U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20143 / June 5, 2007 SEC v. Amit Mathur, et al., (United States District Court for the District of Massachusetts, C.A. No. 05-10729MLW) Court Enters Final Judgment Against Investment Adviser Accused of Misappropriating Client Funds The Commission announced today that the Massachusetts federal district court entered a Final Judgment by consent on June 4, 2007 against defendant Rajeev Johar, of West Monroe, Louisiana, in connection with a civil injunctive action filed by the Commission against Johar, his partner, and Entrust Capital Management, Inc., a Worcester, Massachusetts-based investment advisory firm. The final judgment enjoined Johar, a principal of Entrust, from engaging in future violations of the antifraud provisions of the federal securities laws and ordered him to pay $446,276 in disgorgement, plus prejudgment interest of $58,557 and a civil penalty of $120,000.
The Commission originally filed its action against Entrust and others on April 12, 2005 and filed an amended complaint adding Johar as a defendant on September 14, 2005. The amended complaint alleged that, beginning in October 2000, Entrust, through Johar and another Entrust principal, raised more than $16 million from approximately twenty investors. The amended complaint also alleged that Johar, Entrust, and the other principal, dissipated nearly all of their clients' assets through undisclosed trading losses in Entrust's brokerage accounts, unauthorized use of investor funds to support Entrust's operating expenses, and misappropriation of client funds for personal use. The Commission's amended complaint further alleged that Johar, Entrust, and the other principal transferred at least $1 million in investor funds to AMR Realty LLC, which the Commission named as a relief defendant and alleged had no legitimate interest in the funds. The Court, on September 21, 2005, entered a preliminary injunction and asset freeze against Johar and earlier, on April 12, 2005, entered a temporary restraining order and asset freeze against Entrust and the other principal and an asset freeze against AMR Realty LLC.
The Final Judgment enjoined Johar from violating Section 10(b) of the Securities Exchange Act of 1934 and rule 10b-5 thereunder, Section 17(a) of the Securities Act of 1933, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The Judgment further ordered Johar to pay $446,276 in disgorgement, plus prejudgment interest of $58,557, and a civil penalty of $120,000.
For more information, see Litigation Release Nos. 19181 (April 13, 2005) and 19396 (September 27, 2005).
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20144 / June 5, 2007 SEC v. C. Wesley Rhodes, Jr., Rhodes Econometrics, Inc., the Rhodes Company, and Resource Transactions, Inc., Civil Action No. CV06-1353-MO (D. Or.) Oregon Investment Adviser and His Companies Consent to the Entry of Permanent Injunctions The Securities and Exchange Commission today announced that C. Wesley Rhodes, age 55 and a resident of West Linn, Oregon, and three Oregon companies he controlled consented to be enjoined from future securities fraud.
The Commission's complaint alleges that Rhodes and his companies raised millions of dollars from individual investors, including many senior citizens, by representing that he would invest their money in stocks and bonds. The complaint further alleges that contrary to representations made to investors, Rhodes did not invest their funds in stocks and bonds. Instead, Rhodes took their money and used it for other purposes, including buying vintage automobiles and sports memorabilia. According to the complaint, Rhodes sent account statements to the investors representing that their investments had an aggregate value of nearly $40 million as of June 30, 2006. At the time a receiver was appointed for Rhodes' companies on September 21, 2006, however, Rhodes had less than $2 million invested in stocks and bonds.
On September 21, 2006, the Commission filed in the United States District Court for the District of Oregon a complaint and an application for temporary emergency relief against Rhodes and three Oregon companies he controlled, charging that they defrauded investors in violation of the federal securities laws. Aside from Rhodes, the defendants were Rhodes Econometrics, Inc., an investment adviser registered with the Commission, and two other companies, The Rhodes Company and Resource Transactions, Inc., both unregistered investment advisers. On the same date, the Commission obtained a temporary injunction against all defendants for securities fraud, as well as a temporary asset freeze and the appointment of a temporary receiver over all Rhodes-controlled companies. (See Litigation Release No. 19855.) The Commission subsequently obtained a preliminary injunction against all defendants and an order appointing a permanent receiver.
Rhodes and his companies, without admitting or denying the allegations of the Commission's complaint, consented to the entry of final judgments permanently enjoining them from future violations of the antifraud provisions of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The court entered the permanent injunctions on May 30, 2007. The Commission continues to seek return of ill-gotten gains with prejudgment interest and penalties against all defendants.
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20145 / June 6, 2007 United States v. Mark R. Conway, 06-CR-10236-PBS (D. Mass.) Securities and Exchange Commission v. Mark R. Conway and Groundswell Partners LLC, 05-12209-RWZ (D. Mass.) Massachusetts Hedge Fund Adviser Sentenced to 7 Years The Securities and Exchange Commission announced that on May 7, 2007, Mark R. Conway, formerly of Waltham, Massachusetts, was sentenced to seven years in prison, to be followed by three years of supervised release, a $1,300 special assessment fine and payment of restitution in the amount of $20 million based upon his guilty plea to criminal charges brought by the United States Attorney's Office for the District of Massachusetts pursuant to a criminal Information. On October 23, 2006, Conway pleaded guilty to 13 counts of mail and wire fraud in connection with a scheme in which he defrauded approximately 50 investors of more than $20 million. The U.S. Attorney's Office has civilly forfeited approximately $15 million in funds from bank accounts controlled by Conway and will apply the forfeited funds to the restitution amount to be returned to investors.
On November 4, 2005, the Commission filed an enforcement action and obtained emergency relief (including an asset freeze) against Conway and his firm, Groundswell Partners based on conduct similar to that in the criminal Information referred to above. On June 30, 2006, the Commission obtained default judgments against Groundswell Partners and Groundswell Capital, a relief defendant. The Commission is continuing to litigate its action against Conway.
Additional information can be found in Litigation Release Nos. 19460, 19473, 19773 and 19807.
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20146 / June 6, 2007 SEC v. Michael J. Snyder, (United States District Court for the District of Colorado, Civil Action No. 07-CV-01162) Court Enters Final Judgment Against Former CEO Charged With Fraud Arising From Failure to Report Compensation The Securities and Exchange Commission announced today that the Colorado federal district court entered a Final Judgment by consent on June 5, 2007 against Michael J. Snyder of Ketchum, Idaho, in connection with a civil fraud case filed against Snyder. The final judgment enjoined Snyder, the former CEO of Red Robin Gourmet Burgers, Inc., ("Red Robin") from engaging in future violations of the antifraud and other provisions of the federal securities laws, ordered Snyder to pay a civil penalty of $250,000 and barred him from serving as an officer or director of a public company.
The Commission filed its action against Snyder on June 4, 2007. The complaint alleged that Snyder misrepresented his personal travel expenses as business expenses to Red Robin and its accountants, causing Red Robin to fail to report material amounts of Snyder's compensation in Commission filings for the years 2002 through 2004.
For more information, see Litigation Release No. 20142.
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20147 / June 7, 2007 SEC v. Pension Fund of America L.C., et al., Case No. 05-CIV-20863 (S.D. of FL) Final Judgments of Permanent Injunction and Other Relief Entered Against Defendants Pension Fund of America L.C., PFA Assurance Group, Ltd., PFA International, Ltd., Claren TPA, LLC, Luis M. Cornide, and Robert De la Riva The Securities and Exchange Commission announced that on May 21, 2007, the Honorable K. Michael Moore, United States District Judge for the Southern District of Florida, entered final judgments of permanent injunction and other relief against Pension Fund of America, LC, PFA Assurance Group, Ltd., PFA International, Ltd., Claren TPA, LLC (PFA entities), Luis M. Cornide and Robert De la Riva (collectively Defendants) for their involvement in an offering fraud that targeted Latin American investors.
