SEC CHARGES CHINA BASED COMPANY WITH "COOKING THE BOOKS" TO INCREASE REVENUES

FROM: U.S. SECURITIES AND EXCHANGE DEPARTMENT

The Securities and Exchange Commission today charged a China-based company and its chief executive with fraud for recording fake sales of a weight loss product to inflate revenues in the company’s financial statements by millions of dollars.

The SEC alleges that China Sky One Medical Inc. (CSKI) falsely stated in 2007 annual and quarterly reports that it had entered into a strategic distribution agreement with a Malaysian company that would become the "exclusive" distributor of CSKI’s "slim patch" in Malaysia and generate $1 million per month in sales. However, the company never actually entered into any such agreement. CSKI instead created approximately $19.8 million in phony export sales to Malaysia that were recorded as revenue in its financial results for 2007 and 2008. CEO Yan-qing Liu certified the overstated financial results, which appear in CSKI’s financial statements through 2010 and continue to impact the company’s retained earnings on its balance sheet.

"Accurate and reliable financial reporting is the bedrock of our capital markets, and CSKI blatantly defrauded investors by fabricating sales and overstating its financial results," said John M. McCoy III, Associate Director of the SEC’s Los Angeles Regional Office

According to the SEC’s complaint filed in U.S. District Court for the Central District of California, CSKI is based Harbin, China. In addition to weight loss patches, the company produces and sells sprays, ointments, and other Chinese traditional pain relief and health and beauty products. CSKI became a public company trading on the U.S. markets through a reverse merger in May 2006.

The SEC alleges that after CSKI devised the purported strategic distribution agreement with Takasima Industries – which is a Malaysian fitness equipment manufacturer and retailer – CSKI went on to falsely report export sales to Malaysia of more than $12.2 million for 2007, which constituted 25 percent of its total revenues. CSKI then falsely recorded $7.5 million (8.2 percent of total revenues) in such sales for 2008. Virtually all of CSKI’s reported sales to Malaysia via Takasima were bogus. Takasima only purchased $167,542 in slim patches from CSKI in 2007, and none in 2008. And it never entered into any distribution agreement with CSKI and never undertook – much less satisfied – any minimum purchase commitment.

According to the SEC’s complaint, CSKI also falsely claimed in its public filings that its top two customers for 2007 were sales agents for Takasima. CSKI identified those customers as Ningbo Yuehua International Trading Company and Guangzhou Xinghe International Trading Company, which collectively accounted for the phony 25 percent of CSKI’s total revenues for 2007. CSKI claimed that all of these purported sales to Ningbo Yuehua and Guangzhou Xinghe went through Takasima, while in fact Takasima never had any relationship with these two entities.

CSKI and Liu are charged with violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and various Exchange Act provisions including corporate reporting, recordkeeping, internal controls, and false statements to auditors.

The SEC’s complaint seeks financial penalties against CSKI and Liu as well as disgorgement of ill-gotten gains by Liu, who personally benefited from the overstated financial statements through the company’s 2008 private placement of securities. The SEC also seeks to have Liu reimburse CSKI for certain incentive-based compensation he received during the period affected by the fraud pursuant to Section 304 of the Sarbanes-Oxley Act, and to have Liu barred from acting as an officer or director of a public company. The SEC also seeks to have CSKI and Liu permanently enjoined from future violations of these provisions of the federal securities laws

In addition to the court action, the SEC instituted administrative proceedings to determine whether to revoke or suspend registration of CSKI’s securities due to the company’s failure to file its annual report for 2011 or any quarterly reports for 2012.

The SEC’s investigation, which is continuing, has been conducted by Junling Ma, Rhoda Chang, and Marshall S. Sprung of the SEC’s Los Angeles Regional Office. The SEC’s Cross Border Working Group – which focuses on U.S. companies with substantial foreign operations – and the SEC’s Office of International Affairs assisted in the investigation. The SEC’s litigation will be led by David Van Havermaat.

