SEC HQs 2Exaggerated promises and extravagant lifestyles financed with shareholder money led to federal charges against several big names last week—including a former New York governor.

The SEC charged three company executives with fraud in an action filed in the U.S. District Court for the Southern District of Georgia. The complaint charged the executives with defrauding investors in a purported project to construct the largest movie studio in North America. In addition, the Commission charged three prominent individuals who served as directors of the company with insider disclosure violations in an administrative proceeding. The SEC did not allege that the three directors were involved in the fraud.

Manu Kumaran, the founder and former chairman and CEO of Medient Studios, allegedly schemed with his successor CEO Jake Shapiro to make false and misleading statements in press releases and corporate filings. The respondents described the studio construction progress in glowing terms even though they knew that they lacked the funding to even begin building the touted "Studioplex."  In addition, the SEC claimed that Kumaran, Shapiro and Roger Miguel, the CEO of a separate successor public company named Fonu2, backdated and falsified promissory notes as part of a scheme to issue common stock in exchange for financing.

As alleged, Kumaran and Shapiro looted the company while the studio plans were floundering. The SEC noted that Kumaran allegedly spent an average of $1,700 per day of company funds on his globetrotting travel and personal expenses in one three-month period after claiming publicly that he did not draw a salary and assuring shareholders that all funds were being used to benefit the company.  Shapiro also allegedly misappropriated company funds, and lived in a house worth nearly a million dollars that was paid for by the company.

Miguel agreed to settle the charges against him, subject to court approval, without admitting or denying the allegations. He agreed to an officer/director bar and a penny stock bar for five years, and to pay monetary sanctions to be determined by the court at a later date. The litigation continues against Kumaran and Shapiro.

The SEC also charged former New York governor David A. Paterson, investor and philanthropist Matthew T. Mellon and music producer Charles A. Koppelman with violations of Exchange Act §16(a) for failing to timely report their stock transactions in the company while serving as directors of Medient. Section 16(a) applies to officers, directors and 10-percent stockholders. Within 10 days after becoming statutory insiders, covered persons must file a Form 3 disclosing their beneficial ownership of all securities of the issuer. Insiders must also file Form 4 within two business days to disclose changes in their security ownership, and an annual report on Form 5. The failure to timely file a required report, even if inadvertent, constitutes a violation.

As alleged, Koppelman did not make required filings for a period of 16 months, while Paterson’s filings were delinquent for more than 10 months. Mellon never filed any insider disclosure forms with the Commission, even after being advised of his violations by the staff. The SEC stated that in light of the length of his noncompliance and his extensive business experience, Mellon deliberately or recklessly disregarded the Section 16 requirements.

Walter Jospin, director of the SEC’s Atlanta Regional Office, stated that "Koppelman, Paterson, and Mellon allegedly failed in their personal responsibility to comply with the beneficial ownership reporting requirements of the federal securities laws." Paterson and Koppelman each agreed to pay $25,000 to settle the charges. The case against Mellon will be referred to an administrative law judge for further proceedings.

Complaint, SEC v. Medient Studios, Inc., Dkt. No.  4:16-cv-00253 (S.D. Ga. Sept. 23, 2016); In the Matter of David A. Paterson, SEC Release No. 34-78921 (Sept. 23, 2016); In the Matter of Charles A. Koppelman, SEC Release No. 34-78922 (Sept. 23, 2016); In the Matter of Matthew T. Mellon, II, SEC Release No. 34-78924 (Sept. 23, 2016).