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IN THE UNITED STATES DISTRICT COURT
COMPLAINT Plaintiff Securities and Exchange Commission ("Commission") alleges as follows: SUMMARY 1. From at least 1997 through December 1998, defendants Barry M. Budilov ("Budilov") and Raymond J. Green ("Green") conducted a financial fraud at Ambassador Eyewear Group, Inc. ("Ambassador"), a now defunct eyeglass frame distributor. As a result of the fraudulent scheme, Ambassador falsely claimed, in filings with the Commission and in press releases, that it was profitable when, in fact, the company had incurred substantial losses. In addition, Ambassador overstated its assets by as much as 35 percent. 2. Specifically, Budilov, Ambassador's former president, chief executive officer, and director, and Green, Ambassador's former treasurer and principal financial accounting officer, artificially inflated Ambassador's assets, income, and retained earnings. As part of the fraudulent scheme, Budilov and Green, among other things, falsified Ambassador's books andrecords, and lied to the company's auditors. As a result of their fraud, Ambassador's financial statements contained in a Form SB-2/A registration statement filed in March 1998, as well as in a Form10-KSB for the fiscal year ended March 31, 1998, Forms 10-QSB for the quarters ended June 30, 1998 and September 30, 1998, and related press releases, were materially false and misleading and made Ambassador appear vital when, in fact, its continued viability was questionable. 3. By deliberately or recklessly engaging in the conduct described in this complaint, defendants Budilov and Green have violated, and unless restrained and enjoined, will continue to violate, Section 17(a) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §77q(a); and Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§78j(b) and78m(b)(5), and Rules 10b-5, 13b2-1, and 13b2-2 thereunder, 17 C.F.R. §§240.10b-5, 240.13b2-1 and 240.13b2-2. 4. By deliberately or recklessly engaging in the conduct described in this complaint, defendants Budilov and Green have aided and abetted violations of, and unless restrained and enjoined, will continue to aid and abet violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, 15 U.S.C. §§78m(a), 78m(b)(2)(A), 78m(b)(2)(B), and Rules 12b-20, 13a-1, and 13a-13 thereunder, 17 C.F.R. §§240.12b-20, 240.13a-1, and 240.13a-13. JURISDICTION AND VENUE 5. The Commission brings this action pursuant to the authority conferred upon it by Section 20(b) of the Securities Act, 15 U.S.C. §78t(b), and Sections 21(d) and (e) of the Exchange Act, 15 U.S.C. §§78u(d) and (e), to enjoin such acts, transactions, practices andcourses of business, obtain disgorgement and civil penalties, and for other appropriate relief. The Commission also seeks an order barring Budilov and Green from acting as an officer or director of any issuer that has a class of securities registered under Section 12 of the Exchange Act, 15 U.S.C. §78l, or that is required to file reports pursuant to Section 15(d) of the Exchange Act, 15 U.S.C. §78o(d), pursuant to Section 21(d)(2) of the Exchange Act, 15 U.S.C. §78u(d)(2). 6. This Court has jurisdiction over this action pursuant to Section 22(a) of the Securities Act, 15 U.S.C. §77v(a), and Section 27 of the Exchange Act, 15 U.S.C. §78aa. 7. Certain of the acts, transactions, practices and courses of business constituting the violations alleged herein occurred, and certain of the offers or sales of securities took place, within the Eastern District of Pennsylvania and elsewhere, and were effected, directly or indirectly, by making use of the means and instruments of transportation or communication in interstate commerce, or of the means and instrumentalities of interstate commerce, or of the mails, or of the facilities of a national securities exchange. THE DEFENDANTS 8. Barry M. Budilov is 47 years old and lives in Lafayette Hill, Pennsylvania. At all times relevant to this complaint, Budilov was the president, chief executive officer and a director of Ambassador, and a certified public accountant licensed to practice in Pennsylvania. He and others incorporated Ambassador in May 1995. 