraudulent scheme and acted 

knowingly or with severe recklessness. 

3. O'Donnell and Cote knew or should bave known that they were s igning fal se or 

misleading documents filed wi th the SEC. Additional ly, O'Donnell and Cote knowingly joined 

in the effort to manipulate the price of CLCN shares, and at least recklessly approved improper 

loans from the company to Pappas and Cote. 

4. Pappas was removed as CEO and President of CLCN in July 20 15, but violated 

the securities laws again in early 2017 when he sought to regain control of the company. While 

conducting an unsuccessful proxy contest, Pappas failed to file soliciting materials with the SEC 

as required. 

5. The Commission requests that the Court enjoin CLCN, Pappas, O'Donnell, and 

Cote ("Defendants") from further securities law violations, require that Pappas, O'Donnell, and 

2 



Case 3:17-cv-00954-TJC-JRK Document 1 Filed 08/21/17 Page 3 of 35 PageID 3 

Cote (the " Individual Defendants") disgorge their ill-gotten gains and pay civi l penalties, and 

enter officer and director bars and penny stock bars against the Individual Defendants. 

JURISDICTION 

6. The Court bas jurisdiction over this action pursuant to Sections 20 and 22 of the 

Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77t and 77v, and Section 27 of the 

Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78aa. 

7. Venue is proper in this judicial district pursuant to Section 22(a) of the Securities 

Act, 15 U.S.C. § 77v(a), and Section 27 of the Exchange Act, 15 U.S.C. § 78aa, because certain 

of the acts and omissions constituting the violations alleged herein occurred in this judicial 

district and because Defendants are inhabitants of, transact business in, or can be found in this 

disttict. 

8. Defendants made use of the mails and of the means and instrumentalities of 

interstate commerce in connection with the acts, practices, and courses of business described in 

this Complaint. 

DEFENDANTS 

9. CLCN is a Delaware corporation with its principal offices in St. Augustine, 

Florida. CLCN is a franchisor of children's educational programs. CLCN became a U.S. issuer 

in July 2010 through a reverse merger with B2 Health, Inc. ("B2 Health"), a Delaware 

corporation. 

10. CLCN 's common stock is registered with the Commission pursuant to Section 

12(g) of the Exchange Act, 15 U.S.C. § 78/(g), and is traded on the Over-the-Counter Bulletin 

Board ("OTCBB") under the symbol "CLCN." CLCN' s stock p1ice fell from nearly $3.00 per 

share in April 2014 to $0. 18 per share as of mid-July 2017. 

3 



Case 3:17-cv-00954-TJC-JRK Document 1 Filed 08/21/17 Page 4 of 35 PageID 4 

11 . CLCN offers three educational programs (" Bricks 4 Kidz," "Challenge Island," 

and "Sew Fun Studios") , each franchised through a separate wholly-owned subsidiary of CLCN. 

12. CLCN is subject to the reporting, internal controls, and books and records 

provisions of Section 13 of the Exchange Act, 15 U.S.C. § 78m, including the requirement that 

the company fi le a Form 10-K (" 10-K") with the SEC after the close of each fiscal year, file an 

amended Form 10-K ("10-K/A") as needed, and file a Form 10-Q (" 10-Q") after the close of 

each :fiscal quarter. CLCN is a "smaller reporting company" under Rule 12b-2 of the Exchange 

Act, 17 C.F.R. § 240. 12b-2. 

13. CLCN's fiscal year runs from October 1 to September 30. 

14. The first CLCN filing at issue is CLCN's I 0-K for fi scal year 2010, which was 

filed with the SEC onApril 27, 2011. 

15. In addition to the on-going trading in CLCN's shares on the OTCBB, CLCN 

engaged in private offerings. In offering memoranda distributed by CLCN in connection with 

those private offerings, CLCN directed potential investors to the company 's SEC filings as a 

source of information relevant to their investment decisions. Additionally, in 2014 and 2015, 

CLCN offered 3 million shares of CLCN stock to a Chinese investor in exchange for the 

purchase of a master :franchise agreement. 

16. Brian Pappas, age 66, is a U.S. citizen residing in St. Augustine, F lorida. He 

was CLCN's CEO and President from July 2010 until July 2015, and was a member of the Board 

of Directors from July 2010 until January 2016. Pappas also identified himself as CLCN' s 

Principal Financial Officer and Principal Accounting Officer. Pappas signed and certified all 10-

Ks, 10-K/As, and 10-Qs filed by CLCN for fiscal years 2010 through 2014. 

4 



Case 3:17-cv-00954-TJC-JRK Document 1 Filed 08/21/17 Page 5 of 35 PageID 5 

l 7. Daniel O'Donnell, age 48, is a U.S. citizen residing in St. Augustine. Florida. He 

served as CLCN's Vice President of Operations, Chief Operating Officer, and, from 2010 until 

April 20 16, as a director. O' Donnell s igned all 10-Ks and 10-K/As filed by CLCN for fisca l 

years 20 11 through 2014. 

18. Michelle Cote, age 48, is a U.S. citizen residing in St. Augustine, Florida. Cote 

created the children' s educational program Bricks 4 Kidz, which became the core of CLCN's 

franchise business. She served on the CLCN board from July 20 10 until October 2016. 

Additionally, Cote was President and Secretary of the company from July 2015 until May 20 17. 

She is currently CLCN's Director of Creati ve Development. Cote signed all IO-Ks and 10-K/As 

filed by C LCN for fi scal years 20 10 through 2014. 

OTHER RELEVANT PERSONS AND ENTITIES 

19. Audioflix, Inc. ("Audio.fl ix") is a Florida corporation organized in 20 I 2 to 

provide audio entertainment to subscribers. Pappas is the President and a director of Audio fl ix. 

and owns approximately 85% of the Audio.flix shares. O' Donnell is a minority shareholder and 

was a director. 

20. Fran Ventures, LLC C'Fran Ventures") is a Florida limited liability company 

created in 2009. Pappas and his wife are the only members, and Pappas is the Managing 

Member. Fran Ventures holds most of the CLCN shares beneficially owned by Pappas and his 

wife, and it was used to receive commiss ions and other payments from CLCN to Pappas. 

2 1. Jeffrey Pappas, age 64, is Brian Pappas's brother. Jeffrey Pappas, who resides 

in Las Vegas, Nevada, was a consultant and franchise broker for the CLCN programs Bricks 4 

K.idz and Challenge Island. 

5 



Case 3:17-cv-00954-TJC-JRK Document 1 Filed 08/21/17 Page 6 of 35 PageID 6 

22. Jeffrey Ball (" Ball"), age 30, is Pappas' s son-in-l aw. Ball. who resides in 

Jacksonv ille Beach, Florida, was a CLCN franchise broker from 20 11 to 20 15. In 20 13, he also 

became Director of Franchise Development fo r CLCN' s Bricks 4 Kidz program. 

23. MC Logic, LLC (" MC Logic") is a Fl01ida limited li abili ty company owned and 

controlled by Cote. Cote used MC Logic to receive consulting fees and commissions fro m 

CLCN in connection with sales of Bricks 4 Kidz franchises. 

FACTUAL ALLEGATIONS 

A. Defendants Made Material Misrepresentations and Omissions in SEC Filings 

24. Between April 20ll and March 201 5, CLCN, under Pappas' s direction, filed ten 

10-Ks or l 0-K/ As containing materially fa lse or misleading statements or omissions, including, 

at various times, misstatements or omiss ions regarding (i) related-person transactions, (ii) 

management' s evaluation of disclosure contro ls and procedures ("disc losure controls"), (iii) 

management"s evaluation of internal controls over fi nancia l reporting ('·internal contro ls .. ), (iv) 

Pappas's personal bankruptcy and (v) the bankruptcy of Pappas' s fo rmer franchising business. 

