HARTCOURT/ALAN PHAN PREPARES THE TROOPS FOR SEC ACTION
Posted by: drlvanb
In reply to: None Date:5/27/2003 9:19:56 PM
Post #of 27038
The Bad News that shouldn't be:
To: All Hartcourt Directors
May 22nd, 2003
Dear Directors:
I have some bad news for you. The SEC told us that they would file a civil lawsuit against the company and myself some time during next week. The principal charge would be that we used the S-8 registration back in 1999 to raise fund for the company, not to pay professional fees as specified by the law. We had haggled with the SEC in 2000 about the case; afterwards, they were quiet and we thought that they were satisfied. Let me give you a little background:
In August 1999, we granted Yan Wu and her husband an option to purchase One Million shares of HRCT at $1.25 as compensation for the broker fee (they introduced us the UAC people and helped close the deal). They exercised the option and pay us $850,000 (we could not collect the remaining $400,000, later written off as bad debt) for the shares which were registered under S-8 as they were for professional services. Due to the complex currency regulation of PRC and the money already past due to UAC as part of the purchase price, we instructed them to pay UAC directly. NONE of these $850,000 went into Hartcourt's pockets or Yan Wu's pockets or anybody's pocket; but directly to UAC operation. The money was recorded properly in both companies’ accounting book. The S-8 was registered with proper legal opinion by the SEC law firm Archer & Weed. The S-8 and the money received were disclosed fully in our 10Q and 10K filings.
That’s why we still don't see what we did wrong? The SEC claimed that we used the S-8 shares to raise money, in their eyes. However, we simply collected the money for the exercised option, and the option was for broker’s services, so it was qualified under an S-8 registration. Our attorney at that time, Rick Weed, thought that everything was kosher.
I told the SEC that we would fight the charge and we would prevail. They were quiet for the last 26 months; then as HRCT share price shot up, they bring back the case and want to file a civil lawsuit. Before anybody has funny idea, let me stress that this is a civil, not criminal lawsuit (there is no accounting fraud, no stock manipulation, no insider trading or any misuse of trust to the shareholders). The worst-case scenario (if the SEC wins the lawsuit, 2 or 3 years down the road) would be an injunction and a penalty against Hartcourt and/or myself. The penalty would be substantially less than the judgment given to Charles Hogue last year (which we finally prevailed).
I would not hesitate to go to Court with them (you all know the fighter inside me, when we were unjustly accused) but the perception would be devastated for our share price. The SEC knows this; they knew that I would give them a heck of a fight when our share price was 6 cents, nowhere to go down. But now, they have leverage because of the recent upward momentum.
As a result, I have asked John Furutani to negotiate a settlement and by Tuesday we shall know if the deal could be struck. If not, we should be prepared for the bad publicity and the hit on the share price.
Whatever happens, we are fully prepared. A Press Release and a shareholders’ letter will come out if the lawsuit is filed. David and his team were told to concentrate on the business plan of more PC company acquisitions. Two, three years down the road, if we could reach the $1 Billion mark in revenue and 3 percent of net profit ($30 Million); the outcome of this SEC lawsuit will have negligible effect. Furthermore, even if we lose, we could sue the law firm of Archer & Weed for malpractice to recoup our financial loss.
The purpose of this letter is to inform you of the situation so you won’t be surprised if the news is released. We welcome any comment or suggestion and we shall keep you updated of the case.
Best
Alan |
