U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 22698 / May 8, 2013
Accounting and Auditing Enforcement Release No. 3458 / May 8, 2013
Securities and Exchange Commission v. Subaye, Inc. and James T. Crane, Civil Action No. 13 CIV 3114 (S.D.N.Y.)
SEC Charges China-based Company and Former Chief Financial Officer in Fraudulent Scheme involving Non-Existent Computing Business
The Securities and Exchange Commission announced today that it filed an enforcement action on May 8, 2013, in federal court in New York City charging Subaye, Inc., a company based in China whose stock trades in the U.S., and James T. Crane, its former Chief Financial Officer and a U.S. citizen believed to be recently living in southern California, with engaging in a fraudulent scheme during 2010-2011. The Commission alleges that Subaye and Crane misrepresented the company’s business and operations, deceived the company’s auditors, and misled investors about the company’s true status and revenues. According to the complaint, Subaye claimed to be operating a cloud computing business but investigations found no evidence of such a business. Subaye has offered to settle the case, while the action against Crane is unsettled.
The Commission’s complaint, filed in the U.S. District Court for the Southern District of New York, alleges that Subaye began promoting itself during 2010 as a provider of cloud computing services to Chinese businesses. According to the complaint, Subaye claimed to have over 1,400 sales and marketing employees in 2010, with reported revenues of $39 million that fiscal year and projected revenues of more than $71 million for 2011. However, by May 2011, according to the complaint, and Subaye was revealed to be a company with no verifiable revenues, few, if any, real customers, and no infrastructure to support its claimed cloud computing business. The complaint alleges that the business that Subaye had presented to investors and described in filings with the Commission was imaginary and non-existent.
The complaint further alleges that Crane signed Subaye’s materially misleading filings with the Commission that contained false statements about Subaye’s revenues, business, number of employees, and number of paying customers. According to the complaint, Crane also falsified the books, records, and accounts of Subaye and provided false information to Subaye’s outside auditors. The Commission’s complaint also charges Crane with violating a bar from the Public Company Accounting Oversight Board (PCAOB). According to the complaint, in January 2011, Crane and his Cambridge, Massachusetts-based accounting firm were sanctioned by the PCAOB, which permanently revoked his firm’s registration and barred him from being associated with a registered accounting firm or being associated with any public company in an accounting or financial management capacity. The complaint alleges that, in violation of the January 2011 PCAOB order, Crane remained as the CFO of Subaye until March 2011, even after the PCAOB denied his request to remain as Subaye’s CFO for those two months.
The complaint alleges that Crane violated Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5, 13a-14, 13b2-1 and 13b2-2 thereunder, and Section 105(c)(7)(B) of the Sarbanes-Oxley Act of 2002; and that Crane aided and abetted Subaye’s violations of 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, 13a-11, thereunder. The Commission is seeking a permanent injunction, disgorgement plus prejudgment interest, and civil penalties. It also seeks an order prohibiting Crane from serving as an officer or director of a public company.
The complaint alleges that Subaye violated Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1 and 13a-11 thereunder. Subaye has agreed to settle this matter, subject to Court approval, without admitting or denying the allegations in the Commission’s complaint, by consenting to the entry of a final judgment that would permanently enjoin it from future violations of the above law sections.
The Commission acknowledges the assistance of the Ontario Securities Commission and the Public Company Accounting Oversight Board.
The Commission’s investigation was conducted by John Kaleba, Matthew Jacques and Rachel Hershfang of the Boston Regional Office. The Commission’s litigation will be conducted by Ms. Hershfang and Mr. Kaleba.