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HELANE L. MORRISON (CA Bar No. 127752)
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SECURITIES AND EXCHANGE COMMISSION,
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Civil Action No. COMPLAINT FOR PERMANENT INJUNCTION AND LEGAL AND OTHER EQUITABLE RELIEF DEMAND FOR JURY TRIAL |
Plaintiff Securities and Exchange Commission (the "Commission") alleges:
1. This enforcement action arises from an egregious securities fraud by two former executives, defendants Oliver Hilsenrath ("Hilsenrath") and David S. Klarman ("Klarman"), of a publicly traded corporation, U.S. Wireless Corporation ("USW"). From August 1997 to January 2000, Hilsenrath and Klarman had USW transfer common stock worth approximately $3.2 million and cash totaling approximately $428,000 to several offshore entities that they secretly owned and controlled. The transfers were part of a scheme by Hilsenrath and Klarman to extract assets from USW without providing any consideration in return.
2. Under the direction of Hilsenrath and Klarman, the cash and stock transfers were originally recorded in USW's books and financial statements as compensation for services or as the sale of stock for valid consideration. In early 2001, USW's Board of Directors received information challenging the validity of those transfers. Once the unauthorized and illegal character of the transfers was recognized, USW restated its financial results for fiscal 2000 to increase its annual net loss from $11.4 million to $17.7 million, or by 35%. In essence, USW treated the improper cash and stock transfers as the embezzlement of company assets by Hilsenrath and Klarman.
3. By way of this action, the Commission seeks an order enjoining Hilsenrath and Klarman from future violations of anti-fraud and other provisions of the federal securities laws, barring them from serving as directors or officers of companies reporting to the Commission, requiring them to disgorge their ill-gotten gains, and requiring them to pay civil money penalties.
4. The Commission brings this action pursuant to Sections 20(b) and 20(c) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. §§ 77t(b), 77t(c)] and Sections 21(d) and 21(e) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §§ 78u(d), 78u(e)]. This Court has jurisdiction over this action pursuant to Sections 20(b), 20(c), and 22(a) of the Securities Act [15 U.S.C. §§ 77t(b), 77t(c), 77v(a)] and Sections 21(e) and 27 of the Exchange Act [15 U.S.C. §§ 78u(e) and 78aa].
5. Hilsenrath and Klarman, directly or indirectly, have each made use of the means and instrumentalities of interstate commerce, of the mails, or of the facilities of a national securities exchange, in connection with the acts, practices, and courses of business and transactions alleged herein.
6. This district is an appropriate venue for this action under Section 22(a) of the Securities Act [15 U.S.C. § 77v(a)] and Section 27 of the Exchange Act [15 U.S.C. § 78aa]. Certain of the transactions, acts, practices and courses of business constituting the violations alleged herein occurred within the Northern District of California. Assignment to the San Francisco Division is appropriate because much of the relevant conduct took place in Contra Costa County.
7. Oliver Hilsenrath, age 46, was Chief Executive Officer, Chairman of the Board and a Director of USW until he was terminated in May 2001. Prior to assuming the title of Chairman, he served as CEO and Director beginning in 1996, and had also used the titles President, Principal Financial Officer, and Principal Accounting Officer. A former resident of California, Hilsenrath is a citizen of Israel, where he currently resides.
8. David S. Klarman, age 39, was Vice President, General Counsel and Secretary of USW until he resigned in March 2001. Prior to assuming the title of Vice President, he served as General Counsel and Secretary beginning in 1996. Klarman was admitted to practice law in the State of California in November 1997. Klarman currently resides in East Hampton, New York.
9. U.S. Wireless Corporation came into existence via a reverse merger in 1996. USW is a Delaware corporation headquartered in San Ramon, California. USW developed systems designed to enable wireless telecommunications carriers to provide location-based services (such as electronic highway signs that flash traffic warnings). It has never had significant revenues and has always operated at a loss. At all relevant times, USW's common stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act and was quoted on the Nasdaq National Market.
10. Matheson Trust Co. ("Matheson") is a corporate management services company in Jersey, which is part of the Channel Islands. At a client's request and for a fee, Matheson will form a corporate entity. Under a written management agreement with the client, Matheson and corporate directors it provides then manage the entity per the client's instructions.
11. Acting through Matheson, Klarman formed Biskara Limited in July 1996, and in June 1997 he renamed it "KS Legal Consultants Limited." This entity, hereinafter "KS Legal," is incorporated and registered in the British Virgin Islands. At all times, Klarman was KS Legal's beneficial owner and controlled KS Legal through a management agreement with Matheson and otherwise.