Pappas signed all ten of these false or mis leading SEC filings, Cote signed nine, and o·oonne ll 

signed eight. Additionally, Pappas made mate1ial misrepresentations regarding his evaluation of 

CLCN's disclosure controls in at least 15 quarterly fi lings made by CLCN on Fo1m 10-Q. As 

CEO and President, Pappas exercised ultimate control over the content of all CLCN filings. 

Undisclosed Related-Person Transactions 

25. In 2011 , Pappas hired his brother, Jeffrey Pappas, to locate and recruit potentia l 

franchisees. Jeffrey Pappas, who was referred to as a "franchise broker," worked as an 

independent contrac tor on a commission basis. 

6 



Case 3:17-cv-00954-TJC-JRK Document 1 Filed 08/21/17 Page 7 of 35 PageID 7 

26. In 20 12. Jeffrey Pappas also began receiving a consulting fee from CLCN for 

training new franchisees. Jeffrey Pappas·s consulting fee was $4,000 per month, in addition to 

his commissions as a franchise broker. 

27. In 20 13, Jeffrey Pappas began receiving an additional $2,000 monthly consulting 

fee in connection with the Challenge Island education program. 

28. The commissions and consulting fees CLCN paid to Jeffrey Pappas were directed 

to Bottom Line Group LLC ("Bottom Line Group"), a Nevada limited liability company Jeffrey 

Pappas owned and controlled. 

29. Jeffrey Ball is Brian Pappas 's son-in-law. In 2011, Pappas hired Ball as a 

franchise broker to be paid on a commission basis. 

30. Item 404 of Exchange Act Regulation S-K, 17 C.F.R. § 229.404, require~ an 

issuer to disclose in its 10-K filings "any transaction . . . in which any related person had or will 

have a direct or indirect material interest." l 7 C.F.R. § 229.404(a)( I )-(6). For a company such 

as CLCN, the disclosure requirement is triggered by any transaction exceeding " the lesser of 

$120,000 or one percent of the average of the ... company" s total assets at year end for the last 

two completed fiscal years. 17 C.F.R. § 229.404(d). The relevant related-person reporting 

thresholds for CLCN were $23,156 at the end of fiscal year 2013 and $36,824 at the end of fiscal 

year 20 14. 

3.1. CLCN paid Jeffrey Pappas consulting fees and commissions totaling $163,034 for 

fiscal year 20 13 and $209,284 for fiscal year 2014. CLCN paid Ball consulting fees and 

commissions of $98,564 for fiscal year 2013 and $128,393 for fiscal year 2014. These payments 

to Jeffrey Pappas and Ball constituted reportable transactions under Item 404 of Exchange Act 

Regulation S-K. 

7 



Case 3:17-cv-00954-TJC-JRK Document 1 Filed 08/21/17 Page 8 of 35 PageID 8 

32. CLCN 's initial 10-K for fi scal year 2013 and its two 10-K/As for fi scal year 2013 

fa iled to disclose the transactions with Jeffrey Pappas or Ball. Although Pappas, o· o onnell. and 

Cote were aware of the payments to Jeffrey Pappas and Ball for fiscal year 20 13, they signed the 

10-K and lhe two I 0-K/ As for fiscal year 20 13 that did not disclose those related-person 

transactions, thus rendering the CLCN fil ings materially mis leading. 

33. CLCN's 10-K and its first 10-K/A fo r fi scal year 20 14 also fai led to disclose the 

transactions with Jeffrey Pappas or Ball. Although Brian Pappas, O 'Donne!L and Cote were 

aware of the fees and commissions paid to Jeffrey Pappas and Ball for fi scal year 2014, they 

signed the 10-K and the first 10-K/A for fiscal year 2014 that did not disc lose the related-person 

transactions, thus rendering those CLCN filings materially misleading. 

34. Pappas knew that disclosure of related-person transacti ons was required. In 

November 20 11 , CLCN's outside auditor told Pappas that " [i]t is cri ti cal that all related-party 

transactions/acti vity be reported in the financial statements." 

35. Further, in late 20 I 3, CLCN's controller told Pappas that the amounts paid to 

Jeffrey Pappas in fiscal year 2013 should be included in the company' s related-person analysis, 

and Pappas replied "got it." 

36. In late 2014, CLCN's new controller asked Pappas and O'Donnell for "help 

identifying the ' related parties' with respect to Franchise consulting and commissions." The 

controller provided a di-aft of the related-person disclosures (which did not mention the 

transactions with Jeffrey Pappas or Ball) and asked that Pappas and O 'Donnell "let me know if 

there is anything you think is missing." The new controller was unaware that the payments to 

Bottom Line Group were actually to Jeffrey Pappas, and likewise did not know that Ball was 

Brian Pappas ' s son-in-law. However, neither Pappas nor O 'Donnell told CLCN's controller that 

8 



Case 3:17-cv-00954-TJC-JRK Document 1 Filed 08/21/17 Page 9 of 35 PageID 9 

the payments to Jeffrey Pappas (through Bonom Line Group) and to Ball were payments to 

re lated persons. 

37. During a presentaLion to Pappas, 0 Donnell , and Cote in January 20 15, the 

company's independent auditors identified related-party transactions as one of the "most 

sensitive disclosures affecting the Company's financial statements." Nonetheless, the 

transactions with Jeffrey Pappas and Ball were omitted from the I 0-K filed the next day. 

38. CLCN's failure to disclose the related-person transactions with Jeffrey Pappas 

and Ball was material because a reasonable investor would have considered in formation 

regarding those transactions to be important in determining whether to invest or remain invested 

in CLCN. Consequently, these related-person transactions should have been disclosed pursuant 

to Item 404 of Exchange Act Regulation S-K, 17 C.F.R. § 229.404, and in order to make the 

company' s related-person disclosures not misleading. 

39. The payments to Jeffrey Pappas and Ball were not disc losed un ti l March 19, 

20 15, when CLCN fi led a Form 8-K ("8-K'') indicating that previously issued financial 

statements should not be relied on and d isclosing that it "had not properl y identified and 

presented certain related patt y transactions[.]" Pappas signed that 8-K. 

40. In a 10-K/A fil ed on March 31, 201 5, CLCN indicated that it was restating its 

related-person disclosures for fiscal years 201 3 and 2014 because it had failed to properly 

identify transactions with related persons. CLCN restated its consolidated balance sheets with 

regard to accounts payable, franchise consulting and commissions, and cash flows in light of the 

payments to Jeffrey Pappas and Ball. Pappas, O 'Donnell, and Cote signed that 10-K/A. 

9 



Case 3:17-cv-00954-TJC-JRK Document 1 Filed 08/21/17 Page 10 of 35 PageID 10 

False Statements Regarding Evaluation of 
Internal Controls and Disclosure Controls 

4 1. In each of the ten l 0-Ks and 10-K/ As fil ed by CLCN for fiscal years 20 l 0 

through 20 14, Pappas false ly stated that he had evaluated the effecti veness of the company's 

internal controls as required and had likewise evaluated CLCN·s disclosure controls. 

42. In each of those ten l 0-Ks and 10-K/ As, as well as in the quarterly l 0-Qs filed by 

CLCN during fiscal years 20 10 through 20 14, Pappas also fa lse ly stated in paragraph 4( c) of 

certifications submined pursuant to Section 302 of the Sarbanes-Oxley Act ("SOX .. ) that he had 

evaluated the effectiveness o f CLCN ·s disclosure controls. 

43. In fact, Pappas never evaluated the effectiveness of CLCN' s internal controls or 

CLCN's disclosLu-e control s. 

44. In February 20 14 the SEC's Division of Corporation Finance asked Pappas to 

address how he had evaluated CLCN·s disclosure controls. That request was repeated in three 

su bsequent letters dated April 28, June 16, and July 3 1 of 20 14. but Pappas failed to provide tbe 

requested info rmation . 

45. In June 20 14, Pappas was told by CLCN's controll er that an "actual" evaluation 

of the company 's internal controls was required. The controller also provided Pappas a SEC 

pamphlet discussing internal contro ls and the evaluat ion of such controls. 

