SEC VS ALAN V.PHAN & CO....
UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA WESTERN DIVISION
SECURITIES AND EXCHANGE COMMISSION,
VS
Plaintiff,
THE HARTCOURT COMPANIES,
INC., ALAN V. PHAN, and
YONGZHI YANG,
Defendants.
Case No. CV 03-3698
COMPLAINT FOR VIOLATIONS
OF THE FEDERAL SECURITIES
LAWS
Plaintiff Securities and Exchange Commission ("Commission") alleges as follows:
JURISDICTION AND VENUE.
1. This Court has jurisdiction over this action pursuant to Sections 20(b), 20(d)(1) and 22(a) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. 77t(b), 77t(d)(1) & 77v(a), and Sections 21(d)(I), 21(d)(3)(A), 21(e) and 27 of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. 78u(d)(1), 78u(d)(3)(A), 78u(e) & 78aa. Defendants have, directly or indirectly, made use of the means or instrumentality's of interstate commerce, of the maiIs, or of the facilities of a national securities exchange, in connection with the transactions, acts, practices and courses of business alleged in this Complaint.
2. Venue is proper in this district pursuant to 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, because certain of the transactions, acts, practices and courses of conduct constituting violations of the federal securities laws occurred within this district and because certain of the defendants reside and/or transact business in this district.
SUMMARY
3. This case involves a fraudulent scheme by defendants to raise money for The Hartcourt Companies Inc. ("Hartcourt") by improperly issuing shares using a Form S-8 registration statement, and issuing false and misleading press releases. The Commission's Form S-8 registration statement permits a company to register securities with the Commission to be issued to employees, including consultants and advisers, as compensation if they provide "bona fide services" to the company, and the services "are not in connection with the offer or sale of securities in a capital-raising transaction." Hartcourt improperly issued shares using a Form S-8 registration statement to raise capital for its investments, and issued false and misleading press releases to inflate the price of its stock artificially while the Form S-8 shares were being sold. By this conduct, defendants Hartcourt and Phan avoided the disclosure requirements associated with registering securities under Section 5 of the Securities Act.
4. From September 1999 to November 1999, Hartcourt obtained over $800,000 by improperly using a Form S-8 registration statement to issue one million shares of Hartcourt stock to Yongzhi Yang's ("Yang") wife, purportedly to compensate her for services provided to Hartcourt.
5. In fact, Hartcourt's CEO, Alan Phan ("Phan"), with. Yang's assistance, used the majority of the shares issued under the Form S-8 registration statement to
raise capital for Hartcourt. Phan arranged the sale of the majority of the stock and caused the proceeds of the sales, with Yang's assistance, to be used for Hartcourt.
6. In addition, as part of this scheme, Phan caused Hartcourt to issue a series of false and misleading press releases while Yang was selling stock, directly and indirectly, into the market.
7. Defendants Hartcourt, Phan and Yang, by engaging in the above conduct, have violated the registration provisions of Sections 5(a) and 5(c) of the Securities Act, 15 U.S.C 77e(a) and 77e(c), and the antifraud provisions of Section 17(a) of the Securities Act, 15 U.S.C. 77q(a), and Section 10(b) of the Exchange Act, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5. The Commission requests permanent injunctions and civil penalties against all defendants, disgorgement and prejudgment interest against Hartcourt and Yang, and an officer and director bar against Phan.
THE DEFENDANTS
8. The Hartcourt Companies, Inc. ("Hartcourt") is a Utah corporation headquartered in Long Beach, California. Shares of Hartcourt common stock are quoted on the OTC Bulletin Board.
9. Alan V. Phan ("Phan"), age 57, resides in Long Beach, California. Phan is the former Chairman, CEO and President of Hartcourt. Phan asserted his Fifth Amendment privilege against self-incrimination in response to questions about the Form S-8.
10. Yongzhi Yang ("Yang"), age 45, resides in Los Angeles, California. Yang, a former assistant professor of mathematics at Alabama State University, is currently in the computer consulting business.
