FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., Nov. 8, 2012 — The Securities and Exchange Commission today charged three executives with repeatedly lying to investors about the operations and financial condition of an Irvine, Calif.-based company that purported to sell credit card-size electronic games. The SEC also charged the company’s independent auditor with facilitating the scheme.
The SEC alleges that chief executive officer Lee Cole and chief financial officer Linden Boyne orchestrated a scheme in which Electronic Game Card Inc. (EGMI) enticed investors by claiming to have millions of dollars in annual revenue, hold millions of dollars in investments, and own an off-shore bank account worth more than $10 million. In reality, many of the company’s purported contracts were phony, the purported investments were merely in entities affiliated with Cole or Boyne, and the bank account did not exist. As a result of EGMI’s false claims, the company’s outstanding common stock was once valued as high as $150 million. EGMI is now bankrupt and its stock is worthless.
The SEC charged the company’s outside auditor — certified public accountant Timothy Quintanilla — with repeatedly issuing clean audit opinions about EGMI based on reckless and deficient audit work. Also charged is Kevin Donovan, who later replaced Cole as CEO and ignored many red flags about the accuracy of the company’s public statements and the integrity of Cole and Boyne. He provided false information during conference calls with analysts and investors.
"Cole and Boyne played a game of make-believe with a publicly-traded microcap company," said Andrew M. Calamari, Director of the SEC’s New York Regional Office. "We will continue to fight microcap fraud and bring charges against not only the company executives but also the auditors or other gatekeepers who legitimize a fraud and allow investors to be victimized."
According to the SEC’s complaint filed in federal court in Manhattan, EGMI’s material misrepresentations and omissions in SEC filings and public statements occurred from 2007 to 2009. The company repeatedly reported non-existent revenues and assets, misrepresented its business operations, and failed to disclose related-party transactions. Those misrepresentations and others like them were just part of a scheme that Cole and Boyne orchestrated through EGMI to reap approximately $12 million in unlawful gains. While they were making material misrepresentations to inflate EGMI’s stock price, Cole and Boyne also secretly funneled millions of shares of EGMI stock to entities based in Gibraltar that they secretly controlled. They directed the Gibraltar entities to sell the shares, and proceeds of those sales were transferred to people or entities associated with Cole and Boyne or to EGMI itself. Cole and Boyne bolstered their lies by providing falsified documents to the company’s outside auditors.
The SEC alleges that as EGMI’s engagement partner, Quintanilla and the public accounting firm Mendoza Berger & Co. LLP issued clean audit opinions for EGMI’s year-end financial statements for 2006, 2007, and 2008, even though those statements were riddled with material misstatements and omissions. Mendoza Berger and Quintanilla knowingly or recklessly misrepresented that the firm had conducted audits of EGMI’s financial statements "in accordance with the standards of the Public Company Accounting Oversight Board (United States)." Mendoza Berger’s opinion stated that EGMI’s financial statements "present[ed] fairly, in all material respects, the financial position" of EGMI. In fact, Mendoza Berger had not audited critical aspects of EGMI’s financial statements, and its work did not conform to the standards of the Public Company Accounting Oversight Board (PCAOB). Quintanilla had no meaningful basis to have Mendoza Berger issue an opinion on EGMI’s financial statements.
The SEC further alleges that shortly after Donovan became CEO, he was notified of many red flags related to the company’s public statements about its operations, finances, and share count. Donovan violated the antifraud provisions of the securities laws when he led several public conference calls with securities analysts and investors in 2009, and knowingly or recklessly relayed false financial information about the company that had been provided to him by Cole and Boyne.
The SEC’s complaint alleges that Cole and Boyne violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933; Sections 10(b), 13(b)(5), 13(d), and 16(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 13a-14, 13b2-1, 13b2-2, 13d-1, 13d-2, 16a-2, and 16a-3; and Section 304 of the Sarbanes-Oxley Act of 2002. The SEC also alleges that Cole and Boyne are liable as control persons and for aiding and abetting violations of Sections 10(b), 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13. The SEC charges that Donovan violated Sections 17(a)(1) and 17(a)(3) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5. The SEC alleges that Quintanilla violated Section 17(a) of the Securities Act and Sections 10(b), 10A(a)(1), and 10A(b)(1) of the Exchange Act and Rule 10b-5. Quintanilla also is charged with aiding and abetting violations of Sections 10(b), 10A(a)(1), and 10A(b)(1) of the Exchange Act and Rule 10b-5 thereunder.
The SEC’s complaint seeks, among other things, a final judgment ordering Cole, Boyne, Donovan, and Quintanilla to pay financial penalties and permanently enjoining them from future violations of the securities laws; enjoining Cole, Boyne, and Donovan from serving as officers and directors of public companies and from participating in penny stock offerings; and ordering Cole, Boyne, and Quintanilla to disgorge their ill-gotten gains with prejudgment interest.
The SEC’s investigation, which is continuing, has been conducted by Michael Paley, Stephen Larson, James Addison, Gwen Licardo, and Aaron Arnzen of the New York Regional Office. Mr. Arnzen will lead the SEC’s litigation. The SEC thanks the PCAOB for its assistance in this matter.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
SEC Charges Medlink International and Two Executives with Fraudulent Filing
The Securities and Exchange Commission today announced that it filed a civil injunctive action against MedLink International, Inc., its CEO, Aurelio Vuono, and its CFO, James Rose, accusing them of filing an annual report falsely stating that its audit had been completed and defrauding a MedLink investor. MedLink's principal office is in Hauppauge, New York, and it purports to be a healthcare information technology company. Vuono, age 46 and a recidivist securities law violator, resides in Huntington Station, New York. Rose, age 33, resides in Hauppauge, New York.
