UNITED STATES OF AMERICA
In the Matter of
KOREA DATA SYSTEMS USA, INC.,
ORDER INSTITUTING PUBLIC PROCEEDINGS PURSUANT TO SECTION 8A OF THE SECURITIES ACT OF 1933 AND SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS AND IMPOSING A CEASE-AND-DESIST ORDER
The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative proceedings be, and hereby are, instituted against Korea Data Systems USA, Inc. ("KDS"), Lap Shun (John) Hui ("Hui"), and Bun (Ben) Wong ("Wong") (collectively "Respondents") pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act").
In anticipation of the institution of these proceedings, Respondents have submitted Offers of Settlement, which the Commission has determined to accept. Solely for the purposes of these proceedings and any other proceedings brought by or on behalf of the Commission or to which the Commission is a party, Respondents, without admitting or denying the findings set forth herein, except that they admit the jurisdiction of the Commission over them and over the subject matters set forth herein, consent to the issuance of this Order Instituting Proceedings, Making Findings and Imposing a Cease-and-Desist Order (the "Order").
On the basis of this Order and Respondents' Offers of Settlement, the Commission makes the following findings:1
Korea Data Systems USA, Inc. ("KDS") is a California corporation located in Garden Grove, California. KDS was affiliated with Korea Data Systems Co. Ltd. ("KDS Korea"), a Korean computer manufacturer. During its 1997 and 1998 fiscal years, Aura Systems, Inc. ("Aura") claims to have purchased and resold $26.5 million of KDS computer monitors.
Lap Shun Hui, age 46, also known as John Hui owns KDS and serves as its Chief Executive Officer. Hui also controlled alleged Aura customers Micro Distribution Power Inc. ("MCDP") and FYE Trading, Inc. ("FYE") at all times relevant to this proceeding. Hui resides in South Pasadena, California.
Bun Wong, age 40, also known as Ben Wong, is the Chief Financial Officer and Chief Operating Officer of KDS. Wong resides in Rowland Heights, California.
B. Other Relevant Persons and Entities
Aura Systems, Inc. ("Aura"), a Delaware corporation headquartered in El Segundo, California, formerly sold sound related and multi-media products, and now sells an induction power system for mobile power applications. Aura's common stock is registered with the SEC pursuant to Section 12(g) of the Exchange Act and was quoted on the NASDAQ national market system until July 1999, when its stock was delisted. Aura's stock currently trades on the over-the-counter bulletin board under the symbol "AURA." Aura's fiscal year ends February 28. On October 2, 1996, the SEC entered a Cease-and-Desist Order by consent against Aura and others for violations of Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 promulgated thereunder.
C. Fiscal 1997 Computer Monitor Sales
From at least 1996 to 1998, KDS Korea manufactured and sold two brands of computer monitors to a California computer monitor distributor then called Mag Innovision. Mag Innovision sold one brand to its own customers; the other brand belonged to a major U.S. personal computer retailer that had a contract with Mag Innovision. Mag Innovision placed its monitor orders directly with KDS Korea, and KDS Korea shipped the monitors directly to Mag Innovision and/or the U.S. personal computer retailer. Aura had nothing whatsoever to do with these monitor sales.
Nonetheless, during its 1997 fiscal year, Aura fictitiously inserted itself into the monitor-sale transactions to the U.S. personal computer retailer so that Aura could falsely record revenue. To accomplish the scheme, individuals at Aura booked fictitious sales and created and carried fictitious open accounts receivable from its alleged monitor customers. These individuals also created or caused the creation of false documents to make it appear that Aura was a party to these computer-monitor sales from KDS Korea to Mag Innovision and the U.S. retailer. These false documents included false Mag Innovision purchase orders and false Aura invoices to Mag Innovision. KDS agreed to this fictional insertion of Aura into the transactions for business reasons of its own.
To convince its auditors that the computer monitor receivable was legitimate and to avoid a write-off at year-end, individuals at Aura made arrangements with KDS, Hui, and Wong to have Aura record "payments" from Mag Innovision. On at least six occasions in fiscal 1997 and 1998, at Hui's and Wong's direction, KDS accounting personnel instructed Mag Innovision to pay a combined total of $13.4 million in funds Mag Innovision owed KDS directly to Aura. Individuals at Aura caused these transfers to be falsely booked as payments for computer monitors on Aura's books. KDS then credited Mag Innovision on its books for the payments. Thereafter, in several transfers from June 27, 1996 to November 3, 1997, Aura wired back to KDS virtually all of the funds Aura had received from Mag Innovision.
In July 1996, Aura falsely booked as payments from Mag Innovision another $1.9 million of funds Aura had received from Orchestra MultiSystems ("Orchestra"), a shell company controlled by Hui. Hui and Wong directed those transfers from Orchestra to Aura. Aura paid KDS back the $1.9 million with outgoing wire transfers within several days of receiving the payments from Orchestra.
In connection with the fiscal 1997 year end audit, Aura's independent auditors were provided a false "balance due" audit confirmation letter concerning the collectibility of the Mag Innovision receivable. This confirmation letter asked Mag Innovision to confirm that it owed Aura approximately $9 million as of February 28, 1997. The confirmation letter, which was sent to KDS instead of to Mag Innovision, was purportedly signed by a Mag Innovision employee. However, the person who purportedly signed the letter was not a Mag Innovision employee and the signature was not authentic.
