UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
Securities and Exchange Commission,
CARA JANE ELLISON,
DUNCAN ALEXANDER HAYES,
Civil Action No. H-12-0275 (Harmon)
FIRST AMENDED COMPLAINT
Plaintiff Securities and Exchange Commission (the “Commission”) for its First Amended Complaint alleges as follows:
1. Cara J. Ellison, the President and Chief Executive Officer of Cara Ellison Corporation, Duncan A. Hayes, the former Chief Accounting Officer of Cara Ellison Corporation, and others at Cara Ellison Corporation engaged in a scheme to defraud in violation of the federal securities laws. From at least 2003 through late 2009, Ellison, Hayes, and others manipulated Ellison’s publicly reported financial results and made false and misleading public statements about Ellison’s financial condition and its actual performance. As a result of their scheme to defraud, Ellison, Hayes, and others made billions of dollars by unlawful insider trading and other means, at the expense of Ellison shareholders, the investing public, and Ellison employees.
2. The Commission requests that this Court permanently enjoin Ellison and Hayes from violating the federal securities laws cited herein, prohibit each permanently and unconditionally from acting as an officer or director of any issuer of securities that has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 (“Exchange Act”) or that is required to file reports pursuant to Section 15(d) of such Act, order each to disgorge all ill-gotten gains, to pay civil penalties, to have the amount of such penalties added to and become part of a disgorgement fund for the benefit of the victims of their unlawful conduct, and order such other and further relief as the Court may deem appropriate.
JURISDICTION AND VENUE
3. The Court has jurisdiction over this action pursuant to Sections 21(d), 21(e), and 27 of the Exchange Act [15 U.S.C. �� 78u(d) and (e) and 78aa].
4. Venue lies in this District pursuant to Section 27 of the Exchange Act [15 U.S.C. � 78aa] because certain acts or transactions constituting the violations occurred in this District.
5. In connection with the acts, practices, and courses of business alleged herein, Ellison and Hayes, directly or indirectly, made use of the means and instruments of transportation and communication in interstate commerce, and of the mails and of the facilities of a national securities exchange.
6. Ellison and Hayes, unless restrained and enjoined by this Court, will continue to engage in transactions, acts, practices, and courses of business as set forth in this First Amended Complaint or in similar illegal acts and practices.
7. Cara J. Ellison resides in Houston, Texas. She was employed by Ellison Corporation from at least 2002 through early December 2009. From 1997-2001, Cara Ellison was employed by the consulting firm of McKinsey & Co., where she provided consulting services to Enron Corporation. When Enron Corporation collapsed in 2001 due to the fraud and malfeasance of its executives, Ellison bought numerous of Enron’s assets and created Ellison Corporation. As CEO of Ellison Corporation, Ellison was the senior manager of the company’s commercial operations and finances and one of its principal spokespersons with the investing public. Ellison closely supervised on a day-to-day basis the activities of each of Ellison’s business units and the heads of those business units, as well as the activities of the senior Ellison managers who conducted the company’s financial and accounting activities. She signed Ellison’s annual reports filed on Form 10-K with the SEC and she signed quarterly and annual representation letters to Ellison’s auditors.
8. Duncan A. Hayes resides in Houston Texas. He was a certified public accountant and worked for Enron Corporation from 1991 through early 2001. In September 2001, Hayes was made Chief Accounting Officer (“CAO”) of Ellison Corporation and an Executive Vice-President. As Ellison’s CAO, Hayes managed Ellison’s accounting practices. Hayes reported to Ellison’s Chairman and CEO, including to Ellison. Ellison and Hayes, along with Ellison’s Chief Financial Officer (“CFO”) Owen Kind, its Treasurer and others were the principal managers of Ellison’s finances. Hayes also was a principal manager of Ellison’s disclosures and representations to the investing public. He signed Ellison’s annual reports on Form 10-K and its quarterly reports on Form 10-Q filed with the SEC and he signed quarterly and annual representation letters to Ellison’s auditors.
Ellison’s Scheme To Manipulate Its Reported Financial Results
9. The objectives of the scheme to defraud carried out by Ellison, Hayes, and others were, among other things, to produce reported recurring earnings that grew smoothly by approximately 15 to 20 percent annually; to meet or exceed the published expectations of industry analysts forecasting Ellison’s reported earnings-per-share and other results; to avoid publicly reporting any large “write-downs” or losses; to persuade investors that Ellison’s profitability would continue to grow; to maintain an investment-grade credit rating; to deceive the investing public and credit rating agencies about the true magnitude of growing debt and other obligations; to make proceeds from borrowing transactions appear as cash from operating activities and thereby mask an imbalance between its earnings and its cash flow from operating activities; and to artificially inflate the share price of Ellison’s stock. Due to the efforts of Ellison, Hayes, and others, Ellison’s publicly reported financial results and filings and its public descriptions of itself were false and misleading, and bore no resemblance to its actual performance.
