The US Securities and Exchange Commission (SEC) is suing Chinese video-advertising and entertainment company Subaye for fraud, saying it has an "imaginary business" and has misled investors about its financial prospects and revenue.
When the firm's newly hired German chief executive travelled to China to inspect operations, he concluded the firm was "a scam", the SEC said.
The SEC, after filing its complaint on Tuesday in federal court in Manhattan, later said Subaye had agreed to settle the matter without admitting or denying the allegations against it. The mainland-based company also consented to a final judgment barring any further securities law violations, the agency said.
"Through its public filings and announcements, Subaye repeatedly made misrepresentations to prospective investors," the SEC alleged. "Subaye falsely promoted itself as an up-and-coming company with a bright future, millions of dollars in revenue and vibrant business operations."
The SEC also named Subaye's former chief financial officer, James Crane, in its complaint, and is seeking disgorgement of his allegedly unethical gains and a civil monetary penalty against him.
Subaye offered cloud-computing services, enabling customers to use its web servers instead of their own hard drives. Subaye also offered video marketing, business-to-business and business-to-customer services.
In SEC filings and in statements issued to investors, Subaye made claims of rapid growth in sales and operations, claiming in 2010 to have more than 1,400 sales and marketing employees. It reported revenue of US$39 million for its 2010 fiscal year and projected more than US$71 million in revenue in 2011.
In a December 2010 press release and regulatory filings, Subaye reported US$22 million in "marketing expenses", which it attributed to a "strategic decision to dramatically increase our marketing expenses in new markets".
The SEC said the scheme began to come apart that month, when it hired a new auditor, PricewaterhouseCoopers Hong Kong, which began posing questions about its revenues, customers and marketing expenses.
Crane, who the SEC says lives in southern California, resigned soon after. PricewaterhouseCoopers resigned as well.
After Nasdaq threatened to delist the company because of compliance issues, Subaye hired a new chief executive officer, Alexander Holtermann, who travelled to China on May 12, 2011, according to the complaint.
Holtermann discovered that Subaye's Guangzhou-based office, located in a university building, was shuttered. He learned from neighbours that the office had been vacated the previous day, regulators said.
Inside, he found "an empty student office, a small stack of papers, no bank accounts, very little cash, two paying customers, no employees, no IT infrastructure and almost no financial records. Holtermann concluded that Subaye was a scam," according to the complaint.
"Subaye had no verifiable revenues to back up its claims of customers; the people it claimed as customers had no such relationship to the company; and it lacked the infrastructure to support its claimed cloud computing services," the SEC said in the complaint. "Instead, with the support of its chief financial officer Crane, Subaye had presented the world with an imaginary business. The multimillion-dollar company Holtermann had been recruited to run appeared not to exist."
Subaye was listed on the Nasdaq from March 15, 2010, to November 11, 2011. Its website is still live.
Crane could not be located for comment.
Additional reporting by Reuters