UNITED STATES DISTRICT COURT
Plaintiff Securities and Exchange Commission ("SEC") alleges as follows:
1. This action involves false financial statements and other false disclosures in documents filed with the SEC between January and November 2000 by Freedom Surf Inc., now known as Freestar Technologies. During the relevant period, Freedom Surf was a startup company with ambitions of becoming a major producer of wetsuits and other surfing related apparel. Freedom Surf's former senior officers, Raece Richardson and David McKenzie, orchestrated the fraud, aided and abetted by Cameron Gorges, a long-time friend of Richardson. Briefly, Freedom Surf filed a registration statement, periodic reports and other filings with the SEC falsely showing that it owned machinery and equipment (the "Equipment) valued at $5.18 million. In fact, the valuation of these purported assets was phony, and driven by the desire to include sufficient assets on its financial statements to avoid SEC scrutiny and attract interest from potential investors. The only support for the valuation was a fabricated appraisal signed by Gorges, who had no experience valuing this type of Equipment, never saw the Equipment, and obtained no historical records concerning the purchase, maintenance, or replacement of the Equipment, but relied instead on the valuation given him by McKenzie. The valuation was then provided to an accountant who provided an audit report in reliance upon it. Subsequently, Freedom Surf reported the sale of the Equipment in a sham transaction with another company controlled by Richardson. During the relevant period, this Equipment comprised virtually all of Freedom Surf's assets. By virtue of their conduct, Freestar Technologies, Raece Richardson, David McKenzie, and Cameron Gorges violated or aided and abetted violations of the antifraud, records keeping, internal controls and periodic reporting provisions of the federal securities laws.
JURISDICTION AND VENUE
2. This Court has jurisdiction over this matter pursuant to Section 22 of the Securities Act of 1933 [15 U.S.C. § 77v], and Sections 21(e) and 27 of the Securities Exchange Act of 1934 [15 U.S.C. §§ 78u(e) and 78aa]. The defendants made use of the means or instruments of interstate commerce, of the mails, and the facilities of a national securities exchange in connection with the acts, transactions, practices and courses of business alleged herein.
3. Venue properly lies in this Court pursuant to Section 22(a) of the Securities Act [15 U.S.C. § 77v(a)] and Section 27 of the Exchange Act [15 U.S.C. § 78aa] because Freedom Surf filed false and misleading periodic reports and other filings with the SEC, in this district.
4. Freestar Technologies is a Nevada corporation with its principal place of business in the Dominican Republic. Freestar Technologies' common stock is registered with the SEC pursuant to Section 12(g) of the Exchange Act, and is quoted on the OTC Bulletin Board under the symbol FSTI. During the relevant period, and up until February 2001, the company was called Freedom Surf, Inc., and its stock was quoted on the OTC Bulletin Board under the symbol FRSH.
5. Raece B. Richardson is an Australian citizen living in Huntington Beach, California. Richardson created Freedom Surf on November 17, 1999, and merged it with a public shell known as Interstate Capital Corporation, which had been provided by a stock promoter who was working with Richardson. Richardson served as Freedom Surf's President, CEO, and a director from the formation of the company until he resigned on August 10, 2000. His wife then became a director, and Richardson continued as a major Freedom Surf shareholder. Richardson has been the subject of other lawsuits and actions by the SEC and certain state regulators. Richardson has never been an officer, director or employee of Freestar Technologies.
6. David W. McKenzie was at all relevant times a resident of Huntington Beach, California, and now resides in Costa Rica. McKenzie served as Executive Vice President, Secretary, and a director of Freedom Surf from December 1999 until he resigned on February 5, 2001. McKenzie has never been an officer, director or employee of Freestar Technologies.
7. Cameron R. Gorges is a resident of San Clemente, California, and is a long-time friend of Richardson. Gorges has never been an officer, director or employee of Freestar Technologies.