The Defendants, without admitting or denying the Complaint's allegations, consented to the entry of an order enjoining them from future violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The final judgments against Cornide and De la Riva also enjoin them from future violations of Section 15(a) of the Exchange Act. In addition, both Defendants agreed to turn over several million dollars of assets apiece to the Court-appointed Receiver to partially satisfy their obligation to disgorge ill-gotten gains they received from the conduct alleged in the Complaint. Both Defendants turned over their homesteads to the Receiver, who will sell the houses and use the proceeds to help satisfy disgorgement. Previously, Cornide and De la Riva had turned over assets worth $2,691,743.71 and $2,441,351.55, respectively. Based on those payments and sworn representations of their financial condition, the Court waived a portion of disgorgement and did not impose a civil penalty against both Cornide and De la Riva. The Commission dismissed its disgorgement and civil penalty claims against the PFA entities because they are under the control of the Receiver.
For more information on earlier actions in this case, see Litigation Release Nos. 19161 (March 30, 2005) and 19745 (June 28, 2006).
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20148 / June 8, 2007 SEC v. John L. Montana, Melvin R. Lyttle, Paul E. Knight, Worldwide T&P, Inc., First National Equity, LLC and P.K. Trust & Holding, Inc., Civil Action No. 03-CV-1513 (S.D. Ind.) (Barker, J.) The Securities and Exchange Commission ("Commission") announced that on May 23, 2007, the Honorable Sarah Evans Barker of the United States District Court for the Southern District of Indiana entered Orders of Permanent Injunction against Defendants Melvin R. Lyttle ("Lyttle"), Paul E. Knight ("Knight"), First National Equity, LLC ("FNE"), P.K. Trust & Holding, Inc. ("P.K. Trust"), John L. Montana, Jr. ("Montana") and Worldwide T&P, Inc. ("Worldwide T&P"). Judge Barker had already granted the Commission's motion for summary judgment against Lyttle, FNE, Knight and Montana on November 22, 2007. SEC v. Montana, et al., 464 F. Supp. 2d 772 (S.D. Ind.). P.K. Trust and Worldwide T&P had previously defaulted.
In entering the Orders of Permanent Injunction, the Court ruled that the Defendants should be permanently enjoined from future violations of the antifraud and registration provisions of the securities laws. Also, the Court ruled that Knight, P.K. Trust, Montana and Worldwide T&P should be permanently enjoined from future violations of the broker-dealer registration provisions of the securities laws. The Court awarded the following amounts of disgorgement and pre-judgment interest: (1) Lyttle and FNE were ordered to disgorge, jointly and severally, $7,038,443, representing profits or other financial gain resulting from the conduct alleged in the Commission's Complaint, together with prejudgment interest thereon in the amount of $4,146,233, for a total payment of $11,184,676; and (2) Knight and P.K. Trust were ordered to disgorge, jointly and severally, $1,750,945, representing profits or other financial gain resulting from the conduct alleged in the Commission's Complaint, together with prejudgment interest thereon in the amount of $900,874, for a total payment of $2,651,819. Defendants Lyttle and Knight were also ordered to each pay a civil penalty in the amount of $110,000.
The Commission alleged in its Complaint that the Defendants raised approximately $32 million by selling interests in a purported trading program which would invest money in the trading of various instruments including medium term notes. The Commission's Complaint alleged that in the offer and sale of the investments in the purported trading program, the Defendants defrauded investors by making misrepresentations and omissions of material fact regarding the investment's rate of return, the safety of the investment and the use of investor funds.
For additional information see Litigation Release No. 18411
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20149 / June 12, 2007 SEC v. World Information Technology, Inc., et al., Civil Action No. 06-CV-13181 (VM) (S.D.N.Y.) Court Enters Permanent Injunctions Against Ira Dicapua in "Pump-And-Dump" Scheme The Securities and Exchange Commission announced that on June 5, 2007, the Honorable Victor Marrero, United States District Judge for the Southern District of New York entered a judgment by consent against defendant Ira Dicapua. The judgment enjoins Ira Dicapua from future violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. Dicapua consented to the entry of the judgment without admitting or denying any of the allegations in the Commission's complaint. The Court also ordered that Dicapua pay disgorgement and prejudgment interest in an amount to be determined a after further proceedings, and that it would determine in those proceedings whether Dicapua should pay a civil penalty.
Previously, on May 2, 2007, the Court entered default judgments against Dicapua's co-defendants World Information Technology, Inc. and Gary Morgan. [Litigation Release No. 20109] (May 10, 2007). For further information, see Litigation Release No. 19910 (November 15, 2006).
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20150 / June 12, 2007 Securities and Exchange Commission v. Security Asset Capital Corporation, et al., Civil Action No. 04-0683 (E.D. Pa.), filed February 18, 2004 Court Enters Default Judgments Against Darrell G. Musick, Richard E. Wensel, Arthur B. Carlson, III, Gary J. Spirk, and Richard C. Wallace and Orders the Payment of Over $2.5 Million The Securities and Exchange Commission announced that on June 12, 2007, a Pennsylvania District Court entered default judgments against Darrell G. Musick ("Musick"), Richard E. Wensel ("Wensel"), Arthur B. Carlson, III ("Carlson"), Gary J. Spirk ("Spirk"), and Richard C. Wallace ("Wallace"), defendants in an action that was filed by the Commission in February 2004. In total, the Court ordered these defendants to pay in excess of $2.5 million in disgorgement, prejudgment interest, and civil penalties; and each has been permanently enjoined from future violations of the charged provisions of the federal securities laws. On the same date, at the Commission's request, the District Court also ordered the dismissal of the case against Apacor Financial, Inc. ("Apacor"), Continental Capital Group, Ltd., and Secure Investments, Inc., because each of these entities is defunct; ordered the dismissal of the case against Security Asset Capital Corporation ("Security Asset"), a bankruptcy debtor with liabilities that overwhelmingly exceed its assets and is no longer doing business; and also ordered the case dismissed against defendant David S. Walton, who is quite ill and unable to defend the action.
The Commission filed its complaint against these defendants in February 2004, alleging that defendants made material misrepresentations and omissions in the offering of nine-month promissory notes, issued by Security Asset and/or by Apacor, whereby investors were promised secure investments with 12% (or more) annual returns, but instead lost their money. The alleged misrepresentations and omissions related to, among other things, the use of the offering proceeds and the risks associated with the investment. Specifically, the complaint alleged that, contrary to representations, at the time of the offerings each of these issuers was in dire financial circumstances, and the offering proceeds were used, not for the purchase of productive assets as promised, but, largely, to pay commissions, officers' salaries and personal expenses, and to pay interest to prior investors. The complaint further alleged that no registration statement was in effect as to these promissory notes; nor were they exempt from registration, and that, in connection with the charged conduct, Wensel, Carlson, and Spirk acted as unregistered broker-dealers.