FORMER STARMEDIA EXECUTIVE AGREES TO SETTLEMENT IN SEC LITIGATION

The following excerpt is from the U.S. Securities and Exchange Commission website:
March 13, 2012
The U.S. Securities and Exchange Commission today announced that on March 12, 2012, the U.S. District Court for the Southern District of New York entered a settled final judgment as to Adriana J. Kampfner, the former Senior Vice President for Global Sales for StarMedia Network, Inc., a now-defunct Internet portal, in Securities and Exchange Commission v. Fernando J. Espuelas et al., Civil Action No. 06 CV 2435 (PAE) (S.D.N.Y. filed Mar. 29, 2006). The Commission’s injunctive action alleged violations of the federal securities laws by eight former StarMedia executives. The Commission’s amended complaint alleges, in relevant part, that for fiscal year 2000 and the first two quarters of fiscal year 2001, StarMedia’s books and records misstated the company’s revenue.

Without admitting or denying the allegations in the amended complaint, Kampfner consented to the entry of the Final Judgment permanently enjoining her from future violations of Rule 13b2-1 promulgated under the Securities Exchange Act of 1934 (Exchange Act), and from aiding and abetting violations of Section 13(b)(2)(A) of the Exchange Act.

INVESTMENT ADVISER CHARGED BY SEC WITH GIVING INVESTORS BOGUS AUDIT REPORT

The following excerpt is from the SEC website:
Washington, D.C., March 15, 2012 – The Securities and Exchange Commission today charged a San Francisco-area investment adviser with defrauding investors by giving them a bogus audit report that embellished the financial performance of the fund in which they were investing.

The SEC alleges that James Michael Murray raised more than $4.5 million from investors in his various funds including Market Neutral Trading LLC (MNT), a purported hedge fund that claimed to invest primarily in domestic equities. Murray provided MNT investors with a report purportedly prepared by independent auditor Jones, Moore & Associates (JMA). However, JMA is not a legitimate accounting firm but rather a shell company that Murray secretly created and controlled. The phony audit report misstated the financial condition and performance of MNT to investors.

“An independent financial audit is one of the best protections available to investors,” said Marc Fagel, Director of the SEC’s San Francisco Regional Office. “Murray conjured up an accounting firm and deliberately faked the audit to induce investors into believing the fund was in better shape than it actually was.”

The U.S. Attorney’s Office for the Northern District of California also has filed criminal charges against Murray in a complaint unsealed yesterday.

According to the SEC’s complaint filed in federal court in San Francisco, Murray began raising the funds from investors in 2008. The following year, MNT distributed the phony audit report to investors claiming the audit was conducted by a legitimate third-party accounting firm. However, JMA is not registered or licensed as an accounting firm in Delaware, where it purports to do business. JMA’s website was paid for by a Murray-controlled entity and listed 12 professionals with specific degrees and licenses who supposedly work for JMA. However, at least five of these professionals do not exist, including the two named principals of the firm: “Richard Jones” and “Joseph Moore.” Murray has attempted to open brokerage accounts in the name of JMA, identified himself as JMA’s chief financial officer, and called brokerage firms falsely claiming to be the principal identified on most JMA documents.

The SEC alleges that the bogus audit report provided to investors understated the costs of MNT’s investments and thus overstated the fund’s investment gains by approximately 90 percent. The JMA audit report also overstated MNT’s income by approximately 35 percent, its member capital by approximately 18 percent, and its total assets by approximately 10 percent.

The SEC’s complaint charges Murray with violating an SEC rule prohibiting fraud by investment advisers on investors in a pooled investment vehicle. The complaint seeks injunctive relief and financial penalties from Murray.