RELATED PARTIES
11. Beijing UAC Stock Trading Online Co., Ltd. ("Stock Trading"), a Chinese company, purportedly operates a nationwide online securities trading network, known as the UAC 162 Network, which connects investors with their stock brokerage office via a nationwide network in China that is owned by China Telecom. Stock Trading develops the software that enables investors to connect with their brokerage office by dialing a local number.
12. Beijing UAE Stock Exchange Online Co., Ltd. ("UAC") is purportedly a joint venture company formed by Stock Trading and Hartcourt. Stock Trading was to transfer all of its assets to UAC, which would then operate the online trading network.
13. Financial Telecom Limited ("FTL"), a Hong Kong company, is purportedly a financial data bank providing real-time stock quotes and financial information for Hong Kong listed companies as well as information on other international stock exchanges in the U.S. and Europe to institutional and retail investors.
BACKGROUND
14. In 1994, Phan merged a private company he owned, Hartcourt Investments, with Stardust, Inc., a publicly traded shell company, and renamed the
company The Hartcourt Companies, Inc.
15. From 1994 to at least 2000, Phan was the Chairman, CEO and President of Hartcourt.
16. From March to May 1999, Phan purportedly changed Hartcourt's business focus to an Internet-related business and attempted to merge Hartcourt
with a Chinese Internet company as part of this new business focus. The merger failed.
17. In mid-1999, Hartcourt entered into an agreement with Stock Trading to form UAC as a joint venture under Chinese law. Under this agreement, for a
35% interest in UAC, Hartcourt agreed to invest $1 million in UAC, pay $1.7 million to Stock Trading's owner, and transfer one million Hartcourt common shares to UAC. Pursuant to the agreement, Stock Trading was to transfer all of its assets to UAC, which would then operate the online trading network.
18. In August 1999, Hartcourt entered into a stock purchase agreement with FTL. Hartcourt agreed to purchase 58.53% of FTL's common stock for $3 million, payable 50% in cash and 50% in Hartcourt common shares. Hartcourt was required to make three $500,000 payments to FTL on or before September 20, 1999, October 20, 1999, and November 20, 1999.
19. Phan and Yang participated in a scheme to finance the UAC and FTL transactions, among other things, through issuance of shares under a fraudulent Form S-8 registration statement.
THE FRAUDULENT SCHEME
A. One Million Hartcourt Shares Are Issued to Yang's Wife
Using a Form S-8 Registration Statement
20. Phan, with Yang's assistance, improperly used a Form S-8 registration statement (the "Form S-8") to raise capital for Hartcourt.
21. On or about September 7, 1999, Hartcourt filed with the Commission a Form S-8, registering 2,137,623 shares that Hartcourt issued to several consultants and advisers, including Yang's wife, ostensibly to compensate them for services. Phan signed the Form S-8. Attached as an exhibit to the Form S-8 ,vas a document, dated August 23, 1999, entitled: "Fee and Option Agreement with [Yang's Wife], Fee Agreement for Introduction of Services," signed by Phan and by Yang's wife ("Yang Fee Agreement"), which incorporated as an exhibit another document, dated August 23, 1999, entitled: "Option Agreement" ("Yang Option Agreement").
22. The Yang Fee Agreement provided that Yang's wife would search and identify for Hartcourt's potential acquisition different Internet-related businesses and assets, and in return, Hartcourt would compensate Yang's wife through the Yang Option Agreement with an option to purchase up to one m/Ilion (1,000,000) shares of Hartcourt stock at a price of $1.25 per share. Under the terms of the Yang Option Agreement, it could be exercised upon written notice to Hartcourt setting out the number of shares to be purchased, together with payment of the option price.
23. Yang and Phan negotiated and reviewed the Yang Fee Agreement and Yang Option Agreement, attached to the Form S-8 as exhibits, and Yang knew that the exhibits would become part of a public filing. After the documents were filed, Yang accessed and reviewed the Form S-8 over the Internet.
24. Hartcourt issued one million shares under the Form S-8 to Yang's wife, (the "S-8 Shares"). The one million S-8 Shares were deposited by Yang into a brokerage account he held jointly with his wife.
