Friday, April 02, 2004 11:33:17 AM
IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO
Civil Action No. 04-RB-0626
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff,
v.
MICHAEL B. JOHNSON,
MICHAEL JOHNSON &CO., LLC,
DAVID C. SKINNER, JR. and
AMERICAN TELEVISION AND FILM COMPANY,
formerly known as WINNERS INTERNET NETWORK, INC.,
Defendants.
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COMPLAINT
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Plaintiff the Securities and Exchange Commission ("Commission"), for its complaint, alleges as follows:
A. Summary
1. Between December 23, 1999 and December 6, 2000, Winners Internet Network, Inc., now known as American Television and Film Company (hereinafter referred to as "Winners"), and its then-president, David C. Skinner, Jr. ("Skinner"), carried out a scheme to defraud investors by filing eight reports and a registration statement with the Commission containing numerous false statements, including material overstatements of Winners' revenues, income, assets and cash inflows through the improper capitalization of certain expenses to Winners' software asset, recognition of assets from a sham transaction, recording fictitious licensing fees as revenue, recognition as valid income receivables from licensing fees Winners had little or no chance of collecting, recognition of revenue and receivables that had not been realized or earned by Winners, and false reports of stock issued for services or assets as stock issued for cash proceeds.
2. Winners' outside accounting firm, Michael Johnson &Co., LLC ("Johnson &Co.") and its sole officer and shareholder, Michael B. Johnson ("Johnson"), assisted in the scheme by performing a range of accounting functions for Winners.
3. Furthermore, between January and October 2000, Skinner and Winners reviewed or disseminated three promotional "analyst reports" containing baseless financial projections and false statements about the independence of the analysts.
4. Skinner profited from the fraud by selling Winners stock into the resulting inflated market, thereby realizing proceeds of at least $170,701.
5. In addition, Winners, assisted by Skinner, Johnson and Johnson &Co., failed to create and maintain required books, records and accounts that accurately and fairly reflected transactions and dispositions of its assets, and Winners, assisted by Skinner, failed to devise and maintain a required system of internal accounting controls.
6. Finally, Winners also failed to file mandatory periodic reports with the Commission between March 31, 2001 and February 26, 2004.
7. The Commission brings this action pursuant to the authority conferred upon it by Section 21 of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. § 78u] for an order permanently restraining and enjoining Defendants Johnson, Johnson &Co., Skinner and Winners and granting other relief.
8. In addition to permanent injunctive relief, the Commission also seeks other relief including, without limitation, orders:
a. requiring Johnson, Johnson &Co. and Skinner to disgorge all ill-gotten gains received or benefits derived from the illegal conduct alleged in this complaint, plus pre-judgment and post-judgment interest;
b. requiring Johnson, Johnson &Co. and Skinner to pay third tier civil money penalties pursuant to Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)].
c. prohibiting Skinner from serving as an officer and director of a public company pursuant to Section 21(d)(2) [15 U.S.C. § 78u(d)(2)] of the Exchange Act and the general equitable powers of the Court; and
d. prohibiting Skinner from participating in any offering of penny stock pursuant to Section 21(d)(6) of the Exchange Act [15 U.S.C. § 78u(d)(6)] and the general equitable powers of the Court.
B. Jurisdiction and Venue
9. This Court has jurisdiction over this action pursuant to Sections 21(d) and 27 of the Exchange Act [15 U.S.C. §§ 78u(d) and 78aa].
10. In connection with the transactions, acts, practices, and courses of business described in this Complaint, Defendants Johnson, Johnson &Co., Skinner and Winners directly or indirectly, have made use of the means or instrumentalities of interstate commerce, of the mails, of the facilities of a national securities exchange, and/or of the means and instruments of transportation or communication in interstate commerce.
11. Venue lies in this Court pursuant to Section 27 of the Exchange Act because certain of the transactions, acts, practices and courses of business constituting the violations of law alleged herein occurred within this judicial district. In addition, Johnson resides, and Johnson &Co. is domiciled, in this judicial district.
C. The Defendants
12. Defendant Johnson, a resident of Littleton, Colorado, has been the president and sole shareholder of Johnson &Co. and a licensed certified public accountant in Colorado since 1975. He also is a licensed certified public accountant in Florida and Mississippi.
13. Defendant Johnson &Co. is an accounting firm located in Denver, Colorado. Johnson is the only shareholder of, and the only certified public accountant affiliated with, the firm. Johnson &Co., through Johnson and an employee under Johnson's supervision, made entries to Winners' books, records and/or accounts and prepared, compiled, audited and/or reviewed certain financial statements of Winners filed with the Commission by Skinner and Winners between December 23, 1999 and December 6, 2000.
14. Defendant Skinner, a resident of Jacksonville, Florida, was the president, chief executive officer and chairman of the board of directors of Winners from July 1997 to March 2001.
15. Defendant American Television and Film Company, formerly known as Winners, is a Nevada corporation, which, at all times relevant to this Complaint, maintained offices in St. Augustine, Florida and/or in the country of Liechtenstein. Between 1999 and June 2002, Winners offered online processing of Internet gaming and other financial transactions using its proprietary processing software and thereafter had no operations. Winners' name was changed to American Television and Film Company in February 2004. Winners' offices are currently located in Houston, Texas.
16. In December 1999, Winners filed a general form of registration of securities of a small business issuer with the Commission on Form 10-SB, which Winners withdrew on February 17, 2000, before it became effective.
17. On May 15, 2000, Winners' common stock became registered with the Commission pursuant to Section 12(g) of the Exchange Act, when Winners acquired Glennaire Financial Services, Inc., a corporation whose common stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act, effective September 1999.
18. On February 26, 2004, Winners terminated the registration of its common stock by filing a Form 15 with the Commission. Therefore, from May 15, 2000 to at least February 26, 2004, Winners, now American, was required to file periodic reports with the Commission. Winners' common stock is quoted on the National Quotation Bureau's Pink Sheets.
19. At all times relevant to this Complaint, Winners' stock has been a "penny stock" as defined by Section 3(a)(51) of the Exchange Act and Exchange Act Rule 3a51-1 because it did not qualify for any of the exemptions from the definition of a penny stock.
D. Factual Allegations
Winners' Commission Filings
20. On December 23, 1999, Winners and Skinner and filed with the Commission an Exchange Act registration statement on Form 10-SB, which included financial statements for the years ended December 31, 1997 and December 31, 1998 and for the ten months ended October 31, 1998 and October 31, 1999. Skinner reviewed and signed the Form 10-SB before filing it with the Commission.
21. Johnson &Co., Johnson and an employee supervised by Johnson audited Winners' financial statements for the years ended December 31, 1997 and December 31, 1998 and compiled the financial statements for the ten months ended October 31, 1998 and October 31, 1999, all of which were included in Winners' Form 10-SB referenced in Paragraph 20.
22. On May 15, 2000, Winners and Skinner filed with the Commission a current report on Form 8-K, which included financial statements for the years ended December 31, 1998 and December 31, 1999. Skinner reviewed and signed the Form 8-K before filing it with the Commission.
23. Johnson &Co., Johnson and an employee supervised by Johnson audited Winners' financial statements for the year ended December 31, 1998 and prepared and audited Winners' financial statements for the year ended December 31, 1999, both of which were included in Winners' Form 8-K referenced in Paragraph 22. In preparing Winners' financial statements for December 31, 1999, Johnson and a Johnson &Co. employee supervised by Johnson decided the values that would be assigned to certain of Winners' accounts and made false entries to Winners' books, records and accounts.
24. On May 19, 2000 Winners and Skinner filed with the Commission a quarterly report for the quarter ended March 31, 2000 on Form 10-QSB, which included financial statements for the quarter ended March 31, 2000 ("original March 31, 2000 financial statements"). Skinner reviewed and signed this Form 10-QSB before filing it with the Commission.
25. Johnson and Johnson &Co. did not participate in the preparation, compilation or review of Winners' original March 31, 2000 financial statements included in the Form 10-QSB referenced in Paragraph 24.
26. On June 21, 2000, Winners and Skinner filed with the Commission an amended quarterly report for the quarter ended March 31, 2000 on Form 10-QSB/A, which included amended financial statements for the quarter ended March 31, 2000 ("first amended March 31, 2000 financial statements"). Skinner reviewed and signed this Form 10-QSB/A before filing it with the Commission.
27. Johnson and Johnson &Co. did not participate in the preparation, compilation or review of Winners' first amended March 31, 2000 financial statements included in the Form 10-QSB referenced in Paragraph 26.
28. On November 22, 2000, Winners and Skinner filed with the Commission a second amended quarterly report for the quarter ended March 31, 2000 on Form 10-QSB/A, which included amended financial statements for the quarter ended March 31, 2000 ("second amended March 31, 2000 financial statements"). Skinner reviewed and signed this Form 10-QSB/A before filing it with the Commission.
29. Johnson &Co., Johnson and an employee supervised by Johnson prepared and reviewed a version of the financial statements for the quarter ended March 31, 2000 that were included in the Form 10-QSB/A filed on November 22, 2000 and referenced in Paragraph 28. In preparing Winners' these financial statements, a Johnson &Co. employee supervised by Johnson decided the values that would be assigned to certain accounts and made false entries to Winners' books, records and accounts.
30. On August 17, 2000, Winners and Skinner filed with the Commission a quarterly report for the quarter ended June 30, 2000 on Form 10-QSB, which included financial statements for the quarter ended June 30, 2000 ("original June 30, 2000 financial statements"). Skinner reviewed and signed this Form 10-QSB before filing it with the Commission.
31. Johnson and Johnson &Co. did not participate in the preparation, compilation or review of Winners' original June 30, 2000 financial statements included in the Form 10-QSB referenced in Paragraph 30.
32. On November 22, 2000, Winners and Skinner filed with the Commission an amended quarterly report for the quarter ended June 30, 2000 on Form 10-QSB/A, which included amended financial statements for the quarter ended June 30, 2000 ("amended June 30, 2000 financial statements"). Skinner reviewed and signed this Form 10-QSB/A before filing it with the Commission.
33. Johnson &Co., Johnson and an employee supervised by Johnson, prepared and reviewed a version of the financial statements for the quarter ended June 30, 2000 that were included in the Form 10-QSB/A filed on November 22, 2000 and referenced in Paragraph
32. In preparing these financial statements, an employee supervised by Johnson made decisions concerning the values that would be assigned to certain accounts and made false entries to Winners' books, records and accounts.
34. On November 21, 2000, Winners and Skinner filed a quarterly report for the quarter ended September 30, 2000 on Form 10-QSB, which included financial statements for the quarter ended September 30, 2000 ("original September 30, 2000 financial statements"). Skinner reviewed and signed this Form 10-QSB before filing it with the Commission.
35. Johnson &Co., Johnson and an employee supervised by Johnson prepared and reviewed a version of the financial statements for the quarter ended September 30, 2000 that were included in the Form 10-QSB/A filed on November 21, 2000 and referenced in Paragraph 34. In preparing these financial statements, a Johnson &Co. employee supervised by Johnson decided the values that would be assigned to certain accounts and made false entries to Winners' books, records and accounts.