The Commission's complaint, filed October 24, 2012 in U.S. District Court in Brooklyn, New York, alleges that on April 25, 2011, MedLink filed with the Commission an annual report on Form 10-K for the year ended December 31, 2010. Included in the filing was an audit report with the electronic signature of MedLink's auditor, which stated that the auditor had conducted an audit of MedLink's financial statements for the years ended December 31, 2009 and 2010. The complaint alleges that the Form 10-K was false and misleading because the audit had not been completed, and the auditor had not authorized MedLink to include the audit report or to use its electronic signature. The complaint also alleges that the Form 10-K was false and misleading because it contained the electronic signature of MedLink's founder and director, even though the director had not reviewed it nor authorized use of his electronic signature.
The complaint further alleges that in approximately April 2011, a MedLink investor agreed to purchase 210,526 shares of MedLink stock for $149,473.50. Vuono promised the investor that MedLink would delay this purchase and not cash the investor's check until the investor had sufficient funds in his checking account. Shortly thereafter, the investor informed Vuono and Rose that MedLink was not authorized to cash the check and instructed MedLink to return it. Instead of returning the check, Rose deposited it in MedLink's bank account. Despite repeated requests, MedLink did not return the investor's money or issue any MedLink stock to the investor.
The Commission's complaint charges: MedLink, Vuono and Rose with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5; MedLink with violations of Section 15(d) of the Exchange Act and Rules 12b-20 and 15d-1; Vuono and Rose with violations of Exchange Act Rule 15d-14; and Vuono and Rose with aiding and abetting MedLink's violations of Section 17(a) of the Securities Act, Sections 10(b) and 15(d) of the Exchange Act and Rules10b-5, 12b-20 and 15d-1. The Commission is seeking against MedLink, Vuono and Rose permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest to be paid jointly and severally, and civil monetary penalties. The Commission is also seeking against Vuono and Rose officer and director and penny stock bars.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Former Silicon Valley Executive to Pay $1.75 Million to Settle Insider Trading Charges
On October 24, 2012, the Securities and Exchange Commission charged a former senior executive at a Silicon Valley technology company for illegally tipping convicted hedge fund manager Raj Rajaratnam with nonpublic information that allowed the Galleon hedge funds to make nearly $1 million in illicit profits.
The SEC alleges that Kris Chellam tipped Rajaratnam in December 2006 with confidential details from internal company reports indicating that Xilinx Inc. would fall short of revenue projections it had previously made publicly. The tip enabled Rajaratnam to engage in short selling of Xilinx stock to illicitly benefit the Galleon funds. Chellam tipped Rajaratnam, who was a close friend, at a time when Chellam had his own substantial investment in Galleon funds and was in discussions with Rajaratnam about prospective employment at Galleon. Chellam was hired at Galleon in May 2007.
Chellam, who lives in Saratoga, Calif., has agreed to pay more than $1.75 million to settle the SEC's charges. The settlement is subject to court approval.
According to the SEC's complaint filed in federal court in Manhattan, Xilinx announced in October 2006 the financial results for the second quarter of its 2007 fiscal year. Xilinx also provided guidance for the third quarter by projecting revenues of approximately $476 million to $490 million. Xilinx said it would update this revenue guidance on Dec. 7, 2006.
The SEC alleges that in the weeks leading up to Xilinx's December 7 update, Chellam received multiple reports indicating that the company's third quarter business results were not going to be as positive as projected in October. Chellam learned on November 21 that the top end of the projected revenue range was being lowered from $490 million to $470 million. He attended a December 4 confidential executive staff meeting where the bottom end of the revenue projection was lowered from $476 million to $455 million. On December 5, Chellam telephoned Rajaratnam and tipped him about Xilinx's worse-than-expected performance. Just minutes after the call, Galleon hedge funds controlled by Rajaratnam sold short Xilinx stock, eventually selling short more than 650,000 shares over the course of that day and the following day.
According to the SEC's complaint, the Galleon hedge funds reaped approximately $978,684 in illegal profits after the December 7 announcement by covering the substantial short position that Rajaratnam had accumulated based on Chellam's tip. Chellam had more than $1 million invested in one of the Galleon hedge funds in which Rajaratnam placed these trades. In May 2007, Chellam became the co-managing partner of the Galleon Special Opportunities Fund, a venture capital fund that focused on investments in late-stage technology companies. Chellam continued to work at Galleon until April 2009 and continued to obtain confidential information about Xilinx's financial performance and pass it along to Galleon colleagues. Chellam earned approximately $675,000 in total compensation during his employment at Galleon.
The SEC's complaint charges Chellam with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Section 17(a) of the Securities Act of 1933. The proposed final judgment orders Chellam to pay $675,000 in disgorgement, $106,383.05 in prejudgment interest, and a $978,684 penalty. Chellam also would be barred for a period of five years from serving as an officer or director of a public company, and permanently enjoined from future violations of these provisions of the federal securities laws. Chellam neither admits nor denies the charges.
The SEC has now charged 32 defendants in its Galleon-related enforcement actions, which have exposed widespread and repeated insider trading at numerous hedge funds and by other traders, investment professionals, and corporate insiders throughout the country. The alleged insider trading has occurred in the securities of more than 15 companies for illicit profits totaling approximately $93 million.
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