25. In fact, contrary to the stated purpose of the Form S-8, the S-8 Shares were not issued by Hartcourt to compensate Yang's wife for services. Yang's wife had not agreed to search and identify for Hartcourt's potential acquisition Internet related businesses and assets. Yang's wife did not perform any services of any kind for Hartcourt. Rather, file S-8 Shares were used primarily to raise capital for Harcourt.
26. Neither Yang nor Yang's wife paid to Hartcourt the option price before the S-8 Shares were issued, as required under the Yang Option Agreement. Phan caused Hartcourt to issue the one million shares without payment of the option price of $1,250,000 as required under the Yang Option Agreement. After Hartcourt issued the one million shares, Phan told Yang that he would not have to pay the entire option price provided in the Yang Option Agreement. Phan told Yang that the proceeds generated from the sale of the S-8 Shares that were transferred for Hartcourt's benefit would satisfy Yang's payment obligation under the Yang Option Agreement.
B. The Sale of the Hartcourt Shares While Phan Causes Hartcourt to Issue False Press Releases to Support Hartcourt's Stock Price
27. Phan was directly involved in the sale of at least 800,000 of the S-8 Shares, which were sold to raise approximately $819,363 in capital for Hartcourt's
UAC and FTL transactions, among other things. Between September 20, 1999 and November 18, 1999, Yang sold a total of 1,050,000 Hartcourt shares, consisting of the one million S-8 Shares, 20,000 Hartcourt shares yang o~med prior to receiving the S-8 Shares, and 30,000 shares that Yang purchased on the open market between September 2I and October 21, 1999.
28. As part of the scheme to use the S-8 Shares to raise capital for Hartcourt, between September 9, 1999 and November 18, 1999, Phan caused Hartcourt to issue false and misleading press releases that principally concerned Hartcourt% pending UAC and FTL transactions. Hartcourt's stock price rose from $1.27 on September 9, 1999, to a high of $4.50 on November 26, 1999, or a 254% increase.
29. Phan was reviewed and approved all of Hartcourt's press releases issued between September 9, 1999 and November 18, 1999.
30. On September 9, 1999, two days after the Form S-8 was filed, Hartcourt issued a false press release stating that UAC was profitable. In fact, UAC was not profitable as of September 9, 1999. UAC was issued its joint venture license in October 1999 and from that date until December 31, 1999, UAC did not have any sales and incurred a total net loss of $27,755.
31. On September 20, 1999, Yang deposited the one million S-8 Shares into a brokerage account Yang held jointly with his wife, commingling it with 20,000 shares he previously owned.
32. On September 21, Yang purchased 10,000 shares of Hartcourt in the open market at a cost of $9,119.
33. On September 22, 1999, two days after Yang deposited the S-8 Shares into his brokerage account, Hartcourt issued a false press release announcing that Hartcourt's "acquisition of [FTL] was completed as all the payments have been made to the escrow account." After this p/ess release, Harcourt's stock price increased from $0.97 a share to $1.11 a share, a 14.4% increase. In fact, the acquisition of FTL was not complete as of September 22, 1999, and not ail the payments had been made to the escrow account.
34. On September 22, 1999, Yang sold 10,000 shares of Hartcourt for proceeds of $9,479.
35. In mid to late October 1999, at about the time that Hartcourt's October 20, 1999 payment of $500,000 to FTL was due, Phan told Yang to sell the S-8 Shares to raise money for Hartcourt's UAC and FTL acquisitions. In addition to the pending FTL payment, Hartcourt had missed making a payment to UAC pursuant to its contract.
36. On October 21, Yang purchased 20,000 Hartcourt shares on the open market at a cost of $15,319.
37. On or about October 25, 1999, Hartcourt issued another false press release announcing that Hartcourt had "signed a Joint Venture Agreement with Innostar... to establish a nationwide Interact Service Provider (ISP) and IP Phone Service in China." The press release falsely stated that the joint venture would provide high-speed Internet connections using a Chinese satellite and would start operations within four months. The joint venture agreement required a cash contribution by Hartcourt. After this press release, Hartcourt's stock price increased from $0.77 a share to $1.05 a share, a 36.4% increase. In fact, the joint venture did not have any agreement to use a Chinese satellite. In addition, Phan and Hartcourt did not contribute funds as required by the joint venture agreement. Moreover, the Chinese government did not approve the Innostar joint venture.