36. On December 6, 2000, Winners and Skinner filed with the Commission an amended quarterly report for the quarter ended September 30, 2000 on Form 10-QSB/A, which included amended financial statement for the quarter ended September 30, 2000 ("amended September 30, 2000 financial statements"). Skinner reviewed and signed this Form 10-QSB/A before filing it with the Commission.
37. Johnson &Co., Johnson and an employee supervised by Johnson prepared and reviewed a version of the financial statements for the quarter ended September 30, 2000 that were included in the Form 10-QSB/A filed on December 6, 2000 and referenced in Paragraph 36. In preparing these financial statements, a Johnson &Co. employee supervised by Johnson decided the values that would be assigned to certain accounts and made false entries to Winners' books, records and accounts.
False Financial and Other Statements in Commission Filings
Overstatements of Assets Due to Improper Capitalization of Demonstration Software Costs
38. Winners' financial statements for the year ended December 31, 1997, the ten months ended October 31, 1998 and each of the original and amended financial statements for the quarters ended March 31, June 30 and September 30, 2000 reported as part of Winners' software assets demonstration software valued at $300,000.
39. Winners' financial statements for the years ended December 31, 1998 and December 31, 1999 and the ten months ended October 31, 1999 reported as part of Winners' software assets demonstration software asset valued at $75,000.
40. Winners' Forms 10-SB and 8-K, referenced in Paragraphs 20 and 22, respectively, falsely claimed that the demonstration software had been used in the development of Winners' proprietary processing software, referenced in Paragraph 15.
41. The inclusion of the $75,000 and $300,000 demonstration software values in Winners' assets was improper, because the demonstration software, which was actually purchased for approximately $50,000, was never was used in the development of Winners' proprietary processing software.
42. In addition, $250,000 worth of stock issued by Winners that was included in the $300,000 demonstration software value was not, in fact, issued for the purchase of the demonstration software.
43. The improper capitalization of purported demonstration software costs to Winners' software assets resulted in materially false statements in each of Winners' financial statements filed with the Commission concerning the value of Winners' total assets, by overstating total assets by between $75,000 and $300,000, or between 3% and 191%.
44. During the audit of Winners' December 31, 1997 financial statements, a Winners employee supervised by Skinner notified Johnson and Johnson &Co. that Winners did not use the demonstration software in developing its proprietary processing software and that the $250,000 Winners had previously claimed was used to purchase the demonstration software was not, in fact, used to purchase the software.
45. Despite knowing that none of the purported costs of Winners' demonstration software could be capitalized to Winners' assets, Johnson and Johnson &Co. allowed Winners to include a demonstration software value of $300,000 in Winners' financial statements for the year ended December 31, 1997, the ten months ended October 31, 1998, and in the second amended March 31, 2000 financial statements, the amended June 30, 2000 financial statements, and the original and amended September 30, 2000 financial statements, and a demonstration software value of $75,000 in the financial statements for the years ended December 31, 1998 and December 31, 1999 and the ten months ended October 31, 1999.
46. Furthermore, a Johnson &Co. employee under Johnson's supervision made the decision to increase the value of Winners' demonstration software from $75,000 at December 31, 1999 back to $300,000 in quarters in 2000 and made the false entries to Winners' books, records and accounts increasing this value.
47. Skinner, who reviewed, signed and filed every Winners filing that included the materially overstated demonstration software asset, knew that Winners did not use the demonstration software in the development of Winners' processing software, particularly since he supervised the employee who developed Winners' processing software without using the demonstration software. Furthermore, as a member of Winners' board, which authorized all issuances of Winners' stock, Skinner knew that Winners did not issue $250,000 for the purchase of demonstration software.
Overstatements of Assets Due to Improper Capitalization of Certain Expenses
48. Winners' December 31, 1999 financial statements filed with Winners' Form 8-K identified in Paragraph 22, included in Winners' proprietary processing software asset $421,000 of improperly capitalized expenses, including wages, payroll taxes, rent, travel, marketing and consulting expenses for the entire 1999 fiscal year primarily related to Skinner, who played no role in developing Winners' processing software.
49. The capitalization of the expenses identified in Paragraph 48 was improper, because, in addition to the fact that many expenses unrelated to developing Winners' proprietary processing software were capitalized, generally accepted accounting principles dictated that Winners could capitalize relevant expenses only between the date its software reached technological feasibility, approximately October 1, 1998, until the date that Winners' software was available for general release to customers, approximately January 31, 1999.
50. The improper capitalization of 1999 expenses to Winners' software asset resulted in materially false statements in Winners' December 31, 1999 financial statements concerning the value of Winners' total assets, which were overstated by over $421,000, or 416%.
51. Johnson and Johnson &Co. knew that the 1999 expenses identified in Paragraph 48 could not be capitalized to Winners' software asset. They knew that Winners had sold its processing software to customers beginning in early 1999, yet they allowed Winners to capitalize expenses incurred throughout the entire year.
52. Furthermore, Johnson and a Johnson &Co. employee supervised by Johnson jointly decided which of Winners' 1999 expenses would be capitalized to the software asset, including Skinner's 1999 salary and other expenses, and the Johnson &Co. employee supervised by Johnson made the journal entry that improperly increased the software asset by over $421,000.
53. Skinner, who reviewed, signed and filed the Form 8-K incorporating the December 31, 1999 financial statements, which included the improperly capitalized 1999 expenses, was at least reckless in not knowing, at a minimum, that his 1999 salary could not be capitalized to Winners' software asset, since he played no role in its creation. Overstated Licensing Revenues and Accounts Receivable and Understated Expenses Due to Recording of Fictitious License Fees and Uncollectible License Fee Receivables
54. Winners' December 31, 1999 financial statements also contained materially false statements concerning the value of Winners' licensing revenues and licensing receivables by overstating such revenues and receivables by $140,000 and $301,000, respectively.
55. Winners' licensing revenues and receivables were materially overstated due to the recording of fictitious license fees and the recognition of receivables from licensing fees that Winners had little or no chance of collecting. In addition, by failing to write off receivables that Winners had little or no chance of collecting, Winners' December 31, 1999 financial statements contained materially false statements concerning its expenses, which were understated by $161,000 or 17%.
56. Winners reported fictitious licensing fees by valuing licensing revenues of one client at $130,000 and license fee receivables at $107,500, when the client's contract with Winners, a portion of which appeared in Johnson &Co.'s audit workpapers, showed that the client's license fee totaled only $50,000.
57. In addition, while another client's licensing fee was just $10,000 and its corresponding receivables were only $9,000, Winners included $70,000 in revenues and $69,000 in receivables from that client in its December 31, 1999 financial statements. 58. Winners failed to write off $133,500 in receivables from licensing fees it had little or no chance of collecting. For example, the licensing receivables from three of Winners' clients had been outstanding for periods of over 330 days, with at least one client having terminated its relationship with Winners by the end of 1999, and there was no evidence of payment or confirmation of validity of the receivables by the clients. 59. Furthermore, Winners agreed on March 1, 2000 to refund license fees paid by a fourth client in response to a claim by that client that Winners had breached its contract, and therefore Winners would not receive the $27,500 in licensing fees still owed by the client. Winners' improper accounting for these receivables resulted in a material understatement of expenses of $161,000, or 17%, for the year ended December 31, 1999.
60. Johnson and Johnson &Co. knew that Winners' December 31, 1999 financial statements materially misstated licensing revenues, receivables and related expenses. Johnson and a Johnson &Co. employee supervised by Johnson determined the amount of licensing revenues and receivables that would be recorded for the year ended December 31, 1999 while knowing that Winners' documents and their own audit workpapers did not support the reported revenues and receivables, and that the auditors did not perform adequate audit test work.
61. For example, Johnson &Co.'s audit workpapers included only partial license fee contracts for only some of Winners' clients, and only some of these partial contracts showed the amount of license fees owed to Winners by the respective clients.
62. With respect to at least one client, Johnson and Johnson &Co. never saw the license fee contract or other documentation showing the client's license fees.
63. In addition, there was no documentation in Johnson &Co.'s workpapers showing the amount of license fees paid and owed by Winners' clients.
64. In many instances in which there was no documentation supporting certain licensing revenue or receivable values, Johnson and Johnson &Co. relied merely on unverified representations by Winners' management concerning the values and failed to perform adequate audit test work to confirm those values.
65. Johnson and Johnson &Co. ignored the documentation and information that did exist concerning the true amounts of Winners' licensing revenues and receivables and instead recorded significantly higher values for these accounts for the year ended December 31, 1999.
66. As stated in Paragraph 61, Johnson &Co.'s own audit workpapers included partial contracts that set forth the amount of license fees owed by some clients, yet Johnson and Johnson &Co. allowed Winners to record significantly higher licensing revenue amounts for these clients.
67. In addition, a Johnson &Co. employee supervised by Johnson knew, and documents in Johnson &Co.'s workpapers state, that certain of Winners' clients had accused the company of breaching its contracts with them and that Winners had agreed to refund one client's licensing fee, thereby making it unlikely that Winners would receive or retain those fees.
68. Winners continued to report $200,000 of uncollectible licensing receivables in all of its quarterly financial statements for the year 2000, and therefore these financial statements contained materially false statements concerning its licensing receivables and expenses.
69. Skinner reviewed, signed and filed the Form 8-K and the Forms 10-QSB and Forms 10-QSB/A in which the overstated licensing revenues and receivables and understated licensing-related expenses appeared, while knowing that Winners' documents did not support the reported licensing revenues and receivables and that certain clients likely would never pay Winners their licensing fees
.
Overstated Processing Revenues and Accounts Receivable
70. Winners' December 31, 1999 financial statements materially overstated Winners' processing revenues by inappropriately including in revenues and receivables amounts that had not been realized or earned by Winners.
71. Winners historically collected all gaming proceeds due to its casino clients, extracted fees of between 1% and 5%, and paid the remaining 95% to 99% to its clients. For the month of December 1999, however, Winners reported as revenue all of the gaming proceeds it received instead of its much smaller retained processing fees, which were its true revenues. Winners did not record a corresponding expense.
72. Furthermore, Winners' December 31, 1999 financial statements also included as processing income over $115,900 of licensing and processing fees that Winners had not earned but that it anticipated receiving upon the signing of certain license fee contracts in 2000. These amounts had been neither realized nor earned by Winners, since the anticipated contracts had not been executed and Winners had not rendered any services or delivered products to the potential clients. In fact, the contracts were never signed.
73. As a result of the improper recognition of revenue that was neither earned nor realized by Winners, Winners' financial statements for December 31, 1999 contained materially false statements concerning its processing fee revenues and receivables, each of which were overstated by $232,766, resulting in overstated total revenues of 52% and total assets of 230%.
74. Johnson and a Johnson &Co. employee under Johnson's supervision decided to report as revenue 100% of Winners' gaming proceeds for the month of December 1999, without recording a corresponding expense, while knowing that Winners' true revenues were only 1% to 5% of that amount.
