Carnegie International Corporation, et al.
Litigation Release No. 18229 / July 14, 2003
Accounting and Auditing Enforcement Release No. 1813 / July 14, 2003
Securities and Exchange Commission v. Carnegie International Corporation, et al., No. 1:03CV01513 (D.D.C.) (EGS)
SEC Sues Carnegie International Corporation and Several Current and Former Executives in Accounting Fraud Case
Carnegie's CEO and Former Corporate Secretary Consent to Permanent Officer and Director Bars
Carnegie's Stock Registration Revoked in Related Proceeding
On July 14, 2003, the Commission filed a civil injunctive action in the United States District Court for the District of Columbia against Carnegie International Corporation, a company headquartered in Laurel, Maryland, and six individual defendants. The individual defendants are E. David Gable, Carnegie's chairman, Lowell Farkas, Carnegie's president and chief executive officer, David Pearl, a lawyer and the former corporate secretary of Carnegie, Richard J. Greene, Carnegie's former chief financial officer, Scott Caruthers, a former Carnegie director, and Dashielle Lashra Caruthers, the wife of Scott Caruthers. The Caruthers are also named as relief defendants. All the defendants except Gable have consented to the entry of final judgments in settlement of this matter.
The Commission's complaint alleges, among other things, that Gable, Farkas, and Pearl carried out a financial fraud at Carnegie that resulted in Carnegie improperly reporting revenue and income on three transactions in filings with the Commission. The transactions related to Carnegie's sale of a former subsidiary, Electronic Card Acceptance Corporation, and certain business assets of a second subsidiary, Talidan Limited, and its granting of distribution rights to a telephone voice-recognition product called MAVIS. The filings at issue are the company's original and amended registration statements, filed in October 1998 and February 1999, respectively, and its original and amended 1998 Form 10-KSB annual report, filed in April 1999 and January 2000, respectively.
The complaint further alleges that Carnegie senior management arranged for the sale of Carnegie shares through management-controlled entities, and had proceeds from these sales transferred to Carnegie as purported payment on certain of these transactions. According to the complaint, Carnegie's accounting for these transactions, and the company's failure to make required disclosures concerning these transactions, including the involvement of related parties, was not in accordance with generally accepted accounting principles ("GAAP"). The complaint further alleges that Carnegie's financial reporting was highly susceptible to the financial fraud because Greene, Carnegie's former chief financial officer, failed to implement an adequate system of internal accounting controls.
Carnegie is also alleged to have materially misrepresented Talidan's expected future performance in the company's 1998 Form 10-KSB, by failing to disclose known adverse events and uncertainties that were materially impacting Talidan's revenues. Finally, the company is alleged to have materially misrepresented the terms of other purported MAVIS distribution agreements in press releases issued in 1998.
According to the complaint, Gable and Pearl, along with the Caruthers, personally benefited from this fraud by selling Carnegie shares at inflated prices through an offshore trust, and they failed to make required disclosures concerning their beneficial ownership and sales of Carnegie shares.
Based on the facts alleged, the Commission charged the following violations:
- Carnegie was charged with securities fraud in violation of Section 17(a) of the Securities Act of 1933 (the "Securities Act), Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), and Exchange Act Rule 10b-5, and with violating the reporting, books-and-records, and internal controls provisions of Exchange Act Sections 12(g), 13(a), 13(b)(2)(A), and 13(b)(2)(B), and Exchange Act Rules 12b-20 and 13a-1;
- Gable, Farkas, and Pearl were each charged with (i) securities fraud in violation of Exchange Act Section 10(b) and Exchange Act Rule 10b-5; (ii) falsifying Carnegie's books, records, and accounts, and circumventing or failing to implement internal accounting controls, in violation of Exchange Act Section 13(b)(5) and Exchange Act Rule 13b2-1; (iii) misleading Carnegie's auditors in violation of Exchange Act Rule 13b2-2; and (iv) aiding and abetting Carnegie's violations of Exchange Act Sections 12(g), 13(a), 13(b)(2)(A), and 13(b)(2)(B), and Exchange Act Rules 12b-20 and 13a-1. Gable and Pearl were also charged with violating the antifraud provisions of Securities Act Section 17(a) and the stock ownership disclosure requirements of Exchange Act Section 16(a) and Exchange Act Rules 16a-2 and 16a-3;
- Greene was charged with failing to implement internal accounting controls in violation of Exchange Act Section 13(b)(5), and with aiding and abetting Carnegie's violation of Exchange Act Section 13(b)(2)(B); and
- The Caruthers were each charged with violating the stock ownership disclosure provisions of Exchange Act Sections 13(d) and 16(a) and Exchange Act Rules 13d-1, 13d-2, 16a-2, and 16a-3, and, in their capacity as relief defendants, with receiving unjust enrichment as a result of the fraud perpetrated by the other defendants.
Without admitting or denying the allegations in the Commission's complaint, all of the defendants except Gable have agreed to settle the Commission's charges by consenting to the entry of final judgments that, if approved by the Court, would permanently enjoin them from further violations of the securities laws. In addition, Farkas and Pearl have consented to be permanently barred from serving as officers or directors of any public company. The Court judgments would not impose civil penalties or disgorgement obligations on the settling individual defendants and relief defendants based on the sworn representations each of them made to the Commission regarding his or her financial condition. With regard to Gable, the Commission's complaint seeks the entry of a final judgment permanently enjoining him from future violations of the federal securities laws, permanently barring him from serving as an officer or director of a public company, and ordering him to pay disgorgement (with prejudgment interest) and civil penalties.
In a related administrative proceeding instituted on July 14, 2003, the Commission issued an order revoking Carnegie's stock registration pursuant to Exchange Act Section 12(j) based on the company's failure to file with the Commission any periodic reports required by Exchange Act Section 13(a) and Rules 13a-1 and 13a-13 for reporting periods after September 30, 2001. See In the Matter of Carnegie International Corporation, Admin. Proc. 3-11177 (July 14, 2003). In addition, Pearl has consented to the Commission's entry of an order, pursuant to Rule 102(e) of the Commission's Rules of Practice, that will deny him the privilege of appearing or practicing before the Commission as an attorney following the federal court's anticipated entry of an injunction against him.
Last Reviewed or Updated: June 27, 2023