12. On August 1, 1998, Klarman signed a consulting agreement with KS Legal on behalf of USW. Under the agreement, KS Legal purportedly would provide USW with "legal services regarding the companies [sic] overseas operations." From September 1998 through January 2000, Hilsenrath directed USW to wire transfer nearly $5,000 per month to KS Legal's bank and brokerage accounts, for a total of approximately $80,000. The consulting agreement also granted KS Legal an option to purchase 150,000 shares of USW common stock from the company at $2.00 per share, for "legal services regarding the companies [sic] overseas operations." In July 1999, KS Legal exercised the option, resulting in USW issuing 88,016 shares of common stock to KS Legal.
13. KS Legal never provided any services under the consulting agreement or any other consideration to USW in exchange for the cash, option, and stock it received.
14. Acting through Matheson, Hilsenrath formed Telecom Associates, Ltd. ("Telecom") in July 1997. Telecom is incorporated and registered in the British Virgin Islands. At all times, Hilsenrath was Telecom's beneficial owner and controlled Telecom through a management agreement with Matheson and otherwise.
15. From August 1997 through January 2000, Hilsenrath directed USW to wire transfer $12,000 per month to Telecom, for a total of $348,000. At Hilsenrath's direction, these disbursements were recorded in USW's books and records as being for "outside consulting."
16. Telecom never provided any consulting services or other consideration to USW in exchange for the $348,000 it received.
17. Acting through Matheson, Hilsenrath formed Aida Limited in May 1996, and he renamed it "Borazon Limited" in approximately July 1999. This entity, hereinafter "Borazon," is incorporated and registered in the British Virgin Islands. At all times, Hilsenrath was Borazon's beneficial owner and controlled Borazon through a management agreement with Matheson and otherwise.
18. On August 4, 1999, USW issued 43,300 shares of common stock to Borazon under USW's 1999 employee private placement. Klarman directed this stock issuance, which violated a directive from USW's Board of Directors limiting sales of stock under the private placement to USW employees and management.
19. Borazon did not provide USW with any consideration for the stock it received.
20. Acting through Matheson, Klarman formed Silicon Valley Investment Partners, Inc. ("SVIP") in June 1999. SVIP is incorporated and registered in the British Virgin Islands. At all times, Klarman was SVIP's beneficial owner and controlled SVIP through a management agreement with Matheson and otherwise.
21. On August 4, 1999, USW issued 43,300 shares of common stock to SVIP under USW's 1999 employee private placement. Klarman directed this stock issuance, which violated a directive from USW's Board of Directors limiting sales of stock under the private placement to USW employees and management.
22. SVIP did not provide USW with any consideration for the stock it received.
23. Acting through Matheson, Klarman formed Craiglands, Ltd. ("Craiglands") in May 1996. Craiglands, which was later renamed "IDS Telecom Investment Group," is incorporated and registered in the British Virgin Islands. At all times, Klarman was Craiglands's beneficial owner and controlled Craiglands through a management agreement with Matheson and otherwise.
24. On May 1, 1999, Hilsenrath signed an option agreement with Craiglands on behalf of USW. The agreement granted Craiglands an option to purchase 150,000 shares of USW's common stock at $2.50 per share in exchange for investment banking services. In December 1999, Craiglands exercised the option, causing USW to issue Craiglands 130,520 shares of common stock.
25. On May 17, 1999, USW, upon Klarman's direction, issued 149,425 shares of common stock to Craiglands. Klarman represented to USW and its auditors that this transfer was related to investment banking services Craiglands provided in connection with a 1999 financing.
26. Craiglands never provided any investment banking services or any other consideration to USW in exchange for the option and stock it received.
27. On June 25, 1997, Hilsenrath signed a Form S-3 registration statement, and Klarman signed a supporting legal opinion letter. The registration statement (including the letter) was filed with the Commission and declared effective on September 26, 1997. The purpose of the registration statement was to allow certain parties to sell USW stock in a registered offering. Among the proposed sellers were KS Legal (then named Biskara Limited) and Borazon (then named Aida Limited).
28. The registration statement stated that "no officer or director of" USW was "affiliated with" KS Legal or Borazon. Klarman's opinion letter stated that shares which proposed sellers would obtain from USW by exercising options would be "legally issued" by USW. As Hilsenrath and Klarman knew or were reckless in not knowing, these statements were false because (i) Klarman controlled KS Legal and Hilsenrath controlled Borazon, and (ii) Hilsenrath and Klarman planned to obtain from USW by fraud the shares that KS Legal and Borazon proposed to sell.
