May 27 (Bloomberg) -- Pegasus Wireless Corp. and two former executives were sued by the U.S. Securities and Exchange Commission for allegedly bilking investors in a $30 million stock-dumping scheme.

Former Chief Executive Officer Jasper Knabb, 42, and ex- Chief Financial Officer Stephen Durland, 55, illegally sold hundreds of millions of Pegasus shares they secretly controlled and lied about the sales in company filings, the SEC said today in an e-mailed statement. The sales were used to support Knabb and Durland’s lavish lifestyles and purchases of boats, sports cars and homes, the SEC said.

“The public had no idea that insiders were controlling the shares and dumping them,” Bob Leach, chief of the SEC’s San Francisco branch, said in a phone interview. “It was all smoke and mirrors.”

Pegasus, a maker of wireless networking equipment, was created by the two men out of a dormant shell company in 2005. Knabb and Durland touted a series of acquisitions through press releases, which pushed up share values and briefly gave the penny stock company a market capitalization of $1.4 billion, according to the SEC complaint filed in federal court in San Francisco.

Debt Fabrication

The former executives said in SEC filings that Pegasus issued shares to pay off debt. They forged documents to hide that the debt was a fabrication and the shares were issued to relatives and entities that Knabb and Durland controlled, according to the complaint.

Knabb, a resident of Anchorage, Alaska, and Little River, South Carolina, and Durland, of West Palm Beach, Florida, together reaped more than $30 million from the sales from 2006 to 2008, the SEC said.

The company, originally based in Fremont, California, has been in out and of bankruptcy proceedings since last year and is no longer operational, the agency said.

In a Feb. 25, 2008, Chapter 11 filing in U.S. Bankruptcy Court in West Palm Beach, Pegasus listed assets of $17 million and debt of almost $4 million.

Kevin Gleason, an attorney handling Pegasus’s bankruptcy case, and James Sallah, an attorney for Durland, didn’t immediately return messages. There is no phone listing for Knabb in Anchorage or Little River.

The case is SEC v. Pegasus Wireless Corp. 09-02302, U.S. District Court, District of Northern California (San Francisco).

To contact the reporter on this story: Karen Gullo in San Francisco at kgullo@bloomberg.net.

Last Updated: May 27, 2009 15:53 EDT