SEC Charges Former Board Chairman and Two Business Associates in Insider Trading Scheme
The Securities and Exchange Commission today charged the former Chairman of the Board at Home Diagnostics Inc. with illegally tipping friends and business associates with inside information about an impending acquisition of the company.
The SEC alleges that George H. Holley, who co-founded Home Diagnostics, provided his personal accountant Steven Dudas and his friend and business associate Phairot Iamnaita with confidential information about the company's upcoming acquisition by Nipro Corporation. Holley then gave Dudas $121,500, which Dudas and Iamnaita used to purchase Home Diagnostics stock in a joint brokerage account. After the acquisition was publicly announced, Dudas and Iamnaita tendered their shares for an illicit profit of approximately $90,120. Dudas and Iamnaita are charged along with Holley in the SEC's complaint filed today in federal district court in Trenton, N.J.
"Holley breached the fiduciary duty he owes to the company he co-founded and its shareholders by exploiting confidential board room information to enrich his friends and business associates," said Antonia Chion, Associate Director of the SEC's Division of Enforcement.
The SEC alleges that in addition to tipping Dudas and Iamnaita between December 2009 and Jan. 13, 2010, Holley illegally provided two other friends, a relative, and a business associate with inside information about Home Diagnostics's imminent acquisition. Holley provided at least two of these individuals with a cover story, giving them copies of analyst reports and telling them that they should use the reports to justify their illicit trading. All four of these individuals purchased Home Diagnostics stock on the basis of Holley's tips for combined profits of more than $170,000.
The SEC's complaint charges Holley, Dudas, and Iamnaita with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, the general antifraud provisions of the federal securities laws, and Section 14(e) of the Exchange Act and Rule 14e-3 thereunder, the tender offer fraud provisions. The Commission seeks permanent injunctive relief, disgorgement of illicit profits with prejudgment interest, and the imposition of monetary penalties against all defendants. The SEC also seeks to permanently prohibit Holley from acting as an officer or director of a public company pursuant to Section 21(d)(2) of the Exchange Act.
The SEC thanks the U.S. Attorney's Office for the District of New Jersey, the Federal Bureau of Investigation, FINRA, and the Securities and Exchange Commission of Thailand for their cooperation and assistance in this matter.
The SEC's investigation is continuing.
For more information about this enforcement action, contact:
Yuri B. Zelinsky
SEC Charges Arizona-Based Health Food Company and Former Executives With Accounting Fraud
The Securities and Exchange Commission today charged NutraCea, three former executives, and two former accounting personnel for engaging in a fraudulent accounting scheme to inflate sales revenues at the Arizona-based company, which manufactures and sells health food products.
The SEC alleges that NutraCea booked false sales and engaged in improper revenue recognition practices to disguise its true operating results in its 2007 annual report and financial statements for the second and third quarters of 2007. The SEC charged NutraCea's former chief executive officer Bradley D. Edson, former chief financial officer Todd C. Crow, and former senior vice president and secretary Margie Adelman for their roles in the scheme. The SEC also charged NutraCea's former controller Joanne D. Kline and former director of financial services Scott Wilkinson.
NutraCea and four of the five individuals agreed to settle the SEC's charges against them, and the SEC's litigation continues against Crow.
"NutraCea, its former executives, and accounting personnel violated the public's trust by falsifying NutraCea's revenues to meet earnings and gross sales expectations throughout 2007," said Rosalind R. Tyson, Director of the SEC's Los Angeles Regional Office.
The SEC's complaint filed in federal district court in Arizona alleges that NutraCea, Edson, Crow, and Adelman falsified NutraCea's sales revenues in 2007, and Kline and Wilkinson engaged in improper accounting by recording these false revenues. NutraCea booked $2.6 million in false sales to Bi-Coastal Pharmaceutical Corp. in the second quarter, resulting in overstated product sales revenue of as much as 35 percent.