38. On or about October 26, 1999, Phan directed Hartcourt's attorney to prepare a contract between a promoter and Yang's wife to sell 500,000 shares of the S-8 Shares to the promoter at a 30% discount from the stock price as of the date of the contract.
39. Between October 26 and October 28, 1999, Yang sold 20,000 shares of Hartcourt in the open market. Yang received proceeds of approximately $21,634 from the sale of these shares. Also on October 28, I999, Yang transferred 50,000 shares to a Chinese national who was providing services to Yang in connection with Hartcourt's transaction with Innostar. Hartcourt's stock closed at $1.10 per share on October 28, 1999, so that the value of the stock at the time of the transfer was approximately $55,000.
40. On October 30, 1999, Hartcourt issued a press release falsely announcing, among other things, that UAC's "total revenues, excluding the TV set-top box users segment, are projected to exceed $40 million by 2004." After this press release, the price of Hartcourt's stock increased from $1.11 a share to $1.56 a share, a 40.5% increase. In fact, as of October 30, 1999, UAC's total revenues were no longer projected to exceed $40 million by 2004 because of slow sales.
41. On or before November 1, 1999, Phan instructed Yang to transfer 500,000 of the S-8 Shares to the promoter's brokerage account, which Yang did on November 1. The promoter sold these shares on November 1 and 2, 1999, and wired $381,500 to Yang's brokerage account. On November 5, 1999, at Phan's direction, Yang wired $381,500 to UAC's bank in Beijing, China, for the benefit of Hartcourt.
42. On November 1, 1999, Yang sold 20,000 shares of Hartcourt stock in the open market for proceeds of $30,279.
43. On November 3, 1999, at Phan's direction, Yang transferred 300,000 of the S-8 Shares to the promoter's brokerage account. The promoter sold the shares on November 4, 1999. On November 5, 1999, the promoter wired $301,875 to Yang's brokerage account. On November 15, I999, at Phan's direction, Yang wired $301,875 to an FTL bank account, for the benefit of Hartcourt.
44. On or before November 4, 1999, Phan instructed Yang to transfer 36,400 of the S-8 Shares to a Hartcourt creditor, which Yang did on November 4,
1999. Hartcourt's stock closed at $I.50 per share on November 4, 1999, so that the value of the 36,400 shares at the time of the transfer was $54,600.
45. On November 15, 1999, Hartcourt issued another false press release announcing that "[T]he [Innostar] operation will utilize a bi-directional KU bands of a Chinese satellite to connect high-density buildings, offices, colleges, and hotels in China." After this press release, Hartcourt's stock price rose from $2.56 a share to $4.03 a share, a 57.4% increase. In fact, Innostar did not own or have permission to use a Chinese satellite.
46. Between November 15 and 19, 1999, Yang sold 32,600 Hartcourt shares for proceeds of $96,261. Yang transferred $ 81,388 to UAC.
47. On November 18, 1999, while Yang was selling shares, Hartcourt issued another false press release announcing that Hartcourt, UAC, and FTL had agreed to be part of a new company, Sinobull.com, and that Sinobull.com was "finalizing an underwriting agreement for an IPO with a major investment banking firm in Hong Kong." In fact, Sinobull.com was not, at any time, finalizing an underwriting agreement for an IPO with a major investment banking firm in Hong Kong.
48. In total, Phan and Yang used over 800,000 of the S-8 Shares to provide a total benefit to Hartcourt of approximately $819,363.
49. Yang received $168,560 in cash proceeds from the sale of Hartcourt stock during this scheme, and a $55,000 benefit from the October 28 transfer of 50,000 shares to one of Yang's associates, for a total benefit of $223,560.
