UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 17397 / March 6, 2002
Accounting and Auditing Enforcement
Release No. 1514 / March 6, 2002
Securities and Exchange Commission v. Raece Richardson, David McKenzie, Cameron Gorges, and Freestar Technologies, Civil Action No. 1:02CV00426 (Judge Friedman) (filed March 6, 2002)
SEC CHARGES FORMER OFFICERS OF FREEDOM SURF, INC.
WITH ACCOUNTING FRAUD
FORMER AUDITOR NAMED IN ADMINISTRATIVE PROCEEDING
The Securities and Exchange Commission today filed an action charging Raece Richardson and David McKenzie, formerly the President and Vice President of Freedom Surf, Inc., respectively, with securities fraud, for falsifying Freedom Surf"s financial statements. Richardson, 37 years old, is a resident of Huntington Beach, California. McKenzie, 42 years old, is a former resident of Huntington Beach, who is currently living in Costa Rica. The Commission's complaint alleges that the two included $5.18 million in fraudulently-valued assets on Freedom Surf's financial statements filed with the Commission between January and November 2000. Freedom Surf, now known as Freestar Technologies, Inc., is located in the Dominican Republic. Also charged were Cameron Gorges, a friend of Richardson, who provided a phony appraisal of the equipment to assist the scheme, and Freestar Technologies as successor to Freedom Surf. The company's former auditor, James P. Slayton, CPA, was charged in a separate administrative proceeding.
Without admitting or denying the allegations in the Complaint, Freestar Technologies McKenzie and Gorges each consented to the entry of final judgments of permanent injunction. Under the terms of the settlements, the Court did not order McKenzie or Gorges to pay civil money penalties based on their sworn statements of financial condition and other documents submitted to the SEC. Richardson is currently a defendant in another securities fraud action that the Commission filed in April 2001. See SEC v. First Americap Corp, et. al., Civil Action No. H 01-1153 (S.D. Tex.), Lit. Release No.16960 (April 12, 2001). In the action filed today, the Commission is seeking an injunction, civil money penalties, and an order barring Richardson from serving as an officer or director of a public company in the future.
The Commission's Complaint alleges that Richardson and McKenzie orchestrated a scheme to inflate Freedom Surf's assets with certain equipment located in Costa Rica and fraudulently valued at $5.18 million. During the relevant period, this equipment comprised virtually all of Freedom Surf's assets. Freedom Surf purportedly acquired the equipment in exchange for stock and a note in December 1999. Richardson had Gorges fabricate and sign an appraisal, which valued the equipment at $5.18 million. Gorges merely used numbers that McKenzie gave him. Gorges had no experience valuing this type of equipment, never saw the equipment, and never performed any appraisal. Gorges' appraisal was then given to Slayton, the auditor, who failed to perform an audit and instead relied on the fabricated appraisal to issue an audit opinion for Freedom Surf's financial statements. Subsequently, Freedom Surf reported the sale of the equipment in a sham transaction with another company controlled by Richardson. Freedom Surf included the fraudulent equipment valuation or the sham sale of the equipment in a registration statement, periodic reports, and other filings with the Commission between January and November 2000.
The Commission's Complaint alleges violations of the antifraud, record keeping, internal controls, and periodic reporting provisions of the federal securities laws. Specifically, the Complaint charges Richardson and McKenzie with violations of Section 17(a) of the Securities Act of 1933, Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 13b2-1, and 13b2-2 thereunder, and with aiding and abetting Freestar's violations of Sections 12(g), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11, and 13a-13. Freestar Technologies is charged with violations of Section 17(a) of the Securities Act, Sections 10(b), 12(g), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13. Cameron Gorges is charged with aiding and abetting Richardson's, McKenzie's, and Freestar's violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Richardson's and McKenzie's violations of Exchange Act Rule 13b2-2.
Simultaneous with the filing of the Commission's Complaint, the Division of Enforcement and the Office of the Chief Accountant instituted an administrative proceeding against Slayton charging that he violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5, caused and willfully aided and abetted Freestar's violations of Section 12(g) and Rule 12b-20 of the Exchange Act; and engaged in improper professional conduct in his audit of Freedom Surf. Slayton is currently a respondent in another Commission administrative proceeding that charges similar violations in connection with Slayton's audits of another company, California Software Corporation. In the Matter of James E. Slayton, CPA, Exchange Act Release No. 45245 (Jan. 7, 2002).
In a related matter, the Commission today issued an order barring John C. Cruickshank, Jr., a former Freedom Surf director, from appearing or practicing before the Commission based on his disbarment by the State Bar of California and on his prior felony conviction for cocaine distribution. Cruickshank prepared and filed all of Freedom Surf's SEC filings involved in this matter.
The investigation is continuing to determine if there were other violations of the federal securities laws.