Chinese Company Never Existed, SEC Says

MANHATTAN (CN) - China-based Subaye and its CFO James T. Crane claimed to have 1,400 employees and $39 million in income, but it was "an imaginary business" that "appeared not to exist," the SEC claims in Federal Court.

The SEC sued Subaye and Crane in Federal Court. Subaye, incorporated in Delaware and allegedly based in China, traded on the NASDAQ until Nov. 11, 2011, and still trades over the counter.

Crane, 36, a CPA, was its CFO for 3½ years. He also ran J. Crane CPA, P.C., out of Cambridge, Mass., though he "claimed to be living in China," the SEC says in its complaint. It believes he has moved to Southern California.

In a remarkably lighthearted complaint, given the nature of the charges and the nature of the agency, the SEC claims that the company barely existed at all.

"For one, the company's claimed business kept changing," the SEC says.

From 2008 though late 2010 it claimed to provide advertising for small to medium sized businesses in China.

Then it claimed to be shifting to cloud computing.

"The company claimed in 2010 to have over 1,400 sales and marketing employees. Its reported revenues were $39 million for its 2010 fiscal year, and it projected revenues of more than $71 million for 2011, a year in which it was planning to discontinue one business and shift into another," the SEC says in its complaint.

"And then there was the vanishing money. In Subaye's 2010 year-end filing, the company expensed $22 million - equal to more than half of its reported revenues for the year - as 'marketing expenses.' This write-off was explained by Crane as a 'strategic decision' to invest in marketing to new markets. In truth, however, it was questions from Subaye's auditors - questions like, Where are the bank accounts? Do you have control over this money? - that had forced the company to reclassify the money, formerly claimed as 'cash held in trust,' as 'marketing expenses.'

"But it was Subaye's retention of a new auditor in December 2010 that started to crack the façade."

The new auditor, PricewaterhouseCoopers Hong Kong, "started to ask questions," the SEC says. "Those questions - Could the company show an entitlement to revenues it claimed to have? Who were its customers? Where was the support for the marketing expenses?-were never answered by Subaye. Instead, in short order, first Crane, and the PwC HK, resigned. The company was threatened with delisting by NASDAQ and, in desperation, turned to a new CEO, Alexander Holtermann ('Holterman') to try to bring the company into NASDAQ compliance. But Holtermann could not get answers from management to NASDAQ's and PwC HK's questions."

Holtermann is not a defendant. The company president told him Subaye's offices were "in a university building, among student offices," but "through the closed doors, Holtermann heard nothing," the SEC says. "His knocks went unanswered. Students working in nearby offices reported that the offices had been cleared out the day before ...

"After considerable effort to try to identify company documents, assets, customers, and employees, Holtermann found himself with approximately $200,000 and a box of documents. He was told this was all that remained of Subaye. 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. 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."

The SEC wants Crane to disgorge his ill-gotten gains, plus penalties, and an injunction.

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