FIRST CLAIM FOR RELIEF
UNREGISTERED OFFER AND SALE OF SECURITIES
Violations of Sections 5(a) and 5(c) of the Securities Act
(Against Hartcourt, Phan and Yang)
50. The Commission realleges and incorporates by reference 1 through 49 above
51. Defendants Hartcourt, Phan and Yang, and each of them, by engaging in the conduct described above, directly or indirectly, made use of means or instruments of transportation or communication in interstate commerce or of the mails, to offer to sell or to sell securities, or to carry or cause such securities to be carried through the mails or in interstate commerce for the purpose of sale or for delivery after sale.
52. No registration statement has been filed with the Commission or has been in effect with respect to the offering alleged herein.
53. By engaging in the conduct described above, each of the defendants violated, and unless restrained and enjoined will continue to violate, Sections 5(a) and 5(c) of the Securities Act, 15 U.S.C, 77e(a) and 77e(c).
SECOND CLAIM FOR RELIEF
FRAUD IN THE OFFER OR SALE OF SECURITIES
Violations of Section 17(a) of the Securities Act
(Against Hartcourt, Phan and Yang)
54.The Commission realleges and incorporates by reference 1 through 49 above.
55. Defendants Hartcourt, Phan and Yang, and each of them, by engaging in the conduct described above, 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 use of the mails:
a. with scienter, employed devices, schemes, or artifices to defraud;
b. obtained money or property by means of untrue statements of a material fact or by omitting to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or
c. engaged in transactions, practices, or courses of business which operated or would operate as a fraud or deceit upon the purchaser.
56. By engaging in the conduct described above, each of the defendants violated, and unless restrained and enjoined will continue to violate, Section 17(a) of the Securities Act, 15 U.S.C. 77q(a).
THIRD CLAIM FOR RELIEF
FRAUD IN CONNECTION WITH THE
PURCHASE OR SALE OF SECURITIES
Violations of Section 10(b) of the Exchange Act
and Rule 10b-5 thereunder
(Against Hartcourt, Phan and Yang)
57. The Commission realleges and incorporates by reference 1 through 49 above
58. Defendants Hartcourt, Phan and Yang, and each of them, by engaging in the conduct described above, directly or indirectly, in connection with fi~e purchase or sale of a security, by the use of means or instrumentalities of interstate commerce, of the mails, or of the facilities of a national securities exchange, with
scienter:
a. employed devices, schemes, or artifices to defraud;
b. made untrue statements of a matterial fact or omitted to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or
c. engaged in acts, practices, or courses of business which operated or would operate as a fraud or deceit upon other
persons.
59. By engaging in the conduct described above, each of the defendants violated, and unless restrained and enjoined will continue to violate, Section 10Go) of the Exchange Act, 15 U.S.C, 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5.
PRAYER FOR RELIEF
WHEREFORE, the Commission respectfully requests that the Court:
I.
Issue findings of fact and conclusions of law that the defendants committed the alleged violations.
II.
Issue judgments, in a form consistent with Fed. R. Civ. P. 65(d), permanently enjoining each defendant and its officers, agents, servants, employees and attorneys, and those persons in active concert or participation with any of them, who receive actual notice of the order by personal service or otherwise, and each of them, from violating Sections 5(a), 5(c) and 17(a) of the Securities Act, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
III.
Order defendants Hartcourt and Yang to disgorge all ill-gotten gains from their illegal conduct, together with prejudgment interest thereon.
IV.
Order defendants Hartcourt, Phan and Yang to pay civil penalties under Section 20(d) of the Securities Act, 15 U.S.C. 77t(d), and Section 21(d)(3) of the Exchange Act, 15 U.S.C. 78u(d)(3).
Enter an order, pursuant to Section 20(e) of the Securities Act, 15 U.S.C. 77t(e), and Section 21(d)(2) of the Exchange Act, I5 U.S.C. 78u(d)(2), prohibiting defendant Phan from acting as an officer or director of any issuer that has a class of securities registered pursuant m Section 12 of the Exchange Act, 15 U.S.C. 781, or that is required to file reports pursuant to Section 15(d) of the Exchange Act, 15 U.S.C. 78o(d).
VI.
Retain jurisdiction of this action in accordance with the principles of equity and the Federal Rules of Ci¥il 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.
DATED: May 22, 2003
Andrew J. Dunbar
Attorney for Plaintiff
Securities and Exchange Commission
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