75. Furthermore, a Johnson &Co. employee under Johnson's supervision knew that over $115,900 of anticipated licensing and processing fees had not been earned in 1999, and Johnson &Co.'s audit workpapers were devoid of any documentation concerning these anticipated fees, yet Johnson and Johnson &Co. allowed Winners to record them in its December 31, 1999 financial statements.
76. As a result of the overstatements of licensing and processing revenues and the understatement of licensing- and processing-related expenses, Winners' December 31, 1999 financial statements contained materially false statements concerning its revenues, assets, expenses and net income, and its net loss of over $501,000 was reported as net income of over $5,000.
Overstated Assets and Revenues Based on Sham Asset Exchange
77. Beginning with Winners' October 31, 1999 financial statements filed with Winners' registration statement on December 23, 1999, Winners engaged in a pattern of improperly recognizing assets and revenues from a sham asset exchange between Winners and CyberLink Monetary Systems AG ("Cyberlink"), a Liechtenstein trust which existed for the sole purpose of allowing Winners to conduct business in Liechtenstein. In a series of purported transactions, Winners purported to sell its processing software to Cyberlink for $3 million, and Cyberlink purported to sell certain domain names to Winners for $4 million.
78. The purported transactions with Cyberlink lacked economic substance because, among other things, Cyberlink and Winners functioned as the same entity, and Winners already owned the asset it purportedly agreed to purchase for $4 million. Therefore, Winners should not have reported assets or revenues from the transactions, or, in the alternative, the transactions should have been eliminated in the consolidation of Winners' and Cyberlink's financial transactions.
79. The improper recognition of assets and revenues from the sham transactions identified in Paragraph 77 resulted in the following materially false statements in Winners' financial statements: (a) overstatement of Winners' accounts receivables by $1,200,000, resulting in overstatements of total assets by 3% and total revenues by 218% in Winners' October 31, 1999 financial statements; (b) overstatement of the value of Winners' software asset by $1 million, resulting in an overstatement of total assets of 205%, and overstatement of revenues of $1,500,000, resulting in an overstatement of total revenues of 1,125%, in Winners' original March 31, 2000 financial statements; (c) overstatement of the value of Winners' software asset by $4 million, resulting in an overstatement of total assets of 923%, and overstatement of revenues by $3 million, resulting in an overstatement of total revenues of 22,497%, in Winners' first amended March 31, 2000 financial statements; (d) overstatement of the value of Winners' software asset by $1 million, resulting in an overstatement of total assets of 231%, in Winners' second amended March 31, 2000 financial statements; (e) overstatement of the value of Winners' software asset by $4 million, resulting in an overstatement of total assets of 2,550%, and overstatement of revenues by $3 million, resulting in an overstatement of total revenues of 1,749%, in Winners' original June 30, 2000 financial statements; (f) overstatement of the value of Winners' software asset by $1 million, resulting in an overstatement of total assets of 638%, in Winners' amended June 30, 2000 financial statements; (g) overstatement of the value of Winners' software asset by $1 million, resulting in an overstatement of total assets of over 100%, in Winners' original September 30, 2000 financial statements; and (h) overstatement of the value of Winners' software asset by $1 million, resulting in an overstatement of total assets of over 100%, in Winners' amended September 30, 2000 financial statements.
80. Compounding the falsity of the asset and revenue values in Paragraph 79, the Management's Discussion and Analysis section of Winners' registration statement identified in Paragraph 20 stated that Winners' October 31, 1999 revenues of $1,744,878 "were generated from [Winners'] European processing operations," when, in fact, $1,200,000 of Winners' October 31, 1999 revenues were the result of the improper recognition of revenues from the sham transactions identified in Paragraph 77.
81. In addition, the notes to Winners' original March 31, 2000 financial statements contained in the Form 10-QSB identified in Paragraph 24 stated that the increase in revenues of $1,516,419 from March 31, 1999 to March 31, 2000 "was primarily due to an overall increase in [Winners'] operations," when, in fact, $1,500,000 of the increase in revenues from March 31, 1999 to March 31, 2000 was the result of the improper recognition of revenues from the sham transactions identified in Paragraph 77.
82. Johnson and Johnson &Co. knew that Cyberlink and Winners were essentially the same company and, therefore, Winners had no valid basis for recognizing such assets. Johnson and a Johnson &Co. employee supervised by Johnson were sufficiently concerned about the purported asset exchange between Winners and Cyberlink that they did not allow Winners to record any assets or revenues from the transactions in the December 31, 1999 financial statements they prepared and audited.
83. In addition, in February 2000, during their audit of those financial statements, Johnson and a Johnson &Co. employee supervised by Johnson advised Skinner that no revenues from the exchange should be recognized.
84. Nevertheless, Johnson and a Johnson &Co. employee supervised by Johnson prepared and conducted reviews of the second amended March 31, 2000 financial statements, the amended June 30, 2000 financial statements and the original and amended September 30, 2000 financial statements, which recognized assets based on the asset exchange.
85. Furthermore, none of Johnson &Co.'s workpapers indicate that Johnson or Johnson &Co. took any steps to determine whether assets were actually bought or sold pursuant to the purported asset exchange.
86. Skinner, who signed, reviewed and filed with the Commission every report containing the overstated assets and revenues based on the sham asset exchange and the false statements in two of the reports that increased revenues were due to reasons other than the sham asset exchange, knew that Cyberlink and Winners were essentially the same company and, therefore, Winners had no valid basis for recognizing such assets.
87. Moreover, even after Johnson and a Johnson &Co. employee supervised by Johnson advised Skinner that no revenues could be recognized from the exchange in 2000, Skinner continued to file with the Commission quarterly reports that included Cyberlink-related revenues of between $1.5 million and $3 million and Cyberlink-related assets of between $1 million and $4 million.
Overstated Cash Inflows
88. Six of seven of Winners' quarterly financial statements contained in quarterly reports filed with the Commission in 2000 contained materially false statements concerning Winners' cash inflows from financing activities, which were overstated by between $423,172 and $2,476,432, or between 135% and 790%, due to the improper reporting of stock issued for services or assets as stock issued for cash proceeds.
89. Skinner, who reviewed, signed and filed every quarterly report containing the financial statements that overstated Winners' cash inflows, knew or was reckless in not knowing that Winners' cash inflows were materially overstated, given the magnitude of the overstatements and Skinner's position as president and chairman of Winners' board of directors, which authorized all issuances of Winners' stock.
False Statements in Audit Reports
90. Johnson and Johnson &Co. issued audit reports accompanying Winners' year-end financial statements for 1997, 1998 and 1999. As to 1997 and 1998, the audit opinions each contained a going concern qualification. As to 1999, the audit opinion was unqualified. The 1997, 1998 and 1999 audit reports falsely stated that the financial statements were presented fairly in all material respects in conformity with Generally Accepted Accounting Principles ("GAAP") and that the audits of these financial statements were conducted in accordance with Generally Accepted Auditing Standards ("GAAS").
91. The statements in Johnson &Co.'s audit reports referenced in Paragraph 90, that Winners' financial statements for 1997, 1998 and 1999 were presented in conformity with GAAP, were false, because, as discussed above, these financial statements included numerous financial misstatements.
92. The statements in Johnson &Co.'s audit reports referenced in Paragraph 90, that its audits of Winners' 1997, 1998 and 1999 financial statements were conducted in accordance with GAAS, were false, because portions of the underlying financial statements were not presented in conformity with GAAP, which, in turn, rendered false the statements that the audits were conducted in accordance with GAAS, since the failure to address a deviation from GAAP in an audit report is a violation of GAAS.
93. In addition, Johnson &Co.'s audit of Winners' December 31, 1999 financial statements was not conducted in accordance with GAAS because, among other things, by participating in both the preparation and audit of these financial statements, Johnson and Johnson &Co. failed to maintain their independence from Winners.
94. Johnson and Johnson &Co. also failed to conduct their audit of Winners' December 31, 1999 financial statements in accordance with GAAS, because they failed to adequately plan their audit, failed to obtain competent evidential matter, failed to use due professional care, failed to properly evaluate Winners' ability to continue as a going concern, and failed to adopt reasonable procedures to retain audit documentation. Improper Document Creation and Destruction by Johnson and Johnson &Co.
95. Certain original Johnson &Co. workpapers relating to the audit of Winners' December 31, 1999 financial statements were missing within approximately fifteen months after completion of the audit. These documents were inappropriately recreated by Johnson the night before his investigative testimony before the Commission and inserted into the original audit workpapers.
96. After receiving the Commission's subpoena to Johnson &Co., a Johnson &Co. employee under Johnson's supervision destroyed the original trial balance relating to the audit of Winners' December 31, 1999 financial statements. According to Johnson, this trial balance contained numerous handwritten notes. The Johnson &Co. employee then recreated or printed a new trial balance, produced it to the Commission in testimony, and falsely testified under oath that she did not know what had happened to the original trial balance.
False and Misleading Analyst Reports
97. On January 13 and February 24, 2000, World of Internet.com AG ("World of Internet"), a German company that touted the stock of microcap companies using the name "Stockreporter," issued analyst reports recommending that investors buy Winners stock ("the Stockreporter reports"). Skinner reviewed and edited the Stockreporter reports prior to their public dissemination. World of Internet posted these reports on its Internet website, where they remained until at least June 26, 2000, and issued press releases linking to the reports. Winners employees supervised by Skinner posted these releases on Winners' website, where they remained until October 14, 2000. The Stockreporter reports stated that Winners would achieve revenues of between $18 million and $35 million and stock prices of between $12 and $23.60 between the years 2000 and 2002.
98. The revenue projections in the Stockreporter reports lacked a reasonable basis because the projections were not supported by Winners' historical operations, and the reports failed to disclose material adverse facts, specifically that the revenue projections were dependent upon Winners obtaining funding from a third party and that Winners had not received any commitments for such funding. The stock price projections were similarly baseless because, among other things, they were based on the false revenue projections.
99. On February 29, 2000, Christina Skousen ("Skousen"), a California resident who wrote analyst reports both for World of Internet and under her business name CSK Securities Research ("CSK"), issued a CSK analyst report recommending that investors buy Winners stock ("the CSK report"). Skousen disseminated this report through a press release, and Skinner reviewed the report prior to its public dissemination. On March 3, 2000, Winners issued its own press release regarding the CSK report. Winners employees under Skinner's supervision posted this press release and the CSK report on Winners' Internet website, where they remained until October 14, 2000. The CSK report stated that Winners would achieve revenues of between $20 million and $50 million and stock prices of between $15 and $38.50 between 2000 and 2002.
100. The revenue projections in the CSK report lacked a reasonable basis because the projections were not supported by Winners' historical operations, and the reports failed to disclose Winners' need for funding. The stock price projections were similarly baseless because, among other things, they were based on the false revenue projections.
101. Stockreporter's press release announcing its report about Winners and Winners' press release announcing the CSK report falsely stated that Stockreporter and CSK were "independent" from Winners. These statements were false, since Winners paid 200,000 shares of its stock to Stockreporter for, among other services, writing and publicizing the Stockreporter report, and Stockreporter, in turn, paid for, and Stockreporter's principals and Skinner reviewed, the CSK report.
