SEC Sues Tech Company Founder for Fraud

LOS ANGELES (CN) - The Securities and Exchange Commission says the chairman and CEO of STEC defrauded investors and engaged in insider trading to reap $134 million in a 9 million share offering of his company's stock.

In 2009, Manouchehr Moshayedi's Santa Ana-based STEC, which sells high speed, high capacity flash storage device for computers, saw its stock rise by more than 800 percent. That was after increased sales and the announcement of a $120 million deal with its largest customer (nonparty) EMC Corp. to buy STEC's ZeusIOPS drives in the third and fourth financial quarters of 2009, according to the complaint.

But the SEC says Manouchehr Moshayedi failed to disclose "two critical" facts before proceeding with an offering to capitalize on STEC's rise - that demand from EMC for its flash drive product was much lower than expected, and that a supply agreement with the customer was a "'one off' deal."

Rather than going public, Moshayedi "embarked on a fraudulent course of conduct" omitting information in second quarter financial results that EMC's demand for the ZeusIOPS product was only $34 million for the third financial quarter. The release of those financial results was on the same day that the secondary offering went ahead on August 3, 2009, according to the SEC.

"As part of this scheme, Moshayedi entered into a secret side deal with EMC to have EMC commit to take $55 million of ZeusIOPS product in the third quarter - which was far more than it actually needed - in exchange for an undisclosed $2 million price discount on the product. He then announced third quarter revenue guidance for STEC that met the analysts' consensus estimates. This guidance, however, included the $55 million in orders from EMC - an amount that was about $21-22 million more than EMC's actual forecasted demand for the quarter, and that was only possible because of his secret deal with EMC," the lawsuit states.

According to the complaint, after a secondary offering in August 2009, Moshayedi and his brother, STEC co-founder Mehrdad Mark Moshayedi, each sold 4.5 million shares for roughly $134 million dollars.

Mehrdad Mark Moshayedi is not a party to the complaint, filed at the U.S. District Court Central District of California.

Three months later Moshayedi disclosed for the first time that the EMC deal was a one off, the SEC says. STEC stock then declined by almost 39 percent from a $23.15 closing price on November 3 to a closing price of $14.14 the day after, the lawsuit says.

"Moshayedi put his own self-interest ahead of his responsibility to lead a public company, and shareholders who placed their trust in him suffered as a result," Michele Wein Layne, Director of the SEC's Los Angeles Regional Office said in a news release. "Company insiders are strictly prohibited under the securities laws from exploiting corporate dealings for private gain, particularly in the secretive and manipulative manner that Moshayedi did."

SEC attorney Finola Manvelian filed the lawsuit for fraud in the offer of sale of securities, and fraud in connection with the purchase or sale of securities under the Securities and Exchange Act.

Investigators want a judgment which orders Moshayedi to disgorge his and his brother's profits from the offering, and bars Moshayedi from serving as an officer and director of a company which issues securities.

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