9. Raymond J. Green is 41 years old and lives in Springfield, Pennsylvania. At all times relevant to this complaint, Green was Ambassador's treasurer and principal financial accounting officer. FACTS Background 10. Ambassador was incorporated under the laws of Delaware in May 1995. At all times relevant to this complaint, Ambassador was a Philadelphia-based company that marketed and distributed prescription eyeglass frames and sunglasses to department and specialty stores. Wal Mart Stores, Inc. ("Wal Mart") was one of its largest customers. Ambassador's fiscal year ended on March 31. 11. At all times relevant to this complaint, Ambassador's common stock was registered with the Commission pursuant to Section 12(b) of the Exchange Act and was traded on the Chicago Stock Exchange. 12. In March 1998, Ambassador made an initial public offering of its common stock, raising $5.5 million in net proceeds. 13. On February 15, 2000, Ambassador filed a petition for bankruptcy in the United States Bankruptcy Court for the District of Delaware, seeking relief under Chapter 13 of the U.S. Bankruptcy Code, 11 U.S.C. 1301 et seq. 14. At all times relevant to this complaint, Budilov controlled all facets of Ambassador's daily operations. For example, he controlled, reviewed, and had final authority over all of Ambassador's accounting policies, procedures, reports, public statements and filings. He authorized all company payments, and reviewed payables and sales figures daily. He communicated directly and/or directed all of the company's communications with lenders andauditors. Furthermore, Budilov controlled Ambassador's relationship with certain of its large customers, including Wal Mart. 15. In both 1997 and 1998, Budilov received an annual salary of approximately $240,000 from Ambassador. 16. Budilov hired Green in 1996 and, at all relevant times, Green reported solely to Budilov. 17. In 1997 and 1998, Green received an annual salary of approximately $60,000 from Ambassador. THE FRAUD Ambassador's Cash Problems and the Line of Credit 18. By 1996, Ambassador suffered from substantial cash shortfalls that jeopardized its continued existence. In response to this problem, Budilov secured an asset-based collateralized line of credit (the "Line of Credit"). Under the terms of the Line of Credit, Ambassador could borrow up to a percentage of the total value of Ambassador's accounts receivable that were less than 90 days old and its current inventory value. 19. The Line of Credit lender determined the amount that Ambassador could borrow at any given time based on a "borrower's certificate" created, signed and submitted daily by Budilov and later, by Green at Budilov's direction. 20. Despite the cash infusions from the Line of Credit, Ambassador continued to have cash shortfalls. Accordingly, beginning in 1996, Budilov began, deliberately or recklessly, tofalsify the borrowing base certificates to reflect higher accounts receivable and inventory values and, thus, to enable Ambassador to borrow more money from the lender. 21. In late 1996, Budilov delegated the task of preparing inflated borrower's certificates to Green, showing Green how to overstate the assets reported to the lender, and instructing him to do so. Thereafter, at Budilov's direction, Green prepared and signed false borrowing base certificates, deliberately or recklessly overstating Ambassador's accounts receivable, sales, and inventory in a document that he submitted to the lender daily. The Initial Public Offering 22. Meanwhile, in order to obtain additional capital for Ambassador, Budilov and Green prepared to offer Ambassador's stock to the public. In anticipation of this initial public offering, Green prepared Ambassador's March 31, 1997 annual financial statements (the "March 31, 1997 financial statements") and Ambassador's financial statements for the nine month period ending December 1997 (the "December 1997 financial statements"). 23. As set forth in more detail below, Green, at Budilov's direction, deliberately or recklessly overstated accounts receivable, sales, and inventory and failed to establish adequate reserves in both the March 31, 1997 financial statements and the December 1997 financial statements. By so doing, Green and Budilov deliberately or recklessly caused Ambassador to report significant net income as opposed to a net loss, and to overstate its assets and its retained earnings, in both financial statements. 24. Ambassador's March 31, 1997 financial statements were audited by a public auditing firm ("the auditor"). Budilov retained strict control over the auditor's access toAmbassador's financial records and personally approved all documents and information that Green and others provided to the auditor. 25. In order to elude detection of their fraudulent bookkeeping, Budilov and Green deliberately or recklessly provided false and misleading books, records and information to the auditor, including:
26. Ambassador, through Budilov and Green, registered the stock to be issued and sold during the initial public offering by filing with the Commission a completed Form SB-2. The Form SB-2 is a form used by small business issuers to register securities to be sold for cash. Ambassador amended the Form SB-2 several times, ultimately resulting in a Form SB-2/A filed on March 18, 1998 (the "SB-2/A"). The SB-2/A included the audited March 31, 1997 financial statements as well as the unaudited December 1997 financial statements. Both Budilov and Green signed the SB-2/A. The Overstatement of Accounts Receivable and Related Items 27. The term "reserves" as used herein refers to accruals for loss contingencies. Under Generally Accepted Accounting Principles ("GAAP"), Statement of Financial Accounting Standards No. 5, an estimated loss from a loss contingency requires an accrual, by a charge toincome, when it is probable that an asset has been impaired or a liability incurred and the amount of the loss can be reasonably estimated. 28. At Budilov's direction, Green deliberately or recklessly overstated accounts receivable as reflected on the balance sheets in the audited March 31, 1997 financial statements and in the December 1997 financial statements, in violation of GAAP, by, among other things:
29. By failing to establish proper reserves, Green, at Budilov's direction, deliberately or recklessly understated Ambassador's bad debt expense and overstated income in violation of GAAP. 30. By failing to reduce accounts receivable after issuing customer credits, Green, at Budilov's direction, deliberately or recklessly overstated sales in violation of GAAP. The Overstatement of Inventory 31. Under GAAP, Accounting Research Bulletin 43, Chapter 4, inventory must be valued at the lower of cost or market. 32. Green, at Budilov's direction, deliberately or recklessly inflated Ambassador's ending inventory in the March 31, 1997 financial statements and the December 1997 financial statements by millions of dollars by adjusting the cost basis of the inventory upward and by failing to write off inventory that Budilov and Green knew, or were reckless in not knowing, was obsolete. 33. By artificially inflating Ambassador's inventory, Budilov and Green deliberately or recklessly increased Ambassador's assets and overstated Ambassador's income and retained earnings in violation of GAAP. Misstatements in the SB2/A 34. Budilov and Green knew or were reckless in not knowing that, by virtue of the fraudulent bookkeeping set forth above, the SB-2/A that they signed and filed with the Commission included materially false and misleading financial information in the audited March 31, 1997 financial statements and the December 1997 financial statements, including:
Misstatements in Other Documents Filed with the Commission and Released to the Public 35. Budilov and Green continued to deliberately or recklessly inflate Ambassador's income, expense, accounts receivable, retained earnings and inventory throughout 1998 in substantially the same manner as they did in the audited March 31, 1997 financial statements and the December 1997 financial statements contained in the March 1998 Form SB/2A. They further continued to deliberately or recklessly include the false and misleading financial information in documents filed with the Commission and/or released to the public in 1998, including, as set forth below, Ambassador's 1998 annual and quarterly filings with the Commission. The March 1998 10-KSB and the Related Press Release 36. On July 10, 1998, Ambassador filed a completed Form10-KSB with the Commission for the year ended March 30, 1998 (the "10-KSB"). The Form 10-KSB is a formfiled annually by small business issuers that provides certain business and financial information about the issuer. 37. Budilov and Green both signed the 1998 10-KSB, which contained Ambassador's audited 1998 financial statements as well as an unqualified audit opinion by Ambassador's auditor. 