SEC Charges Executives For Defrauding Investors In Financial Fraud Scheme – Seeks Return Of Allegedly Ill-Gotten Executive Compensation
The Securities and Exchange Commission today charged two former executives of ContinuityX Solutions Inc. with fabricating nearly all of the company’s revenue and enriching themselves in the process. Metamora, Illinois-based ContinuityX was a publicly traded company that claimed to sell Internet services to businesses. The company is now in bankruptcy and its former CEO was criminally charged last year with six counts of wire fraud for conduct related to the SEC’s allegations.
The SEC’s complaint charges ContinuityX’s former CEO David P. Godwin and former chief financial officer Anthony G. Roth with engineering a scheme to inflate the company’s revenues. ContinuityX reported revenues of $27.2 million from April 2011 to September 2012, but the complaint alleges that 99 percent of it came from fraudulent and fictitious sales. Godwin and Roth used the allegedly fraudulent SEC filings to raise millions of dollars from investors in a private offering of ContinuityX securities, the complaint further alleges.
According to the complaint, Godwin and Roth enriched themselves through their allegedly fraudulent conduct, as Godwin received $1.3 million in compensation from ContinuityX and Roth received $351,800 in compensation and $456,098 of profits from sales of ContinuityX stock.
In one alleged scheme, Godwin and Roth approached companies to become a straw buyer of services from Internet providers, promising them they would not have to pay for the services and would receive a portion of the commissions paid to ContinuityX by the providers. ContinuityX allegedly reported the commissions from the sham sales as revenue in its quarterly and annual reports. In another scheme, Godwin is alleged to have fabricated service orders and to have caused ContinuityX to recognize revenue from these fake transactions.
“We allege that Godwin and Roth cheated investors out of millions of dollars, depicting ContinuityX as a successful Internet service sales company, when in reality it was a sham from beginning to end, complete with phony customers and fake contracts,” said Timothy L. Warren, Associate Director of SEC’s Chicago Regional Office.
The SEC’s complaint filed in federal court in Peoria, Illinois, charges Godwin and Roth with violating the antifraud provisions of the federal securities laws and related SEC rules. The complaint also alleges that Godwin and Roth aided and abetted ContinuityX’s violations of the financial reporting, books and recordkeeping, and internal controls requirements of the federal securities laws.
The SEC’s complaint seeks return of allegedly ill-gotten gains with interest, financial penalties, and permanent injunctions against further violations of the securities laws. The SEC also is seeking an order that would bar Godwin and Roth from acting as public company officers or directors and require them to reimburse ContinuityX for bonuses, incentive and equity-based compensation, and stock sale profits, pursuant to Section 304 of Sarbanes-Oxley Act.
ContinuityX, in a separate administrative action, agreed to an order revoking the registration of its securities.
The SEC’s investigation, which is continuing, has been conducted by Justin M. Delfino and Ann M. Tushaus of the Chicago Regional Office under the supervision of Assistant Regional Directors Steven L. Klawans and Scott J. Hlavacek. Daniel J. Hayes and Alyssa Qualls will lead the SEC’s litigation efforts.