46. Even after the SEC inquir ies and the warning from CLCN's controller, Pappas did 

not evaluate CLCN's internal controls or disclosure controls, but continued to falsely assert that 

he had done so. 

47. Pappas' s multiple false statements regarding the evaluation of CLCN's internal 

controls and disclosure controls were material because whether those controls had been 

10 



Case 3:17-cv-00954-TJC-JRK Document 1 Filed 08/21/17 Page 11 of 35 PageID 11 

evaluated as required would have been considered important by a reasonable investor in 

evaluating whether to invest or remain invested in CLCN. 

Failure to Disclose Pappas's Personal Bankruptcy 

48. In October 2003. Pappas tiled for personal bankruptcy under Chapter 7 of the 

U.S. Bankruptcy Code. He was granted a general discharge by the United States Bankruptcy 

Court for the District of Massachusetts in January 2004. 

49. Pursuant to Item 401(f)( l ) of Exchange Act Regulation S-K, 17 C.F.R. § 

229.401(£)(1), a personal bankruptcy petition filed during the prior ten years by a director or 

executive officer of a reporting company must be d isc losed in the company's l 0-K fil ings if it is 

material to an evaluation of the director or officer 's abi lity or integrity. 

50. Pappas became a director and officer of CLCN on July 7, 2010. Accordingly, 

CLCN was required to disclose Pappas's bankruptcy in the 10-Ks and amended 10-Ks fi led by 

CLCN for fi scal years 20 IO through 20 l 3. 

5 1. Each of CLCN's I 0-K and 10-K/A fi li ngs from fi scal year 2010 through the fast 

10-K/ A fi led for fiscal year 2014 included a glowing account, written originally by Pappas and 

never changed, of his experience in the franchising business. Those fi lings failed to disclose that 

Pappas had previously fi led for personal bankruptcy. 

52. Because CLCN is an emerging company and Pappas was its CEO, President, and 

dominant figure, a reasonable investor would have considered information regarding Pappas's 

earlier bankruptcy to be important in determining whether to invest or remain invested in CLCN. 

Consequently, Pappas's bankruptcy should have been disclosed as required by Item 401(£)( 1) of 

Regulation S-K and in order to make CLCN's filings not misleading. 

11 



Case 3:17-cv-00954-TJC-JRK Document 1 Filed 08/21/17 Page 12 of 35 PageID 12 

53. In its 10-K/ A for fi scal year 20 14. filed in March 20 15. CLCN admitted that it 

had fail ed to make the required disclosures regarding Pappas ·s personal bankruptcy. Pappas, 

O' Donnell, and Cote signed that filing. 

False Statements Regarding Together Development Corp. 

54. In each of the ten 10-Ks and 10-K/As fil ed by CLCN for fiscal years 201 0 

through 20 14, CLCN and Pappas fa lse ly stated that Pappas "sold" hi s prior franch ising business, 

Together Development Corporation ('"Mr. Pappas sold Together Development Corporation in 

1998"). 

55. In fact, Together Development Corporation fi led for Chapter 11 bankruptcy in 

November 1997. The Bankruptcy Court subsequently authorized the sale of substantially all the 

assets of the estate in order to pay creditors. 

56. The statement that Pappas "sold" Together Development Corporation was written 

by Pappas fo r inclusion in CLC1 ··s l 0-K for fiscal year 20 l 0. Pappas subsequently had multiple 

opportunities to revise that misstatement, but fa iled to do so. Further, CLCN's investors were 

not otherwise in.formed of the Together Development Corporation bankruptcy. 

57. Pappas's false assertion that he "sold" Together Development Corporation was 

material. Because CLCN was an emerging company and Pappas was its CEO, President, and 

dominant figure, a reasonable investor would have considered info rmation regarding the 

bankruptcy of Pappas's previous company, which had also been a franchising business, to be 

important in determining whether to invest or remain invested in CLCN. 

Pappas and CLCN Acted With Scienter in Making 
lVlisrepresentations and Omissions in the CLCN Filings 

58. When Pappas signed and certified the ten 10-Ks and amended 10-Ks fi led on 

behalf of CLCN for fi scal years 2010 through 2014, he knew, or was severely reckless in not 

12 



Case 3:17-cv-00954-TJC-JRK Document 1 Filed 08/21/17 Page 13 of 35 PageID 13 

knowing, that those SEC filings contained the material misstatements and omissions identi fied in 

Paragraphs 24-57 above. Pappas also fa iled to exercise reasonable care with regard to those 

statements and omissions, and thus knew or should have known that the fil ings contained 

material misstatements and omissions. 

59. Because Pappas was the CEO and President of CLCN and exercised ul timate 

contro l over the content of all o f CLCN' s fi lings with the SEC from Ju ly 2010 unti l July 20 15, 

Pappas' s conduct with regard to those filings, as well as Pappas's scienter and failure to exerc ise 

reasonable care, are attributable to CLCN. 

Cote and O'Donnell Failed to Exercise 
Reasonable Care With Regard to the CLCN Filings 

60. [n signing nine ofCLCN 's 10-Ks and 10-K/As for fiscal years 20 10 through 

2014, Cote failed to exercise reasonable care with regard to whether those filings contained the 

material misstatements and omissions identified in Paragraphs 24-40 and 48-53 above. Cote 

knew or should have known that there were material misstatements and omissions in each of 

those filings. 

6 1. fn signing eight ofCLCN' s JO-Ks and amended 10-Ks fo r fiscal years 20 11 

th.rough 20 14, O'Donnell fa iled to exercise reasonable care with regard to whether those fi lings 

contained the material misstatements and omissions identified in Paragraphs 24-40 and 48-53 

above. O' Donnell knew or should have known that there were material misstatements and 

omissions in each of those fi lings. 

B. Pappas, O'Donnell, and Cote Engaged in a Scheme to Manipulate the Stock Price 

62. Throughout 20 14, Pappas was focused on increasing CLCN's stock price so that 

the company could be li sted on the NASDAQ stock exchange. l n November 2014, Pappas, 

O' Donnell, and Cote engaged in a manipulati ve scheme designed to inflate the price of this 

13 



Case 3:17-cv-00954-TJC-JRK Document 1 Filed 08/21/17 Page 14 of 35 PageID 14 

lightl y-traded penny stock, build marketplace confidence in the company, and induce others to 

purchase the stock. 

63. On November 5, 2014, Pappas proposed that they "open an account and buy 

CLCN stock when and if it takes a sizeable dip to prop it up. '· O ' Donnell and Cote agreed. 

64. On November 13, 2014, O' Donnell purchased 2,000 CLCN shares on the open 

market fo r $ 1.57 per share. 

65. That same day, Pappas purchased 1,000 CLCN shares on the open market for $ 1.80 

per share. Jn the Form 4 disclosing the purchase, filed by Pappas on November 17, 2014, Pappas 

listed the price as $ 1.85 per share, which, if true, would have been above the market price. 

66. Cote needed to open a brokerage account to make her purchases and therefore it 

took her longer to buy shares. In a series of e-mails between November 19 and December 1, 

2014, Pappas advised Cote to wait " to buy on the next dip. " 

67. Pappas disclosed the scheme to one re tai l investor, writing that " [ w]e will be 

buying more stock on the dips. Dan o·Donnell bought 2k shares ... and Michelle Cote (our 

Founder) will be buying some too." 

68. 1n early December 2014, Cote made two purchases for a total of 1,700 CLCN 

shares. 

69. Instead of using their own funds to purchase the stock, Pappas, O'Donnell, and 

Cote used company funds. Pappas directed CLCN's bookkeeper to write company checks in the 

amount of $3,000 each to O ' Donnell, Cote, and himself (addressed to the legal entities each used 

to receive funds from CLCN). Pappas kept the difference between the $3,000 that he issued to 

himse lf and the approximately $1,800 he spent on purchasing shares. 

