More good stuff from PACER - Luis' response. Look at the first sentence.
After over a year’s investigation crossing two continents, the SEC was apparently unable to elicit evidence sufficient to charge GlobeTel’s executives who devised an “off-net” revenue program with any securities violations, undoubtedly because of these executives’ refusal to cooperate with the SEC. By contrast, Luis Vargas, a low level employee with a bookkeeping background, has borne the brunt of the SEC’s investigation and now faces allegations of securities fraud among other violations of the federal securities laws. Such allegations against Vargas are unwarranted, untrue, and as discussed below, must be dismissed. The SEC’s Lengthy and Unfocused Investigation
The SEC has virtually unlimited resources to investigate potential violations of the federal securities laws. See Section 20(a) of the Securities Act of 1933 (“Securities Act”), 15 U.S.C. §§ 77a et seq.; Section 21(a) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. §§ 78a et seq. It chose to focus its regulatory sites on GlobeTel,2 its officers, employees and countless others. During the spring of 2006, the SEC initiated an informal inquiry into GlobeTel. Several months later, on September 21, 2006, the SEC obtained a formal order of investigation. During the next 14 months, the SEC issued subpoenas for documents and testimony from dozens of entities and individuals. See Section 19(c) of the Securities Act;3 Section 21(b) of the Exchange Act.4
From the beginning the SEC’s investigation was akin to a poorly planned fishing expedition because it lacked focus and explored many different theories of potential wrongdoing. Initially, the SEC staff focused on certain business relationships with GlobeTel’s subsidiaries,
2 Established in 2002, GlobeTel is a Delaware corporation which is currently headquartered in Fort Lauderdale, Florida. (D.E. 1, ¶ 12). At all relevant times it was a public company with several subsidiaries. According to its filings, GlobeTel was engaged in the business of providing domestic and international telecommunications services, primarily involving internet telephone service using voice over internet protocol technology and equipment, stored value services and wireless communications. As such, the company and its officers were very sophisticated in utilizing technology relating to communications and conducting business in this arena. Sanswire Networks, LLC and HotZone Wireless, LLC, which were unrelated to Vargas. Later, the staffs’ investigation turned to explore potential violations of stock option backdating, false press releases, and insider trading, which were also unrelated to Vargas. Finally, the SEC sought to investigate Vargas. They looked into both his employment with a GlobeTel subsidiary, Centerline Communications, LLC (“Centerline”), and his prior employment with a private company, Carrier Services, Inc. The SEC encountered substantial obstacles from GlobeTel regarding all aspects of its investigation. Initially, GlobeTel failed to provide any meaningful response to the SEC’s voluntary request for information. Likewise, in response to an SEC subpoena, GlobeTel initially stated that it had very few, if any, documents related to the SEC’s investigation. Ultimately, GlobeTel produced very few documents to the SEC and it failed to cooperate with the SEC’s investigation. Moreover, it appears that there was a concerted effort to prevent the production of relevant information. Upon information and belief, a GlobeTel officer intentionally interfered with the SEC’s investigation by withholding (and perhaps destroying) relevant documents that should have been produced to the SEC. One can only conclude that GlobeTel failed to cooperate with the SEC’s investigation and withheld valuable evidence because its cooperation and production of evidence would incriminate GlobeTel’s officers. Contrary to the SEC’s experience with GlobeTel, Vargas fully cooperated with the SEC’s investigation. In response to several subpoenas, Vargas produced over fifteen thousand (15,000) pages of documents. The SEC advised that this was the single largest production of documents from any entity or individual in the GlobeTel investigation. Most of the documents produced by Vargas included email communications. Unfortunately, it was discovered only after the production that the response was not complete because the reproduction of certain electronic information was unintentionally omitted on the hard copy that was printed. The missing information was the “cc” recipients of each email as well as any attachments to the emails. This missing information was extremely important because it showed who was privy to pertinent information. The SEC was immediately advised of this unintentional oversight yet it failed to request or obtain a complete production from Vargas.