Winners' Inaccurate Books, Records and Accounts and Deficient Internal Controls
102. Although, beginning with the registration of its common stock with the Commission on May 15, 2000, Winners was required to maintain books, records and accounts which accurately and fairly reflected its transactions and the disposition of its assets, Winners maintained incomplete and inaccurate books, records and accounts for its European operations, which encompassed its software asset, receivables, revenues, and the majority of its expenses and liabilities.
103. In connection with the preparation of Winners' second amended March 31, 2000 financial statements, amended June 30, 2000 financial statements, and original and amended September 30, 2000 financial statements, a Johnson &Co. employee under Johnson's supervision knowingly made false entries to certain of Winners' books, records and/or accounts.
104. Once its common stock was registered with the Commission, Winners also was required to, but did not, devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances concerning the execution, recording, access to and accountability for Winners' assets.
105. Between May 15, 2000 and December 6, 2000, Skinner knowingly falsified Winners' books, records and/or accounts and, between May 15, 2000 and March 2001, knowingly failed to implement a system of internal accounting controls for Winners.
Winners' Delinquent Filings
106. As a public company registered with the Commission pursuant to the provisions of the Exchange Act, Winners was required to file periodic reports with the Commission from May 15, 2000 until February 26, 2004.
107. From March 31, 2001 to February 26, 2004, Winners failed to file three annual reports and nine quarterly reports.
Trading in Winners Stock
108. Between January 31 and March 3, 2000, when the materially false public statements in the Stockreporter and CSK reports were first disseminated, the price of Winners stock increased from $2.38 to $4.69 per share.
109. Between January and December 2000, when materially false statements concerning Winners were disseminated both in analyst reports and false filings with the Commission, Skinner sold a total of 103,000 shares of Winners stock through open market transactions for proceeds of at least $170,701.
FIRST CLAIM
Violations by Skinner, Winners, Johnson and Johnson &Co.
of Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5 [15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5]
110. Plaintiff repeats and realleges paragraphs 1 through 109 above.
111. Skinner, Winners, Johnson and Johnson &Co., directly or indirectly, with scienter, in connection with the purchase or sale of securities, by the use of means or instrumentalities of interstate commerce, the mails, or any facility of a national securities exchange, employed devices, schemes, or artifices to defraud; made untrue statements of material fact or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or engaged in acts, practices, or courses of business which operated or would operate as a fraud or deceit upon any person; in violation of Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5].
112. By reason of the foregoing, Skinner, Winners, Johnson and Johnson &Co.
violated Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5.
SECOND CLAIM
Winners' Violations of Section 13(a) of the Exchange Act
and Exchange Act Rules 12b-20, 13a-1, 13a-11 and 13a-13
[15 U.S.C. § 78m(a), 17 C.F.R. §§ 240.12b-20, 240.13a-1, 240.13a-11 and 240.13a-13]
113. Plaintiff repeats and realleges paragraphs 1 through 109 above.
114. From May 15, 2000 until February 26, 2004, Winners was an issuer of a security registered with the Commission pursuant to Section 12 of the Exchange Act, and was subject to the periodic reporting requirements imposed on such issuers by the Exchange Act.
115. As described elsewhere in this Complaint, between May 15, 2000 and December 6, 2000, Winners filed materially inaccurate and misleading current and quarterly reports with the Commission.
116. Winners also failed to add such further material information to its current and quarterly reports as was necessary to make the required statements or reports, in light of the circumstances under which they were made, not misleading.
117. Furthermore, between March 31, 2001 and February 26, 2004, Winners failed to file annual and quarterly reports with the Commission.
118. By reason of the foregoing, Winners violated Section 13(a) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 13a-11 and 13a-13 [15 U.S.C. § 78m(a), 17 C.F.R. §§ 240.12b-20, 240.13a-1, 240.13a-11 and 240.13a-13].
THIRD CLAIM
Aiding and Abetting by Skinner, Johnson and Johnson &Co.
of Certain of Winners' Violations of Section 13(a) of the Exchange Act
and Exchange Act Rules 12b-20, 13a-11, and 13a-13
[15 U.S.C. § 78m(a), 17 C.F.R. §§ 240.12b-20, 240.13a-11, and 240.13a-13]
119. Plaintiff repeats and realleges paragraphs 1 through 109 above.
120. Skinner, Johnson and Johnson &Co. knew or were reckless in not knowing that Winners filed materially inaccurate and misleading current and quarterly reports with the Commission and failed to add such further material information as was necessary to make the required statements or reports, in light of the circumstances under which they were made, not misleading, in violation of Section 13(a) of the Exchange Act and Exchange Act Rules 12b-20, 13a-11, and 13a-13, and substantially assisted Winners in committing these violations.
121. By reason of the foregoing, Skinner, Johnson and Johnson &Co. aided and abetted Winners' violations of Section 13(a) of the Exchange Act and Exchange Act Rules 12b-20, 13a-11, and 13a-13 [15 U.S.C. § 78m(a), 17 C.F.R. §§ 240.12b-20, 240.13a-11, and 240.13a-13].
FOURTH CLAIM
Winners' violations of Section 13(b)(2)(A) of the Exchange Act
[15 U.S.C. § 78m(b)(2)(A)]
122. Plaintiff repeats and realleges paragraphs 1 through 109 above.
123. Between May 15, 2000 and February 26, 2004, the period in which Winners' common stock was registered pursuant to Section 12 of the Exchange Act, Winners failed to make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflected the company's transactions and disposition of its assets.
124. By reason of the foregoing, Winners violated Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. § 78m(b)(2)(A)].
FIFTH CLAIM
Aiding and Abetting by Skinner, Johnson and Johnson &Co.
of Winners' Violations of Section 13(b)(2)(A) of the Exchange Act
[15 U.S.C. § 78m(b)(2)(A)]
125. Plaintiff repeats and realleges paragraphs 1 through 109 above.
126. Until his resignation from Winners in March 2001, Skinner knew or was reckless in not knowing of Winners' violations of Section 13(b)(2)(A) of the Exchange Act and substantially assisted Winners in committing these violations.
127. Until at least December 6, 2000, Johnson and Johnson &Co. knew or were reckless in not knowing of Winners' violations of Section 13(b)(2)(A) of the Exchange Act and substantially assisted Winners in committing these violations.
128. By reason of the foregoing, Skinner, Johnson and Johnson &Co. aided and abetted Winners' violations of Section 13(b)(2)(A) [15 U.S.C. § 78m(b)(2)(A)] of the Exchange Act.
SIXTH CLAIM
Winners' Violations of Section 13(b)(2)(B) of the Exchange Act
[15 U.S.C. § 78m(b)(2)(B)]
129. Plaintiff repeats and realleges paragraphs 1 through 109 above.
130. During the period in which Winners' common stock was registered pursuant to Section 12 of the Exchange Act, Winners failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions were recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements.
131. By reason of the foregoing, Winners violated Section 13(b)(2)(B) of the Exchange Act [15 U.S.C. § 78m(b)(2)(B)].
SEVENTH CLAIM
Aiding and Abetting by Skinner of Winners' Violations
of Section 13(b)(2)(B) of the Exchange Act
[15 U.S.C. § 78m(b)(2)(B)]
132. Plaintiff repeats and realleges paragraphs 1 through 109 above.
133. Until his resignation from Winners in March 2001, Skinner knew or was reckless in not knowing of Winners' violations of Section 13(b)(2)(B) of the Exchange Act and substantially assisted Winners in committing these violations.
134. By reason of the foregoing, Skinner aided and abetted Winners' violations of Section 13(b)(2)(B) of the Exchange Act [15 U.S.C. § 78m(b)(2)(B)].
EIGHTH CLAIM
Violations by Skinner, Johnson and Johnson &Co.
of Rule 13b2-1 Under the Exchange Act
[17 C.F.R. § 240.13b2-1]
135. Plaintiff repeats and realleges paragraphs 1 through 109 above.
136. Between May 15, 2000 and February 26, 2004, Winners' books, records and accounts were subject to Section 13(b)(2)(A) of the Exchange Act.
137. Between May 15, 2000 and March 2001, Skinner directly or indirectly falsified or caused to be falsified Winners' books, records and/or accounts. 138. Between May 15, 2000 and at least December 6, 2000, Johnson and Johnson &Co. directly or indirectly falsified or caused to be falsified Winners' books, records and/or accounts.
139. By reason of the foregoing, Skinner, Johnson and Johnson &Co. violated Rule 13b2-1 under the Exchange Act [17 C.F.R. § 240.13b2-1].
NINTH CLAIM
Violations by Skinner, Johnson and Johnson &Co.
of Section 13(b)(5) of the Exchange Act
[15 U.S.C. § 78m(b)(5)]
140. Plaintiff repeats and realleges paragraphs 1 through 109 above.
141. Between May 15, 2000 and at least December 6, 2000, Skinner, Johnson and Johnson &Co. knowingly falsified books, records and/or accounts described in Section 13(b)(2) of the Exchange Act
.
142. Between May 15, 2000 and March 2001, Skinner knowingly circumvented or knowingly failed to implement a system of internal accounting controls.
143. By reason of the foregoing, Skinner, Johnson and Johnson &Co. violated Section
13(b)(5) of the Exchange Act [15 U.S.C. § 78m(b)(5)].
PRAYER FOR RELIEF
WHEREFORE, the Commission respectfully requests that this Court:
1. Find that the defendants, and each of them, committed the violations alleged;
2. Enter an injunction permanently restraining and enjoining Defendants Johnson, Johnson &Co., Skinner and Winners, his or its agents, servants, employees and attorneys, and those persons in active concert or participation with them who receive actual notice of a judgment by personal service or otherwise, and each of them, from violating, directly or indirectly, the provisions of law and rules alleged in this Complaint;
3. Order Defendants Johnson, Johnson &Co. and Skinner to disgorge all ill-gotten gains received or benefits in any form derived from the illegal conduct alleged in this Complaint, together with prejudgment and post-judgment interest as provided by law;
4. Order Defendants Johnson, Johnson &Co. and Skinner to pay third-tier civil money penalties pursuant to Section 21(d)(3) [15 U.S.C.§ 78u(d)(3)] of the Exchange Act;
5. Order that Defendant Skinner be barred from serving as an officer or director of any publicly held company pursuant to Section 21(d)(2) of the Exchange Act [15 U.S.C. § 78u(d)(2)] and the general equitable powers of the Court;
6. Order that Defendant Skinner be barred from participating in any offering of penny stock pursuant to Section 21(d)(6) of the Exchange Act [15 U.S.C. § 78u(d)(6)] and the general equitable powers of the Court; and
7. Grant such other and further relief as this Court may deem just or appropriate.
Dated: _______________, 2004
Respectfully submitted,
___________________________________
Julie K. Lutz
Kelli Farrand Chan
Attorneys for Plaintiff
Securities and Exchange Commission
1801 California Street, Suite 1500
Denver, CO 80202
Phone: (303) 844-1000
Fax: (303) 844-1068
http://www.sec.gov/litigation/complaints/comp18652.htm
Civil Action No. 04-RB-0626
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff,
v.