38. Green, at Budilov's direction, deliberately or recklessly falsified the 1998 financial statements in substantially the same manner as he did the March 31, 1997 financial statements and the December 1997 financial statements, as further described in ¶¶ 27 to 33, above. In addition, Green, at Budilov's direction, deliberately or recklessly booked non-existent sales and accounts receivable at the end of the reporting period. 39. Moreover, much like they did in connection with the March 31, 1997 financial statements, Budilov and Green deliberately or recklessly provided false and misleading books, records and information to the auditor, including:
40. Budilov and Green knew or were reckless in not knowing that, by virtue of the fraudulent bookkeeping set forth above, the 10-KSB that they filed with the Commission included materially false and misleading financial information in the audited 1998 financial statements, including:
41. Budilov and Green deliberately or recklessly prepared, and issued or directed the issuance of, a press release dated June 5, 1998 that, among other things, falsely claimed net income to have increased by more than 66 percent when compared to the prior fiscal year. The June 1998 Form 10-QSB and the Related Press Release 42. On August 14, 1998, Ambassador filed its Form 10-QSB with the Commission for the quarter ended June 30, 1998 (the "June 10-QSB"). The Form10-QSB is a form submittedquarterly by small business issuers that provides certain business and financial information about the issuer. 43. Budilov and Green both signed the June 10-QSB. The June 10-QSB included Ambassador's unaudited quarterly financial statements for the quarter ended June 30, 1998 (the "June financial statements"). 44. Green, at Budilov's direction, deliberately or recklessly falsified the June financial statements in substantially the same manner as he did the March 31, 1997 financial statements and the December 1997 financial statements, as further described in ¶¶ 27 to 33, above. 45. Budilov and Green knew or were reckless in not knowing that, by virtue of the fraudulent bookkeeping set forth above, the June 10-QSB that they signed and filed with the Commission included materially false and misleading financial information in the June financial statements. For instance:
46. Budilov and Green deliberately or recklessly prepared, and issued or directed the issuance of, a press release dated August 12, 1998 that, among other things, falsely claimed net income to have increased by more than 500 percent when compared to the same quarter in the prior year. The September 1998 10-QSB and the Related Press Release 47. On November 30, 1998, Ambassador filed its Form 10-QSB with the Commission for the quarter ended September 30, 1998 (the "September 10-QSB"). 48. Budilov and Green both signed the September 10-QSB. The September 10-QSB included Ambassador's unaudited quarterly financial statements for the quarter ended September 30, 1998 (the "September financial statements"). 49. Green, at Budilov's direction, deliberately or recklessly falsified these financial statements in substantially the same manner as he did the March 31, 1997 financial statements, and the December 1997 financial statements, as further described in ¶¶ 27 to 33, above. 50. Budilov and Green knew or were reckless in not knowing that, by virtue of the fraudulent bookkeeping set forth above, the September 10-QSB that they signed and filed with the Commission included materially false and misleading financial information in the September financial statements, including:
51. Budilov and Green deliberately or recklessly prepared and issued or directed the issuance of, a press release dated November 11, 1998 that, among other things, falsely claimed net income to have increased by more than 261 percent when compared to the same quarter in the prior year. 52. The September 10-QSB was Ambassador's final filing with the Commission. 53. In December 1998, after the Line of Credit lender informed Budilov that its bank auditors had found irregularities in Ambassador's books and records, Budilov attempted to conceal his involvement in the foregoing fraud by destroying evidence, causing others to destroy evidence, and persuading others to accept responsibility for the fraud. Among other things, he instructed others to delete electronic accounts receivable files related to the Wal Mart account. FIRST CLAIM Violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5, thereunder 54. Paragraphs 1 through 53 are realleged and incorporated herein by reference. 