8. In or about mid-1999, Richardson wanted to raise money to sell "Freedom Surf" brand wetsuits. A stock promoter told Richardson that he could help Richardson form a new company and raise $5 million once the company had publicly trading stock. The promoter also told Richardson and McKenzie that the company needed to have $5 million to $10 million in assets on its books to avoid SEC review and capture investors' attention. To that end, the promoter provided a publicly trading "shell" corporation, Interstate Capital, into which Freedom Surf was merged in November 1999.
9. Because Freedom Surf had no cash, Richardson and McKenzie understood that they needed to obtain the $5 million in assets primarily by issuing Freedom Surf stock. McKenzie had worked as General Manager for STS Manufacturing in Costa Rica from approximately 1992 through 1996, and knew that it had essentially discontinued its operations. McKenzie determined that he could obtain Equipment for stock from STS Manufacturing. He and Richardson also knew that only some of the Equipment they were planning to buy could be used to manufacture wetsuits and that Freedom Surf would never use much of the Equipment for any purpose other than to provide purported asset value on Freedom Surf's financial statements.
10. Although he had not seen the Equipment in over a year, McKenzie created a list of the Equipment he intended to purchase and established a "replacement price" for it from memory. This price was assigned as the value of the Equipment. The defendants did not obtain any documentation or independent valuation of any kind.
11. Freedom Surf then purportedly entered into an agreement with Pacific Standard Financial Group, an intermediary entity provided by the stock promoter, by which Freedom Surf was to purchase the Equipment from Pacific Standard after that company purchased those assets from STS Manufacturing. A purported agreement dated December 6, 1999, memorializes Freedom Surf's acquisition of the Equipment from Pacific Standard for 969,000 shares of stock and a promissory note for $335,000. However, the stock was not transferred to STS Manufacturing or its owners until 10 months after the purchase of the Equipment, and Freedom Surf never paid any amount due on the promissory note. Further, the asset purchase agreement between Freedom Surf and Pacific Standard had little more than paper significance to the parties. Pacific Standard never executed the agreement, and the agreement included an itemized list of assets to be acquired such as real property, leases and easements in Costa Rica that no one has ever claimed Freedom Surf intended to purchase.
12. After the purported Equipment purchase, Freedom Surf never took possession of the Equipment, never paid storage fees to the prior owner, and never insured or maintained the Equipment. Freedom Surf never used the Equipment for any purpose other than to show asset value on its financial statements.
13. Richardson understood that he needed an appraisal of the Equipment to provide to an auditor. He contacted his close friend Cameron Gorges, although he knew Gorges had no experience or training in performing an appraisal. Gorges agreed to provide an appraisal document, although Gorges did not perform any appraisal. With Richardson's assistance, Gorges incorporated Pacific Rim Equipment Brokers. Pacific Rim never did another appraisal, did no other business, had no officers or employees besides Gorges, and never filed any tax returns.
14. McKenzie gave Gorges his value of $5.18 million for the Equipment. Gorges then provided Freedom Surf with a false appraisal showing the Equipment to be worth $5.18 million. The appraisal stated, among other things, that (1), the Equipment was free of encumbrances, (2) STS Manufacturing was operational and all Equipment was well-maintained, (2) all inventory was in good condition and readily saleable, and that (3) the plant had an "excellent Actual Cash Value to the right client." In fact, Gorges never inspected or even saw any of the assets but relied entirely on McKenzie to establish the value of the Equipment. Gorges made no other effort to ascertain the existence, ownership, or value of the assets. He did not speak with the previous owner of the Equipment. He did not know how much the Equipment originally cost, how long any of it was used, or how it was used while in operation.
15. Later, in connection with an audit of Freedom Surf's financial statements for the company's 1999 annual report, Gorges signed an audit confirmation letter indicating that the Equipment was worth 5.18 million.
16. Freedom Surf then retained sole practitioner James E. Slayton, CPA, to audit its financial statements for the fiscal year ended December 15, 1999. Richardson asked Slayton to complete the audit as soon as possible because he wanted to file a registration statement with the SEC and have Freedom Surf publicly traded. Richardson gave Slayton Gorges' false appraisal and Slayton rendered a "going-concern" opinion and consented to have his opinion included in Freedom Surf's registration statement.
