SEC v. Nancy Shao Wen Chu, et al., CV 11-09859 (C.D. Cal.)
Former Chief Financial Officer of Soyo Group Ordered to Pay $15,600,000 Penalty for Securities Fraud
The Securities and Exchange Commission recently announced that Nancy Shao Wen Chu, the former Chief Financial Officer for the now defunct Soyo Group, Inc., was ordered to pay $15,600,000 in penalties for committing securities fraud. Another defendant, Eric Jon Strasser, was ordered to pay a penalty of $260,000. The SEC alleged that between January 2007 and November 2008, Soyo, through the actions of Chu and another defendant, booked over $47 million in fraudulent sales revenues arising from at least 120 fictitious transactions. The scheme had the effect of nearly doubling Soyo’s net revenues for 2007 over the previous year. Soyo’s share price thus increased from a low of $.28/share in the first quarter of 2007, to a high of $1.80/share in the fourth quarter of 2007. The SEC alleged that Chu actively participated in the fraudulent sales transactions and took deliberate steps to hide the scheme from Soyo’s auditor.
Further, the SEC alleged that in order to obtain additional bank financing for Soyo and keep its existing line of credit from defaulting, Chu also misled Soyo’s investors, its primary lending bank, and its auditor regarding a six million dollar debt-for-equity transaction Soyo was negotiating with a vendor. Despite that fact that discussions with the vendor were not finalized and subject to cancelation, Chu signed and caused to be filed a Soyo Form 10-Q for the quarter ended June 30, 2008, reporting that the transaction was complete, eliminating an outstanding accounts payable of slightly over $6 million, and thereby reducing Soyo’s current liabilities by 14% and its accounts payable by 42%.
Strasser, a consultant who prepared Soyo’s SEC filings, was alleged to have been well aware that Soyo’s second quarter Form 10-Q falsely reported the debt-for-equity transaction as complete and to have withheld this information from Soyo’s auditor. In addition, Strasser prepared Soyo’s Form-10-Q for the next quarter, making the same false disclosures and omitting the same liabilities relating to the debt-for-equity transaction.
Neither Chu nor Strasser answered the Commission’s complaint and both were found to be in default. The Court ordered the maximum third-tier penalty of $130,000 against Chu for each of the 120 fictitious transactions she concocted and against Strasser for each of the two fraudulent SEC filings.