Washington, D.C. — The Securities and Exchange Commission has charged five senior executives at high-definition TV developer Syntax-Brillian with financial fraud, and they have all agreed to settlements.
The company, which distributes LCD TVs under the brand name Olevia, allegedly overstated its financial results from at least June 2006 to April 2008 by reporting significant sales of the TVs in China when most of the sales never actually occurred. The SEC’s complaint alleges that the scheme was orchestrated by James Li, a Syntax director who at times held the job of president, CEO and COO at the company, and Thomas Chow, another Syntax director who was also the company’s chief procurement officer.
According to the SEC, Li and Chow initially concealed the scheme through the use of fake shipping and sales documents. As the scheme progressed, they developed a circular cash flow scheme involving Syntax's primary manufacturer, Taiwan Kolin Co., Ltd., and its purported customer in Hong Kong, South China House of Technology Consultants Co. Ltd., or SCHOT.
Kolin chairman Christopher Liu and Kolin executive and board member Roger Kao allegedly helped with the scheme, which created the appearance of substantial revenues from Syntax's purported sales in China. Under the guise of paying various invoices, Li and Chow funneled millions of dollars from Syntax to Kolin, said the SEC’s complaint. Liu and Kao then authorized the transmittal of these funds to SCHOT, which then transferred the funds back to Syntax. Syntax recorded these cash transfers as payments for the previously recorded fictitious sales.
The SEC alleges that Syntax CFO Wayne Pratt ignored red flags of improper revenue recognition and participated in preparing backdated documentation that was provided to Syntax's auditors to support fictitious fiscal 2006 year-end sales. Pratt also ignored indications of impaired assets, agency sales, and potential collectability issues.
The SEC's complaint alleges that between June 30, 2006, and Sept. 30, 2007, Li, Chow, Liu, and Pratt signed various filings with the SEC containing material misstatements. In addition, Li, Chow, and Pratt signed management representation letters for Syntax's auditors that contained material misstatements regarding, among other things, sales to SCHOT, purchases from Kolin, and the relationships between Syntax, SCHOT, and Kolin. Li and Chow also engaged in insider trading.
In settling the charges with the SEC, Li consented to the entry of a final judgment permanently enjoining him from violating the securities laws. The SEC also imposed a permanent officer and director bar against him. A court is also expected to order disgorgement of ill-gotten gains, prejudgment interest, and a civil penalty.
Kao consented to the entry of a final judgment permanently enjoining him from aiding and abetting violations of the securities laws and ordering him to pay a civil penalty of $100,000. Liu consented to the entry of a final judgment permanently enjoining him from violating the securities laws, ordering him to pay a civil penalty of $100,000, and imposing a permanent officer and director bar against him.
Pratt consented to the entry of a final judgment permanently enjoining him from violating the securities laws, ordering him to pay disgorgement of $88,000 and prejudgment interest of $17,000, a civil penalty of $90,000, and imposing a five-year officer and director bar against him. Pratt also consented to the institution of settled administrative proceedings suspending him from appearing or practicing before the SEC as an accountant for a period of five years, based on the anticipated entry of an injunction against him.
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