17. On January 3, 2000, Freedom Surf filed with the SEC a registration statement on Form 10-SB, signed by Richardson. The registration statement incorporated audited financial statements for the period ending December 15, 1999 that reported total assets of $5.18 million, consisting entirely of the Equipment purchased from STS Manufacturing and Pacific Standard. Similarly, the Equipment constituted all of Freedom Surf's assets reported in financial statements included in the company's 1999 annual report, and amendments thereto, filed with the SEC on Form 10-KSB. Freedom Surf's quarterly reports on Forms 10-QSB for the periods ending March 30 and June 30, 2000 also included balance sheets on which the $5.18 million in Equipment constituted the overwhelming majority of the company's assets. In addition, through November 2000, Freedom Surf reported the purchase of "certain assets valued at $5,180,000" in multiple SEC filings. (See the table set forth below for a complete listing of Freedom Surf's fraudulent filings.) Finally, Freedom Surf's December 15, 1999 audited financial statements and Gorges' phony appraisal were also included in the company's information submitted to the NASD pursuant to Rule 15c2-11 to initiate public quotations on the OTC Bulletin Board. During the relevant period, John W. Cruickshank, Jr. prepared and filed all of Freedom Surf's SEC filings. Cruickshank served as a director of Freedom Surf from at least August 11 to December 1, 2000.
18. In a Form 8-K filed with the SEC on October 23, 2000, Freedom Surf reported the sale of the Equipment to Ronbridge Investments, Ltd., described by Freedom Surf as a corporation doing business in Hong Kong. Freedom Surf further reported that Ronbridge agreed to pay $4,750,000 for the Equipment, comprised of a $750,000 down payment and a note for the balance due in two years, and also agreed to assume the debt to Pacific Standard. The reported sale to Ronbridge was a sham, and the second stage of the plan to create fictitious assets for Freedom Surf. Ronbridge was owned and controlled by Raece Richardson and his father. Ronbridge had no other owners, officers or employees. Ronbridge has never done any other business. The related party nature of the reported sale to Ronbridge was not disclosed. Further, although Freedom Surf received $750,000 from a wealthy friend of Richardson in August 2000, that money was a loan, and no portion of it was used to pay off the note to Pacific Standard or otherwise to make a payment for the Equipment.
19. On or about November 16, 2000, long after the note was past due, STS Manufacturing declared a default on the purchase of the Equipment. In a Form 8-K/A filed with the SEC on December 1, 2000, and in its quarterly report on Form 10-QSB filing for the period ending September 30, 2000 (filed on December 8, 2000), Freedom Surf reported, among other things, that (1) Ronbridge was an affiliate because its controlling shareholder was related to Raece Richardson, (2) the valuation of the Equipment was based on a Freedom Surf officer's knowledge, and not on an independent appraisal, (3) Freedom Surf never took possession of the Equipment and never paid storage fees, (4) the note for the Equipment had never been paid, and (5) STS Manufacturing had declared a default. Thereafter, beginning with its annual report on Form 10-SB for the period ending on December 31, 2000, filed with the SEC on March 15, 2000, Freedom Surf no longer included the Equipment in its financial statements.
20. The following Freedom Surf filings were materially false and misleading in that they contained financial statements that included the STS Manufacturing Equipment as assets valued at $5,180,000, identified Freedom Surf as having acquired "assets valued at $5,180,000," or described the purported sale of the Equipment to Ronbridge:
21. During the period from at least January 2000 through November 2000, defendants Freestar Technologies, Richardson, McKenzie and Gorges knew or were reckless in not knowing that the Equipment was falsely valued at $5.18 million.
22. By reason of the foregoing, defendants Freestar Technologies, Raece Richardson and David McKenzie violated Section 17(a) of the Securities Act [15 U.S.C. § 77q(a), Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder.
23. By reason of his conduct in creating an appraisal as requested by Richardson and McKenzie, defendant Cameron Gorges aided and abetted Freestar Technologies', Raece Richardson's and David McKenzie's violations of Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder.