14 



Case 3:17-cv-00954-TJC-JRK Document 1 Filed 08/21/17 Page 15 of 35 PageID 15 

70. At Pappas's direction, these payments were recorded in CLCN·s books and 

records as '·consulting" fees even though no consulting services had been performed. In fact, the 

$3,000 payments were made to Pappas, o· Donnell, and Cote solely to pay them fo r their stock 

purchases as part of the scheme to manipulate the market for CLCN·s stock. 

C. Pappas Directed Improper Loans to Himself and Cote 

71. Exchange Act Section 13(k), 15 U.S.C. § 78m(k). makes it ill egal fo r an issuer to 

directly or indirectl y extend or maintain credit in the form of a personal loan to a director or 

executive officer of that issuer, subject to exceptions not applicable here. 

The Audio.flix Loan 

72. Pappas was the CEO, a director, and the controlling shareholder of Audioflix, an 

entity he created to provide audio entertainment to monthly subscribers. O'Donnell was a 

minority shareholder and director. In June 20 I 3, Pappas arranged for CLCN, through its wholly­

owned subsidiary BFK Franchise Company LLC ("BFK"), to loan $70,000 to Audiofli x. The 

$70,000 loan was for 24 months and carried simple interest of 6%. Pappas signed the note on 

behalf of Audiofl ix and personally guaranteed the loan. 

73. On June 13 , 20 13, Cote and O'Donnell, acting on behalf ofCLCN, approved the 

$70,000 loan to Audiotlix. Cote and O'Donnell knew when they approved this loan that Pappas 

was an officer and controlling shareholder of Audioflix. O'Donnell also knew that he personally 

held an ownership interest in Audioflix. 

74. Neither CLCN nor its subsidiary BFK was in the business of making loans. The 

loan to Audioflix was made because of Pappas's ownership in and control of Audiotlix . Pappas 

negotiated the terms of the loan on behal f of both BFK and Audioflix. 

15 



Case 3:17-cv-00954-TJC-JRK Document 1 Filed 08/21/17 Page 16 of 35 PageID 16 

75. In December 2013, CLCN 's independent audjtor raised concerns regarding "the 

SEC's vie\. s about loans to o fficers." Similarly. during a presentation to the CLCN directors in 

January 2015, other aud itors noted that the Audioflix loan ·'may be a violation of Sarbanes­

Oxley Section 402(a) relating to loans to offi cers.'· Nevertheless, Pappas, o·oonnell. and Cote 

took no action in response to these warrungs . 

76. After the end of the loan term, CLCN demanded repayment. Audio fl ix repaid the 

$70,000 loan on August 12, 2015. 

The MC Logic Loan 

77. Cote owns and controls MC Logic, which receives payments from CLCN in 

connection wi th the sale of "Bricks 4 Kidz" franchises. 

78. In October 2013, Cote asked Pappas and O 'Donnell for a $125,000 loan from 

CLCN to MC Logic so that she could purchase a recreational vehicle. Cote agreed to personally 

guarantee the loan and to make repayment with funds to be generated from a pri vate sale of her 

CLCN stock. 

79. Cote and O'Donnell signed a resolution on behalf of CLCN approving the loan to 

MC Logic. Pappas drafted the requisite loan documents. 

80. On October 23, 2013, MC Logic and CLCN's subsidiary BFK entered into a 

promissory note providing for a loan of $125,000 to MC Logic at 2% interest to be repaid by 

December 1, 201 3. 

81. MC Logic repaid the loan on December 30, 2013, without interest. 

D. Pappas Selectively Disclosed Material, Non-Public Information 

82. Reg111ation FD, 17 C.F.R. § 243 .100 et seq, provides that if an issuer discloses 

material, non-public info rmation regarding the issuer or its secmities to, inter alia, a shareholder 

16 



Case 3:17-cv-00954-TJC-JRK Document 1 Filed 08/21/17 Page 17 of 35 PageID 17 

under circumstances indicating that it is reasonably foreseeable that the shareholder will trade on 

the basis of that information. the issuer must also disclose the information to the public. 

83. Pappas repeatedl y disclosed materia l, non-public informati on regarding CLCN's 

antic ipated earnings to a hedge fund manager ("Fund Manager"), whose fund was one of 

CLCN 's largest outside investors. On November 4, 20 13, Pappas told the Fund Manager that 

CLCN expected to announce fi scal year 2013 revenue of $4.8 million, a 4 1 % increase from the 

prior year. Pappas also revealed to the Fund Manager that CLCN expected to announce 

$900,000 in net income, an increase of more than 56% from the prior year. The Fund Manager 

purchased 40,000 shares of CLCN stock for his fund between November 13 and December 3 1, 

20 13. 

84. On January 3, 20 l 4, Pappas told the Fund Manager that for fiscal year 20 13 

CLCN would "show a pre-tax profit of around $930k on revenue of $4.8 million." The Fund 

Manager purchased an additional 28,000 shares of CLCN stock for hi s fund between January 3 

and January 10, 2014. 

85. The material, non-public information disclosed to the Fund Manager on 

November 4, 2013, and January· 3, 20 14, was not clisclosed to CLCN s other investors or to the 

public until CLCN fil ed a 10-K on January 14, 20 14. 

86. On March 20, 2014, Pappas to ld the Fund Manager that CLCN's gross revenue 

for the second quarter of fi scal year 20 14 "should come in very close to $2M[,]" which 

represented an increase of approximately $925,000 (85%) from the previ.ous year' s second 

quarter. The Fund Manager purchased I 0,000 shares for his fund on March 20, 2014 and 

another 3,200 shares on March 21, 2014. The material, non-public information disclosed to the 

17 



Case 3:17-cv-00954-TJC-JRK Document 1 Filed 08/21/17 Page 18 of 35 PageID 18 

Fund Manager on March 20. 2014. was not disclosed to CLCN's other investors or to the public 

unt il CLCN issued a press release on March 27, 2014. 

87. On August 14, 20 14, Pappas to ld the Fund Manager that CLCN anticipated 

reporting a $ 1.55 million profit for the first three qua11ers of fi scal year 2014. This would have 

been an increase of more than $899,000 (138%) from the previous year's first three quarters. 

CLCN's actual profit for the first three quarters of fiscal year 2014 was not di sclosed to CLCN's 

other investors or to the public until CLCN fil ed a l 0-Q on August 18, 2014. 

88. On December 17, 2014, Pappas told the Fund Manager that CLCN would be 

initiating a stock buyback ··ASAP." On January 20, 2015, Pappas disclosed to the Fund Manager 

that the Board of Directors had voted to repurchase l 00,000 shares of CLCN stock. This 

material, non-public information regarding the buyback plan was not disclosed to CLCN's other 

investors or to the public w1til CLCN filed an 8-K on January 26, 20 15. 

89. In an e-mail on December 18.2014. Pappas made the f und Manager aware of a 

potential CLCN acquisi tion referred to as the ' China Dea1:· which involved the sa le of a master 

franchise agreement to a Chinese investor, who would be issued three million shares of CLCN 

stock and agree to purchase another one million shares on the open market. The issuance of 

three million shares would have increased CLCN's outstanding shares by more than 25%. On 

January 2, 2015, Pappas forwarded to the Fund Manager an e-mail indicating that the deal 

"appears to be still al ive" and informed the Fund Manager that the likely price for the three 

million shares would be $1.50. This material, non-public informat ion regarding the China Deal 

was not disclosed to CLCN's other investors or to the publi c. 

90. On January 14, 20 15, CLCN fi led its 10-K for fi scal year 2014. The next day 

Pappas revealed to the Fund Manager that CLCN had made that filing without its independent 

18 



Case 3:17-cv-00954-TJC-JRK Document 1 Filed 08/21/17 Page 19 of 35 PageID 19 

auditor' s permiss ion and was contemplating giving noti ce that the financial statements in the 1 O­

K could not be relied upon. On January 16.20 15, Pappas told the Fund Manager that the 

company would fil e an amended 10-K. The facts that CLCN ' s 10-K had been filed without the 

independent auditor·s authorization and that the company wou ld fil e an amended 10-K were not 

disclosed to CLCN's other investors or to the public until January 2 1,.2015. An amended 10-K. 

with revised financial statements, was filed on February 2, 20 15. 