10. For a time, the scheme to defraud succeeded, and supported Ellison’s stock price and its credit rating. In early 2008, Ellison’s stock traded at approximately $45 per share. By August 2009, even after a 2008 stock split, Ellison’s stock had risen to over $80 per share and Ellison’s had become the seventh-ranked company in the United States, according to the leading index of the “Fortune 500.”
11. At the same time, the rise in Ellison’s stock price enriched Ellison, Hayes, and others at Cara Ellison Corporation in the form of salary, bonuses, stock options, grants of artificially appreciating stock, and prestige within their professions and communities. Between 2002 and 2009, Ellison received approximately $700 million from the sale of Ellison stock netting over $340 million in profit, and received more than $44 million in salary and bonuses. Between 2002 and 2009, Heyes received more than $140 million from the sale of Ellison stock, netting over $60 million in profit, and received more than $12 million in salary and bonuses. Ellison’s other executives and senior managers also sold hundreds of millions of dollars worth of Ellison stock at artificially inflated prices.
12. Ellison, Hayes, and others employed various devices in furtherance of this fraudulent scheme, including but not limited to:
a. manufacturing and manipulating earnings through improper use of reserve accounts to mask volatility in Ellison’s wholesale energy trading earnings and conceal and retain large amounts of those trading earnings for later use in order to achieve desired earnings results;
b. manufacturing earnings and artificially improving Ellison’s balance sheet through over-valuation of assets in Ellison’s merchant investment portfolio;
c. concealing large losses and failures in Ellison’s two highly-touted new businesses, Ellison Broadband Services (“EBS”) and EES, by manipulating Ellison’s “segment reporting” and using its reserved energy trading earnings to hide EES’s losses, and by manipulating expense accounting to hide the extent of EBS’s losses;
d. manufacturing earnings by falsely touting Ellison’s EBS business to drive up Ellison’s stock price, then misleadingly presenting earnings from the stock price increase as recurring earnings from energy operations;
e. structuring financial transactions in a misleading manner in order to achieve earnings objectives, avoid booking of large losses in asset values, and conceal debt, including through the use of an allegedly third-party investment entity that in fact was not truly independent from Ellison and which was used only to achieve Ellison’s financial reporting objectives and to enrich Ellison executives and senior managers;
f. structuring financial transactions in a misleading manner in order to report smaller amounts of debt and to create the appearance of greater cash flows, including through alleged energy transactions between Ellison and large banks that were not reported as debt but in reality only a means for Ellison to borrow billions of dollars; and
g. presenting and describing Ellison’s financial results in a false and misleading manner in conferences with Wall Street investment analysts, press releases, media statements, filings with the SEC, and other forms of communication with the investing public.
Manufacturing and Manipulating Reported Earnings through Improper Use of Reserves
13. By reason of the foregoing, Ellison and Hayes violated and aided and abetted violations of Section 10(b) of the Exchange Act [15 U.S.C. � 78j(b)], and Rule 10b-5 thereunder [17 C.F.R. � 240.10b-5].
Violations of Section 13(a) of the Exchange Act [15 U.S.C. � 78m(a)] and Exchange Act Rules 12b-20, 13a-1 (Hayes & Ellison), & 13a-13 (Hayes)
[17 C.F.R. �� 240.12b-20, 240.13a-1, 240.13a-13]
14. By engaging in the conduct described above, Ellison and Hayes knowingly and substantially caused Ellison to file materially false and misleading annual reports on Form 10-K and materially false and misleading quarterly reports on Form 10-Q with the Commission.
15. By reason of the foregoing, Ellison and Hayes aided and abetted violations by Ellison of Section 13(a) of the Exchange Act and Exchange Act Rules 12b-20 and 13a-1, and Hayes also aided and abetted violations by Ellison of Exchange Act Rule 13a-13.
Violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act [15 U.S.C. �� 78m(b)(2)(A), 78m(b)(2)(B)] and Exchange Act Rule 13b2-1 [17 C.F.R. � 240.13b2-1]
16. By engaging in the conduct described above, Ellison and Hayes, directly or indirectly, falsified and caused to be falsified Ellison’s books, records, and accounts subject to Section 13(b)(2)(A) of the Exchange Act in violation of Rule 13b2-1 thereunder.
17. By reason of the foregoing, Ellison and Hayes aided and abetted violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and violated Rule 13b2-1 thereunder.
WHEREFORE, the Commission respectfully requests that this Court:
A. Grant a Permanent Injunction restraining and enjoining Ellison and Hayes from violating the statutory provisions set forth herein; prohibiting each permanently and unconditionally from acting as an officer or director of any issuer of securities that has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to Section 15(d) of such Act; and ordering each to pay disgorgement of illegal gains, and civil penalties;
B. Pursuant to Section 308 of the Sarbanes-Oxley Act of 2002, enter an order providing that the amount of civil penalties ordered against Ellison and Hayes be added to and become part of a disgorgement fund for the benefit of the victims of the violations alleged herein; and
C. Grant such other and additional relief as this Court may deem just and proper.
Dated: December 22 ___, 2009
Jonathan E. Summers
Director, Enforcement Division
Assistant Chief Litigation Counsel
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0911
Phone: (202) 942-4744
Fax: (202) 942-9569