SEC wins $120,000 (U.S.) judgment from eConnect ex Hughes
2003-09-18 14:03 ET - Street Wire
by Stockwatch Business Reporter
Canada's most respected securities regulator, the United States Securities and Exchange Commission, has won a civil judgment against Thomas S. Hughes, ex-president of California-based eConnect. The Honorable Nora M. Manella, U.S. District Judge for the Central District of California, entered a judgment against Mr. Hughes on Sept. 4, 2003. Under the judgment, Mr. Hughes will have to pay $120,000 and has been prohibited from ever being an officer or director of a public company. (All figures are in U.S. dollars.) The California court issued the judgment after Mr. Hughes agreed to a settlement with the SEC. On Aug. 11, 2003, Mr. Hughes pled guilty to securities fraud and contempt of court criminal charges.
The SEC filed its complaint on Aug. 7, 2002, in which it alleged that eConnect and Mr. Hughes issued false and misleading press releases, and posted false statements on eConnect's Web site in July, 2002. As an SEC press release from Sept. 8, 2003, states, "These statements concerned a purported $20 million investment of 'AA' rated bonds that in fact were not rated, a nonexistent stock repurchase program, and a purported $964,000 purchase order for eConnect's principal product." Based on prima facie allegations that showed that Mr. Hughes and others violated federal securities laws, the SEC obtained an emergency relief against Mr. Hughes and others, including an asset freeze, on Aug. 8, 2002. On Aug. 16, 2002, Judge Manella granted a preliminary injunction against Mr. Hughes.
In recent years, eConnect had been a favourite penny stock of suspended Toronto broker Mark Valentine, whose Bay Street brokerage Thomson Kernaghan collapsed amid regulatory investigations in 2002, and Los Angeles tree trimmer and Internet tout Stephen Sayre. Mr. Sayre brought the spotlight to Vancouver after he transferred most of the proceeds he received from touting eConnect shares to the Bank of Montreal in Vancouver, for deposit to Exchange Bank & Trust, Terry Neal's offshore Nevis-based brass-plate bank. Mr. Sayre and EBT's eConnect connections confirmed the wisdom of the SEC placing Vancouver's Howe Street in its regulatory sights. Mr. Neal set up EBT in 1997, after he landed in Nevis in the wake of his ITEX Corp. fraud. The SEC's investigation into EBT revealed a veritable Pandora's box of crooked stock players, with the Vancouver bank account taking a starring role as a prime money-laundering conduit for securities violators. Stockwatch reported on the SEC's successful court application against Mr. Sayre on June 21, 2001.
Mr. Hughes's co-defendants in the civil case are eConnect and eConnect shareholders Richard Epstein, a Florida stock consultant, and Alliance Equities Inc. eConnect, Mr. Epstein and his company Alliance Equities had final judgments against them issued by Judge Manella on May 1, 2003. Mr. Epstein and Alliance Equities, have been enjoined from violating various securities regulations. They have also been jointly ordered to disgorge $630,409.46, which represents their ill-gotten gains of eConnect shares. Mr. Epstein has had civil penalties of $25,000 levied against him.
The civil action against Mr. Epstein and Alliance Equities stems from tardy and misfiled documents with the SEC over eConnect shares. The SEC alleged that, from at least May, 2001, Mr. Epstein and Alliance Equities did not file updates with the SEC over their holdings of eConnect stock, and, in May, 2001, filed "a misleading Schedule 13D." The SEC also claims that between June, 2002, and Aug. 7, 2002, Mr. Epstein and Alliance Equities dropped over 74 million eConnect shares into the market, for trading proceeds of $770,000. Those sales were not reported to the SEC via an SEC Form 4.
In a separate ruling on May 1, 2003, Judge Manella ordered eConnect to disgorge $70,719.02, which represents its profits gained as a result of improper conduct as alleged by the SEC in its civil complaint. The SEC allegations regarding eConnect's role in the promotion included issuing false press releases with Mr. Hughes, the details of which stated that eConnect had received a $20-million investment in "AA" rated asset-backed bonds from another issuer, when in fact these bonds were not rated and have little value; eConnect had begun a stock repurchase program, when in fact no stock repurchase program existed; and eConnect had received a purchase order to sell $964,000 worth of its key product (the eCashPad), when in fact the apparent purchaser has denied any knowledge of eConnect.
On Aug. 11, 2003, Mr. Hughes pled guilty to three counts of securities fraud, which stemmed from the same situation as the civil action, and one count of criminal contempt of the permanent injunction that the SEC had obtained against him on April 7, 2000.
The eConnect saga has gone none too well for Mr. Hughes. He was arrested by FBI special agents on Aug. 7, 2002, and was charged with securities fraud. He was indicted by a grand jury on Aug. 27, 2002. By pleading guilty when he did, Mr. Hughes managed to avoid a trial that was scheduled to begin on Aug. 19 in Los Angeles.
The U.S. Attorney for the Central District of California, Debra W. Yang, said in relation to the case: "Manipulation of the markets will not be tolerated. Along with the FBI and the SEC, my office is committed to swiftly exposing any securities fraud scheme and to bringing perpetrators to justice. That commitment only increases when a defendant acts in violation of a court order intended to prevent these fraud schemes from recurring. The cases jointly filed by my office and by the SEC demonstrate our willingness and ability to work together to quickly protect the victims of unscrupulous executives."
Mr. Hughes's sentencing hearing is scheduled for Dec. 1, 2003, to be heard in front of Judge Manella. According to the U.S. Attorney's Office, Mr. Hughes faces up to 30 years for securities fraud, and an indefinite time in jail for the contempt of court charge. |
