UNITED STATES DISTRICT COURT
Securities and Exchange Commission,
CIVIL ACTION NO.:
Plaintiff, Securities and Exchange Commission ("Commission"), for its Complaint against the Defendant, Hatem El-Khalidi, alleges and states that:
1. Dallas-based Arabian American Development Company ("Arabian" or "company"), operates a petrochemical refinery in Silsbee, Texas, and is the business of developing mineral interests in Saudi Arabia and the United States. Between May 2000 and November 2002, Arabian's President, director and Chief Executive Officer, El-Khalidi failed to disclose that the Ministry for Petroleum and Mineral Resources of Saudi Arabia (the "Ministry"), an agency of the Saudi Arabian government, was threatening to terminate the company's mining lease in the Al Masane area of Saudi Arabia (the "Al Masane Project" or "lease"), which is the company's largest asset. As a result of El-Khalidi's actions, Arabian's Commission filings omitted material information relating to the Al Masane Project. In addition, El-Khalidi certified the accuracy and completeness of Arabian's Form 10-Q for the quarter ended September 30, 2002, which he knew or should have known omitted material information.
2. This Court has jurisdiction over this action pursuant to Sections 21(d)(3) and 27 of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §§ 78u(d)(3) and 78aa]. El-Khalidi, directly and indirectly, made use of the mails and of the means and instrumentalities of interstate commerce in connection with the acts, practices and courses of business described in this Complaint.
3. Pursuant to Section 27 of the Exchange Act [15 U.S.C. § 78aa], venue is proper in this Court because Arabian is headquartered in Dallas, Texas, and many of the actions giving rise to the Commission's allegations occurred in Dallas, Texas.
4. Plaintiff Commission is an agency of the United States of America established by Section 4(a) of the Exchange Act [15 U.S.C. § 78d(a)]. The Commission is responsible for enforcing the federal securities laws for the protection of investors.
5. Defendant El-Khalidi, age 78, a United States citizen and resident of Jeddah, Saudi Arabia, helped found Arabian in 1967, and served as the Chief Executive Officer, the President and a director of Arabian during the relevant period. El-Khalidi continues to serve in these positions today.
6. In 1993, Arabian obtained the thirty-year lease from the Saudi Arabian government to mine zinc, lead and gold in the Al Masane area of Saudi Arabia. The Al Masane Project is Arabian's largest asset, accounting for approximately $36 million (65%) of Arabian's $56 million in total assets. The lease agreement requires Arabian to build the mine, and begin mining operations, pursuant to a work schedule, and if Arabian fails to comply with the work schedule, the Saudi government may have the right to terminate the lease.
7. In the late 1990's, an economic crisis in Southeast Asia caused a sharp drop in mineral prices, making it uneconomical for Arabian to comply with the work schedule set forth in the lease. As a result, in May 1999, El-Khalidi, on behalf of Arabian, petitioned the Ministry for permission to delay implementation of the Al Masane Project. El-Khalidi maintained that the drop in mineral prices constituted a "force majeure" under the lease agreement, and that Arabian was not obligated to implement the Al Masane Project while the force majeure persisted.
8. In May 2000, the Ministry notified Arabian, via correspondence sent to El-Khalidi in Saudi Arabia, that Arabian must implement the Al Masane Project, as required by the lease agreement, and if Arabian failed to do so, the Ministry would begin procedures to terminate the lease. Between June 2000 and November 2002, El-Khalidi continued to receive correspondence from the Saudi government, informing Arabian that: (1) it must proceed with positive steps to implement the Al Masane Project; and (2) failure to do so could result in termination of the lease.
9. Notwithstanding the foregoing, in April 2002, El-Khalidi signed a letter to Grant Thornton, Arabian's outside auditor, representing, among other things: (1) Arabian has complied with all aspects of contractual agreements that would have a material effect on the company's financial statements in the event of non-compliance; (2) no events have occurred which would impair the company's ability to recover its investment in the Al Masane Project and other interests in Saudi Arabia; and (3) there is no impairment of the company's investment in the Al Masane Project.
10. It was not until late November 2002 that El-Khalidi disclosed to Arabian's Treasurer that the Saudi government was threatening to terminate the Al Masane lease. The Treasurer promptly informed Arabian's other officers and directors and, on December 23, 2002, Arabian filed a Form 8-K that publicly disclosed for the first time that the Saudi government was threatening to terminate Arabian's lease. The Treasurer also informed the company's outside auditor, which subsequently withdrew its audit reports for Arabian's 2000 and 2001 financial statements and resigned as Arabian's outside auditor.
