SEC, FBI AND U.S. ATTORNEY'S OFFICE COORDINATE TO CHARGE ECONNECT AND ITS CEO WITH SECURITIES FRAUD
DEBRA W. YANG
United States Attorney
Central District of California
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Thom Mrozek, Public Affairs Officer
(213) 894-6947
thom.mrozek@usdoj.gov
August 7, 2002
SEC, FBI AND U.S. ATTORNEY'S OFFICE COORDINATE TO CHARGE ECONNECT AND ITS CEO WITH SECURITIES FRAUD
The Securities and Exchange Commission and the United States Attorney’s Office for the Central District of California announced today the filing of civil and criminal charges against Thomas S. Hughes, CEO of eConnect, and civil charges against eConnect - both repeat securities law violators - for fraud in connection with a scheme to artificially inflate eConnect's stock price using false press releases and false statements on its websites. The filings were the result of investigations conducted by the Securities and Exchange Commission, the United States Attorney’s Office, and the Federal Bureau of Investigation. Both eConnect, based in San Pedro, CA (symbol: ECNT), and Hughes, age 52, of Rancho Palos Verdes, CA, were previously sued by the SEC in 2000 for issuing false press releases.
The United States Attorney’s Office’s two-count criminal complaint, filed today in Los Angeles federal court, charges Hughes with criminal contempt and securities fraud. The complaint alleges that Hughes committed criminal contempt by violating the terms of a permanent injunction issued against him in April of 2000 in the prior SEC case; that injunction prohibited Hughes from committing any future securities fraud violations. The complaint also alleges that Hughes committed securities fraud by issuing false and misleading press releases on behalf of eConnect for the purpose of fraudulently increasing the value of eConnect's stock. Hughes was arrested by FBI special agents early this morning and will make his initial appearance in federal court this afternoon. If convicted of the securities fraud charge in the complaint, Hughes faces a maximum sentence of 10 years in federal prison and a $1,000,000 fine.
The SEC's complaint charges Hughes, eConnect, and major eConnect shareholders Richard Epstein of Tampa, Florida and Alliance Equities, Inc, of Coral Springs, Florida with various federal securities law violations. The SEC simultaneously filed an emergency action seeking over $770,000 from Epstein and Alliance Equities, over $70,000 from eConnect, and a bar against Hughes from acting as an officer or director of a publicly-traded company. The SEC previously suspended trading in eConnect stock on July 25, 2002.
Debra W. Yang, United States Attorney for the Central District of California, said: “This office and the Department of Justice are committed to protecting the investing public from those who seek to manipulate securities markets for their own profit. The criminal complaint filed today, less than two weeks after the suspension of trading, demonstrates the effectiveness of cooperative efforts by this office, the SEC, and the FBI, in ensuring swift prosecution of criminal violations of the securities laws.”
Randall R. Lee, Regional Director of the SEC's Pacific Regional Office said: “By suspending trading in eConnect stock and then working closely with the U.S. Attorney’s Office and the FBI to bring criminal and civil actions, all within 2 weeks, the SEC has taken immediate action to protect investors. These actions demonstrate the SEC’s commitment to “real time enforcement” and to the vigorous prosecution of those who repeatedly violate the federal securities laws.”
Ronald L. Iden, Assistant Director In Charge of the FBI’s Los Angeles office said: “The Los Angeles FBI, in conjunction with the SEC and the United States Attorney’s Office, is committed to ensuring a level playing field for the investing public and will pursue severe criminal sanctions for those who seek to disregard civil and regulatory restrictions. No corporate executive is immune to the consequences of such indifference, regardless of their rank.”
The SEC alleges that since July 10, 2002, Hughes and eConnect have issued false and misleading press releases and posted false statements on eConnect’s websites claiming that:
eConnect had received a $20 million dollar 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.
In addition, the SEC’s complaint alleges that:
During the period when the false press releases were issued, both the price and trading volume of eConnect’s stock increased by over 500 percent.
Epstein and Alliance Equities failed since at least May 2001 to supply the SEC - and the public - with a host of information regarding their eConnect stock by filing updates to Schedule 13D (a form that major shareholders of public companies must file with the SEC to disclose, among other things, how they got their shares and what they plan to do with them);
Epstein and Alliance Equities instead filed, in May 2001, a misleading Schedule 13D;
Since June 2002 alone, Epstein and Alliance Equities have dumped over 74 million eConnect shares into the market for approximately $770,000 in trading proceeds, but failed to report these sales to the SEC and the public in a Form 4 filing (another form that insiders, such as officers, directors and major share holders, must file with the SEC to disclose, among other things, that they have bought or sold their company’s stock); and
In May and June 2002, Hughes purchased shares of eConnect but failed to report his purchases in a Form 4 filing.
In the present action, filed in United States District Court in Los Angeles, the Commission charged Hughes with violating the antifraud and insider transactions reporting provisions of the federal securities laws, eConnect with violating the antifraud provisions of the securities laws, and Epstein and Alliance Equities with violating the insider transactions and stock sale reporting provisions of the federal securities laws. The Commission seeks injunctions, asset freezes, disgorgement of trading proceeds, civil penalties, and an officer and director bar against Hughes.
This is the third criminal contempt proceeding brought in the past year by the United States Attorney’s Office in Los Angeles in conjunction with the SEC’s Pacific Regional Office. In August 2001, Job Kjell Hovik was charged with criminal contempt and mail and wire fraud for violating an SEC injunction and defrauding investors in a purported weight loss business. In November 2001, Cary S. Greene was charged with criminal contempt and securities fraud for violating an SEC injunction and soliciting investors in a purported broadband business.
This case is the product of an investigation by the Securities and Exchange Commission, the United States Attorney’s Office in Los Angeles, and the Federal Bureau of Investigation, which received assistance from NASD Regulation, Inc.
Release No. 02-119
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