Nasdaq Social Partner Was Called on the Carpet

Get this: Major market exchange Nasdaq (Nasdaq: NDAQ) has partnered with a former carpet salesman who wants to sell stock over social networks -- and the stock exchange has apparently overlooked the lawsuit that once cost the man more than $1.3 million in penalties.

Nasdaq isn't saying why it has ignored Barry Schneider's past. And even the SEC declined to respond to questions about the relationship between the stock exchange and Loyal3, a San Francisco-based startup run by Schneider that seeks to sell shares of stock on Websites including Facebook.

Schneider has been described in industry circles as "flamboyant and passionate," as well as a "micromanager" who was tossed from at least one top executive job for excessive interference.

He spent much of his career building a family business called MSA Industries into a $300 million distributor of commercial floor coverings. But he made mistakes, too. In 1991, an Australian judge ordered him to repay a business partner for misleading and deceptive statements he and his company intentionally made in the hope of earning "profits well above normal margins."

He had to repay nearly $1.7 million in Australian dollars, or what was then about $1.3 million in US currency, to a partner who "suffered loss and damage as a result of the misrepresentations."

Although neither Schneider nor his legal issues in Australia were mentioned in the original Loyal3 filings with the SEC, both are on the amended documents now. It's unclear why they were originally omitted, even though they should have been disclosed because Schneider owned the LLC providing the funds for the company seeking approval as a transfer agent.

A few years later, Schneider sold MSA, started a venture capital company from his suburban San Francisco home, and invested in a golf company, where he held the CEO position for several years before his involuntary removal.

Schneider calls himself the inventor of the Customer Stock Ownership Plan (CSOP), "a revolutionary new technology designed to foster a deeper loyalty between brands and consumers." He's promoting the platform to public companies that want to sell fractional shares of stock on Websites like Facebook. (See Selling Stock Through Social Media.)

Although giving small investors the chance to invest as little as $10 in companies they know and like may seem like a novel idea, it's actually been done before. In fact, it was done in the late 1990s by a now defunct company called StockPower.

StockPower was founded by securities lawyer M. Greg Allio, the former CEO of StockLINC, the original name of Loyal3. Allio isn't talking, presumably because he is barred from doing so by a lawsuit he filed after losing his job in a power struggle with Schneider. But depending on whom you ask, Allio is either the founder or co-founder of StockLINC.

StockLINC was incorporated in 2008. About a year later, it changed its name to Loyal3 -- and less than a year after that, Allio was ousted from his job. Some of the other founding executives left too, with the exception of Barry Schneider's son, Blake, the CFO. He kept his job.

Barry Schneider and his son, Blake

No one says much about Blake. But Barry Schneider apparently isn't the easiest person to work with, and he has a reputation for hyperbole. Take his claim that he's the man who created the CSOP. "It's not true," says Denver economist Wendy Willbanks Wiesner. "Loyal3 is coopting a term that has been in use for decades."

Willbanks Wiesner wrote a Master's thesis at the University of Denver last year on the ESOP (Employee Stock Ownership Plan), CSOP, and the mechanics of broadened ownership. The CSOP, she explained, was the brainchild of Louis Kelso, the inventor of the ESOP -- and first used in 1958 to complete the buyout of Valley Nitrogen Producers by farmers located in the Central Valley of California. It's not unique to Loyal3, and it wasn't invented by Schneider, she emphatically asserts.

It's a puzzle to unravel the owners and management of Loyal3, a web of corporate entities and limited liability companies with overlapping ownerships. The parent company, San Francisco-based Loyal3 Holdings Inc., is funded by several Delaware-based LLCs Schneider owns.

Those LLCs are all based at Schneider's $1.6 million Hillsborough, Calif., home (which may be the property county records show was purchased with a loan from a bank in the Cayman Islands). In addition to the LCCs, it's also the headquarters for the Parkside Group of San Francisco LLC, the VC firm Schneider formed after selling MSA.

Gilbert F. Amelio, who briefly served as chairman and chief executive of Apple, also briefly served as a director of the Parkside Group. Why he left is open to speculation. But it says something that Amelio makes no mention of the relationship now on his extensive resumé.

But back to Loyal3... The company has a subsidiary, Loyal3 Transfer Corp., which is a registered transfer agent, according to SEC records. But unlike most transfer agents -- best known, perhaps, for being unknown to the average investor -- Loyal3 is taking a prominent place alongside its strategic partners. Make that "partner." For now, at least, Nasdaq is the only company eager to tap the investment potential of social media.

It's hard to keep the players straight on the various business entities. Barry Schneider is listed as a director of both the parent company and the subsidiary. Stephen Klein, the president of the parent company, is CEO of Loyal3 Transfer Corp. Blake Schneider is listed as CFO of Loyal3 Transfer, but he's not included as an executive on the parent company's Web page.

Nasdaq is supposed to start offering its own shares through the CSOP next month. But Nasdaq spokeswoman Alexandra Honeysett did not respond to multiple requests for comment about Loyal3 or details about how it planned to use the firm's technology.

It will be interesting to see what the SEC thinks about Loyal3. Is it a bird? A plane? A transfer agent? Or a brokerage operating under the disguise of a transfer agency?

The SEC is fairly forthcoming if it has given any sort of approval for a company to operate. In contrast, it says nothing about companies under investigation or companies that could become targets of investigation.

So Investor Uprising asked the SEC for some thoughts on Loyal3. It took hours, but finally, there was a response. "Thank you for contacting us about this," spokeswoman Florence Harmon said, "but we will need to decline to comment about this matter."