According to the SEC's complaint, Edson instructed Bi-Coastal's president to falsify his family's financial statements to reflect a higher net worth in order to support the false sales to Bi-Coastal. In reality, Bi-Coastal's "down payment" for the $2.6 million sale came from NutraCea's former COO. When Kline tried to discuss with Crow in 2007 her discovery that the $1 million deposit for the Bi-Coastal sale came from a loan from the former COO to Bi-Coastal in order to justify NutraCea's recognition of revenue from this sale, she says that Crow "covered his ears and said, 'No, no, no, no, no, no, no, no, no. I don't want to hear it.'"
The SEC also alleges that NutraCea improperly recorded revenue on a bill and hold transaction related to a $1.9 million sale of product to ITV Global, Inc. in the fourth quarter of 2007. As a result of the BiCoastal and ITV Global transactions alone, NutraCea overstated its product sales revenue by 36.8 percent for fiscal year end 2007. These false revenues caused NutraCea to misstate its operating loss by more than 89 percent in the second quarter of 2007, more than 17.6 percent in the third quarter, and nearly 7 percent for the fiscal year.
Without admitting or denying the SEC's allegations, NutraCea, Edson, Adelman, Kline, and Wilkinson agreed to settlements with the following terms:
The settlements are subject to the approval of the U.S. District Court of Arizona.
The SEC's complaint against Crow alleges that he violated and aided and abetted violations of the antifraud, books and records, financial reporting, internal controls, and lying to auditors provisions of the federal securities laws. The complaint also alleges that Crow violated Exchange Act Rule 13a-14 by signing certifications required by Section 302 of the Sarbanes Oxley Act that were false and misleading. The SEC's complaint against Crow seeks a permanent injunction, a financial penalty, and an officer and director bar. The case against Crow is ongoing.
The SEC's investigation was conducted by Ann C. Kim, Roger D. Boudreau, Jessica R. Puathasnanon, and Finola H. Manvelian of the SEC's Los Angeles Regional Office. The SEC's litigation will be led by Spencer E. Bendell.
For more information about these enforcement actions, contact:
John M. McCoy III
Finola H. Manvelian
Spencer E. Bendell
(Rel. Press Rel. 2011-10)
Closed Meeting - Thursday, January 20, 2011 - 2:00 p.m.
The subject matter of the Closed Meeting scheduled for Thursday, Jan. 20, 2011 will be: institution and settlement of injunctive actions; institution and settlement of administrative proceedings; and other matters relating to enforcement proceedings.
At times, changes in Commission priorities require alterations in the scheduling of meeting items. For further information and to ascertain what, if any, matters have been added, deleted or postponed, please contact: The Office of the Secretary at (202) 551-5400
In the Matter of Jay D. Johnson
On Jan. 12, 2011, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934 and Section 203(f) of the Investment Advisers Act of 1940 (Advisers Act) Making Findings, and Imposing Remedial Sanctions (Order) against Jay D. Johnson (Johnson) based upon the entry of a Permanent Injunction against him in the United States District Court for the Northern District of Illinois (SEC v. Hyatt et al., Case No: 08-cv-2224).
The Order finds that Johnson, along with his partner Jason R. Hyatt (Hyatt), was a managing member and principal of Hyatt Johnson Capital, LLC (HJ Capital), which, from 2003 through 2008, acted as an unregistered investment adviser in connection with at least ten Limited Liability Corporations (LLCs) controlled and managed by HJ Capital (HJ Capital LLCs). During that time period, HJ Capital also acted as an unregistered broker-dealer in connection with the HJ Capital LLCs' purchases of securities offered by BCI Aircraft Leasing, Inc.
The Commission's complaint in the above captioned matter alleged that, in connection with the sale of these HJ Capital LLC interests, at least $3.6 million in investor funds was misappropriated by Hyatt for, among other things, the operation of a Latin-themed restaurant in Chicago and Hyatt's personal expenses including numerous mortgage payments and substantial home improvements for two homes, as well as art and antiques and luxury automobiles. The complaint also alleged that Hyatt received and diverted nearly $1.8 million in undisclosed commissions in connection with the HJ Capital LLCs' purchases of securities offered by BCI Aircraft Leasing, Inc.
