U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19627 / March 29, 2006
Accounting and Auditing Enforcement Release No. 2401 / March 29, 2006
SEC v. Fernando J. Espuelas et al., Civil Action No. 06 CV 2435 (RJH) (S.D.N.Y. filed March 29, 2006)
SEC Charges Eight Former StarMedia Network Executives for Roles in Company's Overstatement of Revenue
The U.S. Securities and Exchange Commission filed a civil injunctive action today in the United States District Court for the Southern District of New York charging six former executives of StarMedia Network, Inc. with securities fraud and two former executives with other securities law violations. StarMedia was an Internet portal directed at Spanish and Portuguese speaking communities in the United States and Latin America. It was based in New York City, and its common stock was traded on the Nasdaq National Market. On February 1, 2002, Nasdaq delisted StarMedia's common stock. In 2002, the company undertook major asset dispositions, and in December 2003, it filed for bankruptcy protection.
The Commission's complaint alleges that, in 2000 and the first two quarters of 2001, StarMedia utilized three types of transactions to inflate its revenue by over $18 million in order to meet its revenue projections and secure additional financing for its operations. StarMedia improperly recognized revenue from barter transactions, from round trip transactions, and from sales transactions with undisclosed contingencies or side agreements. The complaint further alleges that in May 2001, StarMedia used its inflated revenue figures to persuade corporate investors to purchase $35 million in convertible preferred shares.
In addition, the complaint alleges that, as a result of the improper transactions, StarMedia made materially false disclosures and financial statements in its annual Report on Form 10-K for its fiscal year 2000 and its quarterly Reports on Form 10-Q for the first two quarters of 2001. StarMedia officers also made false statements to the company's investors and to its independent auditor. The complaint further alleges that Jack Chen, former President of the company, avoided losses by selling StarMedia common stock while in possession of material, nonpublic information regarding the undisclosed fraud.
The Commission's complaint alleges the following violations against the named defendants and seeks the following relief:
- Fernando Espuelas, age 39, former CEO and Chairman of the Board, violated Section 17(a) of the Securities Act of 1933 (Securities Act), Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act), and Exchange Act Rules 10b-5 and 13b2-1, and aided and abetted violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, and 13a-13. The complaint seeks a permanent injunction, civil penalties, and an officer and director bar.
- Jack C. Chen, age 39, former President, violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Exchange Act Rules 10b-5, 13b2-1, and 13b2-2, and aided and abetted violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, and 3a-13. The complaint seeks a permanent injunction; disgorgement of his losses avoided from trading in StarMedia securities, with prejudgment interest thereon; civil penalties; and an officer and director bar.
- Steven Heller, age 40, former CFO, violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Exchange Act Rules 10b-5 and 13b2-2, and aided and abetted violations of Sections 13(a) and13(b)(2)(A) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, and13a-13. Heller, without admitting or denying the allegations in the complaint, has agreed to entry of a proposed final judgment: (i) permanently enjoining him from future violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Exchange Act Rules 10b-5 and 13b2-2, and from aiding and abetting violations of Sections 13(a) and13(b)(2)(A) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, and13a-13; (ii) ordering him to pay a civil penalty in the amount of $100,000; and (iii) prohibiting him from serving as an officer or director of any public company for a period of five years.
- Betsy Scolnik, age 40, former Senior Vice President for Strategic Development, violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Exchange Act Rules 10b-5 and 13b2-1, and aided and abetted violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, and 13a-13. The complaint seeks a permanent injunction, civil penalties, and an officer and director bar.
- Adriana Kampfner, age 33, former Senior Vice President, Global Sales and president of StarMedia de Mexico, violated Exchange Act Rule 13b2-1 and aided and abetted violations of Sections 10(b), 13(a), and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 10b-5, 12b-20, 13a-1, and 13a-13. The complaint seeks a permanent injunction, civil penalties, and an officer and director bar.
- Walther M¶ller, age 45, former President of AdNet, a StarMedia subsidiary, violated Exchange Act Rule 13b2-1 and aided and abetted violations of Sections 10(b), 13(a), and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 10b 5, 12b-20, 13a-1, and 13a-13. The complaint seeks a permanent injunction.
- Peter Morales, age 50, former Controller and Vice President, Finance, violated Exchange Act Rules 13b2-1 and 13b2-2 and aided and abetted violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, and 13a-13. The complaint seeks a permanent injunction and civil penalties.
- Peter Blacker, age 35, former Senior Vice President, Global Sales Strategy & Partnerships, violated Exchange Act Rule 13b2-1 and aided and abetted violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, and 13a-13. The complaint seeks a permanent injunction and civil penalties.
The Commission's complaint alleges that each of the defendants planned the fraud, played important roles in its implementation, or both, thereby violating the federal securities laws, as set forth above. Finally, defendant Heller, without admitting or denying the allegations in the complaint, has agreed to settle the Commission's charges by consenting to a permanent injunction, a $100,000 civil penalty, and a prohibition from serving as an officer or director of any public company for a period of five years.
