SEC Charges CEO and CFO of Digital Entertainment Company with Misleading Investors

Litigation Release No. 24636 / October 4, 2019

Securities and Exchange Commission v. Christopher J. Spencer and John Busshaus, Civil Action No. 1:19-cv-9070 (S.D.N.Y.) (filed September 30, 2019)

On September 30, 2019, the Securities and Exchange Commission charged Chief Executive Officer Christopher J. Spencer and Chief Financial Officer John Busshaus of Pittsburgh-based FAB Universal Corp. with misleading FAB's investors about a key component of the company's business in China.

The SEC's complaint alleges that, in 2012 and 2013, Spencer and Busshaus made false and misleading representations regarding the capabilities and growth prospects of FAB's Intelligent Media Kiosks. Spencer and Busshaus described the kiosks as "iTunes meets Redbox meets Netflix" where customers could download movies, television shows, music, and other media from ATM-style terminals to their cellphones and other devices. According to the complaint, they also made numerous statements about the multi-media functionality, profitability, and growth of the kiosk market. In reality, the complaint alleges that most kiosks did not have media-download functionality and more than half of the kiosks did not function at all. Moreover, public statements that Spencer and Busshaus allegedly reviewed and approved grossly overstated the number of kiosks that the company had installed. According to the complaint, Spencer and Busshaus continued to use information provided by Chinese management to make specific representations despite numerous red flags indicating that the information they received may be inaccurate. Accordingly, the complaint alleges that Spencer and Busshaus did not comply with the requisite standard of care before making or approving these representations.

The SEC's complaint, filed in Federal District Court in the Southern District of New York, charges Spencer and Busshaus with violations of the antifraud provisions of Sections 17(a)(2) and (3) of the Securities Act of 1933. Without admitting or denying the allegations, Spencer and Busshaus have agreed to bifurcated settlements where they will be permanently enjoined from violating these provisions. The settlements, which are subject to court approval, reserve the issues of disgorgement, prejudgment interest, and civil penalties for further determination by the court upon motion of the SEC.

The SEC's investigation was conducted by Tom Keltner in the Fort Worth Regional Office, and supervised by Scott Mascianica and Eric Werner.  The SEC's litigation will be led by Matt Gulde.