MICHAEL B. JOHNSON,
MICHAEL JOHNSON &CO., LLC,
DAVID C. SKINNER, JR. and
AMERICAN TELEVISION AND FILM COMPANY,
formerly known as WINNERS INTERNET NETWORK, INC.,
Defendants.
--------------------------------------------------------------------------------
COMPLAINT
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Plaintiff the Securities and Exchange Commission ("Commission"), for its complaint, alleges as follows:
A. Summary
1. Between December 23, 1999 and December 6, 2000, Winners Internet Network, Inc., now known as American Television and Film Company (hereinafter referred to as "Winners"), and its then-president, David C. Skinner, Jr. ("Skinner"), carried out a scheme to defraud investors by filing eight reports and a registration statement with the Commission containing numerous false statements, including material overstatements of Winners' revenues, income, assets and cash inflows through the improper capitalization of certain expenses to Winners' software asset, recognition of assets from a sham transaction, recording fictitious licensing fees as revenue, recognition as valid income receivables from licensing fees Winners had little or no chance of collecting, recognition of revenue and receivables that had not been realized or earned by Winners, and false reports of stock issued for services or assets as stock issued for cash proceeds.
2. Winners' outside accounting firm, Michael Johnson &Co., LLC ("Johnson &Co.") and its sole officer and shareholder, Michael B. Johnson ("Johnson"), assisted in the scheme by performing a range of accounting functions for Winners.
3. Furthermore, between January and October 2000, Skinner and Winners reviewed or disseminated three promotional "analyst reports" containing baseless financial projections and false statements about the independence of the analysts.
4. Skinner profited from the fraud by selling Winners stock into the resulting inflated market, thereby realizing proceeds of at least $170,701.
5. In addition, Winners, assisted by Skinner, Johnson and Johnson &Co., failed to create and maintain required books, records and accounts that accurately and fairly reflected transactions and dispositions of its assets, and Winners, assisted by Skinner, failed to devise and maintain a required system of internal accounting controls.
6. Finally, Winners also failed to file mandatory periodic reports with the Commission between March 31, 2001 and February 26, 2004.
7. The Commission brings this action pursuant to the authority conferred upon it by Section 21 of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. § 78u] for an order permanently restraining and enjoining Defendants Johnson, Johnson &Co., Skinner and Winners and granting other relief.
8. In addition to permanent injunctive relief, the Commission also seeks other relief including, without limitation, orders:
a. requiring Johnson, Johnson &Co. and Skinner to disgorge all ill-gotten gains received or benefits derived from the illegal conduct alleged in this complaint, plus pre-judgment and post-judgment interest;
b. requiring Johnson, Johnson &Co. and Skinner to pay third tier civil money penalties pursuant to Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)].
c. prohibiting Skinner from serving as an officer and director of a public company pursuant to Section 21(d)(2) [15 U.S.C. § 78u(d)(2)] of the Exchange Act and the general equitable powers of the Court; and
d. prohibiting Skinner from participating in any offering of penny stock pursuant to Section 21(d)(6) of the Exchange Act [15 U.S.C. § 78u(d)(6)] and the general equitable powers of the Court.
B. Jurisdiction and Venue
9. This Court has jurisdiction over this action pursuant to Sections 21(d) and 27 of the Exchange Act [15 U.S.C. §§ 78u(d) and 78aa].
10. In connection with the transactions, acts, practices, and courses of business described in this Complaint, Defendants Johnson, Johnson &Co., Skinner and Winners directly or indirectly, have made use of the means or instrumentalities of interstate commerce, of the mails, of the facilities of a national securities exchange, and/or of the means and instruments of transportation or communication in interstate commerce.
11. Venue lies in this Court pursuant to Section 27 of the Exchange Act because certain of the transactions, acts, practices and courses of business constituting the violations of law alleged herein occurred within this judicial district. In addition, Johnson resides, and Johnson &Co. is domiciled, in this judicial district.
C. The Defendants
12. Defendant Johnson, a resident of Littleton, Colorado, has been the president and sole shareholder of Johnson &Co. and a licensed certified public accountant in Colorado since 1975. He also is a licensed certified public accountant in Florida and Mississippi.
13. Defendant Johnson &Co. is an accounting firm located in Denver, Colorado. Johnson is the only shareholder of, and the only certified public accountant affiliated with, the firm. Johnson &Co., through Johnson and an employee under Johnson's supervision, made entries to Winners' books, records and/or accounts and prepared, compiled, audited and/or reviewed certain financial statements of Winners filed with the Commission by Skinner and Winners between December 23, 1999 and December 6, 2000.
14. Defendant Skinner, a resident of Jacksonville, Florida, was the president, chief executive officer and chairman of the board of directors of Winners from July 1997 to March 2001.
15. Defendant American Television and Film Company, formerly known as Winners, is a Nevada corporation, which, at all times relevant to this Complaint, maintained offices in St. Augustine, Florida and/or in the country of Liechtenstein. Between 1999 and June 2002, Winners offered online processing of Internet gaming and other financial transactions using its proprietary processing software and thereafter had no operations. Winners' name was changed to American Television and Film Company in February 2004. Winners' offices are currently located in Houston, Texas.
16. In December 1999, Winners filed a general form of registration of securities of a small business issuer with the Commission on Form 10-SB, which Winners withdrew on February 17, 2000, before it became effective.
17. On May 15, 2000, Winners' common stock became registered with the Commission pursuant to Section 12(g) of the Exchange Act, when Winners acquired Glennaire Financial Services, Inc., a corporation whose common stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act, effective September 1999.
18. On February 26, 2004, Winners terminated the registration of its common stock by filing a Form 15 with the Commission. Therefore, from May 15, 2000 to at least February 26, 2004, Winners, now American, was required to file periodic reports with the Commission. Winners' common stock is quoted on the National Quotation Bureau's Pink Sheets.
19. At all times relevant to this Complaint, Winners' stock has been a "penny stock" as defined by Section 3(a)(51) of the Exchange Act and Exchange Act Rule 3a51-1 because it did not qualify for any of the exemptions from the definition of a penny stock.
D. Factual Allegations
Winners' Commission Filings
20. On December 23, 1999, Winners and Skinner and filed with the Commission an Exchange Act registration statement on Form 10-SB, which included financial statements for the years ended December 31, 1997 and December 31, 1998 and for the ten months ended October 31, 1998 and October 31, 1999. Skinner reviewed and signed the Form 10-SB before filing it with the Commission.
21. Johnson &Co., Johnson and an employee supervised by Johnson audited Winners' financial statements for the years ended December 31, 1997 and December 31, 1998 and compiled the financial statements for the ten months ended October 31, 1998 and October 31, 1999, all of which were included in Winners' Form 10-SB referenced in Paragraph 20.
22. On May 15, 2000, Winners and Skinner filed with the Commission a current report on Form 8-K, which included financial statements for the years ended December 31, 1998 and December 31, 1999. Skinner reviewed and signed the Form 8-K before filing it with the Commission.
23. Johnson &Co., Johnson and an employee supervised by Johnson audited Winners' financial statements for the year ended December 31, 1998 and prepared and audited Winners' financial statements for the year ended December 31, 1999, both of which were included in Winners' Form 8-K referenced in Paragraph 22. In preparing Winners' financial statements for December 31, 1999, Johnson and a Johnson &Co. employee supervised by Johnson decided the values that would be assigned to certain of Winners' accounts and made false entries to Winners' books, records and accounts.
24. On May 19, 2000 Winners and Skinner filed with the Commission a quarterly report for the quarter ended March 31, 2000 on Form 10-QSB, which included financial statements for the quarter ended March 31, 2000 ("original March 31, 2000 financial statements"). Skinner reviewed and signed this Form 10-QSB before filing it with the Commission.
25. Johnson and Johnson &Co. did not participate in the preparation, compilation or review of Winners' original March 31, 2000 financial statements included in the Form 10-QSB referenced in Paragraph 24.
26. On June 21, 2000, Winners and Skinner filed with the Commission an amended quarterly report for the quarter ended March 31, 2000 on Form 10-QSB/A, which included amended financial statements for the quarter ended March 31, 2000 ("first amended March 31, 2000 financial statements"). Skinner reviewed and signed this Form 10-QSB/A before filing it with the Commission.
27. Johnson and Johnson &Co. did not participate in the preparation, compilation or review of Winners' first amended March 31, 2000 financial statements included in the Form 10-QSB referenced in Paragraph 26.
28. On November 22, 2000, Winners and Skinner filed with the Commission a second amended quarterly report for the quarter ended March 31, 2000 on Form 10-QSB/A, which included amended financial statements for the quarter ended March 31, 2000 ("second amended March 31, 2000 financial statements"). Skinner reviewed and signed this Form 10-QSB/A before filing it with the Commission.
29. Johnson &Co., Johnson and an employee supervised by Johnson prepared and reviewed a version of the financial statements for the quarter ended March 31, 2000 that were included in the Form 10-QSB/A filed on November 22, 2000 and referenced in Paragraph 28. In preparing Winners' these financial statements, a Johnson &Co. employee supervised by Johnson decided the values that would be assigned to certain accounts and made false entries to Winners' books, records and accounts.
30. On August 17, 2000, Winners and Skinner filed with the Commission a quarterly report for the quarter ended June 30, 2000 on Form 10-QSB, which included financial statements for the quarter ended June 30, 2000 ("original June 30, 2000 financial statements"). Skinner reviewed and signed this Form 10-QSB before filing it with the Commission.
31. Johnson and Johnson &Co. did not participate in the preparation, compilation or review of Winners' original June 30, 2000 financial statements included in the Form 10-QSB referenced in Paragraph 30.
32. On November 22, 2000, Winners and Skinner filed with the Commission an amended quarterly report for the quarter ended June 30, 2000 on Form 10-QSB/A, which included amended financial statements for the quarter ended June 30, 2000 ("amended June 30, 2000 financial statements"). Skinner reviewed and signed this Form 10-QSB/A before filing it with the Commission.
33. Johnson &Co., Johnson and an employee supervised by Johnson, prepared and reviewed a version of the financial statements for the quarter ended June 30, 2000 that were included in the Form 10-QSB/A filed on November 22, 2000 and referenced in Paragraph
32. In preparing these financial statements, an employee supervised by Johnson made decisions concerning the values that would be assigned to certain accounts and made false entries to Winners' books, records and accounts.
34. On November 21, 2000, Winners and Skinner filed a quarterly report for the quarter ended September 30, 2000 on Form 10-QSB, which included financial statements for the quarter ended September 30, 2000 ("original September 30, 2000 financial statements"). Skinner reviewed and signed this Form 10-QSB before filing it with the Commission.
35. Johnson &Co., Johnson and an employee supervised by Johnson prepared and reviewed a version of the financial statements for the quarter ended September 30, 2000 that were included in the Form 10-QSB/A filed on November 21, 2000 and referenced in Paragraph 34. In preparing these financial statements, a Johnson &Co. employee supervised by Johnson decided the values that would be assigned to certain accounts and made false entries to Winners' books, records and accounts.
