CEO Accused of Inflating Price of EConnect Stock
The chief executive of EConnect Inc., a San Pedro-based e-commerce firm, was arrested Wednesday and charged with repeated violations of securities laws in an alleged scheme to inflate the company’s stock price using false press releases.
Thomas S. Hughes, 52, was taken into custody at his Rancho Palos Verdes home and later appeared in federal court in Los Angeles. He was charged with civil and criminal violations stemming from a joint probe by the Securities and Exchange Commission, the U.S. attorney’s office and the FBI.
Regulators hailed the case as a sign of increased cooperation among securities-law enforcement agencies in Southern California and as an example of the SEC’s public vow to prosecute repeat securities law offenders.
“These actions demonstrate the SEC’s commitment to ‘real-time enforcement’ and to the vigorous prosecution of those who repeatedly violate the federal securities laws,” said Randall R. Lee, head of the SEC’s Pacific regional office in Los Angeles.
The complaint alleges that Hughes is in contempt of court for violating the terms of an injunction issued against him in April 2000 in a prior SEC case, which prohibited him from further violations of securities laws.
The previous case also charged Hughes with issuing phony press releases designed to boost the firm’s stock. One of the claims Hughes made was that the company had a “unique licensing arrangement” involving hand-held devices made by Palm Inc.
Since July 10, Hughes and EConnect again have been issuing “false and misleading” press releases and have posted false statements on the firm’s Web site, causing the share price to rise more than 500%, authorities said.
Those claims included that EConnect had a stock repurchase plan, that the company received an investment of $20 million in highly rated bonds and that the firm received a purchase order for nearly $1 million of its ECash pad product, the complaint alleges.
In the case of the ECash pad claim, “the apparent purchaser has denied any knowledge of EConnect,” the complaint said.
EConnect’s shares, traded over the counter, rose from 24 cents on June 26 to a closing high of $2.86 on July 15. They fell back to 93 cents by July 24, the day before the SEC suspended trading in the stock. (The share prices are adjusted for the company’s recent 1-for-100 reverse stock split.)
Formed in 1997, EConnect touted plans to be a leader in products that would help businesses and consumers with e-commerce. Its ECash pad was designed to facilitate secure Internet transactions from home, the company has said. The business has yet to turn a profit.
The SEC complaint also charges EConnect investors Richard Epstein of Tampa, Fla., and Alliance Equities Inc. of Coral Springs, Fla., with violations of insider trading regulations.
Since June, Epstein and Alliance Equities have dumped more than 74 million EConnect shares, raising about $770,000, but failed to report the sales to the SEC and the public, the SEC said.
The government is seeking disgorgement of the proceeds from Epstein and Alliance Equities.
Hughes wasn’t available for comment Wednesday. Neither was his attorney, Irving M. Einhorn. A call to the company was not returned.
If convicted, Hughes faces a maximum sentence of 10 years in prison and a $1-million fine. The SEC also is seeking to bar him from acting as an officer or director of a publicly traded company.
His arraignment was set for Sept. 3.
In the wake of the rash of corporate scandals this year, regulators have been under pressure to bring securities law violators to justice and to bring criminal, as well as civil, charges to bear, as a deterrent effort.
“This office and the Department of Justice are committed to protecting the investing public from those who seek to manipulate securities markets for their own profit,” said Debra Yang, U.S. attorney for the Central District of California.
