Securities Regulation Daily Wrap Up, ENFORCEMENT—S.D.N.Y.: KIT Digital’s CEO and co-conspirator convicted for securities-fraud related offenses, (Dec 27, 2017)

By Rebecca Kahn, J.D.

After a six-week trial, a Manhattan jury found two entrepreneurs guilty of market manipulation and accounting fraud related to video software startup KIT Digital (KIT). They were convicted of concocting and executing an elaborate scheme to conceal losses from investors and make KIT appear more profitable. They face maximum prison terms of 30 and 50 years, respectively (U.S. v. Amanat, December 26, 2017.).

Together, former KIT CEO Kaleil Isaza Tuzman and his associate, Omar Amanat were convicted of committing and conspiring to commit wire fraud and securities fraud as well as aiding and abetting investment adviser fraud, the DOJ announced.

Defrauding Maiden Capital investors. Prosecutors charged Amanat with defrauding investors in Maiden Capital, a hedge fund founded by Stephen Maiden that invested in both KIT and Dubai-based Enable Invest Ltd. (Enable). From February 2009 to June 2012, Amanat, Maiden and others hid the fact that Maiden Capital investments in Enable had been lost. With the knowledge and approval of Amanat, Maiden generated fictitious client account statements to hide the losses. Amanat also wired hundreds of thousands of dollars to a Maiden Capital bank account, allowing repayment of the most urgent redemption requests, thereby concealing the losses from investors for three years. Both KIT and Enable collapsed and KIT filed for bankruptcy in 2013.

Maiden pleaded guilty and testified for the Government. He told jurors of his scheme with Amanat and Tuzman to buy thousands of KIT shares on a regular basis to create the illusion of demand for the shares.

Market manipulation scheme. From December 2008 through September 2011, Tuzman, Maiden, and Amanat worked to artificially inflate KIT’s share price and trading volume on the OTC Bulletin Board and the NASDAQ. At Tuzman’s and Amanat’s behest, Maiden purchased and sold KIT shares through Maiden Capital to manipulate the stock price and create the illusion of greater trading volume. Maiden often engaged in "match trading," causing one account to buy or sell KIT stock, and contemporaneously causing another account to take the opposite position. Tuzman also directed Maiden to time KIT stock purchases so as to manipulate the price at critical moments, (e.g., when KIT was seeking additional capital and in the weeks before NASDAQ trading of KIT stock began). At times, Maiden was responsible for nearly all of the day’s trading activity in KIT stock.

Over the course of the scheme, Tuzman caused KIT to invest approximately $1,150,000 in company cash in Maiden Capital, without disclosing that these investments were not part of an arms-length relationship. On one occasion, Tuzman caused KIT to invest $250,000 in Maiden Capital so that Maiden could reimburse Tuzman for his personal investment in Maiden Capital, thereby using KIT as his personal bank.

Accounting fraud scheme. From 2010 through 2012, Tuzman, along with KIT’s former CFO Robin Smyth, and former president Gaven Campionengaged in an illegal scheme to deceive KIT shareholders, the investing public, KIT’s auditors, and others concerning the company’s financial results. The numbers were to be inflated by: (a) improperly recognizing revenue from "perpetual license" software contracts; and (b) executing fraudulent "round-trip" transactions. These transactions used KIT’s own cash to pay off accounts receivable owed to KIT rather than disclose that the bills were uncollectible or, in some cases, resulted from fabricated contracts. These fraudulent practices caused KIT to materially overstate reported revenue from the fiscal quarter ending June 30, 2010, through the fiscal quarter ending March 31, 2012.

Maiden, Smyth, and Campion have pled guilty to various offenses for their roles in the schemes and cooperated with the government. In a related case, the SEC filed charges against Tuzman and Smyth.

The case is No. 15-cr-536.

LitigationEnforcement: AccountingAuditing DirectorsOfficers Enforcement FraudManipulation NewYorkNews