U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 21953 / May 3, 2011
Securities and Exchange Commission v. David Ronald Allen, et al., Civil Action No. 3:11-cv-00882 (NDTX, Dallas Division)
SEC HALTS PONZI SCHEME BY CO-FOUNDER OF CHINA VOICE HOLDING CORP.
On April 28, 2011, the Securities and Exchange Commission obtained a court order freezing the assets of China Voice Holding Corp., which trades in over-the-counter markets and has claimed to have a portfolio of telecommunications products and services in both the U.S. and China. The SEC alleges that China Voice’s co-founder and his two associates are operating an $8.6 million Ponzi scheme and misusing its proceeds, in part, to help fund the company’s operations.
The SEC alleges that David Ronald Allen, who also was China Voice’s chief financial officer, and his associates Alex Dowlatshahi and Christopher Mills promised investors in a series of offerings of limited partnerships that they would earn returns of at least 25 percent on their investments. Investors were falsely told that their money would be loaned to companies with a demonstrated track record and large profit margins. Instead, Allen and his cohorts used investor funds to pay back investors in earlier partnerships and funneled investor money to China Voice and a complicated web of other companies that Allen controls. Allen and his associates also siphoned investor money to enrich themselves and family members.
In order to maintain the scheme, Allen and his associates have increased the pace and size of the offerings to obtain a steady stream of proceeds from defrauded investors. They are planning or have begun to solicit funds from investors in at least two more limited partnerships in the ongoing fraud. The court order obtained late yesterday freezes the assets of Allen and several others in addition to China Voice. The court also temporarily enjoined these defendants from participating in the offering of securities like those used to perpetrate the fraudulent scheme as alleged by the SEC.
In addition to the Ponzi scheme, the SEC’s complaint filed in U.S. District Court for the Northern District of Texas (Dallas Division) charges China Voice, its former chairman and CEO William F. Burbank IV, and Allen, for a series of fraudulent company statements about its financial condition and business prospects. Among other things, the SEC alleges that China Voice greatly overstated the value of certain business relationships and misled investors by failing to disclose significant loans from related parties needed to fund its operations.
The SEC also alleges that beginning in at least September 2006, China Voice overstated its business in China by claiming to provide telephone and other communications software in China on a much more extensive basis than it actually did. Company press releases and public filings extensively publicized contracts signed by Chinese subsidiaries to provide services to the government and other entities in China, which would provide high levels of projected revenue to the company. But the company recanted in audited financial statements in June 2008, when it disclosed that the majority of the company’s revenue came from its U.S. subsidiaries. Nevertheless, China Voice and its stock promotion campaigns continued to tout purported Chinese contracts.
The SEC’s complaint additionally charges two China Voice shareholders, Gerald Patera and Ilya Drapkin, for helping Allen finance stock promotion campaigns to pump up the company’s stock price. These campaigns included a blast fax campaign orchestrated by Robert Wilson, who also is charged in the SEC’s complaint. The spam faxes were sent to thousands of people at once and contained false and misleading statements about China Voice and who was paying for the faxes. At the same time they were spending more than a million dollars on stock promotion, Patera and Drapkin dumped millions of shares of the company into the market.
The SEC’s complaint charges Allen, Dowlatshahi, Mills, and various related companies, Development Capital Associates Joint Venture, Lucrative Enterprises, Corp., Silver Summit Holdings, LLC, Sleeping Bear, LLC, Synergetic Solutions LLC, and Townhome Communities Corp., with violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and seeks a temporary restraining order, preliminary and permanent injunctions, disgorgement of unlawful proceeds plus prejudgment interest, and a financial penalty. The SEC’s complaint charges Burbank, Patera, Drapkin, and Wilson with violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder for their roles in the scheme. With regard to them, the SEC seeks a permanent injunction, disgorgement of unlawful proceeds plus prejudgment interest, and a financial penalty. The SEC’s complaint also seeks penny stock bars against Allen, Burbank, Patera, Drapkin, and Wilson as well as officer and director bars against Allen and Burbank.