11. Between June 30, 2000 and September 30, 2002, Arabian omitted material information about the possible termination of the Al Masane lease from quarterly and annual reports that Arabian filed with the Commission. El-Khalidi aided and abetted those omissions by failing to disclose the material information to Arabian. In addition, El-Khalidi certified the accuracy of Arabian's Form 10-Q for the quarter ended September 30, 2002, even though he knew that that 10-Q failed to disclose material information about the possibility of termination of the Al Masane lease.
12. Arabian failed, and El-Khalidi aided and abetted its failure, to keep adequate records relating to the disposition of the Al Masane lease, and, as a result, Arabian's books, records and accounts did not, in reasonable detail, accurately and fairly reflect its transactions and dispositions of assets.
13. Arabian failed, and El-Khalidi aided and abetted its failure, to devise and maintain a system of internal accounting controls that were sufficient to provide reasonable assurances that Arabian's transactions were recorded as necessary to permit preparation of financial statements in conformity with Generally Accepted Accounting Principles and to maintain accountability for assets. For example, Arabian did not have written internal accounting controls requiring important documents, such as contracts and agreements, located in Arabian's Jeddah office, to be copied, translated from Arabic to English, and delivered to Arabian's headquarters in Dallas.
14. El-Khalidi knowingly circumvented Arabian's system of internal accounting controls by withholding information and documents relating to the Al Masane Project from Arabian and Grant Thornton.
15. Paragraphs 1 through 14 above are hereby re-alleged, and incorporated herein by reference.
16. Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Rules 13a-1 and 13a-13 thereunder [17 C.F.R. §§ 240.13a-1 and 240.13a-13] require issuers of registered securities, such as Arabian, to file with the Commission annual and quarterly reports. Exchange Act Rule 12b-20 [17 C.F.R. § 240.12b-20] provides that, in addition to the information expressly required to be included in a report, there shall be added such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made, not misleading.
17. By reason of the foregoing, Arabian violated Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Rules 12b-20, 13a-1 and 13a-13 [17 C.F.R. §§ 240.12b-20, 240.13a-1 and 240.13a-13], and El-Khalidi aided and abetted these violations.
18. Paragraphs 1 through 17 above are hereby re-alleged, and incorporated herein by reference.
19. Section 13(b)(2)(A) the Exchange Act [15 U.S.C. § 78m(b)(2)(A)] requires all issuers to make and keep books, records, and accounts that, in reasonable detail, accurately and fairly reflect their transactions and dispositions of their assets.
20. Section 13(b)(2)(B) of the Exchange Act [15 U.S.C. § 78m(b)(2)(B)] requires issuers to devise and maintain an adequate system of internal accounting controls.
21. By reason of the foregoing, Arabian violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act [15 U.S.C. §§ 78m(b)(2)(A) and 78m(b)(2)(B)], and El-Khalidi aided and abetted these violations.
22. Paragraphs 1 through 21 above are hereby re-alleged, and incorporated herein by reference.
23. Exchange Act Rule 13a-14 [17 C.F.R. § 240.13a-14] requires an issuer's principal executive and financial officer to certify in each quarterly and annual report filed or submitted by the issuer under Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)], that: they have reviewed the report; and that based on their knowledge, the report does not contain any untrue statement of material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the report.
24. By reason of the foregoing, Defendant violated Exchange Act Rule 13a-14 [17 C.F.R. § 240.13a-14].
25. Paragraphs 1 through 24 above are hereby re-alleged, and incorporated herein by reference.
26. Section 13(b)(5) of the Exchange Act [15 U.S.C. § 78m(b)(5)] prohibits any person from knowingly circumventing an issuer's system of internal accounting controls.
27. By reason of the foregoing, El-Khalidi violated Section 13(b)(5) of the Exchange Act [15 U.S.C. § 78m(b)(5)].
28. Paragraphs 1 through 27 above are hereby re-alleged, and incorporated herein by reference.
29. Exchange Act Rule 13b2-2 [17 C.F.R. § 240.13b2-2] prohibits any director or officer of an issuer from making a materially false or misleading statement to an accountant in connection with any audit required under the Exchange Act, or omitting to state to an accountant, in connection with such an audit, material facts without which statements would be misleading to an accountant, in light of the circumstances under which the statements were made.
30. By reason of the foregoing, El-Khalidi violated Exchange Act Rule 13b2-2 [17 C.F.R. § 240.13b2-2].
WHEREFORE, the Commission respectfully requests that this Court:
Enter a Final Judgment ordering El-Khalidi to pay a civil money penalty in the amount of $25,000, pursuant to Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)]; and
Grant such other relief, as this Court may deem just and appropriate.
J. Kevin Edmundson
D.C. Bar No. 430746
U.S. Securities and Exchange Commission
801 Cherry Street, 19th Floor
Fort Worth, TX 76102
(817) 978-4927 (fax)
Alan M. Buie
U.S. Securities and Exchange Commission
801 Cherry Street, 19th Floor
Fort Worth, TX 76102
Dated _____________, 2003
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