UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 21550 / June 9, 2010

Accounting and Auditing Enforcement Release No. 3141 / June 9, 2010

Securities and Exchange Commission v. William G. Mortensen and Feng Zheng, Case No. 3:10-CV-1142-B (United States District Court for the Northern District of Texas, Dallas Division).

SEC Charges Former Advanced Materials Group, Inc. CFO with Securities Fraud and Misappropriation of Hundreds of Thousands of Dollars

On June 9, 2010, the Securities and Exchange Commission sued William G. Mortensen, the former CFO of Texas-based Advanced Materials Group, Inc. ("AMG"), in U.S. District Court in Dallas for fraudulently inflating AMG's publicly reported financial results over multiple quarters in 2008 and 2009. The Commission charged that Mortensen committed securities fraud, lied to accountants, falsified records and circumvented internal controls, and aided and abetted reporting, record-keeping and internal control violations. The Commission also alleged that Mortensen misappropriated hundreds of thousands of dollars from AMG to pay personal expenses.

The Commission also charged one of Mortensen's subordinates, Feng "Eric" Zheng, with lying to accountants, falsifying records and circumventing internal controls, and with aiding and abetting securities fraud and reporting, record-keeping and internal controls violations.

The Commission alleges that, from March 2008 through February 2009, Mortensen directed Zheng to record false sales to two of AMG's largest customers. These entries materially overstated AMG's sales, earnings and accounts receivable, as reported in AMG's quarterly and annual reports during this period. The Commission further alleges that Mortensen, with Zheng's assistance, used the inflated accounts receivable to obtain greater borrowings under AMG's bank line of credit. Mortensen then misappropriated these and other AMG funds to pay such personal expenses as a country club membership, extensive home remodeling, property taxes, and family vacations to Florida, Europe and elsewhere using private jets.

With respect to Mortensen, the Commission seeks civil penalties, disgorgement of misappropriated funds, a permanent bar from serving as a public company officer or director, and permanent injunctive relief. The litigation against Mortensen is continuing.

Zheng has settled the Commission's charges. Without admitting or denying the Commission's allegations, Zheng has consented to a $25,000 civil penalty and a permanent injunction against future violations of the antifraud, lying-to-accountants, reporting, record-keeping and internal controls provisions of the federal securities laws.

The Commission charged Mortensen with violating Sections 10(b) and 13(b)(5) of the Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 13a-14, 13b2-1, and 13b2-2 thereunder, and for aiding and abetting violations Exchange Act Section 13(a), 13(b)(2)(A) and 13(b)(2)(B) and Rules 12b-20, 13a-1, and 13a-13 thereunder. The Commission charged Zheng with violating Exchange Act Section 13(b)(5) and Rules 13b2-1 and 13b2-2 thereunder and for aiding and abetting violations of Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B), and Rules 10b-5, 12b-20, 13a-1, and 13a-13 thereunder.

In related administrative proceedings instituted pursuant to Section 12(j) of the Exchange Act, AMG has consented to the revocation of its securities registration. In addition, the Commission is instituting settled administrative proceedings pursuant to Rule 102(e) of the Commission's Rules of Practice against AMG's former auditor, Fei-Fei Catherine Fang, in which she has consented to a permanent bar from appearing or practicing before the Commission as an accountant.

 
http://www.sec.gov/litigation/litreleases/2010/lr21550.htm

Last modified: 6/09/2010