9 1. Pappas' s disclosures of material, non-publ ic information to the Fund Manager 

were made under circumstances in which it was reasonably foreseeable that the Fund Manager 

would trade in CLCN shares on the basis of that information. As noted, on at least three 

occasions the Fund Manager traded in CLCN shares after Pappas provided him with materia l, 

non-public information and prior to public disclosure of that information. 

92. In March 2015, Pappas disclosed material, non-public information to two CLCN 

shareholders (''Shareholder A'' and ·'Shareholder B'') by copying them on a confidential internal 

e-mail about a potential acquisition target. This material. non-public info rmation was not 

disclosed to CLCN's other shareholders or to the public. 

93. On June 3, 2015, Pappas again disclosed material, non-public information to 

Shareholder A and Shareholder B by copying them on a confidential internal e-mail discussing 

CLCN 's anticipated losses. In that e-mail, Pappas stated that "as of the end of May we' re 

looking at no Jess than a $60k Joss and possibly a much greater loss as of the end of the quarter." 

The anticipated loss represented a reversa l from the previous quarter' s profit of$ I 38,239. 

94. Pappas' s disclosures of material, non-public informa6on to Shareholder A and 

Shareholder B were made under circumstances making it reasonably foreseeab le that they would 

trade in CLCN shares on the basis of that information. Shareholder A made at least two trades in 

19 



Case 3:17-cv-00954-TJC-JRK Document 1 Filed 08/21/17 Page 20 of 35 PageID 20 

CLCN shares between receiving Pappas's e-mail on Jw1e 3 and CLCN 's disclosure of its actual 

profit figures for May 2015 and the third quarter of fiscal year 20 l 5 on August 19, 20 15. 

95. The non-public information that Pappas disclosed to the fund Manager, 

Shareholder A, and Shareholder B was material because a reasonable investor would have 

considered it important in deciding whether to invest or remain ~nvested in CLCN. 

96. Pappas knew, or was reckless in not knowing, that the information he provided to 

the Fund Manager, Shareholder A, and Shareholder B was material and non-public. 

97. When Pappas disclosed material, non-public information to the Fund Manager, 

Shareholder A, and Shareholder B, he was CLCN's CEO and President, as well as a board 

member, and was acting on CLCN's behalf. Consequently, Pappas's misconduct in making 

those se lective disclosures, while failing to disclose the same information to the public, is 

attributable to CLCN. 

98. By disclosing materia l, non-public information to the Fund Manager, Shareholder 

A, and Shareholder B while fai ling to disclose the same information to the public, Pappas 

knowingl y or recklessly provided substan ti al assistance in CLCN's violations. 

E. Pappas Failed to Make Timely Disclosure of His 
Beneficial Ownership of, and His Transactions in, CLCN Shares 

Failure to File a Schedule 13D for Six Years 

99. Pursuant to Section 13(d) of the Exchange Act, 15 U.S.C. § 78m(d), and the 

regulations thereunder, any person who has acquired beneficial ownership of more than 5% of, 

inter alia, a class of an equity security regi stered under Section 12 of the Exchange Act, 15 

U.S.C. § 78!, must within 10 days file a Schedule 13D with the SEC to disclose that beneficial 

ownership. 

20Case 3:17-cv-00954-TJC-JRK Document 1 Filed 08/21/17 Page 21 of 35 PageID 21 

100. As of July 7, 20 10. Pappas (through FranVentures) had acquired 2,599,000 shares 

of common stock of B2 Health. which soon changed its name to CLCN. Pappas's benefi cial 

ownership constituted approximately 26.5% of B2 Health' s common stock. Pappas failed to fil e 

a Schedule 13D fo llowing that transaction. ln fact, despite bene ficially owning more than 5% of 

the common stock of CLCN at all relevant times s ince July 201 0, Pappas did not file a Schedule 

13 D until October 27, 20 I 6. 

101. A beneficial owner of more than 5% of a class of an equity secU1ity registered 

under Section 12 of the Exchange Act must also fil e a Schedule 13 D to disclose material changes 

in the beneficial owner's interest. On September 13, 2013, Pappas disposed of 150,000 shares of 

CLCN common stock, which was approx imately 6.3% of the shares Pappas owned, and his sale 

of those shares constituted a materia l change. Nevertheless, Pappas did not file a Schedule 13 D 

in connection with that transaction. 

102. For more than six years. from July 2010 until October 2016. Pappas was in 

continuous violation of Section 13(d) and the regulations thereunder. Pappas first filed a Schedule 

13D on October 27, 201 6. 

Failure to File Forms 4 and 5 to Report Transactions 

103. As an officer, director, and beneficial owner of more than 10% of CLCN's 

outstanding shares, Pappas was required by Section l6(a) of the Exchange Act and the rules 

thereunder to file a Form 4 with the SEC by the end of the second business day after any change 

in his beneficial ownership. 

104. Beginning in 201 2 and continuing through most of 20 14, Pappas solicited 

investments in Audio f1i x by offering investors one of his CLCN shares for every three shares of 

21 



Case 3:17-cv-00954-TJC-JRK Document 1 Filed 08/21/17 Page 22 of 35 PageID 22 

Audioflix purchased by an investor. Through Fran Ven tures, Pappas disposed of 363,333 CLCN 

shares in eight such transactions from August 2012 to September 20 14: 

Date Number of Shares 
08/ 13/2012 50,000 
07/23/2013 10.000 
10/ 18/2013 33,333 
11 /03/2013 I 05,000 
12/06/2013 15,000 
03/ 18/2014 50.000 
08/13/2014 50,000 
09/ 16/2014 50.000 

Each of these transactions changed Pappas's beneficial ownership of CLCN. Nevertheless, 

Pappas fa iled to file a timely Form 4 in connection with any of these transactions. 

105. Pursuant to Exchange Act Section 16(a), 15 U.S.C. § 78p(a), and the rules 

thereunder, Pappas was required to file a Form 5 by the end of any CLCN fiscal year in which 

his beneficial ownership in CLCN changed, but the transactions resulting in that change had not 

previously been reported. Pappas failed to file a Form 5 as required after the close of CLCN·s 

fisca l years 20 12 and 20 13. 

l 06. The eight transactions identified in Paragraph I 04 and the corresponding changes 

in Pappas's beneficial ownership of CLCN, were not disclosed until Pappas fi led a Fonn 4 on 

November 17, 2014. 

F. Compensation and Fiscal Year 2014 Bonuses 

I 07. Although at its peak CLCN bad only $4.4 million in assets, CLCN paid Pappas 

approximately $ 1.52 million between 2010 and 2015, including salary, a bonus of$35,000 in 

2014, commissions, and consulting fees. 

108. O' Donnell received a salary consulting fees bonuses (totaling $85 000), and 

stock options for his work as an officer and director of CLCN from 20 IO through 2015. 

22 



Case 3:17-cv-00954-TJC-JRK Document 1 Filed 08/21/17 Page 23 of 35 PageID 23 

109. Cote received commissions and consulting fees for her work as an officer and 

director ofCLCN from 20 10 through 2015. She a lso received a $35.000 bonus for fiscal 20 14 

and was paid a salary in fi scal years 2014 through 2016. 

G. Pappas Failed to File Proxy Solicitation Materials as Required 

110. In December 20 16, Pappas initiated a proxy contest in which he sought to remove 

certain members of CLCN's Board of Directors and replace them with his own nominees. On 

December 9, 2016, Pappas and his wife, through Fran Ventures and along with the individuals 

being nominated to the Board of Directors, fi led a Pre liminary Consent Statement on Schedule 

14A announcing the effort to replace certain members of the board. The proxy statement became 

a Definitive Consent Statement on December 22, 2016. 

