Lee Cole, Linden Boyne, Kevin B. Donovan and Timothy Quintanilla
U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 22529 / November 9, 2012
Accounting and Auditing Enforcement Release No. 3423 / November 9, 2012
Securities and Exchange Commission v. Lee Cole, Linden Boyne, Kevin B. Donovan and Timothy Quintanilla, Civil Action No. No. 12 Civ. 8167 (RJS) (S.D.N.Y.)
SEC Charges Former Officers and Auditor of Electronic Game Card, Inc. with Fraud
The Securities and Exchange Commission yesterday charged three executives with repeatedly lying to investors about the operations and financial condition of an Irvine, Calif.-based company that purported to sell credit card-size electronic games. The SEC also charged the company's independent auditor with facilitating the scheme.
The SEC Complaint alleges that chief executive officer Lee Cole and chief financial officer Linden Boyne orchestrated a scheme in which Electronic Game Card Inc. (EGMI) enticed investors by claiming to have millions of dollars in annual revenue, hold millions of dollars in investments, and own an off-shore bank account worth more than $10 million. In reality, many of the company's purported contracts were phony, the purported investments were merely in entities affiliated with Cole or Boyne, and the bank account did not exist. As a result of EGMI's false claims, the company's outstanding common stock was once valued as high as $150 million. EGMI is now bankrupt and its stock is worthless.
The SEC charged the company's outside auditor - certified public accountant Timothy Quintanilla - with repeatedly issuing clean audit opinions about EGMI based on reckless and deficient audit work. Also charged is Kevin Donovan, who later replaced Cole as CEO and ignored many red flags about the accuracy of the company's public statements and the integrity of Cole and Boyne. He provided false information during conference calls with analysts and investors.
The SEC's Complaint alleges that, from 2007 to 2009, EGMI repeatedly reported non-existent revenues and assets, misrepresented its business operations, and failed to disclose related-party transactions. Those misrepresentations and others like them were just part of a scheme that Cole and Boyne orchestrated through EGMI to reap approximately $12 million in unlawful gains. While they were making material misrepresentations to inflate EGMI's stock price, Cole and Boyne also secretly funneled millions of shares of EGMI stock to entities based in Gibraltar that they secretly controlled. They directed the Gibraltar entities to sell the shares, and proceeds of those sales were transferred to people or entities associated with Cole and Boyne or to EGMI itself. Cole and Boyne bolstered their lies by providing falsified documents to the company's outside auditors.
The SEC Complaint alleges that, as EGMI's engagement partner, Quintanilla and the public accounting firm Mendoza Berger & Co. LLP issued clean audit opinions for EGMI's year-end financial statements for 2006, 2007, and 2008, even though those statements were riddled with material misstatements and omissions. Mendoza Berger and Quintanilla knowingly or recklessly misrepresented that the firm had conducted audits of EGMI's financial statements "in accordance with the standards of the Public Company Accounting Oversight Board (United States)." Mendoza Berger's opinion stated that EGMI's financial statements "present[ed] fairly, in all material respects, the financial position" of EGMI. In fact, Mendoza Berger had not audited critical aspects of EGMI's financial statements, and its work did not conform to the standards of the Public Company Accounting Oversight Board (PCAOB). Quintanilla had no meaningful basis to have Mendoza Berger issue an opinion on EGMI's financial statements.
The SEC Complaint further alleges that, shortly after Donovan became CEO, he was notified of many red flags related to the company's public statements about its operations, finances, and share count. Donovan violated the antifraud provisions of the securities laws when he led several public conference calls with securities analysts and investors in 2009, and knowingly or recklessly relayed false financial information about the company that had been provided to him by Cole and Boyne.
The SEC's action was filed in the U.S. District Court for the Southern District of New York, alleging violations by Cole and Boyne of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933; Sections 10(b), 13(b)(5), 13(d), and 16(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 13a-14, 13b2-1, 13b2-2, 13d-1, 13d-2, 16a-2, and 16a-3 thereunder; and Section 304 of the Sarbanes-Oxley Act of 2002. The SEC action also alleges that Cole and Boyne are liable as control persons and for aiding and abetting violations of Sections 10(b), 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. The SEC action alleges violations by Donovan of Sections 17(a)(1) and 17(a)(3) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. In addition, the SEC action alleges violations by Quintanilla of Section 17(a) of the Securities Act and Sections 10(b), 10A(a)(1), and 10A(b)(1) of the Exchange Act and Rule 10b-5 thereunder. The action against Quintanilla also charges him with aiding and abetting violations of Sections 10(b), 10A(a)(1), and 10A(b)(1) of the Exchange Act and Rule 10b-5 thereunder.
The complaint seeks, among other things, a final judgment ordering Cole, Boyne, Donovan, and Quintanilla to pay financial penalties and permanently enjoining them from future violations of the securities laws; enjoining Cole, Boyne, and Donovan from serving as officers and directors of public companies and from participating in penny stock offerings; and ordering Cole, Boyne, and Quintanilla to disgorge their ill-gotten gains with prejudgment interest.
The New York Regional Office's Michael Paley, Stephen Larson, James Addison, Gwen Licardo and Aaron Arnzen conducted the investigation. The SEC thanks the Public Company Accounting Oversight Board for its assistance in this matter.
