SEC Sues Chinese Video-Sharing Company Subaye for Fraud

The U.S. Securities and Exchange Commission sued Subaye Inc. (SBAY) for fraud, saying the Chinese video-advertising and entertainment company misled investors about its financial prospects and revenue.

The SEC, after filing its complaint yesterday in federal court in Manhattan, later said Subaye agreed to settle the matter without admitting or denying the allegations against it. The Beijing-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.”

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 $39 million for its 2010 fiscal year and projected more than $71 million in revenue in 2011.

In a December 2010 press release and regulatory filings, Subaye reported $22 million in “marketing expenses,” which the company attributed to a “strategic decision to dramatically increase our marketing expenses in new markets.”

New CEO

After NASDAQ threatened to delist the company because of compliance issues, Subaye hired a new chief executive officer, Alexander Holtermann, who traveled to China on May 12, 2011, according to the complaint.

Holtermann discovered that Subaye’s office, located in a university building, was shuttered. He learned from neighbors 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.

Monetary Penalty

James T. Crane, 36, ’s former chief financial officer, was also named in the complaint filed by the SEC. The SEC seeks disgorgement of Crane’s ill-gotten gains and civil monetary penalty against Crane.

“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 had been listed on NASDAQ from March 15, 2010, until Nov. 11, 2011. It currently trades on the over-the-counter market.

A telephone listing for Subaye in Beijing has been disconnected. Crane couldn’t be located for comment.

The case is SEC v. Subaye Inc., 13-cv-03114, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Patricia Hurtado in New York at pathurtado@bloomberg.net; Bob Van Voris in New York at rvanvoris@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.

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