11 l. Pursuant to Section 14(a) of the Exchange Act, 15 U.S.C. § 78n(a), and rules 

thereunder, soliciting materials provided to shareholders as part of a proxy contest must be fil ed 

with the SEC. 

11 2. Between December 27, 20 I 6, and January 28, 2017, Pappas sent at least thirteen 

e-mails regarding the proxy contest Lo two CLCN shareholders. Many of these e-mails 

commented on the existing CLCN management and board, predicted that the company would 

soon be bankrupt if the board was not replaced, and urged the two CLCN shareholders to support 

the effort lo replace the existing board . None of these e-mails were filed with the SEC. 

113. On January 11 , 2017, Pappas sent a memo to Shareholder A, along with the 

CLCN Definiti ve Consent Statement and Consent Card, urging Shareholder A to support the 

effort to replace members of CLCN 's Board of Directors. In that memo, Pappas made 

representations regarding a proposed business plan, claimed that CLCN would be worthless if 

23 



Case 3:17-cv-00954-TJC-JRK Document 1 Filed 08/21/17 Page 24 of 35 PageID 24 

the proxy contest was unsuccessful, and urged Shareholder A to support the effo rt to replace the 

board. Pappas never filed that memo with the SEC. 

FIRST CLAIM FOR RELIEF 

Pappas and CLCN Made Material Misstatements and 
Omissions and Engaged in a Fraudulent Scheme in 

Violation of Section lO(b) and Rule lOb-5 of the Exchange Act 

114. Through the conduct described in Paragraphs 24-59 and 62-70 above, in 

connection with the purchase or sale of securities and by the use of instrumentalities of interstate 

commerce or the mails, CLCN and Pappas (a) employed devices, schemes, and artifices to 

defraud , (b) made untrue statements of material facts or omitted material fac ts necessary to make 

the statements made not misleading, and (c) engaged in acts, practices, and courses of business 

which operated or would operale as a fraud or deceit. 

11 5. Pappas and CLCN engaged in this conduct with the intent to deceive, manipulate 

or defraud, or with severe recklessness. 

11 6. By reason of this conduct, Pappas and CLCN violated, and, unless enjoined, are 

likely to continue to violate, Exchange Act Section I0(b), 15 U.S.C. § 78j(b). and Exchange Act 

Rule lOb-5, 17 C.F.R. § 240. l 0b-5. 

SECOND CLAIM FOR RELIEF 

Pappas and CLCN Made Material Misstatements and 
Omissions and Engaged in a Fraudulent Scheme in 

Violation of Section 17(a) of the Securities Act 

117. Through the conduct described in Paragraphs 9-15, 24-59, 62-70, and 107 above, 

in the offer or sale of securities and using instruments of interstate commerce or the mails, 

CLCN and Pappas (a) employed a device, scheme, or artifice to defraud, (b) obtained money or 

property by means of untrue statements of material fact or the omission of material facts 

24 



Case 3:17-cv-00954-TJC-JRK Document 1 Filed 08/21/17 Page 25 of 35 PageID 25 

necessary to make the statements made not misleading, and (c) engaged in transac tions. 

practices, and courses of business which operated or would operate as a fraud or deceit upon the 

purchasers of CLCN shares. 

118. CLCN and Pappas engaged in this conduct with the intent to deceive, manipulate 

or defraud, or with severe recklessness. CLCN and Pappas also fail ed to exercise reasonable 

care with regard to their conduct and consequently were negligent. 

l I 9. By reason o f the foregoing, Pappas and CLCN violated. and, unless enjoined, are 

likely to continue to violate, Section l7(a) of the Securities Act, 15 U.S.C. §§ 77q(a). 

THIRD CLAIM FOR RELIEF 

O'Donnell, and Cote Violated Sections l 7(a)(2) and 
17(a)(3) of the Securities Act 

120. Th.ro ugh the conduct described in Paragraphs 9-1 5, 24-40. 48-53, 60-70, and I 08-

109 above, in the offer or sale of securiti es and using instruments of interstate commerce or the 

mails, O'Donne11 and Cote (a) obtained money or prope11y by means of untrue statements of 

material fac t or the omiss ion of material facts necessary to make the statements made not 

misleading and (b) engaged in transactions, practices and courses of business which operated or 

would operate as a fraud or deceit upon the purchasers of such securities. 

12 1. O 'Donnell and Cote failed to exercise reasonable care with regard to trus conduct 

and consequently were negligent. 

122. By reason of the foregoing, O' Donnell and Cote violated, and, unless enjoined, 

are likely to continue to violate, Sections l 7(a)(2) and l 7(a)(3) of the Securities Act, 15 U.S.C. 

§§ 77q(a)(2), (3). 

25 



Case 3:17-cv-00954-TJC-JRK Document 1 Filed 08/21/17 Page 26 of 35 PageID 26 

FOURTH CLAJM FOR RELIEF 

Pappas, O'Donnell, and Cote Engaged in Market 
Manipulation in Violation of Section 9(a) of the Exchange Act 

123. Through the conduct descri bed in Paragraphs 62-70 above and by the use of 

instrumental.ities of interstate commerce or the mail s, Pappas O'Donnell , and Cote effected a 

seri es of transactions in CLCN shares creating actual or apparent trading in those securities, or 

rais ing or depressing the price of those securities. for the purpose of inducing the purchase or 

sa le of those securities by others. 

124. By virtue of the foregoing, Pappas O'Donnell, and Cote violated, and, unless 

enjoined, are likely to continue to violate, Section 9(a)(2) of the Exchange Act, 15 U.S.C. § 

78i(a)(2). 

FIFTH CLAJM FOR RELIEF 

CLCN, Aided and Abetted by Pappas, O'Donnell, and Cote, Made 
Loans to Pappas and Cote in Violation of Section 13(k) of the Exchange Act 

125. Through the conduct described in Paragraphs 7 1-81 above, CLCN violated 

Section 13(k) of the Exchange Act, 15 U.S.C. § 78m(k), by making personal loans to Pappas and 

Cote, both of whom were executive officers of CLCN and members of CLCN's Board of 

Directors. 

126. By reason of the foregoing, CLCN violated, and, unless enjoined, is likely to 

continue to violate, Exchange Act Section 13(k). 

127. Through the conduct described in Paragraphs 71-8 l above, Pappas, 0 'Donnell, 

and Cote at least recklessly provided substantia l assistance to CLCN in connection with CLCN's 

loans to Pappas and Cote. 

26 



Case 3:17-cv-00954-TJC-JRK Document 1 Filed 08/21/17 Page 27 of 35 PageID 27 

128. By reason of the foregoing, Pappas, Cote, and O'Donnell aided and abetted, and, 

unless enjoined, are likely to continue to aid and abet, CLCN's violations of Section l 3(k) of the 

Exchange Act. 

SIXTH CLAIM FOR RELIEF 

CLCN, Aided and Abetted by Pappas, Violated Regulation FD and 
Section 13(a) of the Exchange Act 

129. Through the conduct described in Paragraphs 82-98 above, CLCN, acting through 

Pappas, intentionally disclosed material, non-public information regarding CLCN to ce1tain 

CLCN shareholders without simultaneously disclosing that information to other investors or the 

public. 

130. If an issuer violates Regulation FD, l 7 C.F.R. § 243. 100 et seq, by making 

selective disclosure of mate1ial, non-public information regarding the issuer without making a 

simultaneous public disclosUJe of that information, the issuer also violates Section l 3(a), l 5 

U.S.C. § 78m(a). 

13 1. By reason of the foregoing. CLCN violated, and, unless enj oined, is likely to 

continue to violate, Regulation FD and Exchange Act Section 13(a). 

132. Through the conduct described in Paragraphs 82-98 above, Pappas knowingly or 

recklessly provided substantial assistance in CLCN's violations of Regulation FD and Section 

l 3(a). 

133. By reason of the foregoing, Pappas aided and abetted, and, unless enjoined, is 

likely to continue to aid and abet, violations of Regulation FD and Section 13(a). 

