ALL IN THE FAMILY: FINANCIAL FRAUD AND A DEFUNCT COMPANY
The Commission brought a financial fraud action against the controlling shareholder of a now failed public company and her sister-in-law who was at one time employed by the firm. The complaint claims that the two defendants orchestrated a scheme in which over $47 million in fraudulent sales were booked and revenue was overstated in 2007 and 2008 by a range of 14.4% to 76.8%. SEC v. Chu, Case No. CV 11-09859 (C.D. Cal. Filed Nov. 29, 2011); see also Lit. Rel. No. 22174 (Dec. 2, 2011).
The action focuses on Soyo Group, Inc., a California based company sold LCD televisions, monitors, computer parts and peripherals. Its shares were traded on the American Stock Exchange. During 2007 and 2008 the company reported over $197 million in net revenues. When Soyo could not repay loans to its bank, on May 5, 2009 it filed for bankruptcy.
One defendant is Nancy Shao Wen Chu, the largest shareholder of the company with 47% of its shares. Ms. Chu also served as CFO of the company from 2002 through 2009 and was a member of the board of directors. She ran the operations of the company. The other defendant is Elizabeth Tsang who was employed as an accounting manager by the company from 2002 through 2009.
According to the Commission’s complaint, the two defendants used a number of fraudulent devices to overstate the revenues of the company and mislead its auditors and primary lending bank during the two year period including:
- Booking $47 million in fraudulent sales revenue from at least 120 fictitious transactions with 21 customers;
- Using phony receivables to acquire working capital from a revolving line of credit at the primary bank of the company, United Commercial Bank;
- Round-tripping funds through Asian bank accounts to pay off the receivables connected with the false sales in order to avoid detection by the outside auditors, Vasquez & Company and the bank;
- Falsifying and forging documents in an effort to substantiate the fictitious sales; and
- Falsely representing in a Form 10-Q that the company had completed a deal in which 5.9 million shares of its common stock would be exchanged with a creditor to extinguish over $6 million, thereby reducing current liabilities by almost 14% when in fact the deal was never finalized.
The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b) as well as control person liability under Exchange Act Section 20(a). The case is in litigation.