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U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 22075 / August 31, 2011

Accounting and Auditing Enforcement Release No. 3315 / August 31, 2011

Securities and Exchange Commission v. James Li (A/K/A Ching Hua Li), Thomas Chow (A/K/A Man Kit Chow), Roger Kao (A/K/A Chao Chun Kao), Christopher Liu (A/K/A Chi Lei Liu), And Wayne A. Pratt, Civil Action No. CV-11-1712-PHX-SRB (SRB) (D. Ariz.) (Filed Aug. 30, 2011)

SEC CHARGES FIVE SENIOR EXECUTIVES WITH FINANCIAL FRAUD AT SYNTAX-BRILLIAN CORPORATION

On August 30, 2011, the U.S. Securities and Exchange Commission filed charges in connection with a financial fraud perpetrated by senior management and members of the Board of Directors of Syntax-Brillian Corporation, a developer and distributor of high-definition LCD (liquid crystal display) televisions under the Olevia brand name. The SEC's Complaint alleges that the scheme was orchestrated by James Li, a Syntax Director who at times was also its President, Chief Operating Officer and Chief Executive Officer, and Thomas Chow, a Syntax Director and its Chief Procurement Officer.

According to the SEC's Complaint, from at least June 2006 through April 2008, Li and Chow engaged in a complex scheme to overstate Syntax's financial results by publicly reporting significant sales of LCD televisions in China, when in fact the vast majority of these sales never occurred. Li and Chow initially concealed the scheme through the use of fake shipping and sales documents. As the scheme progressed, Li and Chow developed a circular cash flow scheme involving Syntax's primary manufacturer, Taiwan Kolin Co., Ltd., and its purported customer in Hong Kong, South China House of Technology Consultants Co. Ltd. (SCHOT). Kolin's Chairman of the Board, Christopher Liu, and Kolin's executive and board member, Roger Kao, assisted in the scheme, which created the façade of substantial revenues from Syntax's purported sales in China. Under the guise of paying various invoices, Li and Chow funneled millions of dollars from Syntax to Kolin. Liu and Kao then authorized the transmittal of these funds to SCHOT, which then transferred the funds back to Syntax. Syntax recorded these cash transfers as payments for the previously recorded fictitious sales.

The SEC alleges that Wayne Pratt, Syntax's Chief Financial Officer, ignored red flags of improper revenue recognition and participated in preparing backdated documentation that was provided to Syntax's auditors to support fictitious fiscal 2006 year-end sales. Pratt also ignored indications of impaired assets, agency sales, and potential collectability issues.

The SEC's Complaint alleges that between June 30, 2006, and September 30, 2007, Li, Chow, Liu, and Pratt signed various filings with the SEC containing material misstatements. In addition, Li, Chow, and Pratt signed management representation letters for Syntax's auditors that contained material misstatements regarding, among other things, sales to SCHOT, purchases from Kolin, and the relationships between Syntax, SCHOT, and Kolin. Li and Chow also engaged in insider trading.

The SEC's Complaint charges Chow with violations of Section 17(a) of the Securities Act of 1933 ("Securities Act"), Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Exchange Act Rules 10b-5, 13b2-1, and 13b2-2, and that he aided and abetted violations of Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13. In connection with its civil action against Chow, the SEC is seeking a permanent injunction, disgorgement with prejudgment interest, a civil penalty up to a maximum of three times trading profits pursuant to Section 21A(a)(2) of the Exchange Act, a civil penalty pursuant to Section 20(d) of the Securities Act and Section 21(d)(3)(A) of the Exchange Act, and a bar against service as an officer or director of a public company ("officer and director bar"). Without admitting or denying the allegations in the SEC's Complaint or the Commission's findings, all of the other defendants have reached settlements with the SEC, as described below.

  • Li consented to the entry of a final judgment permanently enjoining him from violating Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5, 13a-14, 13b2-1 and 13b2-2, and aiding and abetting violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13, imposing a permanent officer and director bar against him, and providing that, upon motion of the Commission, the court shall order disgorgement of ill-gotten gains, prejudgment interest thereon, and a civil penalty in amounts the court deems to be appropriate.
     
  • Kao consented to the entry of a final judgment permanently enjoining him from aiding and abetting violations of Sections 10(b), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5, 13b2-1 and 13b2-2, and ordering him to pay a civil penalty of $100,000.
     
  • Liu consented to the entry of a final judgment permanently enjoining him from violating Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5, and aiding and abetting violations of Sections 10(b) and 13(a) of the Exchange Act and Exchange Act Rules 10b-5, 12b-20 and 13a-1, ordering him to pay a civil penalty of $100,000, and imposing a permanent officer and director bar against him.
     
  • Pratt consented to the entry of a final judgment permanently enjoining him from violating Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act, and Exchange Act Rules 10b-5, 13a-14, 13b2-1 and 13b2-2, and aiding and abetting violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13, ordering him to pay disgorgement in the amount of $88,000 and prejudgment interest of $17,000, a civil penalty of $90,000, and imposing a five-year officer and director bar against him. Pratt also consented to the institution of settled administrative proceedings pursuant to Rule 102(e)(3) of the Commission's Rules of Practice suspending him from appearing or practicing before the Commission as an accountant for a period of five years, based on the anticipated entry of an injunction against him.

The SEC acknowledges the assistance and cooperation of the Securities and Futures Commission (Hong Kong).

 

http://www.sec.gov/litigation/litreleases/2011/lr22075.htm


Modified: 08/31/2011