The Court's Final Judgments enjoined Musick, Wensel, Carlson, Spirk, and Wallace from future violations of the antifraud provisions, Section 17(a) of the Securities Act of 1933 ("Securities Act") and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, as well as the securities registration provisions, Sections 5(a) and 5(c) of the Securities Act. In addition, defendants Wensel, Carlson, and Spirk were enjoined from future violations of the broker-dealer registration provisions, Section 15(a)(1) of the Exchange Act. Musick was ordered to pay disgorgement of $100,026, prejudgment interest of $47,387, and a civil penalty of $110,000; Wensel was ordered to pay disgorgement of $130,642, prejudgment interest of $61,891, and a civil penalty of $110,000; Carlson was ordered to pay disgorgement of $124,169, prejudgment interest of $58,824, and a civil penalty of $120,000; and Spirk was ordered to pay disgorgement of $1,104,016, prejudgment interest of $523,020, and a civil penalty of $120,000. No monetary relief was ordered against Wallace, in light of his criminal conviction for, in addition to other charges, the same conduct as was charged in the Commission's complaint, and sentencing to, among other sanctions, 37 months in prison and restitution orders totaling $2,117,496.
For further information, please see Litigation Release Number 18580 (February 18, 2004).
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20151 / June 13, 2007 SEC v. Mutual Benefits Corp., et al., Civil Action No. 04-60573-CIV-MORENO (S.D. Fla.). Final Judgments of Permanent Injunction and Other Relief Entered Against Defendants Mutual Benefits Corp. and Steven Steiner, and Relief Defendants Camden Consulting, Inc., and SKS Consulting, Inc. The Securities and Exchange Commission announced that on April 10, 2007, the Honorable Federico Moreno, United States District Judge for the Southern District of Florida entered Final Judgments of Permanent Injunction and Other Relief against Defendants, Mutual Benefits Corp. and Steven Steiner, and Relief Defendants Camden Consulting, Inc. and SKS Consulting, Inc., respectively. The Final Judgments, which were entered with the consents of Steiner and Mutual Benefits, enjoin them from violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. The Final Judgment against Steiner, Camden and SKS finds them jointly and severally liable for disgorgement and prejudgment interest in the amount of $5,000,000, but orders them to pay $3,925,000 based on their financial statements and other information submitted to the Commission. The Final Judgment against Mutual Benefits dismisses the Commission's remaining claims for disgorgement, prejudgment interest and civil penalties. Additionally, on April 13, 2007, the Commission filed a notice of voluntary dismissal of its disgorgement claims against Relief Defendants Viatical Benefactors, LLC and Viatical Services, Inc. because these entities are under the control of the court-appointed receiver who will be distributing their assets to defrauded investors.
For additional information, see Litigation Release No. 18698 (May 6, 2004), Litigation Release No. 19274 (June 20, 2005) and Litigation Release No. 19480 (December 1, 2005).
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20152 / June 13, 2007 SEC v. David A. Schwinger, C.A. No. 1:07-CV-01047 (D.D.C.) (RMC) SEC Files Settled Insider Trading Charges Against Former Managing Partner of National Law Firm's Washington, D.C. Office The Securities and Exchange Commission today filed a settled civil injunctive action in the United States District Court for the District of Columbia against David A. Schwinger, an attorney and former managing partner of Katten Muchin Rosenman LLP's (KMR) Washington, D.C. office. Schwinger was charged with engaging in illegal insider trading by purchasing shares of Vastera, Inc. (Vastera), a Virginia-based company assisting businesses in tracking information about international shipments, in violation of the antifraud provisions of the federal securities laws. Without admitting or denying the allegations in the Commission's complaint, Schwinger has agreed to settle this matter by consenting to the entry of a final judgment against him which imposes injunctive and monetary relief.
The complaint alleges that Schwinger purchased Vastera common stock on November 5, 2004, on the basis of material, nonpublic information that an acquisition of Vastera was imminent. The complaint further alleges that Schwinger learned of the impending merger while interviewing Vastera's Chief Counsel, who was then seeking to be hired by KMR as a partner. In responding to Schwinger's inquiries during the interview process about the Chief Counsel's reasons for leaving Vastera, the Chief Counsel allegedly disclosed to Schwinger no later than October 27, 2004 that Vastera's acquisition was imminent. On the basis of that material, nonpublic information, the complaint alleges that Schwinger purchased 10,000 shares of Vastera common stock on November 5, 2004 at an average price of $1.70 per share. The complaint further alleges that Schwinger knew that Vastera was a KMR client at the time of the purchase.
According to the complaint, Vastera announced on January 7, 2005 that it was being acquired by JP Morgan Chase Bank N.A. Vastera's share price, which had closed at $2.00 on January 6, rose 50% to $3 a share by the close of the market on January 7 on approximately four times the historical average daily trading volume.
The complaint alleges that Schwinger knew, or was reckless in not knowing, that he purchased Vastera shares based on material, nonpublic information obtained during the interview process and in breach of a fiduciary duty owed to his firm, KMR. Schwinger is alleged to have imputed profits of $13,027. Based on the facts alleged, the Commission charged Schwinger with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
Without admitting or denying the allegations in the complaint, Schwinger has consented to the entry of a final judgment that: (i) permanently enjoins him from violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; (ii) requires him to disgorge $13,027 in illicit gains and $1,940 in prejudgment interest thereon; and (iii) orders him to pay a civil penalty of $26,054.
The Commission acknowledges the assistance of the National Association of Securities Dealers in this matter.
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20153 / June 13, 2007 SEC v. Joseph Galamb, Civil Action No. 07-cv-2743(D.N.J.) The Securities and Exchange Commission ("Commission") today announced the filing of a civil action in the United States District Court for the District of New Jersey against Joseph Galamb, of Marlboro, New Jersey, for engaging in unlawful insider trading in the securities of Hudson United Bancorp ("Hudson United"). The complaint alleges that the defendant, a former Hudson United Assistant Vice President, purchased securities of Hudson United on the basis of material, nonpublic information concerning an impending acquisition of Hudson United by TD Banknorth, Inc. Without admitting or denying the allegations of the complaint, Galamb has consented to the entry of a final judgment permanently enjoining him from engaging in the violations set forth below, and ordering him to pay disgorgement of $7,125, plus prejudgment interest of $412, and a civil penalty of $7,125.
The Commission's complaint alleges that Hudson United was a bank holding company headquartered in Mahwah, New Jersey, operating 204 bank branches throughout several states. Sometime in June 2005, Galamb learned that Hudson United was in the process of being sold or acquired. At or around that time, another Hudson United employee, with whom Galamb had a close working relationship and who worked in Hudson United's corporate offices, told Galamb that, based on certain activity she had witnessed, she believed the bank was going to be sold. The employee told Galamb that there had been a "flurry of activity" that, from her experience, was consistent with acquisition and merger negotiations.
The complaint further alleges that on July 7, 2005, in violation of his fiduciary duties to Hudson United and its shareholders, Galamb purchased 1,450 shares of Hudson United stock, paying $36.50 per share. Prior to the market opening on July 12, 2005, TD Banknorth announced that it would acquire Hudson United in a cash and stock transaction valued at approximately $42.78 per Hudson United share. On July 12, 2005, Hudson United's stock closed at $41.64 per share, an 11 percent increase over the previous day. On that same day, after the announcement, Galamb sold his shares, realizing an unlawful profit of $7,125.
The complaint alleges that by his conduct, Galamb violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and seeks a permanent injunction, disgorgement together with prejudgment interest, and a civil penalty against Galamb.
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20154 / June 14, 2007 SEC v. Peter W. Fisher, N. Tyler Fisher, David B. Stocker, Phillip W. Offill, Jr., and Collective Thought Holdings, Inc., Case No. 2:07-CV-12552 (E.D. Mich. filed June 14, 2007) SEC Charges Securities Attorneys in Penny Stock Scam The Securities and Exchange Commission today filed suit against the principals of a micro-cap technology company as well as two securities lawyers for their role in an illegal "pump and dump" scheme. The Commission alleges that Arizona attorney David B. Stocker and Texas attorney Phillip W. Offill, Jr. assisted Michigan-based AVL Global, Inc., in a scheme to dump millions of shares of AVL Global stock into the marketplace without any public disclosure of the company's failing operations. In the same action, the Commission also charged Peter W. Fisher and his son, N. Tyler Fisher, the principals behind AVL Global, for their roles in the scheme.