29. Hilsenrath signed each of the periodic reports (Forms 10-KSB and Forms 10-QSB) containing financial statements that USW filed with the Commission from the second quarter of USW's fiscal year 1998 through the end of its fiscal year 2000 (March 31, 2000). Klarman drafted or reviewed the same reports before filing. During the period when these reports were drafted, signed, and filed, Hilsenrath and Klarman were the only USW officers responsible for the company's accounting and financial reporting.
30. Hilsenrath and Klarman intentionally or recklessly omitted from the periodic reports that USW received no consideration for the cash and securities it transferred to KS Legal, Telecom, Borazon, SVIP, and Craiglands (collectively "the BVI entities") in the transfers described above. Hilsenrath and Klarman also intentionally or recklessly omitted from the periodic reports that the transfers involved related parties, i.e., that Hilsenrath and Klarman owned and controlled the BVI entities.
31. The periodic reports included a Form 10-KSB for USW's fiscal year ended March 31, 2000. It stated that Klarman (among others) had obtained no common stock by exercising options during the year. As Hilsenrath and Klarman knew or were reckless in not knowing, this statement was false because as described above, Klarman, through KS Legal and Craiglands, had exercised options and thereby obtained 218,536 shares of USW common stock.
32. During 1997 through 2000, Hilsenrath and Klarman intentionally caused USW's books and records to contain numerous entries that falsely recorded the transfers to the BVI entities as arms-length transfers in exchange for valid consideration.
33. During the fiscal year 1999 and fiscal year 2000 audits of USW, Hilsenrath and Klarman signed letters to USW's external auditors which stated that USW had properly recorded "all material transactions," that it had properly recorded and disclosed "all related-party transactions," and that there had "been no fraud" involving management or others that could have a material effect on USW's financial statements. Hilsenrath and Klarman knew or were reckless in not knowing that these representations were false, because they had improperly recorded the transfers to the BVI entities in USW's records and financial statements as transfers to unrelated parties in exchange for valid consideration.
34. During February through May 2001, USW's Board of Directors discovered that USW had transferred cash and securities to the BVI entities and had no record of receiving consideration in return. The board also came to believe that Hilsenrath and Klarman likely had an interest in the BVI entities. By May 2001, the board had sought and accepted Klarman's resignation and had terminated Hilsenrath.
35. Thereafter, in July 2001, USW restated the financial results contained in each of the periodic reports it had previously filed with the Commission for the fiscal year ended March 31, 2000. In restating, USW reclassified transfers to the BVI entities as embezzlements and disclosed them as related-party transactions. USW recorded a loss of approximately $3.2 million associated with unauthorized stock issuances to the BVI entities. It also recorded a loss of approximately $2.1 million associated with an unauthorized stock issuance to another entity that it believed was affiliated with Hilsenrath and Klarman, and recorded other adjustments of approximately $938,000. Overall, the restatement increased USW's losses for the fiscal year by approximately $6.3 million, from $11.4 million to $17.7 million. This amounted to a 35.6% increase in loss for USW.
36. In August 2001, USW filed a voluntary bankruptcy petition, and in December 2001, USW sold substantially all of its assets as part of the bankruptcy proceedings. Today, USW exists essentially as a shell and conducts no substantial operations.
37. The Commission realleges and incorporates by reference Paragraphs 1 through 36 above.
38. During the relevant period, Hilsenrath and Klarman, directly or indirectly, in the offer or sale of securities, by the use of means or instruments of transportation or communication in interstate commerce or by the use of the mails:
employed devices, schemes, or artifices to defraud, with scienter;
obtained money or property by means of untrue statements of material fact or omissions to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and
engaged in transactions, practices, and courses of business which operated or would operate as a fraud or deceit upon the purchaser.
39. Hilsenrath and Klarman have violated and, unless restrained and enjoined, will continue to violate Sections 17(a)(1), 17(a)(2) and 17(a)(3) of the Securities Act [15 U.S.C. §§77q(a)(1), 77q(a)(2) and 77q(a)(3)].
40. The Commission realleges and incorporates by reference Paragraphs 1 through 36 above.
41. During the relevant period, Hilsenrath and Klarman, directly or indirectly, in connection with the purchase or sale of securities, by the use of means or instrumentalities of interstate commerce, or of the mails, with scienter:
employed devices, schemes, or artifices to defraud;
made untrue statements of material facts or omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; and
engaged in acts, practices, or courses of business which operated or would operate as a fraud or deceit upon other persons, including purchasers and sellers of securities.