Upon information and belief, the SEC took testimony from all of GlobeTel’s former and present officers, including Tim Huff (CEO/CTO), Lawrence Lynch (COO/CFO), Thomas Jimenez (CFO), Jonathan Leinwand (General Counsel), Jesus Quintero (comptroller), John Coniglio (outside accountant), in addition to countless others. Many of these testimonies took multiple days to complete. In fact, the SEC staff was so committed to ferreting out potential wrongdoing that several members of the staff traveled to Australia to pursue the “investigation”. At the end of its 14-month multi-pronged investigation, the SEC initiated the instant action, an alleged revenue recognition fraud, against only two individuals. The SEC alleged that Vargas was a willing participant in a multi-year $119 million dollar scheme to defraud the investors of GlobeTel. (D.E. 1, ¶¶ 1 and 2). Nonsense. Vargas was a low level employee who did not obtain a college degree and he certainly was not a CPA. He is a family man who served as a sergeant in the Marine Corps and also served in the reserves (his son is also a Marine who was wounded in Iraq). Vargas was not an officer at GlobeTel or its subsidiary, Centerline. Additionally, he did not maintain the books and records of GlobeTel or its subsidiary Centerline. Furthermore, Vargas had no actual, apparent or implied authority to formulate accounting policies or recognize revenue at GlobeTel. To be sure, Vargas was at the absolute bottom of the totem pole at Centerline. Vargas did not supervise any other employee. What did Vargas do at Centerline? Simple, he took direction and followed instructions from upper level management at GlobeTel (i.e., its officers). Vargas was not an employee in GlobeTel’s accounting department and he was not invited to attend (nor did he attend) any accounting meetings at GlobeTel. Vargas did not maintain the books and records of GlobeTel (or its subsidiaries) and was not responsible for making any entries into its books and records. He did not formulate or have any input into GlobeTel’s internal controls. Vargas did not report to GlobeTel’s CFO. Moreover, Vargas did not draft or review any of GlobeTel’s financial statements and SEC filings (e.g., including quarterly and annual filings as well as registration statements). And, Vargas had very limited contact with GlobeTel’s auditors. Certainly, he never discussed revenue recognition with GlobeTel’s auditors. Vargas merely followed orders. GlobeTel’s Scheme to Book Revenue
According to the Complaint, “in about October 2004 [several months before Vargas became an employee of GlobeTel, according to ¶ 11 of the Complaint], Monterosso, Vargas and GlobeTel executives devised an ‘off-net’ revenue program.” (D.E. 1, ¶32). According to the Complaint, this program allowed the generation of revenue “from telecom traffic that did not
pass through the switch in Los Angeles that was owned by Monterosso and controlled by Centerline.” (D.E. 1, ¶ 32). In other words, according to the SEC, GlobeTel executives, allegedly along with Monterosso and Vargas, sought a way to “generate” revenue even though it was not providing services through its switch. According to the Complaint, GlobeTel then recorded and reported this revenue. (D.E. 1, ¶¶ 56-61). GlobeTel’s finance department, according to the Complaint, “asked Monterosso and Vargas” for invoices to customers (presumably those buying the use of someone else’s switch service) and call detail records (commonly referred to in the telecom industry as “CDRs”) documenting each call made through a switch other than the one owned by GlobeTel (incorrectly identified in the Complaint as owned by Monterosso). (D.E. 1, ¶ 34). According to the Complaint, these “invoices – and the technical data that Monterosso and Vargas provided to the company’s auditors – caused [sic] GlobeTel to materially overstate its revenues for eight consecutive quarters and caused [sic] GlobeTel to fail to keep accurate books, records and accounts.” (D.E. 1, ¶ 4). The SEC alleges that from September 2004 until June 2006, GlobeTel and its subsidiaries overinflated revenue by $119 million which was described as “off net” revenue. (D.E. 1, ¶ 2). The “off net” revenue equated to approximately 80% of GlobeTel’s reported revenue during this period of time – roughly four out of every five dollars. Id. It is inconceivable that such an overstatement in revenue could occur without the knowledge, consent and approval of upper management. During this period of time, GlobeTel had a finance/accounting department, which included an internal accounting staff of four individuals (including a full-time CFO) and an external accountant. It also had a CEO. Since it was a public company, its financials were reported on a quarterly basis and reviewed by auditors. The financials were also audited once a year. Its CEO and CFO also certified the accuracy of all of these quarterly and annual reports pursuant to the Sarbanes-Oxley Act of 2002. Interestingly, the SEC has not included GlobeTel’s CEO or CFO in this action relating to false financial statements, and no Sarbanes-Oxley signing violations were alleged in the SEC’s complaint.
The SEC alleges that the primary motive for Vargas to engage in this alleged scheme to defraud was financial compensation, but the SEC refused to provide the specific amount Vargas allegedly kept, undoubtedly because any such amount was insignificant. (D.E. 1, ¶¶ 94-6). Even if this were true (and it is not), then several other upper level managers were also complicit, yet
such individuals have not been included in this action. GlobeTel’s officers and directors, not Vargas, profited from any alleged scheme to fraud. Upon information and belief, GlobeTel’s officers and directors sold large blocks of GlobeTel’s stock and received substantial compensation from these transactions. The SEC failed to pursue this theory or include these actors in this matter.
AI