According to the Commission's complaint, filed in the United States District Court for the Eastern District of Michigan, the defendants devised a scheme to deliver millions of AVL Global shares to Peter Fisher — an Ontario resident with a criminal record who secretly controlled the company through his son — as well as various family members, business associates and stock promoters. The Commission alleges that, in late 2005, Peter Fisher and Tyler Fisher then caused AVL Global to issue a series of misleading press releases that touted the company's business prospects when, in reality, AVL Global had essentially abandoned its business and ceased operations. Peter Fisher, who controlled the vast majority of the company's stock, dumped his shares and netted approximately $160,000.
The Commission further alleges that Stocker and Offill arranged a series of sham transactions that helped the company avoid registering the stock sales with the Commission and disclosing to the public AVL Global's true financial position. According to the complaint, the defendants caused AVL Global to issue approximately 15 million shares of stock to bogus investment companies controlled by Offill or Stocker. Stocker falsely claimed that these companies had purchased the stock for "investment purposes" and thus the sales were exempt from registration; however, within days of the supposed investments, the Stocker and Offill entities transferred all the stock to Peter Fisher and his associates, who could then commence dumping the stock into the market.
The Commission's complaint alleges that the defendants violated the registration provisions of the federal securities laws (Section 5 of the Securities Act of 1933), and that Peter and Tyler Fisher violated the antifraud provisions as well (Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder). In its complaint, the Commission seeks some or all of the following relief against each of the defendants: injunctive relief, disgorgement of ill-gotten gains plus prejudgment interest, civil monetary penalties, and a bar from participating in penny stock offerings and from serving as an officer or director of a publicly-traded company.
Without admitting or denying the allegations, AVL Global president Tyler Fisher, of Ontario, Canada, agreed to settle the charges against him. Tyler Fisher agreed to pay a $25,000 civil penalty and consented to an order barring him from serving as an officer or director of a publicly-traded company and from participating in penny stock offerings for five years.
For additional information, see Litigation Release No. 19305 (July 18, 2005).
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20155 / June 18, 2007 SEC v. Terese Dearmin and Richard Harris, (United States District Court for the District of Columbia, C.A. No. 1:07-CV-01089 (JDB )) SEC Files Settled Insider Trading Charges against Terese Dearmin and Richard Harris The Securities and Exchange Commission today filed a settled civil injunctive action in the United States District Court for the District of Columbia against Terese Dearmin (Dearmin) and her father Richard Harris (Harris), alleging violations of federal securities laws in separate instances of insider trading in the securities of U.S. Home & Garden, Inc. (USHG) ahead of the public announcement of its merger with Ionatron, Inc. (Ionatron). Without admitting or denying the allegations in the complaint, Dearmin and Harris have consented to the entry of a final judgment which imposes a permanent injunction, disgorgement, with prejudgment interest, and civil penalties against each defendant.
The complaint alleges that Dearmin and Harris engaged in insider trading in USHG securities. On February 25, 2004, prior to the opening of the market, USHG publicly announced it had agreed to merge with privately-held Ionatron, Inc. Approximately one month before the merger announcement, Dearmin learned of the pending merger from her husband, the former CEO of Ionatron. Dearmin then tipped Harris, her mother, and her business partner, all of whom purchased USHG stock on the basis of that information in advance of the merger announcement.
The complaint further alleges that: (i) Dearmin knew the non-public information regarding the pending merger she misappropriated from her husband was confidential; (ii) Dearmin knew, or should have known, that she violated a duty of trust and confidence owed to her husband by misappropriating from him the pending merger information, and communicating that information to Harris, her mother, and her business partner; and (iii) Harris knew, or should have known, that the pending merger information he received from his daughter had been obtained in breach of a duty of trust and confidence.
Dearmin has consented to the entry of a final judgment that permanently enjoins her from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, requires her to disgorge $13,178 in illicit gains and $2,390 in prejudgment interest, and orders her to pay a civil penalty of $22,501 civil penalty. Harris has consented to the entry of a final judgment that permanently enjoins him from violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, requires him to disgorge $9,323 in illicit gains and $1,714 in prejudgment interest, and orders him to pay a civil penalty of $9,323.
The Commission acknowledges the assistance of the National Association of Securities Dealers in this matter.
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20156 / June 18, 2007 Accounting and Auditing Enforcement Release No. 2617 / June 18, 2007 SEC v. Tom Shanahan and Clem Hannon, Civil Action No. 07-2879-JNE-SRN (D. Minn.) filed June 15, 2007 SEC Files Financial Fraud Action Against Two Irish Citizens for Their Scheme to Defraud The Securities and Exchange Commission today announced that on June 15, 2007, it filed a Complaint in the U.S. District Court for the District of Minnesota against two former senior officers of Zomax Limited (Zomax Ireland), the Irish subsidiary of Zomax, Inc. (Zomax), a former U.S. public corporation that was based in Plymouth, Minnesota. The Commission's Complaint alleges that from the end of 2003 through 2004, Tom Shanahan (Shanahan), the former General Manager of Zomax Limited and Clem Hannon (Hannon), the former Financial Controller of Zomax Ireland, engaged in a fraudulent scheme to artificially inflate the financial results of Zomax Ireland by manipulating certain accounting entries and financial records to hide the declining performance of Zomax Ireland. The Complaint seeks injunctive relief against Shanahan and Hannon, as well as the imposition of an officer and director bar.
The Complaint alleges that Shanahan and Hannon directed one of Zomax Ireland's financial accountants to conceal Zomax Ireland's losses by making false journal entries to overstate the sales accrual account, to capitalize spare machine parts that should have been expensed, and to understate accruals for employee holiday pay. The Complaint further alleges that Shanahan and Hannon submitted false Zomax Ireland financial information to Zomax. In addition, they sent false site certifications to Zomax, which Zomax required in order to fulfill its obligations under the Sarbanes-Oxley Act. The Complaint alleges that Shanahan and Hannon's fraudulent scheme caused Zomax to misstate its financial statements for the first three quarters of 2004. The Complaint also alleges that Shanahan and Hannon's fraudulent accounting at Zomax Ireland had a material effect on Zomax's consolidated quarterly financial statements during the first three quarters of 2004. On March 31, 2005, Zomax filed its Form 10-K for 2004, which restated its financial statements for the first three quarters of 2004. The restatement, caused primarily by Shanahan and Hannon's fraudulent accounting, negatively impacted Zomax's previously reported quarterly results for 2004. For the first quarter of 2004, Zomax previously reported a net loss of $981,000; the restatement increased this net loss by $565,000 to $1,546,000. For the second quarter of 2004, Zomax previously reported net income of $1,252,000; the restatement decreased net income for this period by $718,000 to $534,000. For the third quarter of 2004, Zomax previously reported a net loss of $5,497,000; the restatement increased this net loss by $540,000 to $6,037,000.
The Complaint alleges that Shanahan and Hannon committed fraud in connection with the purchase and sale of securities, in violation of Sections 10(b) of the Securities and Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. The Complaint also alleges that Shanahan and Hannon violated Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder by knowingly circumventing Zomax's system of internal accounting controls, knowingly falsifying Zomax Ireland's books, records and accounts, and as a result, aided and abetted Zomax's violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder.