On Dec. 9, 2010, a partial final judgment was entered by consent against Johnson, permanently enjoining him from future violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Advisers Act.
Based on the above, the Order bars Respondent Jay D. Johnson from association with any broker, dealer, or investment adviser. Johnson consented to the Order without admitting or denying any of the findings except that he admitted the entry of the partial final judgment. (Rels. 34-63710; IA-3137; File No. 3-14188)
In the Matter of Apex Capital Group, Inc.
An Administrative Law Judge has issued an Order Making Findings and Revoking Registrations by Default as to Three Respondents (Default Order) in Apex Capital Group, Inc., Admin. Proc. No. 3-14151. The Order Instituting Proceedings (OIP) alleged that five Respondents repeatedly failed to file required annual and quarterly reports while their securities were registered with the Securities and Exchange Commission (Commission).
The Default Order finds these allegations to be true as to three Respondents and revokes the registrations of each class of registered securities of Apex Capital Group, Inc., Applied Carbon Technology, Inc. (n/k/a Merchant Capital Group, Inc.), and Asia Fiber Holdings Ltd., pursuant to Section 12(j) of the Securities Exchange Act of 1934.
The proceeding has been stayed as to Respondent Ardeo PLC, while the Commission considers its Offer of Settlement. Proof of service of the OIP is not yet available for Respondent Atlas Consolidated Mining and Development Corp., the final respondent named in the OIP, and the proceeding remains open as to it. (Rel. 34-63713; File No. 3-14151)
SEC Charges NIC, Inc. and Four Current or Former Executives for Failing to Disclose CEO Perquisites
The Commission today filed civil injunctive actions charging Kansas-based NIC Inc. which manages government websites, its former CEO Jeffery Fraser, current CEO Harry Herington, former CFO Eric Bur, and current CFO Stephen Kovzan with failing to disclose more than $1.18 million in perquisites to Fraser from at least 2002 to 2007.
The complaints allege that NIC filed false and misleading proxy statements, annual reports and registration statements that failed to disclose Fraser's perquisites and falsely represented he worked virtually for free from 2002 until 2005, and continued to materially understate the perquisites Fraser received in 2006 and 2007. The Commission also alleges that NIC's related party transactions disclosures for 2002 through 2005 were misleading in failing to disclose its payment of $1 million to fly and operate planes for Fraser.
Without admitting or denying the allegations in the SEC's complaint, NIC, Fraser, Herington and Bur have agreed to settle this matter, and have consented to the following:
NIC will be enjoined from violating Sections 17(a)(2) and (3) of the Securities Act of 1933 (Securities Act); and Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Securities Exchange Act of 1934 (Exchange Act), and Rules 12b-20, 13a-1, 13a-11, 14a-3, and 14a-9 thereunder; hire an independent consultant to recommend, if appropriate, improvements to policies, procedures, controls, and training relating to payment of expenses, handling of whistleblower complaints, and related party transactions; and pay a $500,000 penalty;
Fraser will be enjoined from violating Section 17(a) of the Securities Act, Sections 10(b), 13(b)(5), and 14(a) of the Exchange Act, and Rules 10b-5, 13a-14, 13b2-1, 13b2-2, 14a-3, and 14a-9 thereunder, and for aiding and abetting NIC's violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20 and 13a-1 thereunder; pay $1,184,246 in disgorgement, $358,844 in prejudgment interest, and a $500,000 civil penalty; and be barred from serving as an officer or director of a public company;
Herington will be enjoined from violating Sections 17(a)(2) and (3) of the Securities Act and Section 13(b)(5) of the Exchange Act, and aiding and abetting NIC's reporting and proxy violations of Sections 13(a) and 14(a) of the Exchange Act, and Rules 12b-20, 13a-1, 14a-3, and 14a-9 thereunder; and pay a $200,000 civil penalty; and
Bur will be enjoined from violating Exchange Act Rules 13a-14 and 13b2-1, and aiding and abetting NIC's violations of Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a), and Rules 12b-20, 13a-1, 14a-3, and 14a-9; and pay a $75,000 civil penalty. In addition, Bur agreed to resolve an anticipated administrative proceeding by consenting to a Commission order prohibiting him from appearing or practicing before the Commission as an accountant with a right to reapply after one year.