The SEC’s investigation was conducted by Karen Kreuzkamp and Robert S. Leach of the San Francisco Regional Office following an examination of MNT conducted by Yvette Panetta and Doreen Piccirillo of the New York Regional Office’s broker-dealer examination program. The SEC’s litigation will be led by Robert L. Mitchell of the San Francisco Regional Office. The SEC thanks the U.S. Attorney’s Office for the Northern District of California and the U.S. Secret Service for their assistance in this matter.

SEC FILES CIVIL INJUNCTIVE ACTION AGAINST THORNBURG MANAGEMENT SENIOR MANAGEMENT

The following excerpt is from the SEC website:
March 13, 2012
SEC Files Civil Injunctive Action Against Senior Management of Thornburg Mortgage, Inc. for Alleged Fraudulent Overstatement of Thornburg’s Income
On March 13, 2012, the Securities and Exchange Commission filed securities fraud charges in the United States District Court for the District of New Mexico against Larry Goldstone, the former chief executive officer and president, Clarence Simmons, the former chief financial officer and senior executive vice-president, and Jane Starrett, the former chief accounting officer of Thornburg Mortgage, Inc. (“Thornburg”), currently TMST, Inc., for allegedly materially misrepresenting the financial condition and liquidity of Thornburg, formerly the country’s second largest independent mortgage company. Goldstone, Simmons, and Starrett reside in Santa Fe, New Mexico.

The Complaint alleges that Thornburg, through Goldstone, Simmons, and Starrett, fraudulently overstated its quarterly income by more than $420 million in its 2007 annual report filed with the Commission. As a result, the Complaint alleges that Thornburg fraudulently reported a profit rather than a loss for the quarter. According to the Complaint, in the two weeks leading to the filing of its annual report, Thornburg received more than $300 million in margin calls from its lenders that severely drained its liquidity. The Complaint further alleges that, unable to meet its margin calls on a timely basis, Thornburg violated three of its lending agreements, and received a reservation of rights letter from one lender in which the lender reserved its right to declare Thornburg in default at any time. Accordingly, the Complaint alleges that in the days before Thornburg filed its annual report, the collateral it used for its lending agreements, adjustable rate mortgage (“ARM”) securities, was subject to being seized and sold by its lenders. According to the Complaint, given the circumstances of Thornburg’s liquidity crisis, circumstances that were misrepresented to, and concealed from, the company’s auditor, Goldstone, Simmons, and Starrett each knew, or was reckless in not knowing, that Thornburg did not have the intent or ability to hold its ARM securities until maturity or until their value recovered in the market. The Complaint concludes that the individual defendants also knew, or were reckless in not knowing, that this meant Thornburg was required to recognize on its income statement approximately $428 million of losses associated with the company’s ARM securities, and that the proper accounting treatment for these securities would have resulted in Thornburg reporting a loss rather than a profit for the quarter.

The Complaint claims that, based on this conduct, the defendants violated or aided and abetted the violation of, or in the case of Goldstone and Simmons are liable as control persons under Section 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) for Thornburg’s violation of, Section 17(a) of the Securities Act of 1933, and Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13b2-1, and 13b2-2 thereunder. The Complaint also claims that Goldstone and Simmons violated Rule 13a-14 of the Exchange Act. As part of this action, the Commission seeks against each of the defendants an injunction against future violations of the provisions set forth above, officer and director bars, and third tier civil money penalties.

SEC GOES TO COURT TO HELP INVESTORS IN BISYS GROUP INC., REPORTING CASE

The following excerpt is from the SEC website:

February 22, 2012
SEC v. The BISYS Group, Inc. 07 Civ. 4010 (RJS) (S.D.N.Y.)
SEC SEEKS COURT APPROVAL FOR PLAN OF DISTRIBUTION IN BISYS FINANCIAL REPORTING CASE
Washington, D.C., February 22, 2012 — On December 23, 2011, the Securities and Exchange Commission filed a motion in SEC v. The BISYS Group, Inc. 07 Civ. 4010 (RJS) (S.D.N.Y.), a financial reporting case, seeking court approval of a plan to distribute the approximately $25 million available for distribution to investors harmed by the conduct alleged in that case (the “Distribution Plan” or “Plan”). In connection with that motion, on February 8, 2012, the Hon. Richard J. Sullivan issued an order appointing A.B. Data, Ltd., the claims administration firm that served as the court-appointed claims administrator in a parallel class action, In re BISYS Securities Litigation, 04-Civ-3840 (JSR) (S.D.N.Y.) (the “Class Action”), as the claims administrator in the Commission’s case. The Court’s order also directed the posting of notice of the proposed Plan on the Commission’s website and A.B. Data’s website and set a deadline of March 12, 2012 for the submission of any comments or objections.

A copy of the proposed Distribution Plan and the Court’s order setting the schedule for proceedings on the proposed plan can be found here: [imbed links] Additional information can also be found on the Commission’s Investor Claims Funds webpage here:http://www.sec.gov/divisions/enforce/claims/bisys.htm.

If approved by the Court, the Distribution Plan will govern the distribution of the approximately $25 million paid by BISYS in settlement of the case, plus additional funds that may added from the approximately $225,000 paid in settlement by the defendant in a related case, SEC v. Wevodau, 08-Civ-8343 (RJS) (S.D.N.Y.). Under the terms of the Distribution Plan, the available funds will be distributed to shareholders who acquired and held BISYS stock during the period beginning on October 23, 2000 and ending on April 22, 2004) (the “Recovery Period”), and suffered a loss on their investment, as calculated under the Plan. The Plan will be administered by A.B. Data, the claims administration firm that served as the court-appointed claims administrator in the Class Action. Persons eligible to receive a distribution under the proposed Plan are persons who acquired BISYS shares during the Recovery Period, and who incurred a Net Recognized Loss, as defined under the Plan, with respect to their purchase of BISYS shares and (a) submitted a claim that was not deemed deficient in the Class Action; or (b) who opted out of the class in the Class Action.

The Commission’s complaint, filed May 23, 2007, alleged that BISYS violated the financial reporting, books-and-records, and internal control provisions of the Securities Exchange Act of 1934 by engaging in a variety of improper accounting practices that resulted in material overstatements of BISYS’s reported financial results by roughly $180 million in fiscal years 2001, 2002, and 2003. As a result, the Commission alleged that BISYS filed annual and quarterly reports, and other documents, that materially misstated its results for the fiscal years ended June 30, 2001, 2002, and 2003, interim quarters during those fiscal years, and the quarters ended September 30, and December 31, 2003. On July 18, 2007, the Court entered a final judgment against BISYS, to which BISYS consented without admitting or denying the allegations in the complaint, pursuant to which BISYS paid a total of approximately $25 million in disgorgement and pre-judgment interest in settlement of the case.

For additional information regarding the Commission’s civil actions against BISYS and Wevodau, see Litigation Release Nos. 20125 (May 23, 2007), and20756 (September 30, 2008).
BISYS is now known as Citi Investor Services, Inc.”

FINAL JUDGEMENT ENTERED AGAINST FORMER CEO OF BROOKS AUTOMATION, INC.

The following excerpt is from the SEC website:

"The Commission announced that on February 1, 2012, the U.S. District Court for the District of Massachusetts entered a final judgment by consent against Robert J. Therrien of Boston, Massachusetts, a defendant in a civil injunctive action filed by the Commission in July 2007. The Commission alleged in its complaint that Therrien, the former CEO of Massachusetts-based Brooks Automation, Inc. (“Brooks”) engaged in a scheme to falsify company records to create the false appearance that certain options granted below the then-current market price actually had been granted at the then-current market price on an earlier date. Without admitting or denying the allegations in the Commission's Complaint, Therrien consented to the entry of a final judgment enjoining him from violating the antifraud, books and records, and other provisions of the federal securities laws, ordering him to disgorge $728,269, representing profits gained, and the proceeds of the sale of 150,000 shares of Brooks stock and to pay a civil penalty of $100,000, and barring him from serving as an officer or director of a public company.