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20157 / June 19, 2007 SEC v. Romano Ancelmo Fontana Filho, C.A. No. 1:07CV01095 (PLF) (D.D.C.) SEC Files Settled Insider Trading Charges Against Former Director of Sadia S.A. The Securities and Exchange Commission today filed a settled civil injunctive action in the United States District Court for the District of Columbia against Romano Ancelmo Fontana Filho, a former Director at Sadia S.A. ("Sadia"), a Brazilian food products company. The Commission charged Fontana with engaging in illegal insider trading both by purchasing securities of Perdigão S.A. ("Perdigão") prior to Sadia's tender offer for Perdigão and by selling the same securities of Perdigão prior to Sadia's subsequent revocation of the tender offer. Without admitting or denying the allegations in the Commission's complaint, Fontana has consented to the entry of a final judgment imposing injunctive and monetary relief and barring him from acting as an officer or director of a publicly traded company for a period of five years.
The Commission's complaint alleges that Fontana learned of the contemplated tender offer on April 26, 2006, through a conversation with the chairman of Sadia's board of directors. According to the complaint, Fontana subsequently purchased 18,000 American Depositary Shares ("ADSs") of Perdigão at an average cost of $19.12 per ADS through three transactions executed between July 5 and 12, 2006, on the basis of material, nonpublic information concerning the proposed acquisition, and in breach of a duty of trust and confidence he owed to Sadia. On Sunday, July 16, 2006, Sadia announced the tender offer for Perdigão. The following day, the price of Perdigão ADSs increased to $24.50, up $4.25 (21%) from the previous closing price. On the morning of July 21, 2006, Fontana participated by conference call in a meeting at which Sadia's board of directors decided to revoke the tender offer. As the complaint alleges, after this meeting — but before Sadia announced the revocation later that day — Fontana sold all 18,000 ADSs of Perdigão at an average selling price of $26.85 per ADS. By selling in advance of the public announcement of the revocation, the complaint alleges, Fontana again engaged in illegal insider trading, in breach of a duty of trust and confidence he owed to Sadia. The complaint alleges that Fontana realized ill-gotten profits of $139,114.50 from his unlawful trading.
Without admitting or denying the allegations in the complaint, Fontana has agreed to settle the Commission's charges by consenting to the entry of a final judgment that would: (i) permanently enjoin him from further violations of Sections 10(b) and 14(e) of the Securities Exchange Act of 1934, and Rules 10b-5 and 14e-3 thereunder; (ii) require him to pay $142,848.95 in disgorgement and prejudgment interest; (iii) order him to pay a 1.25-time civil penalty of $173,893.13; and (iv) bar him for a period of five years from serving as an officer or director of a publicly traded company.
The Commission wishes to acknowledge the assistance of the Brazilian Comissão de Valores Mobilários. This is the third settled insider trading action filed by the Commission arising out of Sadia's tender offer for Perdigão. See SEC v. Luiz Gonzaga Murat Júnior, C.A. No. 1:07CV00381 (PLF) (D.D.C.) (filed Feb. 22, 2007), Litigation Release No. 20013 (Feb. 22, 2007); SEC v. Alexandre Ponzio De Azevedo, C.A. No. 1:07CV00380 (PLF) (D.D.C.) (filed Feb. 22, 2007), Litigation Release No. 20013 (Feb. 22, 2007). The Commission's investigation in this matter is continuing.
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20158 / June 20, 2007 Securities and Exchange Commission v. International Fiduciary Corp., S.A., et al., Civil Action No. 1:06CV1354 (E.D. Va.) Court Enters Default Judgments Against Daniel Eric Byer and Malcolm Cameron Boyd Stevenson The Securities and Exchange Commission announced today that on June 19, 2007, the United States District Court for the Eastern District of Virginia entered default judgments against Daniel Eric Byer and Malcolm Cameron Boyd Stevenson, defendants in an action that was filed by the Commission in December 2006. The Court's default judgments include factual findings that defendants Byer and Stevenson have "not appeared in this matter," despite having had "actual notice that these proceedings are ongoing." The Court's judgments permanently enjoin both defendants from future violations of the antifraud provisions, Section 17(a) of the Securities Act of 1933 ("Securities Act") and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, as well as the securities registration provisions, Section 5 of the Securities Act. The Court's judgments also provide that disgorgement, prejudgment interest thereon, and a civil penalty "should be assessed" against both Byer and Stevenson; and direct the Commission to make application, supported by affidavit or declaration, for an order setting forth those amounts. The Court's judgments further provide that it will retain jurisdiction for all purposes, including entertaining an application by the Commission for additional relief.
The Commission filed its complaint against Byer, Stevenson and two other defendants-Preston David Pinkett II and International Fiduciary Corp., S.A.-on December 4, 2006, alleging that they defrauded investors through a fraudulent "asset growth program" purportedly involving risk-free participation in the trading of "1st tier medium-term bank notes." On December 4, 2006, the Court issued an order that, among other things, temporarily restrained the defendants from violating the antifraud provisions of the federal securities laws, and freezing investor funds wherever located and all assets of the defendants. On December 11, 2006, the Court entered a preliminary injunction which extended the temporary restraining order and asset freeze. On January 19, 2007, on the Commission's motion, the Court appointed Roy M. Terry, Jr., Esq. as Receiver over defendant International Fiduciary Corporation, S.A.; and on April 19, 2007, the Commission filed an amended complaint alleging, among other things, that the defendants raised at least $40 million from at least 140 investors, and added two individuals and four Washington State-based companies as relief defendants.
The Commission wishes to acknowledge the continuing assistance of the British Columbia Securities Commission. For further information, see Litigation Release Nos. 19934 (December 5, 2006); 19976 (January 23, 2007); and 20087 (April 24, 2007).
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20159 / June 20, 2007 Accounting and Auditing Enforcement Release No. 2619 / June 20, 2007 SEC v. Jeffrey McMahon, Civil Action No. H-07-2051 (SDTX) (June 20, 2007) SEC Charges Former Enron Executive Jeffrey McMahon With Violating Federal Securities Laws Defendant Barred From Serving as Officer or Director of Public Company and Ordered to Pay $300,000 The Securities and Exchange Commission today charged former Enron Treasurer and Chief Financial Officer Jeffrey McMahon with violating the antifraud provisions of the federal securities laws and with aiding and abetting Enron's violations of the reporting and record keeping provisions. McMahon simultaneously settled with the Commission without admitting or denying the allegations in the Complaint. As part of the settlement agreement, which is subject to the approval of the U.S. District Court, McMahon has agreed to a permanent injunction and to be barred from acting as an officer or director of a public company for five years. In addition, McMahon will pay disgorgement and prejudgment interest in the amount of $150,000 and a civil penalty of $150,000.
Specifically, the Commission's Complaint alleges that McMahon participated in a fraudulent transaction involving the "sale" of an interest in Nigerian power generating barges to Merrill Lynch that allowed Enron to improperly report $12 million in earnings in the fourth quarter of 1999. Enron never should have recorded profits from this purported sale because the risks and rewards of ownership in the barges never passed to Merrill Lynch due to an oral side agreement made by McMahon and others. The Complaint also alleges that while serving as Enron's Treasurer from April 1998 through March 2000, McMahon made false and misleading statements to the national credit rating agencies regarding Enron's financial position and cash flow. The Complaint alleges that the false and misleading statements included statements about Enron's cash flow from operations that failed to disclose that a portion of such cash flow was a result of structured financings and debt-like obligations that had nothing to do with Enron's operations or trading business. In addition, the Complaint alleges that McMahon made additional false and misleading statements to the rating agencies after he became Enron's Chief Financial Officer on October 24, 2001 through Enron's bankruptcy filing in December 2001.