27 



Case 3:17-cv-00954-TJC-JRK Document 1 Filed 08/21/17 Page 28 of 35 PageID 28 

SEVENTH CLAIM FOR RELIEF 

CLCN and Pappas Failed to Evaluate CLCN,s Internal Controls and 
Disclosure Controls in Violation of Exchange Act Rules 13a-15(b) and (c) 

134. As described in Paragraphs 41-47 above. during fiscal years 2010 through 2014. 

CLCN and Pappas failed at the end of each fi scal quarter to evaluate CLCN's disclosure controls 

and failed at the end of each fi sca l year to evaluate CLcN·s internal contro ls over financial 

reporting. thereby repeated 1 y violating Exchange Act Rules l 3a- l 5(b) and l 3a- l 5( c ), 17 C.F.R. 

§§ 240. 13a-1 5(b), (c). 

135. By reason of the foregoing, CLCN and Pappas vio lated, and, unless enjoined, are 

likely to continue to violate, Exchange Act Rules 13a-15(b) and 13a-1 5(c). 

EIGHTH CLAIM FOR RELIEF 

Pappas Signed False Certifications in 
Violation of Exchange Act Rule 13a-14 

136. As described in Paragraphs 41-47 above, Pappas fa lsely stated in the certificati ons 

submitted with the ten 10-Ks and 10-K/As fil ed by CLCN for fisca l years 2010 through 20 14 as 

well as in the certifications submitted with the 10-Qs submitted by CLCN during those fi scal 

years, that he had evaluated CLCN's disclosure controls. 

137. By reason of those false certifications, Pappas repeated ly violated, and, unless 

enjoined, is likely to continue to violate, Exchange Act Rule 13a-14, 17 C.F.R. § 240. 13a-14. 

NINTH CLAIM FOR RELIEF 

Pappas Failed to Report His Beneficial Ownership on Schedule 13D in 
Violation of Exchange Act§ 13(d) and Rule 13d-1 

138. As the beneficial owner of more than 5% of CLCN's common stock at all relevant 

times after July 2010, Pappas was required by Section 13(d) of the Exchange Act, 15 U.S.C. § 

28 



Case 3:17-cv-00954-TJC-JRK Document 1 Filed 08/21/17 Page 29 of 35 PageID 29 

78m(d), and Ru le 13d-1 thereunder, 17 C.F.R. § 240. l 3d- l. to fi le a Schedule 13D in July 2010 

and again whenever there was a material change to his beneficial ownership. 

139. As described in Paragraphs 99-102 above, Pappas fai led throughout the period from 

July 2010 until October 20 16 to disclose his beneficial ownership, or the changes thereto, by filing 

a Schedule 13D. Pappas thereby violated, and , unless enjoined, is likely to continue to violate, 

Section 13(d) of the Exchange Act and Rule 13d-l. 

TENTH CLAIM FOR RELIEF 

Pappas Failed to File Form 4s and 5s in 
Violation of Exchange Act§ l 6(a), and Rules J 6a-2 and 16a-3 

140. As an officer, director, and beneficial owner of more than 10% of CLCN 's 

outstanding shares, Pappas was required to file a Form 4 within two business days after any 

change in hi s bene fi cial ownership. He was also required to file a Form 5 by the end of any 

CLCN fi scal year in which his beneficial ownership changed but that change had not previously 

been reported. 

141. As described in Paragraphs l 03-1 06 above, beginning in August 20 12 and 

continuing into September 2014, Pappas on eight occasions disposed of CLCN shares, thereby 

changing hi s beneficial ownership of CLCN. However, he fai led to report any of those 

transactions contemporaneously on Form 4. He also failed to report any of the transactions in 

fiscal years 20 12 and 2013 on Form 5 after the close of those fiscal years. 

142. By reason of the fo regoing, Pappas violated, and, w1less enjo ined, is likely to 

continue to violate, Exchange Act Section 16(a), 15 U.S.C. § 78p(a), and Rules l 6a-2 and 16a-3, 

17 C.F.R. §§ 240. 16a-2, 240. l 6a-3. 

29 



Case 3:17-cv-00954-TJC-JRK Document 1 Filed 08/21/17 Page 30 of 35 PageID 30 

ELEVENTH CLAIM FOR RELIEF 

CLCN, Aided and Abetted by Pappas, Violated Exchange Act 
Section 13(a) and Rules 12b-20, 13a-l, and Ba-13 by Filing Incomplete and 

Inaccurate 10-Qs, 10-Ks, and 10-K/As 

143. Pursuant to Section 13(a) o f the Exchange Act. 15 U.S.C. § 78m(a). and Rules 

l2b-20, l 3a-l , and I 3a-1 3, thereunder, 17 C.F.R. §§ 240.1 2b-20, 240. I Ja-1 , and 240.1 Ja- 13, 

CLCN was required to file complete and accurate annual reports on Form l 0-K, Lo submi t 

complete and accurate amendments on Form l 0-K/ A when circumstances required, and to fil e 

complete and accurate quarterly reports on Fonn I 0-Q. CLCN was obligated to include in these 

fi lings any material info rmation needed to make the required statements not mislead ing. 

144. As described in Paragraphs 24-40 above, CLCN fa iled to make req ui red related-

person disclosures in its 10-Ks and 10-K/As for fiscal year 2013 and in its 10-K and firs t 10-K/A 

for fiscal year 20 14, making those filings incomplete and inaccurate in violation of Exchange Act 

Section l 3(a) and Exchange Act Rules I 2b-20 and I 3a-l. 

145. As described in Paragraphs 4 1-47 above, the 10-Ks and 10-K/As filed by CLCN 

for fiscal years 201 0 through 201 4 as well as the 10-Qs filed by CLCN during those fisca l years, 

contained false or mis leading statements regarding Pappas's evaluation of CLCN's internal 

controls and disclosw-e controls, making those filings incomplete and inaccurate in violation o f 

Exchange Act Section 13(a) and Exchange Act Rules 12b-20, 13a-1, and 13a-13. 

146. As described in Paragraphs 48-53 above, CLCN failed to discl.ose in its I 0-Ks and 

10-K/As for fiscal years 2010 through 201 3 and in its 10-K and first 10-K/A for fi scal year 2014 

that Pappas had fil ed for bankruptcy in October 2003, making those fili ngs incomplete and 

inaccurate in violation of Exchange Act Section 13(a) and Exchange Act Rules 12b-20 and l Ja- 1. 

30 



Case 3:17-cv-00954-TJC-JRK Document 1 Filed 08/21/17 Page 31 of 35 PageID 31 

147. As described in Paragraphs 54-57 above, CLCN·s I 0-Ks and 10-K/As for fiscal 

years 20 IO through 20 14 contained false or mis leading statements regarding the '·sale" of 

Together Development Corporation, making those fi lings incomplete and inaccurate in violation 

of Exchange Act Section IJ(a) and Exchange Act Rules l 2b-20 and 13a- I. 

148. By reason of the foregoing, CLCN violated, and, unless enjoined, is likely to continue 

to violate Exchange Act Section 13(a) and Exchange Act Rules 12b-20. 13a-l , and 13a- 13. 

149. As described in Paragraphs 24-59 above, Pappas a ided and abetted CLCN's 

violations of Exchange Act Section 13(a) and Rules I 2b-20, I 3a-l , and 13a-l 3 by knowingly or 

recklessly providing substantial assistance in those violations, and, unless enjoined, is likely to 

continue to aid and abet such violations. 

TWELFTH CLAIM FOR RELIEF 

Pappas Violated Exchange Rule 13b2-1 

150. Exchange Act Rule 13b2-L 17 C.F.R. § 240. 13b2-l. provides that no person shall 

directly or indirectl y fals ify or cause to be falsified, any book, record or account that is subject 

to Exchange Act Section 13(b)(2)(A), 15 U.S.C. § 78m(b)(2)(A). 