The Commission's Complaint, filed July 26, 2007, alleged that, Therrien, in or about November 1999, created and signed false documents resulting in the issuance of the options to himself, which he immediately exercised, to purchase 225,000 shares of Brooks’ common stock. The Commission further alleged that Therrien signed these false documents after learning that his options to purchase the shares had expired unexercised a few months earlier in or about August 1999. According to the Complaint, the documents Therrien signed falsely indicated that he had actually exercised his option before it expired. As a result, according to the Complaint, Therrien received undisclosed compensation from Brooks, and Brooks failed to report this compensation in its Commission filings.

The final judgment imposed a permanent injunction prohibiting Therrien from violating Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(b)(5), 14(a), and 16(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules 10b-5, 13a-14, 13b2-1, 13b2-2, 14a-9, and 16a-3 thereunder and aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder; ordering him to pay $728,269 in disgorgement and to pay to Brooks the proceeds of the sale of 150,000 shares of Brooks stock; ordering him to pay a civil penalty in the amount of $100,000; and barring him from acting as an officer or director of a public company.

The Commission filed a settled enforcement action against Brooks in May 2008 concerning Therrien’s conduct and other issues."

FORMER GATEWAY, INC. CEO SETTLES FRAUD SEC CHARGES

The following excerpt is from the SEC website:

On January 25, 2012, final judgments were entered against Jeffrey Weitzen, former CEO of Gateway, Inc., and Robert D. Manza, former controller of Gateway. Weitzen and Manza consented to entry of the final judgments without admitting or denying the allegations made by the Securities and Exchange Commission that they engaged in fraud and other violations of the federal securities laws in connection with Gateway’s recognition of revenue in the third quarter of 2000.

The SEC alleged that the defendants falsely represented Gateway’s financial condition in the third quarter of 2000 in order to meet financial analysts’ earnings and revenue expectations. Among other transactions, the SEC alleged that the defendants caused Gateway to record $47.2 million in revenue from a one-time sale of fixed assets to Gateway’s third-party information technology services provider in violation of Generally Accepted Accounting Principles (GAAP), and that Manza and defendant John J. Todd, then Gateway’s CFO, caused Gateway to recognize an additional $21 million in revenue from an incomplete sale of computers to a second entity, also in violation of GAAP. The SEC alleged that absent either of these transactions, Gateway would not have met analysts’ expectations with regard to its third quarter revenue.

Weitzen consented to a final judgment permanently enjoining him from violations of the antifraud provisions of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and payment of a $110,000 civil penalty. Manza consented to a final judgment permanently enjoining him from violations of the antifraud provisions of Section 10(b) and Rule 10b-5 thereunder, and from violations of SEC Rule 13b2-2, which prohibits making misrepresentations and omissions of material fact to company auditors, as well as from aiding and abetting the issuer reporting provisions of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. Manza further consented to be barred for five years from acting as an officer or director of a public company, and to pay disgorgement of $85,150, constituting his salary and bonus for the relevant quarter, together with prejudgment interest thereon of $75,551.43 totaling $160,701.43, and a $110,000 penalty.

Previously, on March 7, 2007, a jury had rendered a unanimous verdict finding Manza and defendant Todd liable for fraud, making false representations to auditors, aiding and abetting issuer reporting violations and other violations following a three week trial. On May 30, 2007, the Honorable Roger T. Benitez overturned the jury verdict as to the fraud and certain other claims. The SEC appealed that ruling, as well as the District Court’s prior August 1, 2006, grant of summary judgment to Weitzen dismissing the SEC’s case as to Weitzen. On June 23, 2011, the Ninth Circuit reversed those rulings and remanded the matter to the District Court.

The case remains pending as to defendant Todd.