In its fiscal 1997 annual report on Form 10-K filed with the SEC on June 13, 1997, Aura falsely reported $16.5 million in sales of KDS computer monitors to Mag Innovision. By recording the fictitious sales in its fiscal 1997 annual report on Form 10-K, Aura materially overstated revenue by $16.5 million and accounts receivable by approximately $9 million, approximately 15% of gross receivables. Aura also falsely described itself as a computer monitor reseller in the text of its annual report.
D. Fiscal 1998 Computer Monitor Sales
In Aura's 1998 fiscal year, Aura booked revenue from wholly fictitious monitor resales to Micro Computer Distribution Power ("MCDP"), a shell entity controlled by Hui which shared office space with KDS. With the assistance of KDS, Hui, and Wong, Aura created or caused the creation of false purchase orders from MCDP and corresponding false invoices from Aura to MCDP and from KDS to Aura to make it appear that Aura was reselling KDS monitors to MCDP. As with Mag Innovision, individuals at Aura made or caused false entries in Aura's internal accounting system to reflect the fictitious sales, and Aura and KDS made circular wire transfers to MCDP to allow Aura to record "payments" from the fictitious sales and avoid a receivable write off at year- end. In mid-1998, KDS wired approximately $2.4 million to MCDP in five separate transfers. Next, MCDP personnel directed five payments totaling $2.4 million from MCDP to Aura. Aura booked those transfers as payments for the computer monitors. Between April 30 and July 29, 1998, Aura repaid KDS the $2.4 million.
In connection with its fiscal 1998 year end audit, Aura's independent auditors were provided a false accounts receivable confirmation letter. That confirmation letter purported to confirm that MCDP owed Aura a balance of $5.9 million as of February 28, 1998. However, the signature on that letter was not authentic. On the last day of fiscal 1999, Aura wrote off over $5 million in receivables attributable to the MCDP sales.
Also in its 1998 fiscal year, Aura falsely reported revenue from fictitious computer monitor sales to FYE Trading ("FYE"), another shell company that Hui and Wong had incorporated as a fictitious business name in 1993. FYE never had its own address, and instead used addresses of KDS and other companies run by Hui and/or Wong. As with the purported sales to Mag Innovision and MCDP, with the assistance of KDS, individuals at Aura created or caused to be created false documents, including false purchase orders from FYE to Aura, to support Aura's alleged sales to FYE. The false purchase orders, purporting to be on FYE letterhead, are addressed to the location of another Hui affiliated entity. Others at Aura also made false accounting entries to reflect the fictitious sales in Aura's internal accounting system. Once again, Aura and KDS caused circular wire transfers to be made to create the appearance that FYE was paying Aura for the monitors. On five occasions between March 11 and August 25, 1998, Hui and Wong caused FYE to transfer a total of $2.25 million to Aura, which Aura recorded as payments for monitors. Within days of its payments to Aura, Hui and Wong had KDS transfer all $2.25 million to FYE. Between March and July 1998, Aura repaid KDS the $2.25 million it had received from FYE.
In connection with the fiscal 1998 year end audit, Aura's independent auditors were provided a false accounts receivable confirmation. During the 1998 year end audit, Aura addressed the confirmation request to FYE at the address of another KDS-affiliated entity. In June 1998, Aura's auditors received the letter confirming that FYE owed Aura approximately $4.1 million as of February 28, 1998. The signature on the letter was not authentic.
As a result of this scheme, in its 1998 annual report on Form 10-K, Aura materially overstated revenue by $5.9 million attributable to the fictitious sales to MCDP and by $4.1 million attributable to the fictitious sales to FYE Trading. It also overstated accounts receivable by $5.9 million and by $4.1 million, respectively, or approximately 15% of gross receivables for the year. Aura also falsely described itself as a computer monitor reseller in the text of its 1998 annual report.
E. Aura Files Registration Statements with the Commission
On December 4, 1997, Aura filed with the Commission a registration statement on Form S-3 that incorporated by reference Aura's materially false annual report for fiscal year 1997. On June 25, 1998, Aura filed with the Commission a registration statement on Form S-3 that incorporated by reference Aura's materially false annual report for fiscal year 1998.
A. Legal Discussion
Section 8A of the Securities Act and Section 21C of the Exchange Act authorize the Commission to enter a cease-and-desist order against any respondent who caused another's violation of the federal securities laws by an act or omission that the respondent knew or should have known would contribute to the violation. Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, prohibit material misstatements or omissions, made with scienter, in connection with the purchase or sale of securities. SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 860-62 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). Section 17(a) of the Securities Act prohibits a person, in the offer or sale of any security, from employing any device, scheme, or artifice to defraud. See, e.g., U.S. v. Naftalin, 441 U.S. 768, 771-72 (1979). Misrepresentation of a company's earnings, and the improper recognition of revenue in departure from GAAP, may be material. See Texas Gulf Sulphur Co., 401 F.2d at 849; Fine v. American Solar King Corp., 919 F.2d 290, 297, 300-01 (5th Cir. 1990). By the conduct described above, KDS, Hui and Wong were a cause of Aura's violations of these provisions of the federal securities laws, and each knew or should have known that its actions contributed to Aura's violations.
Based on the foregoing, the Commission finds that Respondents KDS, Hui, and Wong caused violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
In view of the foregoing, the Commission finds that it is appropriate to accept the Respondents' Offers of Settlement and to impose the sanctions specified therein.
Accordingly, IT IS HEREBY ORDERED, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, that Respondents KDS, Hui, and Wong cease and desist from committing or causing any violation and any future violation of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
By the Commission.
Jonathan G. Katz
|1||The findings herein are made pursuant to KDS's, Hui's, and Wong's Offers of Settlement and are not binding on any other person or entity in this or in any other proceeding.|
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