24. Plaintiff realleges and incorporates by reference paragraphs 1 through 23.
25. Freedom Surf violated Sections 12(g) and 13(a) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder by filing a registration statement and annual, quarterly, and current reports with the SEC between January and November 2000 that included materially false financial statements and accompanying disclosures concerning the company's acquisition of $5.18 million worth of Equipment, and the sale of such Equipment to Ronbridge.
26. Richardson and McKenzie, as the senior officers of Freedom Surf during the relevant period, and the persons responsible for orchestrating the fraud, aided and abetted the company's violations of Sections 12(g) and 13(a) of the Exchange Act [15 U.S.C. §§ 78l(g) and 78m(a)], and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder [17 C.F.R. §§ 240.12b-20, 240.13a-1, 240.13a-11, 240.13a-13].
27. Plaintiff realleges and incorporates by reference paragraphs 1 through 26.
28. Freedom Surf violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act because many of Freedom Surf's books and records were not established until late in 2000 and other records were inaccurate on numerous items and over an extended period, and whatever books, records and accounts Freedom Surf did have did not "accurately and fairly reflect ...the assets" of the issuer because they reflected the inflated value assigned to the Equipment.
29. Richardson and McKenzie aided and abetted these violations because they were the company's senior officers and they failed to assure that Freedom Surf's books, records, and accounting controls were sufficient to properly record and report the Equipment.
30. Richardson and McKenzie violated Rule 13b2-1 by knowingly engaging in a scheme that falsified the value of Freedom Surf's assets on the company's books and records.
31. Richardson and McKenzie violated Rule 13b2-2 by participating in the preparation of a fabricated appraisal, which Richardson provided to Slayton for his audit.
32. By providing Freedom Surf's auditor with a false confirmation in connection with the audit of the company's financial statements for the 1999 10-KSB, Gorges also aided and abetted Richardson's and McKenzie's violations of Exchange Act Rule 13b2-2 [17 C.F.R. § 240.13b2-2].
33 Plaintiff realleges and incorporates by reference paragraphs 1 through 32 above.
34. By engaging in the conduct described herein, defendants Richardson and McKenzie knowingly circumvented and knowingly failed to implement a system of internal financial controls at the company in violation of Section 13(b)(5) of the Exchange Act [15 U.S.C. § 78m(b)(5)].
PRAYER FOR RELIEF
WHEREFORE, the SEC respectfully requests that this Court:
(a) based on violations of the Acts and Rules specified herein, permanently enjoin Defendant Freestar Technologies from violating Section 17(a) of the Securities Act of 1933 ("Securities Act"), Sections 10(b), 12(g), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder;
(b) based on violations of the Acts and Rules specified herein, permanently enjoin Defendant Raece Richardson from violating Section 17(a) of the Securities Act, Sections 10(b), 12(g), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13, 13b2-1, and 13b2-2 thereunder;
(c) based on violations of the Acts and Rules specified herein, permanently prohibit Raece Richardson from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Securities Act or that is required to file reports pursuant to Section 15(d) of that Act;
(d) based on violations of the Acts and Rules specified herein, permanently enjoin Defendant David McKenzie from violating Section 17(a) of the Securities Act, Sections 10(b), 12(g), 13(a), 13(b)(2)(A), and 13(b)(2)(B) and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13,13b2-1, and 13b2-2 thereunder;
(e) based on violations of the Acts and Rules specified herein, permanently enjoin Defendant Cameron Gorges from violating Section 10(b) of the Exchange Act and Rules 10b-5 and 13b2-2;
(f) based on violations of the Acts and Rules specified herein, order defendants Richardson and McKenzie to pay civil penalties pursuant to Sections 20(d) of the Securities Act and 21(d)(3) of the Exchange Act and order defendant Gorges to pay civil penalties pursuant to Section 21(d)(3) of the Exchange Act; and
(g) grant such other relief as this Court may deem just or appropriate.