McMahon has agreed to be enjoined permanently from violating Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Exchange Act Rules 10b-5 and 13b2-1, and from aiding and abetting the violation of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1 and 13a-13.
In settlement of this action, McMahon also consented to the entry of an Administrative Order, pursuant to Rule 102(e) of the Commission's Rules of Practice, suspending him from appearing or practicing before the Commission as an accountant, with a right to reapply after three years.
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20160 / June 20, 2007 SEC v. Alfred S. Teo, Sr., et al., Civil Action No. CV 04-1815-SDW-MCA (D. N.J.) Court Enters Final Judgments Against Teren Seto Handelman, John Reier, Phillip Sacks, David Ross and James Ruffolo The Securities and Exchange Commission announced that on June 19, 2007, Judge Susan D. Wigenton entered a final judgment against defendant Teren Seto Handelman, enjoining her from further violations of Sections 10(b), 13(d), 14(e) and 16(a) of the Securities Exchange Act of 1934 and Rules 12b-20, 13d-1, 13d-2, 14e-3 and 16a-3 thereunder. On June 13, 2007, Judge Wigenton entered final judgments against defendants John Reier, Phillip Sacks and David Ross, and relief defendant James Ruffolo, which enjoined Reier, Sacks and Ross from further violations of Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder. The judgments ordered: (a) Handelman to disgorge $4,287 plus $1,870.71 in prejudgment interest for a total of $6,157.71, and to pay a $114,287 civil penalty; (b) Reier to disgorge $54,843.25 plus $23,931.99 in prejudgment interest for a total of $78,775.24, and to pay a $54,843.25 civil penalty; (c) Sacks to disgorge $479,747.12 plus $199,739.75 in prejudgment interest for a total of $679,486.87, and to pay a $479,747.12 civil penalty; (d) Ross to disgorge $223,612.50 plus $101,860.47 in prejudgment interest for a total of $325,472.97, and to pay a $223,612.50 civil penalty; and (e) Ross and Ruffolo, on a joint and several basis, to disgorge $112,000 plus $51,018.50 in prejudgment interest for a total of $163,018.50. The defendants and relief defendant consented to the entry of these judgments without admitting or denying the allegations in the Commission's complaint.
The Commission's complaint, filed on April 22, 2004, charged Handelman, Reier, Sacks and Ross with engaging in insider trading in the securities of Musicland Stores Corporation before Musicland's December 7, 2000 announcement that it would be acquired by another company by tender offer. The Commission's complaint alleges that Alfred S. Teo, Sr., a major Musicland shareholder, learned about the proposed tender offer for Musicland, and then tipped Handelman, Reier, Sacks, Ross and others with this information. Thereafter, Handelman, Reier, Sacks and Ross purchased Musicland stock, and Ross purchased Musicland stock for Ruffolo, and as a result, they received illicit insider trading profits. The Commission's complaint also alleges that Handelman, as trustee of the MAAA Trust, a trust for Teo's children, filed false and misleading Schedule 13D and other filings regarding its Musicland stock holdings and omitted to make filings when she had a duty to do so.
The Commission action against the remaining defendants continues.
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20161 / June 20, 2007 SEC v. Scott A. Christian, Civ. No. 05-cv-06239 (LTS) (USDC SDNY). Court Enters Final Judgment Against Former Broker For Role In Mutual Fund Market Timing And Late Trading The Securities and Exchange Commission announced today that the United States District Court for the Southern District of New York ("SDNY") entered a Final Judgment on June 19, 2007, in a settled action against Scott A. Christian, a former registered representative at Trautman Wasserman & Company, Inc. ("TWCO"). Christian, without admitting or denying the Commission's allegations, consented to the entry of the judgment that enjoins him from violations of Section 17(a) of the Securities Act of 1933, Sections 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5 thereunder, and from aiding and abetting violations of Sections 15(c) and 17(a) of the Exchange Act and Rules 10b-3 and 17a-3. The final judgment also directs Christian to pay $250,000 of disgorgement.
According to the SEC's Complaint filed in the SDNY in July 2005, Christian, a resident of New York, NY, engaged in late trading on behalf of Trautman Wasserman customers. See Litigation Release 19294 (July 7, 2005). Christian carried out the late trading scheme by having customers submit proposed mutual fund trading orders during the trading day and time-stamping them just before 4:00 p.m. to make it appear that customer orders were received before 4:00 p.m. Christian did not, however, enter these proposed trades for execution. Instead, Christian communicated with customers well after 4:00 p.m. (often until 6:30 p.m. or later) to determine if the customers wanted to execute the proposed orders or submit different orders based on post-4:00 p.m. market information. After customers made their final post-4:00 p.m. trading decisions, Christian entered the customers' orders into the trading system at the price based on the net asset value determined as of 4:00 p.m. Additionally, Christian created false records to conceal the late trading.
Christian and Trautman Wasserman received 307 letters from 40 fund companies seeking to stop excessive trading by accounts at Trautman Wasserman. Knowing that mutual fund companies monitored market-timing activity by account number and registered representative identification number, Christian opened and traded in multiple accounts for his market-timing customers and utilized numerous different registered representative identification numbers, to evade mutual fund companies' restrictions on frequent trading.
In addition, in July 2005 the Commission issued an order pursuant to Section 15(b) of the Exchange Act barring Christian from association with any broker or dealer based upon Christian's guilty plea to a criminal charge in New York state court. See Exchange Act Release No. 52163 (July 29, 2005).
In a related matter, in February 2007, the Commission instituted administrative proceedings against TWCO, Gregory O. Trautman, Samuel M. Wasserman, James A. Wilson, Jr., Mark Barbera, Jerome Snyder, and Forde H. Prigot, alleging violations of the federal securities laws in connection with market timing and late trading. The administrative proceeding, In the Matter of Trautman Wasserman & Co., Inc. et al., File No. 3-12559, is pending.
LR-20162 Jun. 21, 2007 Geoffrey A. Gish; Weston Rutledge Financial Services, Inc.; Zamindari Capital, LLC; Lexington International Fund, LLC a/k/a Lexington International Fund, Inc.; and Oxford Adams Capital, LLC http://www.sec.gov/litigation/litreleases/2007/lr20162.htm
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20162 / June 21, 2007 SEC v. Geoffrey A. Gish; Weston Rutledge Financial Services, Inc.; Zamindari Capital, LLC; Lexington International Fund, LLC a/k/a Lexington International Fund, Inc.; and Oxford Adams Capital, LLC, Civil Action No. 1:06- CV-1171 (NDGA) The Securities and Exchange Commission ("Commission") announced today that that the Honorable Clarence Cooper, United States District Judge for the Northern District of Georgia, entered a Final Judgment as to Defendant Geoffrey A.Gish ("Gish"), restraining and enjoining him from future violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The judgment further restrained Gish from violating, or aiding and abetting violations of, Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. Gish consented to the entry of the judgment without admitting or denying any of the allegations of the Commission's Complaint. Further, the Court ordered disgorgement against Gish in the amount of $1,258,836, plus prejudgment interest of $41,276. Gish was also ordered to pay a civil penalty of $120,000.
