Friday, March 9, 2012

SEC Litigation Releases: Week in Review

By Tim Dulaney, PhD

District Judge Approves SEC Settlement with Koss Corporation and Michael J. Koss, its former CEO and CFO, March 9, 2012 (Litigation Release No. 22279)

In the SEC's October 2011 complaint (Litigation Release No. 22138), the SEC alleged that the Milwaukee, Wisconsin based Koss Corporation had prepared materially inaccurate financial statements from FY 2005-2009.  The complaint alleged that, during this period, Sujata Sachdeva (Koss Corporation's former Principal Accounting Officer and Vice President of Finance) had embezzled more than $30 million and covered up the embezzlement with the help of Julie Mulvaney (Koss Corporation's former Senior Accountant).  Due to the lack of adequate internal controls, Sachdeva was allegedly able to steal approximately half of the retained earnings in FY 2009.  The proposed settlement required Michael J. Koss to reimburse Koss Corporation with his incentive bonuses from FYs 2008-2010.  The SEC announced in the current litigation release that the US District Court for the Eastern District of Wisconsin has approved the proposed settlement.

SEC Charges Prime Star Group, Inc., with Violations of Antifraud, Registration and Reporting Provisions, March 7, 2012 (Litigation Release No. 22278)

According to the SEC complaint, Prime Star Group, Inc., and Roger Mohlman allegedly issued "18 million purportedly unrestricted Rule 144 shares pursuant to backdated consulting agreements or forged attorney opinion letters" to consultants Danny Colon, Marysol Morera, Felix Rivera, DC International Consulting, LLC., Kevin Carson, The Stone Financial Group, Inc., and Joshua Konigsberg.  The consultants alleged then "liquidated Prime Star stock and either kept a portion of the sales proceeds or forwarded proceeds to promoters to tout Prime Star". The SEC alleges these actions constituted a pump and dump scheme.

Judge Order Brookstreet CEO to Pay $10 Million Penalty in SEC Case, March 6, 2012 (Litigation Release No. 22277)

In December 2009, the SEC filed a civil injunctive action against Brookstreet Securities Corporation and Stanley C. Brooks (Brookstreet's former CEO) alleging that Brookstreet and Brooks developed a program in which registered representatives would sell particularly risky and illiquid types of Collateralized Mortgage Obligations (CMOs) to investors for which the investments were unsuitable.  These investors allegedly included seniors and retirees.   As a result of this program, the investors realized severe losses and Brookstreet Securities eventually collapsed.  Stanley C. Brooks was ordered by a federal judge last week to pay a $10 million penalty.

Jury Returns Verdict of Liability on all Claims against Two Former CFOs of infoUSA, Inc., Rajnish K. Das and Stormy L. Dean, March 6, 2012 (Litigation Release No. 22276)

The SEC announced earlier this week that an Omaha jury found former CFOs of infoUSA, Inc., Rajnish K. Das and Stormy L. Dean liable for their assistance in the looting of company funds to pay for former CEO Vinod Gupta's personal expenses.  In particular, the SEC alleged that Das and Dean "signed and certified [infoUSA]’s false public filings which underreported Gupta’s executive compensation and related party transactions."

SEC Charges New York Investment Adviser with Defrauding Investors and Obtains Emergency Relief, March 6, 2012 (Litigation Release No. 22275)

Early this week, the SEC alleged that Brian Raymond Callahan -- a New York Investment advisor associated with Horizon Global Advisors, Ltd., and Hortizon Global Advisors, LLC. -- defrauded at least a dozen investors by raising more than $74 million, promising to invest in liquid assets but instead investing in unsecured, illiquid promisory notes.  Furthermore, Callahan allegedly overstated the amount invested in a real estate project in order to collect inflated (by 800% or more) management fees.  Callahan and his advisory firms assets have now been frozen by the courts and the SEC is "seeking preliminary and permanent injunctions against Callahan and his firms, return of ill-gotten gains, with interest, and civil penalties."

SEC Sues California Insurance Broker and Pennsylvania Tax Manager for Insider Trading, March 5, 2012 (Litigation Release No. 22274)

Earlier this week, the SEC alleged that William F. Duncan -- a California-based insurance broker -- and John M. Williams -- a Pennsylvania-based tax manager -- traded securities of Hi-Shear Technology Corporation on material non-public information concerning a proposed acquisition of Hi-Shear Technology Corportation by Chemring Group, PLC.  Duncan and Williams settled the Commission's charges without admitting or denying the allegations against them by paying over $175,000 and almost $15,000, respectively.

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