The Commission's litigation continues against Kovzan who is charged with violating Section 17(a) of the Securities Act, Section 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5, 13b2-1, and 13b2-2; and aiding and abetting NIC's violations of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 14a-3, and 14a-9. [SEC v NIC, Inc., Jeffery S. Fraser, Harry H. Herington, and Eric J. Bur, Civil Action No. 2:11-CV-02016 (EFM) (D. Kansas); SEC v Stephen M. Kovzan, Civil Action No. 2:11-CV-02017 (JWL) (D. Kansas)] (LR-21809; AAE Rel. 3229)
SEC Obtains Permanent Injunction Against Officer in Lawsuit Alleging Multimillion Dollar Embezzlement
On Jan. 11, 2011, the Honorable Judge Rudolph T. Randa of the U.S. District Court of the Eastern District of Wisconsin entered an order of permanent injunction against Sujata Sachdeva (Sachdeva), a resident of Mequon, Wisconsin, arising from her embezzlement of over $30 million from her employer, Koss Corporation of Milwaukee, Wisconsin.
On Aug. 31, 2010, the Commission filed its complaint against Sachdeva alleging that, since at least 2004, Sachdeva - the former Principal Accounting Officer, Secretary and Vice-President of Finance at Koss - stole over $30 million from Koss. Sachdeva used the embezzled funds to finance an extravagant lifestyle, including lavish spending sprees at department stores, designer boutiques, jewelry stores, and other high-end retailers. Sachdeva concealed and facilitated the theft from Koss by preparing materially false accounting records. Sachdeva attempted to hide the embezzlement on Koss's balance sheet and income statement by overstating assets, expenses, and cost of sales, and by understating liabilities and sales. Based on the fraudulent records prepared by Sachdeva, Koss prepared materially false financial statements and filed materially false current, quarterly, and annual reports with the Commission. After discovering the embezzlement, Koss amended and restated its financial statements for fiscal years 2008 and 2009 and the first three quarters of fiscal year 2010.
The permanent injunction order, consented to by Sachdeva without admitting or denying the allegations in the Commission's complaint, enjoins Sachdeva from violating the antifraud and books and records provisions (Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Exchange Act Rules 10b-5, 13b2-1 and 13b2-2) and from aiding and abetting violations of the reporting, books and records and internal controls provisions (Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13) of the federal securities laws. The order bars Sachdeva from acting as an officer or director of a public company.
On Nov. 17, 2010, Sachdeva pleaded guilty to six counts of wire fraud in a related criminal matter in the U.S. District Court for the Eastern District of Wisconsin and was ordered to pay $34 million in restitution and was sentenced to 11 years in prison. [SEC v. Sujata Sachdeva, et. al., Civil Case No. 10-CV-747, USDC, E.D., Wisc.] (LR-21810; AAE Rel. 3230)
Immediate Effectiveness of Proposed Rule Changes
A proposed rule change (SR-BX-2011-001) filed by NASDAQ OMX BX to amend the BOX trading rules regarding voluntary withdrawal from trading options classes in which they are appointed has become effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of January 17. (Rel. 34-63694)
A proposed rule change (SR-CBOE-2010-116) filed by Chicago Board Options Exchange related to exchange fees for the fiscal year 2011 has become immediately effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of January 17. (Rel. 34-63701)
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