SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 17904 / December 19, 2002
Accounting and Auditing Enforcement Release No. 1695 / December 19, 2002
SECURITIES AND EXCHANGE COMMISSION v. U.S. TECHNOLOGIES, INC. and C. GREGORY EARLS, No. 1:02CV02495 (Robertson, J.) (D.D.C., filed December 19, 2002)
SEC FILES SECURITIES FRAUD CHARGES AGAINST
U.S TECHNOLOGIES, INC. AND C. GREGORY EARLS
On December 19, 2002, the Commission filed a lawsuit in federal court charging U.S. Technologies, Inc. ("UST"), along with its chairman and chief executive officer, C. Gregory Earls, with securities fraud and other violations. The Commission is asking the Court to enjoin both defendants from violating the federal securities laws, to order Earls to disgorge his ill-gotten gains and pay a civil penalty, and to bar Earls from serving as an officer or director of any public company.
The Commission's complaint alleges that from June 1998 through August 2002, Earls misappropriated approximately $13.8 million from investors who believed they were giving Earls money to purchase preferred stock and warrants from UST. According to the complaint, Earls carried out this scam through a limited liability company he created called USV Partners LLC. The complaint charges that Earls falsely told investors in USV Partners that the entity was created solely to purchase and hold UST stock and warrants, and that he would not take any management fees. According to the complaint, Earls lured more than one hundred investors into giving him more than $20 million to purchase UST stock and warrants through USV Partners. Although UST badly needed the capital infusion, according to the complaint, Earls bought only a small portion of the stock he promised investors. He then allegedly misappropriated $13.8 million of their money by paying himself $4.7 million in management fees and $9.1 million that he falsely classified as "Legal and Accounting" expenses. As alleged in the complaint, neither UST nor Earls has ever publicly disclosed Earls' diversion of these investor funds.
The complaint further charges that Earls and UST made numerous materially misleading statements and omissions to cover up Earls' misdeeds. For example, the complaint alleges that while touting Earls' supposed business experience and acumen, Earls and UST failed to disclose that he had previously been accused of misappropriating investor funds in connection with several other companies. Earls and UST are also charged with failing to reveal the material weaknesses noted by its independent auditor concerning its internal accounting controls. Most recently, according to the complaint, Earls and UST failed to disclose that half of its board of directors resigned in or about April 2002.
The Commission's complaint charges UST with violating Section 17(a) of the Securities Act of 1933 (the "Securities Act"), Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 (the "Exchange Act"), and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13. It charges Earls with violating Securities Act Section 17(a), Exchange Act Sections 10(b) and 13(b)(5), and Exchange Act Rules 10b-5 and 13b2-1. The complaint also charges Earls with aiding and abetting UST's violations of Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(b), and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13.
In a related criminal proceeding, Earls was charged with securities fraud, mail fraud, and wire fraud. United States v. C. Gregory Earls, No. 02-MAG-531 (S.D.N.Y.) That case is being prosecuted by the United States Attorney's Office for the Southern District of New York. The Commission thanks the U.S. Attorney's Office, the Department of Justice, and the United States Postal Inspection Service for their assistance in the Commission's investigation of this matter, which is continuing.
SEC Complaint in this matter