36. On December 6, 2000, Winners and Skinner filed with the Commission an amended quarterly report for the quarter ended September 30, 2000 on Form 10-QSB/A, which included amended financial statement for the quarter ended September 30, 2000 ("amended September 30, 2000 financial statements"). Skinner reviewed and signed this Form 10-QSB/A before filing it with the Commission.
37. Johnson &Co., Johnson and an employee supervised by Johnson prepared and reviewed a version of the financial statements for the quarter ended September 30, 2000 that were included in the Form 10-QSB/A filed on December 6, 2000 and referenced in Paragraph 36. In preparing these financial statements, a Johnson &Co. employee supervised by Johnson decided the values that would be assigned to certain accounts and made false entries to Winners' books, records and accounts.
False Financial and Other Statements in Commission Filings
Overstatements of Assets Due to Improper Capitalization of Demonstration Software Costs
38. Winners' financial statements for the year ended December 31, 1997, the ten months ended October 31, 1998 and each of the original and amended financial statements for the quarters ended March 31, June 30 and September 30, 2000 reported as part of Winners' software assets demonstration software valued at $300,000.
39. Winners' financial statements for the years ended December 31, 1998 and December 31, 1999 and the ten months ended October 31, 1999 reported as part of Winners' software assets demonstration software asset valued at $75,000.
40. Winners' Forms 10-SB and 8-K, referenced in Paragraphs 20 and 22, respectively, falsely claimed that the demonstration software had been used in the development of Winners' proprietary processing software, referenced in Paragraph 15.
41. The inclusion of the $75,000 and $300,000 demonstration software values in Winners' assets was improper, because the demonstration software, which was actually purchased for approximately $50,000, was never was used in the development of Winners' proprietary processing software.
42. In addition, $250,000 worth of stock issued by Winners that was included in the $300,000 demonstration software value was not, in fact, issued for the purchase of the demonstration software.
43. The improper capitalization of purported demonstration software costs to Winners' software assets resulted in materially false statements in each of Winners' financial statements filed with the Commission concerning the value of Winners' total assets, by overstating total assets by between $75,000 and $300,000, or between 3% and 191%.
44. During the audit of Winners' December 31, 1997 financial statements, a Winners employee supervised by Skinner notified Johnson and Johnson &Co. that Winners did not use the demonstration software in developing its proprietary processing software and that the $250,000 Winners had previously claimed was used to purchase the demonstration software was not, in fact, used to purchase the software.
45. Despite knowing that none of the purported costs of Winners' demonstration software could be capitalized to Winners' assets, Johnson and Johnson &Co. allowed Winners to include a demonstration software value of $300,000 in Winners' financial statements for the year ended December 31, 1997, the ten months ended October 31, 1998, and in the second amended March 31, 2000 financial statements, the amended June 30, 2000 financial statements, and the original and amended September 30, 2000 financial statements, and a demonstration software value of $75,000 in the financial statements for the years ended December 31, 1998 and December 31, 1999 and the ten months ended October 31, 1999.
46. Furthermore, a Johnson &Co. employee under Johnson's supervision made the decision to increase the value of Winners' demonstration software from $75,000 at December 31, 1999 back to $300,000 in quarters in 2000 and made the false entries to Winners' books, records and accounts increasing this value.
47. Skinner, who reviewed, signed and filed every Winners filing that included the materially overstated demonstration software asset, knew that Winners did not use the demonstration software in the development of Winners' processing software, particularly since he supervised the employee who developed Winners' processing software without using the demonstration software. Furthermore, as a member of Winners' board, which authorized all issuances of Winners' stock, Skinner knew that Winners did not issue $250,000 for the purchase of demonstration software.
Overstatements of Assets Due to Improper Capitalization of Certain Expenses
48. Winners' December 31, 1999 financial statements filed with Winners' Form 8-K identified in Paragraph 22, included in Winners' proprietary processing software asset $421,000 of improperly capitalized expenses, including wages, payroll taxes, rent, travel, marketing and consulting expenses for the entire 1999 fiscal year primarily related to Skinner, who played no role in developing Winners' processing software.
49. The capitalization of the expenses identified in Paragraph 48 was improper, because, in addition to the fact that many expenses unrelated to developing Winners' proprietary processing software were capitalized, generally accepted accounting principles dictated that Winners could capitalize relevant expenses only between the date its software reached technological feasibility, approximately October 1, 1998, until the date that Winners' software was available for general release to customers, approximately January 31, 1999.
50. The improper capitalization of 1999 expenses to Winners' software asset resulted in materially false statements in Winners' December 31, 1999 financial statements concerning the value of Winners' total assets, which were overstated by over $421,000, or 416%.
51. Johnson and Johnson &Co. knew that the 1999 expenses identified in Paragraph 48 could not be capitalized to Winners' software asset. They knew that Winners had sold its processing software to customers beginning in early 1999, yet they allowed Winners to capitalize expenses incurred throughout the entire year.
52. Furthermore, Johnson and a Johnson &Co. employee supervised by Johnson jointly decided which of Winners' 1999 expenses would be capitalized to the software asset, including Skinner's 1999 salary and other expenses, and the Johnson &Co. employee supervised by Johnson made the journal entry that improperly increased the software asset by over $421,000.
53. Skinner, who reviewed, signed and filed the Form 8-K incorporating the December 31, 1999 financial statements, which included the improperly capitalized 1999 expenses, was at least reckless in not knowing, at a minimum, that his 1999 salary could not be capitalized to Winners' software asset, since he played no role in its creation. Overstated Licensing Revenues and Accounts Receivable and Understated Expenses Due to Recording of Fictitious License Fees and Uncollectible License Fee Receivables
54. Winners' December 31, 1999 financial statements also contained materially false statements concerning the value of Winners' licensing revenues and licensing receivables by overstating such revenues and receivables by $140,000 and $301,000, respectively.
55. Winners' licensing revenues and receivables were materially overstated due to the recording of fictitious license fees and the recognition of receivables from licensing fees that Winners had little or no chance of collecting. In addition, by failing to write off receivables that Winners had little or no chance of collecting, Winners' December 31, 1999 financial statements contained materially false statements concerning its expenses, which were understated by $161,000 or 17%.
56. Winners reported fictitious licensing fees by valuing licensing revenues of one client at $130,000 and license fee receivables at $107,500, when the client's contract with Winners, a portion of which appeared in Johnson &Co.'s audit workpapers, showed that the client's license fee totaled only $50,000.
57. In addition, while another client's licensing fee was just $10,000 and its corresponding receivables were only $9,000, Winners included $70,000 in revenues and $69,000 in receivables from that client in its December 31, 1999 financial statements. 58. Winners failed to write off $133,500 in receivables from licensing fees it had little or no chance of collecting. For example, the licensing receivables from three of Winners' clients had been outstanding for periods of over 330 days, with at least one client having terminated its relationship with Winners by the end of 1999, and there was no evidence of payment or confirmation of validity of the receivables by the clients. 59. Furthermore, Winners agreed on March 1, 2000 to refund license fees paid by a fourth client in response to a claim by that client that Winners had breached its contract, and therefore Winners would not receive the $27,500 in licensing fees still owed by the client. Winners' improper accounting for these receivables resulted in a material understatement of expenses of $161,000, or 17%, for the year ended December 31, 1999.
60. Johnson and Johnson &Co. knew that Winners' December 31, 1999 financial statements materially misstated licensing revenues, receivables and related expenses. Johnson and a Johnson &Co. employee supervised by Johnson determined the amount of licensing revenues and receivables that would be recorded for the year ended December 31, 1999 while knowing that Winners' documents and their own audit workpapers did not support the reported revenues and receivables, and that the auditors did not perform adequate audit test work.
61. For example, Johnson &Co.'s audit workpapers included only partial license fee contracts for only some of Winners' clients, and only some of these partial contracts showed the amount of license fees owed to Winners by the respective clients.
62. With respect to at least one client, Johnson and Johnson &Co. never saw the license fee contract or other documentation showing the client's license fees.
63. In addition, there was no documentation in Johnson &Co.'s workpapers showing the amount of license fees paid and owed by Winners' clients.
64. In many instances in which there was no documentation supporting certain licensing revenue or receivable values, Johnson and Johnson &Co. relied merely on unverified representations by Winners' management concerning the values and failed to perform adequate audit test work to confirm those values.
65. Johnson and Johnson &Co. ignored the documentation and information that did exist concerning the true amounts of Winners' licensing revenues and receivables and instead recorded significantly higher values for these accounts for the year ended December 31, 1999.
66. As stated in Paragraph 61, Johnson &Co.'s own audit workpapers included partial contracts that set forth the amount of license fees owed by some clients, yet Johnson and Johnson &Co. allowed Winners to record significantly higher licensing revenue amounts for these clients.
67. In addition, a Johnson &Co. employee supervised by Johnson knew, and documents in Johnson &Co.'s workpapers state, that certain of Winners' clients had accused the company of breaching its contracts with them and that Winners had agreed to refund one client's licensing fee, thereby making it unlikely that Winners would receive or retain those fees.
68. Winners continued to report $200,000 of uncollectible licensing receivables in all of its quarterly financial statements for the year 2000, and therefore these financial statements contained materially false statements concerning its licensing receivables and expenses.
69. Skinner reviewed, signed and filed the Form 8-K and the Forms 10-QSB and Forms 10-QSB/A in which the overstated licensing revenues and receivables and understated licensing-related expenses appeared, while knowing that Winners' documents did not support the reported licensing revenues and receivables and that certain clients likely would never pay Winners their licensing fees
.
Overstated Processing Revenues and Accounts Receivable
70. Winners' December 31, 1999 financial statements materially overstated Winners' processing revenues by inappropriately including in revenues and receivables amounts that had not been realized or earned by Winners.
71. Winners historically collected all gaming proceeds due to its casino clients, extracted fees of between 1% and 5%, and paid the remaining 95% to 99% to its clients. For the month of December 1999, however, Winners reported as revenue all of the gaming proceeds it received instead of its much smaller retained processing fees, which were its true revenues. Winners did not record a corresponding expense.
72. Furthermore, Winners' December 31, 1999 financial statements also included as processing income over $115,900 of licensing and processing fees that Winners had not earned but that it anticipated receiving upon the signing of certain license fee contracts in 2000. These amounts had been neither realized nor earned by Winners, since the anticipated contracts had not been executed and Winners had not rendered any services or delivered products to the potential clients. In fact, the contracts were never signed.
73. As a result of the improper recognition of revenue that was neither earned nor realized by Winners, Winners' financial statements for December 31, 1999 contained materially false statements concerning its processing fee revenues and receivables, each of which were overstated by $232,766, resulting in overstated total revenues of 52% and total assets of 230%.
74. Johnson and a Johnson &Co. employee under Johnson's supervision decided to report as revenue 100% of Winners' gaming proceeds for the month of December 1999, without recording a corresponding expense, while knowing that Winners' true revenues were only 1% to 5% of that amount.