55. As set forth above, Budilov and Green deliberately or recklessly misstated and/or omitted material facts in documents filed with the Commission and accessible to the public, including in the SB-2/A, the 1998 10-KSB, the June 10-QSB, and the September 10-QSB. 56. As set forth above, Budilov and Green deliberately or recklessly misstated and/or omitted material facts in documents released to the public, including the Ambassador June 5, 1998, August 12, 1998, and November 11, 1998 press releases. 57. From at least March 1998 and continuing through at least December 1998, defendants Budilov and Green, deliberately or recklessly, in connection with the offer, purchase or sale of securities, directly and indirectly, by the use of the means or instruments of transportation or communication in interstate commerce, or the means or instrumentalities of interstate commerce, or of the mails, or of the facilities of a national securities exchange:
58. By reason of the foregoing, defendants Budilov and Green violated Section 17(a) of the Securities Act, 15 U.S.C. §77q(a); and Section 10(b) of the Exchange Act, 15 U.S.C. §78j(b), and Rule 10b-5, 17 C.F.R. §240.10b-5, thereunder. SECOND CLAIM Violation of Section 13(b)(5) of the Exchange Act and Rules 13b2-1 and 13b2-2 thereunder 59. Paragraphs 1 through 58 are realleged and incorporated herein by reference. 60. At all times relevant to this complaint, defendants Budilov and Green were directors and/or officers of Ambassador. 61. At all times relevant to this complaint, Ambassador was an issuer of a class of securities registered pursuant to §12 of the Exchange Act, 15 U.S.C. §78l, or required to file reports pursuant to Section 15(d) of the Exchange Act, 15 U.S.C. §78o(d). 62. Pursuant to Section 13(b)(2)(A) of the Exchange Act, 15 U.S.C. §78m(b)(2)(A), every issuer which has a class of securities registered pursuant to Section 12, 15 U.S.C. §78l or required to file reports pursuant to Section 15(d) of the Exchange Act, 15 U.S.C. §78o(d), must, in relevant part, make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer. 63. From at least March 1998 through at least December 1998, defendants Budilov and Green knowingly, directly or indirectly, falsified or caused to be falsified books, records and accounts subject to section 13(b)(2) (A) of the Exchange Act, 15 U.S.C. §78m(b)(2)(A). 64. From at least March 1998 through at least December 1998, defendants Budilov and Green knowingly circumvented or failed to implement a system of accounting controls. 65. From at least March 1998 through at least December 1998, defendants Budilov and Green knowingly, directly or indirectly, in connection with an audit or examination of the financial statements of Ambassador required to be made pursuant to Section 13(b) of the Exchange Act, 15 U.S.C. §78m(b), or the preparation of any document or report required to be filed with the Commission pursuant to Section13(b) of the Exchange Act, 15 U.S.C. §78m(b), or otherwise:
66. By reason of the foregoing, defendants Budilov and Green violated Section 13(b)(5) of the Exchange Act, 15 U.S.C. §78m(b)(5), and Rules 13b2-1 and 13b2-2 thereunder, 17 C.F.R. §§240.13b2-1 and 240.13b2-2. THIRD CLAIM Aiding and Abetting Violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder 67. Paragraphs 1 through 66 are realleged and incorporated herein by reference. 68. Section 13(a) of the Exchange Act, 15 U.S.C. § 78m(a), requires, in relevant part, all issuers with securities registered under Section 12 of the Exchange Act, 15 U.S.C. §78l, to file periodic and other reports with the Commission containing such information as the Commission's rules prescribe. 69. Exchange Act Rules 13a-1 and 13a-13, 17 C.F.R. §§ 240.13a-1 and 240.13a-13, require issuers to file accurate annual and quarterly reports. 70. Exchange Act Rule 12b-20, 17 C.F.R. § 240.12b-20, requires that reports include such further material information as may be necessary to make the required statements, in light of the circumstances under which they were made, not misleading. 