The Commission's Complaint, filed May 17, 2006, alleged that from February 2004 through the present, Gish and the four defendant entities that he controlled fraudulently sold at least $8.8 million of securities to more than 100 investors. Gish offered the securities, in part, through Weston Rutledge Financial Services, Inc. ("Weston Rutledge"), an investment advisory firm that he formed and controlled. According to the Complaint, at least $8.7 million of the money received from investors went into a fraudulent investment program of Zamindari Capital, LLC ("Zamindari"). The balance of the investor funds went into the fraudulent investment programs of Lexington International Fund, LLC a/k/a Lexington International Fund, Inc. ("Lexington") and Oxford Adams Capital, LLC ("Oxford Adams"). Gish was alleged to have operated the investment programs as a Ponzi scheme.
The Complaint alleged that Gish commingled funds from the three investment entities, and that Gish and the co-defendant entities that he controlled made numerous false statements regarding the use of the investment funds, the historical rates of return of the investments, and the risk to the investors. The Zamindari offering documents claimed, among other things, that the investor funds would be used to purchase debt instruments issued by a major bank or corporation. The Lexington offering documents claimed that Lexington traded foreign currency contracts. The Oxford Adams offering documents claimed that the entity was an options trading program. All three investment programs, however, were alleged to have been fictitious "prime bank" schemes.
The Complaint alleged that Zamindari, Lexington, and Oxford lured investors with offering materials that falsely suggested that each program had historically generated returns ranging between 44% to over 100% per year. The Complaint further alleged that since November 2005 Gish diverted approximately $100,000 from Zamindari investors to his personal bank account and at least $100,000 to the Weston Rutledge bank account, and that Gish used those funds to pay miscellaneous personal and other expenses. Gish and Weston Rutledge were also alleged to have sent false account statements to investors, misrepresenting that their investments in Zamindari, Lexington, and Oxford Adams had appreciated substantially.
Gish is a resident of Roswell, Georgia.
See also: L.R. 19705 (May 19, 2006); and L.R. 19759 (July 13, 2006).
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20163 / June 22, 2007 Accounting and Auditing Release No. 2621 / June 22, 2007 SEC v. Graham, United States District Court, District of Massachusetts, Civil Action No. 07-11152 (RWZ) Commission Charges Former Intervoice CFO of Texas Company in Fraudulent Scheme to Inflate Revenue The Commission announced today that it had filed a civil fraud action in Massachusetts federal court against Rob Roy J. Graham, the former CFO of Intervoice, Inc., for engaging in a fraudulent scheme to inflate Intervoice's revenues and misstate other important financial metrics so as to deceive investors as to the company's true financial condition. Graham, a resident of Dallas, Texas, has agreed to settle with the Commission without admitting or denying the allegations in the complaint. Under the settlement, Graham agreed to the entry of an order that enjoins him from future violations of the antifraud and books and records provisions of the securities laws, imposes a permanent officer and director bar, and requires payment of over $200,000 for civil penalties and disgorgement.
The Commission's complaint, dated June 21, 2007, alleges that the scheme involved the improper recognition of revenue from a series of transactions that resulted in Intervoice's publication of materially false and misleading financial statements in four financial periods between 2000 and at least 2002. As set forth in the complaint, Graham negotiated and approved transactions between Intervoice and its distributors that were each subject to significant, ongoing, post-transaction obligations and thus did not qualify for revenue recognition under Intervoice's policies or generally accepted accounting principles (GAAP). The complaint alleges that, as to certain transactions, Graham agreed in advance to reconfigure the hardware and software products, or to substitute products of commensurate value, in order to meet the needs of its distributors' ultimate end users, thereby precluding revenue recognition under GAAP. As to other transactions, the complaint alleges that Graham requested distributors to take products in advance of their receiving orders from end customers, and agreed to allow the distributors to return the products without penalty if the end customers failed to purchase the products. According to the complaint, Graham failed to document these terms, and, in some cases, affirmatively misled Intervoice's external auditors by providing false information and documents. In addition, the complaint also alleges that, during 2001, Graham helped one of Intervoice's suppliers, Speechworks International, Inc., to improperly recognize revenue by falsifying documents that he knew the company would use to deceive its own auditors.
The complaint further alleges that during the fourth quarter of fiscal 2001, Graham negotiated a transaction in which Intervoice paid $900,000 to Speechworks in exchange for Speechworks amending a stock warrant that it had previously issued to Intervoice. The amendment purported to permit Intervoice to immediately exercise the warrant and resell the underlying shares as freely trading shares pursuant to a specific registration exemption. The complaint alleges, however, that because of the $900,000 payment to Speechworks, these shares were not eligible for the exemption and should have been issued to Intervoice as restricted stock. Nonetheless, the complaint alleges, Intervoice improperly sold the shares of Speechworks' stock as freely-trading shares and earned gross proceeds of $21.4 million.
The complaint alleges that through his fraudulent conduct Graham violated Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 ("Securities Act"), Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, aided and abetted Intervoice's violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder, and aided and abetted Speechworks' violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. I addition to injunctions and a permanent officer and director bar, Graham has consented to the entry of a judgment that requires disgorgement of $75,000 with $33,270.37 in prejudgment interest, and a civil penalty of $100,000.
In a related proceeding, the Commission filed a civil action against Richard J. Westelman and Steven Forman, the former CFO and controller of Speechworks (now a part of Nuance, Inc.), and Arthur Haberman, Speechworks' former director of finance, for their role in the improper transactions with Intervoice. Westelman and Haberman have agreed to settle with the Commission without admitting or denying the Commission's allegations. The Commission's action against Forman is pending in the Massachusetts federal district court. For further information, see Litigation Release No. 20164.
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20164 / June 22, 2007 Accounting and Auditing Release No. 2622 / June 22, 2007 SEC v. Forman, et al., United States District Court, District of Massachusetts, Civil Action No.: 07-11151 (RWZ) Commission Charges Former CFO, Controller, and Director of Finance at Massachusetts Technology Company The Securities and Exchange Commission announced that it had filed a civil fraud action in Massachusetts federal court against Richard J. Westelman and Steven Forman, the former CFO and controller of Speechworks International, Inc. (now a part of Nuance, Inc.). The Commission charged that Westelman, a resident of Scituate, Massachusetts, and Forman, a resident of Chelmsford, Massachusetts, engaged in a fraudulent scheme to inflate Speechworks' revenues and misstate other important financial metrics so as to deceive investors as to the company's true financial condition. The Commission also charged Arthur Haberman, Speechworks' former director of finance, with violating and aiding and abetting Speechworks' violations of various books and records provisions of the federal securities laws. Both Westelman and Haberman have agreed to settle with the Commission without admitting or denying the allegations in the complaint. Westelman agreed to the entry of an order that enjoins him from future violations of the antifraud and books and records provisions of the securities laws, imposes a permanent officer and director bar, and requires payment of a $100,000 civil penalty. Haberman agreed to the entry of an order that enjoins him from future violations of the books and records provisions of the securities laws and requires payment of a $25,000 civil penalty. The Commission's action against Forman, in which it is seeking injunctions, an officer and director bar, and a civil penalty, is pending in the U.S. District Court for the District of Massachusetts.
The Commission's complaint, dated June 21, 2007, alleges that from at least 2001 through at least 2003, Westelman and Forman engaged in a fraudulent scheme to inflate Speechworks' revenues and misstate other key financial information. According to the complaint, Westelman negotiated and approved a series of transactions between Speechworks and one of its key resellers, Intervoice, Inc., that called for the reseller to make royalty payments prior to its shipment of software to end customers. For one transaction, the complaint alleges Westelman requested Intervoice to provide falsified documents that allowed him to improperly recognize as revenue a $900,000 cash payment Intervoice made in return for amending a warrant Speechworks had previously issued to Intervoice. For another transaction, the complaint alleges that Westelman and Forman schemed to recognize as revenue $2 million in prepayments to Speechworks, even though they knew the deal was not properly documented and did not otherwise qualify for revenue recognition under Speechworks' policies and GAAP. The complaint further claims that Westelman and Forman purposefully misled Speechworks' external auditors about the terms of the deal and, among other things, permitted the auditors to rely on documents that they knew to be false and misleading. The complaint also alleges that Westelman helped Intervoice improperly recognize revenue. Finally, the complaint alleges that Haberman improperly recorded Intervoice's royalty prepayments as revenue in the company's books and records.