75. Furthermore, a Johnson &Co. employee under Johnson's supervision knew that over $115,900 of anticipated licensing and processing fees had not been earned in 1999, and Johnson &Co.'s audit workpapers were devoid of any documentation concerning these anticipated fees, yet Johnson and Johnson &Co. allowed Winners to record them in its December 31, 1999 financial statements.
76. As a result of the overstatements of licensing and processing revenues and the understatement of licensing- and processing-related expenses, Winners' December 31, 1999 financial statements contained materially false statements concerning its revenues, assets, expenses and net income, and its net loss of over $501,000 was reported as net income of over $5,000.
Overstated Assets and Revenues Based on Sham Asset Exchange
77. Beginning with Winners' October 31, 1999 financial statements filed with Winners' registration statement on December 23, 1999, Winners engaged in a pattern of improperly recognizing assets and revenues from a sham asset exchange between Winners and CyberLink Monetary Systems AG ("Cyberlink"), a Liechtenstein trust which existed for the sole purpose of allowing Winners to conduct business in Liechtenstein. In a series of purported transactions, Winners purported to sell its processing software to Cyberlink for $3 million, and Cyberlink purported to sell certain domain names to Winners for $4 million.
78. The purported transactions with Cyberlink lacked economic substance because, among other things, Cyberlink and Winners functioned as the same entity, and Winners already owned the asset it purportedly agreed to purchase for $4 million. Therefore, Winners should not have reported assets or revenues from the transactions, or, in the alternative, the transactions should have been eliminated in the consolidation of Winners' and Cyberlink's financial transactions.
79. The improper recognition of assets and revenues from the sham transactions identified in Paragraph 77 resulted in the following materially false statements in Winners' financial statements: (a) overstatement of Winners' accounts receivables by $1,200,000, resulting in overstatements of total assets by 3% and total revenues by 218% in Winners' October 31, 1999 financial statements; (b) overstatement of the value of Winners' software asset by $1 million, resulting in an overstatement of total assets of 205%, and overstatement of revenues of $1,500,000, resulting in an overstatement of total revenues of 1,125%, in Winners' original March 31, 2000 financial statements; (c) overstatement of the value of Winners' software asset by $4 million, resulting in an overstatement of total assets of 923%, and overstatement of revenues by $3 million, resulting in an overstatement of total revenues of 22,497%, in Winners' first amended March 31, 2000 financial statements; (d) overstatement of the value of Winners' software asset by $1 million, resulting in an overstatement of total assets of 231%, in Winners' second amended March 31, 2000 financial statements; (e) overstatement of the value of Winners' software asset by $4 million, resulting in an overstatement of total assets of 2,550%, and overstatement of revenues by $3 million, resulting in an overstatement of total revenues of 1,749%, in Winners' original June 30, 2000 financial statements; (f) overstatement of the value of Winners' software asset by $1 million, resulting in an overstatement of total assets of 638%, in Winners' amended June 30, 2000 financial statements; (g) overstatement of the value of Winners' software asset by $1 million, resulting in an overstatement of total assets of over 100%, in Winners' original September 30, 2000 financial statements; and (h) overstatement of the value of Winners' software asset by $1 million, resulting in an overstatement of total assets of over 100%, in Winners' amended September 30, 2000 financial statements.
80. Compounding the falsity of the asset and revenue values in Paragraph 79, the Management's Discussion and Analysis section of Winners' registration statement identified in Paragraph 20 stated that Winners' October 31, 1999 revenues of $1,744,878 "were generated from [Winners'] European processing operations," when, in fact, $1,200,000 of Winners' October 31, 1999 revenues were the result of the improper recognition of revenues from the sham transactions identified in Paragraph 77.
81. In addition, the notes to Winners' original March 31, 2000 financial statements contained in the Form 10-QSB identified in Paragraph 24 stated that the increase in revenues of $1,516,419 from March 31, 1999 to March 31, 2000 "was primarily due to an overall increase in [Winners'] operations," when, in fact, $1,500,000 of the increase in revenues from March 31, 1999 to March 31, 2000 was the result of the improper recognition of revenues from the sham transactions identified in Paragraph 77.
82. Johnson and Johnson &Co. knew that Cyberlink and Winners were essentially the same company and, therefore, Winners had no valid basis for recognizing such assets. Johnson and a Johnson &Co. employee supervised by Johnson were sufficiently concerned about the purported asset exchange between Winners and Cyberlink that they did not allow Winners to record any assets or revenues from the transactions in the December 31, 1999 financial statements they prepared and audited.
83. In addition, in February 2000, during their audit of those financial statements, Johnson and a Johnson &Co. employee supervised by Johnson advised Skinner that no revenues from the exchange should be recognized.
84. Nevertheless, Johnson and a Johnson &Co. employee supervised by Johnson prepared and conducted reviews of the second amended March 31, 2000 financial statements, the amended June 30, 2000 financial statements and the original and amended September 30, 2000 financial statements, which recognized assets based on the asset exchange.
85. Furthermore, none of Johnson &Co.'s workpapers indicate that Johnson or Johnson &Co. took any steps to determine whether assets were actually bought or sold pursuant to the purported asset exchange.
86. Skinner, who signed, reviewed and filed with the Commission every report containing the overstated assets and revenues based on the sham asset exchange and the false statements in two of the reports that increased revenues were due to reasons other than the sham asset exchange, knew that Cyberlink and Winners were essentially the same company and, therefore, Winners had no valid basis for recognizing such assets.
87. Moreover, even after Johnson and a Johnson &Co. employee supervised by Johnson advised Skinner that no revenues could be recognized from the exchange in 2000, Skinner continued to file with the Commission quarterly reports that included Cyberlink-related revenues of between $1.5 million and $3 million and Cyberlink-related assets of between $1 million and $4 million.
Overstated Cash Inflows
88. Six of seven of Winners' quarterly financial statements contained in quarterly reports filed with the Commission in 2000 contained materially false statements concerning Winners' cash inflows from financing activities, which were overstated by between $423,172 and $2,476,432, or between 135% and 790%, due to the improper reporting of stock issued for services or assets as stock issued for cash proceeds.
89. Skinner, who reviewed, signed and filed every quarterly report containing the financial statements that overstated Winners' cash inflows, knew or was reckless in not knowing that Winners' cash inflows were materially overstated, given the magnitude of the overstatements and Skinner's position as president and chairman of Winners' board of directors, which authorized all issuances of Winners' stock.
False Statements in Audit Reports
90. Johnson and Johnson &Co. issued audit reports accompanying Winners' year-end financial statements for 1997, 1998 and 1999. As to 1997 and 1998, the audit opinions each contained a going concern qualification. As to 1999, the audit opinion was unqualified. The 1997, 1998 and 1999 audit reports falsely stated that the financial statements were presented fairly in all material respects in conformity with Generally Accepted Accounting Principles ("GAAP") and that the audits of these financial statements were conducted in accordance with Generally Accepted Auditing Standards ("GAAS").
91. The statements in Johnson &Co.'s audit reports referenced in Paragraph 90, that Winners' financial statements for 1997, 1998 and 1999 were presented in conformity with GAAP, were false, because, as discussed above, these financial statements included numerous financial misstatements.
92. The statements in Johnson &Co.'s audit reports referenced in Paragraph 90, that its audits of Winners' 1997, 1998 and 1999 financial statements were conducted in accordance with GAAS, were false, because portions of the underlying financial statements were not presented in conformity with GAAP, which, in turn, rendered false the statements that the audits were conducted in accordance with GAAS, since the failure to address a deviation from GAAP in an audit report is a violation of GAAS.
93. In addition, Johnson &Co.'s audit of Winners' December 31, 1999 financial statements was not conducted in accordance with GAAS because, among other things, by participating in both the preparation and audit of these financial statements, Johnson and Johnson &Co. failed to maintain their independence from Winners.
94. Johnson and Johnson &Co. also failed to conduct their audit of Winners' December 31, 1999 financial statements in accordance with GAAS, because they failed to adequately plan their audit, failed to obtain competent evidential matter, failed to use due professional care, failed to properly evaluate Winners' ability to continue as a going concern, and failed to adopt reasonable procedures to retain audit documentation. Improper Document Creation and Destruction by Johnson and Johnson &Co.
95. Certain original Johnson &Co. workpapers relating to the audit of Winners' December 31, 1999 financial statements were missing within approximately fifteen months after completion of the audit. These documents were inappropriately recreated by Johnson the night before his investigative testimony before the Commission and inserted into the original audit workpapers.
96. After receiving the Commission's subpoena to Johnson &Co., a Johnson &Co. employee under Johnson's supervision destroyed the original trial balance relating to the audit of Winners' December 31, 1999 financial statements. According to Johnson, this trial balance contained numerous handwritten notes. The Johnson &Co. employee then recreated or printed a new trial balance, produced it to the Commission in testimony, and falsely testified under oath that she did not know what had happened to the original trial balance.
False and Misleading Analyst Reports
97. On January 13 and February 24, 2000, World of Internet.com AG ("World of Internet"), a German company that touted the stock of microcap companies using the name "Stockreporter," issued analyst reports recommending that investors buy Winners stock ("the Stockreporter reports"). Skinner reviewed and edited the Stockreporter reports prior to their public dissemination. World of Internet posted these reports on its Internet website, where they remained until at least June 26, 2000, and issued press releases linking to the reports. Winners employees supervised by Skinner posted these releases on Winners' website, where they remained until October 14, 2000. The Stockreporter reports stated that Winners would achieve revenues of between $18 million and $35 million and stock prices of between $12 and $23.60 between the years 2000 and 2002.
98. The revenue projections in the Stockreporter reports lacked a reasonable basis because the projections were not supported by Winners' historical operations, and the reports failed to disclose material adverse facts, specifically that the revenue projections were dependent upon Winners obtaining funding from a third party and that Winners had not received any commitments for such funding. The stock price projections were similarly baseless because, among other things, they were based on the false revenue projections.
99. On February 29, 2000, Christina Skousen ("Skousen"), a California resident who wrote analyst reports both for World of Internet and under her business name CSK Securities Research ("CSK"), issued a CSK analyst report recommending that investors buy Winners stock ("the CSK report"). Skousen disseminated this report through a press release, and Skinner reviewed the report prior to its public dissemination. On March 3, 2000, Winners issued its own press release regarding the CSK report. Winners employees under Skinner's supervision posted this press release and the CSK report on Winners' Internet website, where they remained until October 14, 2000. The CSK report stated that Winners would achieve revenues of between $20 million and $50 million and stock prices of between $15 and $38.50 between 2000 and 2002.
100. The revenue projections in the CSK report lacked a reasonable basis because the projections were not supported by Winners' historical operations, and the reports failed to disclose Winners' need for funding. The stock price projections were similarly baseless because, among other things, they were based on the false revenue projections.
101. Stockreporter's press release announcing its report about Winners and Winners' press release announcing the CSK report falsely stated that Stockreporter and CSK were "independent" from Winners. These statements were false, since Winners paid 200,000 shares of its stock to Stockreporter for, among other services, writing and publicizing the Stockreporter report, and Stockreporter, in turn, paid for, and Stockreporter's principals and Skinner reviewed, the CSK report.
