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Chattanooga, Tenn., software company charged with defrauding investors

Title: Chattanooga, Tenn., software company charged with defrauding investors
Date: Thursday, 2 December 2004
Publisher: Knight-Ridder Tribune Business News
Author: Dave Flessner
Main source:

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Dec. 2—A Chattanooga company that once bragged its software would create a computer that could receive and implement oral commands in any of five languages has been charged with defrauding investors out of $12.4 million.

The U.S. Securities and Exchange Commission is suing the former E-Brain Solutions and its founder, Peter Warren, for making false claims and raising funds in violation of federal securities laws. The civil suit claims Mr. Warren and the company falsely claimed they had developed a prototype computer system that would carry out orders "as you would expect a computer trained human to carry them out."

Mr. Warren, whom SEC officials said has a residence in Chattanooga, was recently served with the SEC lawsuit in Cannes, France, where he is now living. E-Brain Solutions was renamed to Exo-Brain, but the business shut down its operation in the Four Squares Business Center more than a year ago.

Mr. Warren, a 59-year-old British national, previously served for 15 years as director of worldwide membership recruitment for The Church of Scientology. After resigning that job in 1985, he incorporated E-Brain Solutions LLC in December 2000. He filed provisional patent applications for his technology, but no patents were ever issued to Mr. Warren or his companies.

Mr. Warren was unavailable for comment Wednesday and he has yet to respond to the SEC lawsuit.

In its filing, the SEC charges that Mr. Warren made false claims about the company's products and misrepresented E-Brain's financial situation while raising money from unsophisticated investors in the United States and abroad.

"Warren intentionally misrepresented the capabilities and development status of the technology, misrepresented the financial condition of the companies, and disregarded the warnings of legal counsel recommending against further efforts to raise investor funds," said Edward G. Sullivan, a senior trial counsel for the SEC in Atlanta.

Mr. Warren initially raised $500,000 from four European investors and began soliciting U.S. investors in his business when he moved to Chattanooga. By February 2000, the business had hired about 20 computer programmers and the next year Mr. Warren began distributing weekly newsletters describing his company's activities, the SEC suit said.

Mr. Warren ultimately raised $6.4 million in membership interests for E-Brain LLC during 2000 and 2001 from both American and foreign investors.

The company's part-time counsel warned Mr. Warren, however, that he may have violated securities laws in the nationwide sale of membership interests. But the SEC lawsuit claims Mr. Warren continued to improperly seek more investments.

The SEC is asking the court to order Mr. Warren and the company to pay back any fraudulently raised investments and to permanently ban Mr. Warren from acting as an officer or director of any SEC-regulated company.

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(c) 2004, Chattanooga Times/Free Press, Tenn.