The complaint alleges that through their conduct, Westelman and Forman variously violated, or aided and abetted Speechworks' violations of, Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, aided and abetted Speechworks' violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder; and Westelman also aided and abetted Intervoice's violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; and Haberman violated Rule13b2-1 of the Exchange Act and aided and abetted Speechworks' violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder.
In a related proceeding, the Commission filed a civil injunctive action against Rob Roy J. Graham, Intervoice's former CFO. Graham has agreed to settle with the Commission without admitting or denying the allegations in the complaint. For further information, see Litigation Release No. 20163
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20165 / June 25, 2007 SEC v. Universal Express, Inc., Richard A. Altomare, Chris G. Gunderson, Mark S. Neuhaus, George J. Sandhu, Spiga Ltd., Tarun Mendiratta, No. 1:04-cv-02322-GEL (S.D.N.Y.) SEC Seeks Appointment of Receiver To Operate Universal Express, Inc. The Securities and Exchange Commission announced today that on June 21, 2007, it filed a motion seeking appointment of a receiver to operate Universal Express, Inc., a Nevada corporation with offices in Boca Raton, Florida and New York City, New York. The SEC's request for relief follows a permanent injunction entered earlier this year against the company prohibiting it from future violations of the securities registration and anti-fraud provisions of the federal securities laws contained in Sections 5 and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5. On February 21, 2007, the Honorable Gerard E. Lynch of the United States District Court for the Southern District of New York entered an Opinion and Order determining that Universal Express had issued over 500 million shares of common stock between April 2001 and January 2004 without filing registration statements for those transactions. Additionally, the Court found that Universal Express issued several false and misleading press releases, and ordered the company to pay over $9 million in disgorgement and an additional $9 million in civil penalties. A Final Judgment against Universal Express, Richard Altomare and Chris G. Gunderson was entered on April 2, 2007. Contrary to the provisions in the Final Judgment, the company has not paid the disgorgement and civil penalties ordered. Universal Express, Richard Altomare, and Chris Gunderson filed on June 2, 2007 a notice of appeal challenging the District Court's decision. No hearing date on the SEC's motion for appointment of a receiver has been set.
For further information on the SEC's initial complaint, see LR-18636 (March 24, 2004).
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20166 / June 25, 2007 Accounting and Auditing Enforcement Release No. 2624 / June 25, 2007 SEC v. Kevin B. Collins, Civil Action No. 3:07-0679 (M.D. Tenn.) (filed June 25, 2007) In the Matter of International Business Machines Corporation, Exchange Act Rel. No. 34-55954, Accounting and Auditing Enforcement Rel. No. 2623, (June 25, 2007) SEC FILES SETTLED ACTIONS AGAINST KEVIN B. COLLINS AND IBM FOR ASSISTING IN DOLLAR GENERAL CORPORATION’S ACCOUNTING FRAUD The Securities and Exchange Commission today announced the filing of a settled civil action against Kevin B. Collins, an employee of International Business Machines Corporation (IBM), for aiding and abetting Dollar General Corporation’s commission of accounting fraud. The Commission filed the civil action against Collins in the United States District Court for the Middle District of Tennessee. As set forth in the Commission’s complaint, Collins assisted Dollar General’s commission of accounting fraud through a sham transaction that was designed to achieve a particular accounting result for Dollar General. Also today, the Commission instituted a settled cease-and-desist proceeding against IBM for its role in the Dollar General fraud and for IBM’s own books and records violations.
According to the Commission’s complaint, in 1999, IBM and Dollar General agreed that Dollar General would lease new electronic cash registers from IBM to replace Dollar General’s old registers. As originally planned, Dollar General would phase out the old registers and purchase the new IBM equipment over a multi-year period. As alleged in the Commission’s complaint, in the second half of 2000, IBM, through Collins, instead suggested that Dollar General accelerate the roll-out of new IBM equipment by leasing for approximately $10 million all of the new equipment by the end of 2000. This would have the result of increasing IBM’s revenue for fiscal year 2000, as well as increasing Collins’ bonus compensation for that period. As alleged by the Commission, Dollar General initially rejected the proposal, however, due to an accounting problem. Specifically, if Dollar General replaced all of the Omron equipment, it would be required to write off the book value of that equipment as an expense. This “book loss” problem, as it became known, in turn, would have a negative impact on Dollar General’s earnings for its fiscal year 2000.
The Commission further alleges in its complaint that IBM, through Collins, devised a way to solve Dollar General’s “book loss” problem. Specifically, Collins proposed that IBM would purchase Dollar General’s old cash registers for approximately $11 million. As alleged, by selling the equipment at that price, Dollar General would avoid most of the negative consequences of having to write off the book value of the equipment that would have occurred if it simply replaced the old registers with the new IBM equipment. According to the Commission’s complaint, the proposed “purchase” was not a bona fide transaction because, among other reasons, IBM’s purchase price for Dollar General’s old cash registers was repaid to IBM by an offsetting increase in the amount that Dollar General was to pay for the new IBM equipment. In addition, although IBM agreed to buy the Omron equipment for more than Dollar General was going to pay for the new IBM registers, IBM and Collins knew that the old cash registers were worthless to IBM, IBM intended to destroy the equipment, and ultimately IBM never took possession of any of the sales registers. As alleged, IBM nevertheless engaged in the “purchase” and Dollar General removed the old cash registers from its books and minimized the negative impact on its earnings in fiscal year 2000.
The Commission’s complaint alleges that, as a result of his conduct, Collins aided and abetted Dollar General’s violations of Sections 10(b), 13(a), and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 10b-5, 12b-20 and 13a-11. Collins has agreed, without admitting or denying the allegations in the complaint, to the entry of a final judgment permanently enjoining him from aiding and abetting violations of these provisions. In addition, the final judgment orders Collins to pay $95,000, comprising $48,769 in disgorgement, $21,231 in prejudgment interest and a civil penalty of $25,000. Collins’ settlement is subject to court approval.
In the related administrative proceeding instituted today against IBM, the Commission found that, as a result of the above-referenced conduct, IBM caused Dollar General’s violations of Sections 10(b), 13(a), and 13(b)(2)(A) of the Securities Exchange Act of 1934 and Exchange Act Rules 10b-5, 12b-20 and 13a-11. The Commission’s order also finds that IBM maintained inaccurate books and records during 2000 and 2001 as a result of numerous discrete revenue recognition errors that took place in the United States and at least 23 other countries, totaling approximately $577 million in revenues over that two-year period. The order also finds that IBM violated Section 13(b)(2)(A) by failing to keep accurate books and records. IBM, without admitting or denying the Commission’s findings, consented to the issuance of the Commission’s order directing IBM to cease and desist from committing or causing future violations of these provisions. Under the terms of the order, IBM also undertakes to pay $7 million to the court in connection with the Commission’s previously filed action SEC v. Dollar General, et al. C.A. No. 3:05-0283 (M.D. Tenn.).
For additional information, see also SEC v. Dollar General, et al. Litigation Release No. 19174 (April 7, 2005) and Litigation Release No. 19653 (April 12, 2006).
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