42. Hilsenrath and Klarman have violated and, unless restrained and enjoined, will continue to violate Section 10(b) of the Exchange Act [15 U.S.C. §78j(b)] and Rule 10b-5 [17 C.F.R. §240.10b-5].
43. The Commission realleges and incorporates by reference Paragraphs 1 through 36 above.
44. By engaging in the conduct described above, Hilsenrath and Klarman knowingly falsified USW's books, records, and accounts.
45. Hilsenrath and Klarman have violated and, unless restrained and enjoined, will continue to violate Section 13(b)(5) of the Exchange Act [15 U.S.C. §78m(b)(5)] and Rule 13b2-1 [17 C.F.R. §240.13b2-1].
46. The Commission realleges and incorporates by reference Paragraphs 1 through 36 above.
47. USW filed with the Commission annual and quarterly reports on Form 10-KSB and Form 10-QSB that contained untrue statements of material fact and omitted to state material information required to be stated therein or necessary in order to make the required statements made, in the light of the circumstances under which they were made, not misleading, in violation of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder.
48. By engaging in the conduct described above, Hilsenrath and Klarman knowingly provided substantial assistance to USW in its violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder, and therefore are liable as aiders and abettors pursuant to Section 20(e) of the Exchange Act [15 U.S.C. §78t(e)].
49. Hilsenrath and Klarman have aided and abetted and unless restrained and enjoined will continue to aid and abet violations of Section 13(a) of the Exchange Act [15 U.S.C. §78m(a)] and Rules 12b-20 [17 C.F.R. §240.12b-20], 13a-1 [17 C.F.R. §240.13a-1], and 13a-13 [17 C.F.R. §240.13a-13].
50. The Commission realleges and incorporates by reference Paragraphs 1 through 36 above.
51. USW failed to make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflected the transactions and dispositions of the assets of USW, in violation of Section 13(b)(2)(A) of the Exchange Act.
52. By engaging in the conduct described above, Hilsenrath and Klarman knowingly provided substantial assistance to USW in its violations of Section 13(b)(2)(A) of the Exchange Act, and therefore are liable as aiders and abettors pursuant to Section 20(e) of the Exchange Act [15 U.S.C. §78t(e)].
53. Hilsenrath and Klarman have aided and abetted and unless restrained and enjoined will continue to aid and abet violations of Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. §78m(b)(2)(A)].
54. The Commission realleges and incorporates by reference Paragraphs 1 through 36 above.
55. By engaging in the conduct described above, and in connection with the audits or examinations of the financial statements of USW and the preparation and filing of statements and reports with the Commission, Hilsenrath and Klarman, directly or indirectly, made or caused to be made materially false or misleading statements to accountants and omitted to state, or caused another person to omit to state to accountants, material facts necessary in order to make statements made to the accountants, in light of the circumstances under which such statements were made, not misleading.
56. Hilsenrath and Klarman have violated and, unless restrained and enjoined, will continue to violate Rule 13b2-2 [17 C.F.R. §240.13b2-2].
WHEREFORE, the Commission respectfully requests that this Court:
Permanently enjoin Hilsenrath and Klarman from violating and/or aiding and abetting violations of Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(5) of the Exchange Act, and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13b2-1, and 13b2-2.
Permanently enjoin Hilsenrath and Klarman from serving as an officer or director of any entity having a class of securities registered with the Commission pursuant to Section 12 of the Exchange Act [15 U.S.C. §78l] or that is required to file reports pursuant to Section 15(d) of the Exchange Act [15 U.S.C. §78o(d)].
Order Hilsenrath and Klarman to disgorge any wrongfully obtained benefits, including prejudgment interest thereon.
Order Hilsenrath and Klarman to pay civil penalties.
Retain jurisdiction of this action in accordance with the principles of equity and the Federal Rules of Civil Procedure in order to implement and carry out the terms of all orders and decrees that may be entered, or to entertain any suitable application or motion for additional relief within the jurisdiction of this Court.
Grant such other and further relief as this Court may determine to be just and necessary.
| Dated: July 14, 2003 | Respectfully submitted,
_____________________ |
Plaintiff hereby demands a trial by jury.
| Dated: July 14, 2003 | Respectfully submitted,
_____________________ |
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