151. As desciibed in Paragraphs 62-70 above, in November 20 l 4, Pappas directed 

CLCN's bookkeeper to enter materially false information in CLCN's books and records. Pappas 

thereby violated, and, unless enjoined, is likely to continue to violate, Exchange Act Rule l3b2- l. 

THIRTEENTH CLAIM FOR RELIEF 

CLCN, Aided and Abetted by Pappas, Vio lated of 
Sections 13(b )(2)(A) and 13(b )(2)(B) of the Exchange Act 

152. Pursuant to Exchange Act Sections 13(b)(2)(A) and (B), 15 U.S.C. §§ 

78m(b)(2)(A) and (B), every issuer having a class of securities registered pursuant to Section 12 

of the Exchange Act must (a) make and keep books and records which accurately and fai rly 

31 



Case 3:17-cv-00954-TJC-JRK Document 1 Filed 08/21/17 Page 32 of 35 PageID 32 

reflect its transactions and the dispositions of its assets, and (b) maintain a system of internal 

accounting conLro ls sufficient to provide reasonable assurance that, inter alia, transactions are 

recorded as necessary to pennit preparation of financial statements in conformity wi th generally 

accepted accounting principles. 

153. As desc ribed in Paragraphs 62-70 above, in November 2014 CLCN failed to 

accurately record the payments CLCN made to Pappas, O'Donnell, and Cote in connection the 

manipu lation of the market fo r CLCN 's shares, thereby fai ling to make and keep accurate books 

and records and to maintain an adequate system of internal accounting controls. CLCN thus 

violated, and, unless enjo ined, is likely to conti nue to violate, Exchange Act Sections 

l 3(b )(2)(A) and (B ). 

154. As described in Paragraphs 62-70 above, Pappas knowingly or recklessly 

provided substantial assistance to CLCN in CLCN 's violations of Exchange Ac t Sections 

13(b)(2)(A) and (B) and, unless enjo ined. is likely to conti nue to aid and abet viola ti ons of those 

prov1s 1ons. 

FOURTEENTH CLAIM FOR RELIEF 

Pappas's Failure to File Solicitation Materials Violated 
Section 14(a) and Rule 14a-6(b), Thereunder 

155. Pursuant to Section 14(a) of the Exchange Act, 15 U.S.C. §78n(a). and Rule 14a-

6(b ), 17 C.F.R. §§ 240. l 4a- 6(b ), soliciting materials as defined in Rule 14a-l ([), 17 C.F.R. § 

240. l 4a-1 ([), that are provided to shareholders as part of a proxy contest must be filed with the 

SEC. 

156. As described in Paragraphs 110-113 above, in December 2016 and January 20 17, 

Pappas sent CLCN shareholders solici ting materials that were never fi led with the SEC. Pappas 

32 



Case 3:17-cv-00954-TJC-JRK Document 1 Filed 08/21/17 Page 33 of 35 PageID 33 

thereby violated. and, unless enjoined, is li kely to continue to violate. Section 14(a) of the 

Exchange Act and Rules l4a-6(b) thereunder. 

PRAYER FOR RELIEF 

WHEREFORE. the Commission respectfully requests that the Comt enter the following 

relief: 

A. [njunctive Relie f 

Permanently enjoin CLCN from (i) violating Exchange Act Section 1 0(b ), Exchange Act 

Rule 1 0b-5, or Securities Act Section l 7(a) by, directly or indirectly, making any false or 

mis leading statement , or disseminating any false or misleading documents, materials, or 

information, concerning matters re lating to a decision by an investor or prospective investor to 

buy or sell securities of any company or by engaging in a scheme to defraud involvi ng the en try 

of false or misleading information in CLCN 's books and records; or (ii) violating any other 

statutory provision or regulation CLCN is found to have vio lated; 

Permanently enjo in Pappas from (i) violating Exchange Act Section l 0(b), Exchange Act 

Rule l 0b-5, or Securities Ac t Section l 7(a) by, directly or indirectly, making any false or 

misleading statement, or djsseminating any false or misleading documents, materials, or 

information, concerning matters relating to a decision by an investor or prospective investor to 

buy or sell securities of any company or by engaging in a scheme to defraud involving the entry 

of false or misleading information in CLCN 's books and records or the manipulation of the 

market for any security; (ii) violating any other statutory provision or regulation CLCN is found 

to have violated; or (iii) aiding and abetting the violation of any statutory provision or regulation 

the violation of which Pappas is found to have aided and abetted; and 

..,.., 

.) .) 



Case 3:17-cv-00954-TJC-JRK Document 1 Filed 08/21/17 Page 34 of 35 PageID 34 

Pe1111anently enjoin O'Donnell and Cote from: (i) violating Securities Act Sections 

l 7(a)(2) and (a)(3) by, directly or indirectly, making any fa lse or misleading statement, or 

disseminating any false or misleading documents, materia ls, or information, concerning matters 

relat ing to a decis ion by an investor or prospecti ve investor to buy or sell secmities of any 

company; (ii) vio lating Section 9(a)(2) of the Exchange Act. 15 U.S.C. § 78i(a)(2), by engaging 

in market manipulation through the purchase or sa le of a security for the purpose of inducing the 

purchase or sale of such security by others: or (iii) aiding and abetting an issuer's violation of 

Section l 3(k) of the Exchange Act, 15 U.S.C. § 78m(k), by providing substantial assistance in 

making personal loans to an officer or director of that issuer. 

B. Disgorgement 

Order Pappas, O ' Donnell, and Cote to disgorge the ill-gotten gains obtained as a result of 

their violations, with prejudgment interest, pursuant to Section 2 1 (cl)(5) of the Exchange Act, 15 

U.S.C. § 78u(d)(5); 

C. Civil Penal ties 

Order Pappas, O ' Donne ll, and Cote to pay civil money penalties pursuant to Section 

20(d) of the Securities Act, 15 U.S.C. § 77t(d), and Section 2 l (d)(3) of the Exchange Act, 15 

U.S.C. § 78u(d)(3); 

D. Officer and Director Bars 

Bar Pappas pursuant to Section 21 ( d)(2) of the Exchange Act, 15 U.S. C. § 78u( d)(2), 

from serving as an officer or director of any issuer that has a class of securities registered 

pursuant to Section 12 of the Exchange Act, 15 U.S.C. § 781, or that is required to file reports 

pursuant to Section 15(d) of the Exchange Act, 15 U.S.C. § 78o(d); 

34 



Case 3:17-cv-00954-TJC-JRK Document 1 Filed 08/21/17 Page 35 of 35 PageID 35 

Bar O'Donnell and Cote pursuant to Section 2 1(d)(5) of the Exchange Act, 15 U.S.C. § 

78u( d)(5), from serving as offi cers or directors of any issuer that has a class of securities 

registered pursuant to Section 12 of the Exchange Act or is required to file reports pursuant to 

Section l 5(d) of the Exchange Act: 

E. Penny Stock Bars 

Bar Pappas, O 'Donnell, and Cole pursuant to Section 2 l (d)(6) of the Exchange Act. 15 

U.S.C. § 78u(d)(6), and Section 20(g) of the Securities Act, 15 U.S.C. § 77t(g), from 

participating in any offering of any penny stock; and 

f. Grant such further relief as the Court may deem just and appropriate. 

Date: August 18, 20 17 

Of counsel: 
Antonia Chion 
Melissa R. Hodgman 
Kevin Guerrero 
Securities and Exchange Commission 
100 F Street, N.E. 
Washington, DC 20549-504 1 

Respectfully submitted, 

u.~s;.wk 
H. Michael Semler, Trial Counsel 

District of Columbia Bar No. 162479 
202-55 1-4429 
[email protected] 

Matt Reilly 
New York Bar No. 5130935 
202-551 -5478 
rei 11 [email protected] 

Division of Enforcement 
Securities and Exchange Commission 
100 F Street, N .E. 
Washington, DC 20549 
Attorneys for Plaintiff 

35