The Securities and Exchange Commission has filed suit in a Massachusetts federal court against JBI Inc., a Canadian company that claims to be able to convert waste plastic into clean-burning oil.

The publicly traded company was formerly located in Massachusetts and is now headquartered in Ontario, Canada. The SEC also charged JBI’s current CEO, John Bordynuik, an Ontario resident, and its former CFO, Ronald Baldwin, Jr, who now resides in Palm Harbor, Fla. The SEC alleges that they engaged in a scheme to commit securities and accounting fraud by reporting materially false and inaccurate financial information on JBI’s financial statements for two reporting periods during 2009.

According to the SEC, during the third quarter of 2009 and year-end 2009, JBI materially overstated certain assets in an effort to bolster its balance sheet and success in two private capital raising efforts (Private Investment in Public Equity or PIPES) geared toward raising the capital necessary to begin commercial operation and production of its process for converting plastic waste into oil, known as “Plastic2Oil,” or “P2O.”

The SEC complaint alleges that JBI raised over $8.4 million for the company in these PIPES just before the company issued a public statement indicating its financial statements could no longer be relied upon, in part, due to the erroneous valuation of certain assets, known as media credits, on the balance sheet.

The SEC alleges that in contravention of U.S. GAAP, JBI erroneously booked the media credits at a value of $9.997 million, thereby becoming the single largest asset on the company’s balance sheet, when they should have been initially booked at a value of $1 million when acquired in August 2009. Subsequently, the media credits should have been re-measured at their current value and written down to zero as of the end of the company’s third fiscal quarter on Sept. 30, 2009.

According to the complaint, Bordynuik was aware of, or was reckless in not being aware of, the GAAP concerns surrounding the reported value of the media credits in advance of the company’s third quarter 2009 Form 10-Q filing with the SEC on Nov. 16, 2009 and the year-end 2009 Form 10-K filing with the SEC on March 31, 2010 yet falsely certified that the company’s financial statements for those reporting periods were filed in conformity with GAAP. The SEC complaint further alleges that Baldwin was aware of, or was reckless in not being aware of, GAAP concerns surrounding the reported value of the media credits in advance of the company’s year-end 2009 10-K filing on March 31, 2010, yet falsely certified that the company’s financial statements for that period were filed in conformity with GAAP.

In response to the SEC lawsuit, JBI said it was “profoundly disappointed by the erroneous allegations of fraud.”

“The company regrets that its attempts to negotiate settlement of this dispute failed, and, in consultation with its litigation counsel and board of directors, looks forward to vigorously defending itself in court, where the company believes it will prevail on the merits,” said JBI in a press release. “The allegations in the complaint concern legacy accounting issues that have since been corrected.”

JBI noted that since restating its financial statements, it has hired a new CFO and engaged additional experienced accounting staff along with a reputable independent audit firm.

“Contrary to the allegations made by the SEC, the company believes that its officers acted in good faith in valuing the media credits discussed in the complaint, based on the information available at the time,” said JBI. “The company further maintains that after learning of potential problems relating to these credits, it took appropriate steps in compliance with its obligations to shareholders and the public markets at large.”