71. Ambassador filed with the Commission an annual report on Form 10-KSB for its fiscal year 1998, and filed quarterly reports on Form 10-QSB for the first two quarters of fiscalyear 1998. As set forth above, the financial statements in each of these filings were materially false and misleading. 72. By reason of the foregoing, Ambassador violated Section 13(a) of the Exchange Act, 15 U.S.C. §78m(a), and Rules 12b-20, 13a-1 and 13a-13 thereunder, 17 C.F.R. §§ 240.12b-20, 240.13a-1, and 240 13a-13. 73. Defendants Budilov and Green each knowingly provided substantial assistance to Ambassador in connection with Ambassador's violations of Section 13(a) of the Exchange Act, 15 U.S.C. §78m(a), and Rules 12b-20, 13a-1 and 13a-13 thereunder, 17 C.F.R. §§ 240.12b-20, 240.13a-1, and 240 13a-13. 74. By reason of the foregoing, defendants Budilov and Green each aided and abetted Ambassador's primary violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. FOURTH CLAIM Aiding and Abetting Violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act 75. Paragraphs 1 through 74 are realleged and incorporated herein by reference. 76. From at least March 1998 through at least December 1998, Ambassador's books, records, and accounts did not, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Ambassador. 77. From at least March 1998 through at least December 1998, Ambassador did not devise and maintain a system of internal accounting controls sufficient to provide reasonableassurances that transactions were recorded as necessary to permit preparation of financial statements in conformity with GAAP. 78. By reason of the foregoing, Ambassador violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, 15 U.S.C. §§78m(b)(2)(A) and (b)(2)(B). 79. Defendants Budilov and Green each knowingly provided substantial assistance to Ambassador in connection with Ambassador's violations of the referenced provisions. 80. By reason of the foregoing, defendants Budilov and Green each aided and abetted Ambassador's primary violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, 15 U.S.C. §§78m(b)(2)(A) and (b)(2)(B). WHEREFORE, the Commission respectfully requests that this Court: I. Issue an injunction permanently restraining and enjoining defendants Budilov and Green, and their agents, officers, servants, employees, attorneys, and those persons in active concert or participation with them, directly or indirectly, singly or in concert, from violations of Section 17(a) of the Securities Act, 15 U.S.C. § 77(q)a; and Sections 10(b) and 13(b)(5) of the Exchange Act, 15 U.S.C. §§78j(b) and 78m(b)(5), and Rules 10b-5, 13b2-1 and 13b2-2, 17 C.F.R. §§240.10b-5, 240.13b2-1, and 240.13b2-2 thereunder; II. Issue an injunction permanently restraining and enjoining defendants Budilov and Green, and their agents, officers, servants, employees, attorneys, and those persons in active concert or participation with them, directly or indirectly, singly or in concert, from aiding and abettingviolations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, 15 U.S.C. §§78m(a), 78m(b)(2)(A), 78m(b)(2)(B), and Rules 12b-20, 13a-1, and 13a-13, 17 C.F.R. §§240.12b-20, 240.13a-1, and 240.13a-13, thereunder. III. Enter an order requiring defendants Budilov and Green to each disgorge the salaries that they received from Ambassador during the pendency of the fraud described in this complaint, as well as any and all other unjust enrichment that they derived from the activities set forth in this complaint, together with prejudgment interest. IV. Enter an order requiring defendants Budilov and Green to pay civil penalties pursuant to Section 20(d) of the Securities Act, 15 U.S.C. §78t(d), and Section 21(d)(3) of the Exchange Act, 15 U.S.C. §78u(d)(3), in an amount to be determined by the Court; V. Enter an order prohibiting defendants Budilov and Green permanently and unconditionally from acting as an officer or director of any issuer that has a class of securities registered under Section 12 of the Exchange Act , 15 U.S.C. § 78l, or that is required to file reports pursuant to Section 15(d) of the Exchange Act, 15 U.S.C. §78o(d), pursuant to Section 21(d)(2) of the Exchange Act, 15 U.S.C. §78u(d)(2); and VI. Enter an order granting such other and further relief as the Court may deem just and appropriate.
Dated: September 26, 2002 http://www.sec.gov/litigation/complaints/comp17752.htm
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