Friday, April 13, 2012

SEC Litigation Releases: Week in Review (Part I)

By Tim Dulaney, PhD

Due to the high volume of SEC litigation releases over the previous week, we are summarizing the releases in two parts.  This is the first of the two parts.

Fromer Syntax-Brillian Corp. CEO Ordered to Pay More than $11 Million for Insider Trading and Financial Fraud, April 9, 2012, (Litigation Release No. 22324)

The US District Court for the District of Arizona entered a final judgment against James Li -- former CEO and Director of Syntax-Brillian Corp. -- ordering him to pay over $2 million in disgorgement and prejudgment interest as well as over $9 million in insider trading and civil penalties.  The final judgement stems from an August 2011 SEC complaint (Litigation Release No. 22075) that alleged "Li and other members of Syntax’s senior management engaged in a complex scheme to overstate Syntax’s revenues and earnings and artificially inflate its stock price."  Other members of the senior management have been similarly penalized and punished for their actions related to this scheme.

SEC Alleges Silicon-Valley Businessman Misrepresented IPO Opportunities, April 9, 2012, (Litigation Release No. 22323)

Earlier this week, the SEC alleged that Benedict Van raised millions in investor funds by representing to investors that two Internet start-ups -- hereUare, Inc. and eCity, Inc. -- were going to go public (with the help of Goldman Sachs and an international law firm) in the coming months and would generate millions in profits.  In reality, Van relied on the investor funds to keep the companies afloat and when this income stream dried up, the businesses ceased operations.  Due to Van's inability to pay disgorgement and other penalties, the only punishment he faces is a permanent prohibition from holding an officer or director position in any public company.

SEC Charges Franklin Bank Corporation Executives with Fraud, April 6, 2012, (Litigation Release No. 22321)

The SEC filed a complaint in the US District Court for the Southern District of Texas alleging Anthony J. Nocella and J. Russell McCann -- Franklin Bank Corporation's CEO and CFO, respectively -- "implemented increasingly aggressive loan modification programs [...] to hide from investors the true amount of Franklin’s non-performing assets and to artificially inflate Franklin’s net income and earnings."  The defendants allegedly overstated net income by over 300% in one quarter and understated non-performing assets by more than 40%.  The SEC is seeking disgorgement, prejudgment interest, penalties and bonus repayment pursuant to the Sarbanes Oxley Act of 2002.

SEC Freezes Accounts of Six Chinese Citizens and One Offshore Entity Charged with Insider Trading, April 6, 2012, (Litigation Release No. 22320)

Last week, the SEC filed a complaint in the US District Court of Chicago alleging six Chinese citizens -- Siming Yang, Caiyin Fan, Shui Chong (Eric) Chang, Biao Cang, Jia Wu, and Ming Ni -- and one British Virgin Islands entity --  Prestige Trade Investments Limited -- had traded Zhongpin Inc. common stock and call options ahead of the public announcement of a stock buyback that offered a substantial premium over the closing price.  The trades allegedly resulted in illicit gains approaching $10 million.  The SEC has frozen the assets of the defendants and is seeking disgorgement, prejudgment interest and penalties.

SEC Charges South Florida Man with Fraud in Phony Stock-Trading Funds, April 6, 2012, (Litigation Release No. 22319)

Earlier this month, the SEC filed a complaint in the US District Court for the Southern District of Florida alleging that George Elia and International Consultants & Investment Group Ltd. Corp. had misrepresented his trading experience to raise investor funds and then misappropriated those funds.  Elia covered up his actions by "providing bogus account statements that reflected fictitious profits."

Court Sentences Defendant for Conspiracy to Commit Mail and Wire Fraud, April 5, 2012, (Litigation Release No. 22318)

The US District Court for the Southern District of Florida handed down a sentence of five years imprisonment followed by three years of supervised release to Gaston E. Cantens stemming from the charges brought by the SEC in March 2010 (Litigation Release No. 21430).  According to the 2010 SEC complaint, Cantens and his wife allegedly operated a $135 million Ponzi scheme targeting Cuban-American investors in which investors bought promissory notes -- backed by recorded mortgage assignments -- claiming annual returns of up to 16%.  The Cantens allegedly misappropriated a significant portion of the investor funds for personal use and unrelated business ventures.

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