Winners' Inaccurate Books, Records and Accounts and Deficient Internal Controls
102. Although, beginning with the registration of its common stock with the Commission on May 15, 2000, Winners was required to maintain books, records and accounts which accurately and fairly reflected its transactions and the disposition of its assets, Winners maintained incomplete and inaccurate books, records and accounts for its European operations, which encompassed its software asset, receivables, revenues, and the majority of its expenses and liabilities.
103. In connection with the preparation of Winners' second amended March 31, 2000 financial statements, amended June 30, 2000 financial statements, and original and amended September 30, 2000 financial statements, a Johnson &Co. employee under Johnson's supervision knowingly made false entries to certain of Winners' books, records and/or accounts.
104. Once its common stock was registered with the Commission, Winners also was required to, but did not, devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances concerning the execution, recording, access to and accountability for Winners' assets.
105. Between May 15, 2000 and December 6, 2000, Skinner knowingly falsified Winners' books, records and/or accounts and, between May 15, 2000 and March 2001, knowingly failed to implement a system of internal accounting controls for Winners.
Winners' Delinquent Filings
106. As a public company registered with the Commission pursuant to the provisions of the Exchange Act, Winners was required to file periodic reports with the Commission from May 15, 2000 until February 26, 2004.
107. From March 31, 2001 to February 26, 2004, Winners failed to file three annual reports and nine quarterly reports.
Trading in Winners Stock
108. Between January 31 and March 3, 2000, when the materially false public statements in the Stockreporter and CSK reports were first disseminated, the price of Winners stock increased from $2.38 to $4.69 per share.
109. Between January and December 2000, when materially false statements concerning Winners were disseminated both in analyst reports and false filings with the Commission, Skinner sold a total of 103,000 shares of Winners stock through open market transactions for proceeds of at least $170,701.
FIRST CLAIM
Violations by Skinner, Winners, Johnson and Johnson &Co.
of Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5 [15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5]
110. Plaintiff repeats and realleges paragraphs 1 through 109 above.
111. Skinner, Winners, Johnson and Johnson &Co., directly or indirectly, with scienter, in connection with the purchase or sale of securities, by the use of means or instrumentalities of interstate commerce, the mails, or any facility of a national securities exchange, employed devices, schemes, or artifices to defraud; made untrue statements of material fact or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or engaged in acts, practices, or courses of business which operated or would operate as a fraud or deceit upon any person; in violation of Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5].
112. By reason of the foregoing, Skinner, Winners, Johnson and Johnson &Co.
violated Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5.
SECOND CLAIM
Winners' Violations of Section 13(a) of the Exchange Act
and Exchange Act Rules 12b-20, 13a-1, 13a-11 and 13a-13
[15 U.S.C. § 78m(a), 17 C.F.R. §§ 240.12b-20, 240.13a-1, 240.13a-11 and 240.13a-13]
113. Plaintiff repeats and realleges paragraphs 1 through 109 above.
114. From May 15, 2000 until February 26, 2004, Winners was an issuer of a security registered with the Commission pursuant to Section 12 of the Exchange Act, and was subject to the periodic reporting requirements imposed on such issuers by the Exchange Act.
115. As described elsewhere in this Complaint, between May 15, 2000 and December 6, 2000, Winners filed materially inaccurate and misleading current and quarterly reports with the Commission.
116. Winners also failed to add such further material information to its current and quarterly reports as was necessary to make the required statements or reports, in light of the circumstances under which they were made, not misleading.
117. Furthermore, between March 31, 2001 and February 26, 2004, Winners failed to file annual and quarterly reports with the Commission.
118. By reason of the foregoing, Winners violated Section 13(a) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 13a-11 and 13a-13 [15 U.S.C. § 78m(a), 17 C.F.R. §§ 240.12b-20, 240.13a-1, 240.13a-11 and 240.13a-13].
THIRD CLAIM
Aiding and Abetting by Skinner, Johnson and Johnson &Co.
of Certain of Winners' Violations of Section 13(a) of the Exchange Act
and Exchange Act Rules 12b-20, 13a-11, and 13a-13
[15 U.S.C. § 78m(a), 17 C.F.R. §§ 240.12b-20, 240.13a-11, and 240.13a-13]
119. Plaintiff repeats and realleges paragraphs 1 through 109 above.
120. Skinner, Johnson and Johnson &Co. knew or were reckless in not knowing that Winners filed materially inaccurate and misleading current and quarterly reports with the Commission and failed to add such further material information as was necessary to make the required statements or reports, in light of the circumstances under which they were made, not misleading, in violation of Section 13(a) of the Exchange Act and Exchange Act Rules 12b-20, 13a-11, and 13a-13, and substantially assisted Winners in committing these violations.
121. By reason of the foregoing, Skinner, Johnson and Johnson &Co. aided and abetted Winners' violations of Section 13(a) of the Exchange Act and Exchange Act Rules 12b-20, 13a-11, and 13a-13 [15 U.S.C. § 78m(a), 17 C.F.R. §§ 240.12b-20, 240.13a-11, and 240.13a-13].
FOURTH CLAIM
Winners' violations of Section 13(b)(2)(A) of the Exchange Act
[15 U.S.C. § 78m(b)(2)(A)]
122. Plaintiff repeats and realleges paragraphs 1 through 109 above.
123. Between May 15, 2000 and February 26, 2004, the period in which Winners' common stock was registered pursuant to Section 12 of the Exchange Act, Winners failed to make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflected the company's transactions and disposition of its assets.
124. By reason of the foregoing, Winners violated Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. § 78m(b)(2)(A)].
FIFTH CLAIM
Aiding and Abetting by Skinner, Johnson and Johnson &Co.
of Winners' Violations of Section 13(b)(2)(A) of the Exchange Act
[15 U.S.C. § 78m(b)(2)(A)]
125. Plaintiff repeats and realleges paragraphs 1 through 109 above.
126. Until his resignation from Winners in March 2001, Skinner knew or was reckless in not knowing of Winners' violations of Section 13(b)(2)(A) of the Exchange Act and substantially assisted Winners in committing these violations.
127. Until at least December 6, 2000, Johnson and Johnson &Co. knew or were reckless in not knowing of Winners' violations of Section 13(b)(2)(A) of the Exchange Act and substantially assisted Winners in committing these violations.
128. By reason of the foregoing, Skinner, Johnson and Johnson &Co. aided and abetted Winners' violations of Section 13(b)(2)(A) [15 U.S.C. § 78m(b)(2)(A)] of the Exchange Act.
SIXTH CLAIM
Winners' Violations of Section 13(b)(2)(B) of the Exchange Act
[15 U.S.C. § 78m(b)(2)(B)]
129. Plaintiff repeats and realleges paragraphs 1 through 109 above.
130. During the period in which Winners' common stock was registered pursuant to Section 12 of the Exchange Act, Winners failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions were recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements.
131. By reason of the foregoing, Winners violated Section 13(b)(2)(B) of the Exchange Act [15 U.S.C. § 78m(b)(2)(B)].
SEVENTH CLAIM
Aiding and Abetting by Skinner of Winners' Violations
of Section 13(b)(2)(B) of the Exchange Act
[15 U.S.C. § 78m(b)(2)(B)]
132. Plaintiff repeats and realleges paragraphs 1 through 109 above.
133. Until his resignation from Winners in March 2001, Skinner knew or was reckless in not knowing of Winners' violations of Section 13(b)(2)(B) of the Exchange Act and substantially assisted Winners in committing these violations.
134. By reason of the foregoing, Skinner aided and abetted Winners' violations of Section 13(b)(2)(B) of the Exchange Act [15 U.S.C. § 78m(b)(2)(B)].
EIGHTH CLAIM
Violations by Skinner, Johnson and Johnson &Co.
of Rule 13b2-1 Under the Exchange Act
[17 C.F.R. § 240.13b2-1]
135. Plaintiff repeats and realleges paragraphs 1 through 109 above.
136. Between May 15, 2000 and February 26, 2004, Winners' books, records and accounts were subject to Section 13(b)(2)(A) of the Exchange Act.
137. Between May 15, 2000 and March 2001, Skinner directly or indirectly falsified or caused to be falsified Winners' books, records and/or accounts. 138. Between May 15, 2000 and at least December 6, 2000, Johnson and Johnson &Co. directly or indirectly falsified or caused to be falsified Winners' books, records and/or accounts.
139. By reason of the foregoing, Skinner, Johnson and Johnson &Co. violated Rule 13b2-1 under the Exchange Act [17 C.F.R. § 240.13b2-1].
NINTH CLAIM
Violations by Skinner, Johnson and Johnson &Co.
of Section 13(b)(5) of the Exchange Act
[15 U.S.C. § 78m(b)(5)]
140. Plaintiff repeats and realleges paragraphs 1 through 109 above.
141. Between May 15, 2000 and at least December 6, 2000, Skinner, Johnson and Johnson &Co. knowingly falsified books, records and/or accounts described in Section 13(b)(2) of the Exchange Act
.
142. Between May 15, 2000 and March 2001, Skinner knowingly circumvented or knowingly failed to implement a system of internal accounting controls.
143. By reason of the foregoing, Skinner, Johnson and Johnson &Co. violated Section
13(b)(5) of the Exchange Act [15 U.S.C. § 78m(b)(5)].
PRAYER FOR RELIEF
WHEREFORE, the Commission respectfully requests that this Court:
1. Find that the defendants, and each of them, committed the violations alleged;
2. Enter an injunction permanently restraining and enjoining Defendants Johnson, Johnson &Co., Skinner and Winners, his or its agents, servants, employees and attorneys, and those persons in active concert or participation with them who receive actual notice of a judgment by personal service or otherwise, and each of them, from violating, directly or indirectly, the provisions of law and rules alleged in this Complaint;
3. Order Defendants Johnson, Johnson &Co. and Skinner to disgorge all ill-gotten gains received or benefits in any form derived from the illegal conduct alleged in this Complaint, together with prejudgment and post-judgment interest as provided by law;
4. Order Defendants Johnson, Johnson &Co. and Skinner to pay third-tier civil money penalties pursuant to Section 21(d)(3) [15 U.S.C.§ 78u(d)(3)] of the Exchange Act;
5. Order that Defendant Skinner be barred from serving as an officer or director of any publicly held company pursuant to Section 21(d)(2) of the Exchange Act [15 U.S.C. § 78u(d)(2)] and the general equitable powers of the Court;
6. Order that Defendant Skinner be barred from participating in any offering of penny stock pursuant to Section 21(d)(6) of the Exchange Act [15 U.S.C. § 78u(d)(6)] and the general equitable powers of the Court; and
7. Grant such other and further relief as this Court may deem just or appropriate.
Dated: _______________, 2004
Respectfully submitted,
___________________________________
Julie K. Lutz
Kelli Farrand Chan
Attorneys for Plaintiff
Securities and Exchange Commission
1801 California Street, Suite 1500
Denver, CO 80202
Phone: (303) 844-1000
Fax: (303) 844-1068
http://www.sec.gov/litigation/complaints/comp18652.htm
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