ENFORCEMENT PROCEEDINGS - SEC Charged Wireless Company Executives in Stock Dumping Scheme, Instituted Administrative Proceedings Against Company for Failure to Make Required Filings, and Instituted Administrative Proceeding Against Auditors for Improper Professional Conduct

May 28, 2009 (SECURITIES AND EXCHANGE COMMISSION RELEASE/ContentWorks via COMTEX) -- PGSW | Quote | Chart | News | PowerRating -- On May 27, the Securities and Exchange Commission announced the filing of securities fraud charges against Pegasus Wireless Corporation, former CEO Jasper Knabb, and CFO Stephen Durland alleging they defrauded investors by illegally selling millions of Pegasus shares they secretly controlled and lying about the transactions in company filings.

According to the SEC's complaint, Knabb and Durland created Pegasus from a dormant shell company and then touted several acquisitions in a series of press releases, causing Pegasus' stock price to soar and briefly giving it a market capitalization of over $1.4 billion. Unbeknown to investors, however, Knabb and Durland secretly controlled millions of Pegasus shares through nominees. The nominees unloaded the shares and funneled the proceeds to Knabb, Knabb's wife, and Durland. Knabb and Durland together reaped more than $30 million through their scheme. Pegasus, meanwhile, saw its share price steadily decline to under a penny and filed bankruptcy.

As alleged in the complaint, Knabb and Durland reported none of these nominee transactions in reports with the SEC and instead falsely told investors they owned only minimal amounts of stock. The SEC further alleges that Knabb and Durland falsely claimed in numerous SEC filings that much of the stock was issued to satisfy a business debt, when in reality this "debt" was entirely fabricated through phony documentation.

The SEC's complaint, filed in federal court in San Francisco, alleges Pegasus, Knabb, and Durland violated, or aided and abetted violations of, Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 (Securities Act), Sections 10(b) and 13(a) of the Securities Exchange Act of 1934 (Exchange Act), and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13. It alleges that Knabb and Durland violated Section 13(b)(5) and 16(a) of the Exchange Act and Rules 13a-14, 13b2-1, and 16a-3 thereunder, and that Durland violated Rule 13b2-2. The complaint also names Jasper's wife Tammy Knabb and Aero-Marine, LLC as relief defendants.

In addition, the SEC announced the institution of administrative proceedings against Pegasus pursuant to Section 12(j) of the Exchange Act to determine whether the registration of Pegasus's securities should be revoked or suspended for a period not exceeding twelve months. The SEC's Division of Enforcement (Division) alleges that Pegasus failed to comply with Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder by not filing a periodic report since its report on Form 10-QSB for the quarter ended September 30, 2007. In this proceeding, a hearing will be scheduled before an Administrative Law Judge. At the hearing, the judge will hear evidence from the Division and Pegasus to determine whether the allegations are true. The Commission ordered that the Administrative Law Judge issue an initial decision not later than 120 days from the date of service of the order instituting proceedings.

Finally, the SEC announced the institution of administrative proceedings against Pollard Kelley Auditing Services, Inc., a public accounting firm, and Terance Kelley, CPA to determine whether they engaged in improper professional conduct as defined in Rules 102(e)(1)(ii) and (iv) of the Commission's Rules of Practice. The Division and the Office of the Chief Accountant allege that Respondents tampered with workpapers to conceal multiple deficiencies in their audit of Pegasus' 2006 financial statements. During the 2006 audit, Respondents violated numerous professional standards by failing to obtain written representations from Pegasus' management and failing to exercise due care and professional skepticism. Respondents also are alleged to have created workpapers after the fact and added them to their audit documentation, without identifying the date they were added or the reason for adding them, in violation of professional standards.

The Order directs that a public administrative hearing be scheduled to determine whether the allegations in the Order are true, to afford Respondents an opportunity to establish any defenses, and to determine what, if any, remedial action is appropriate. The Order requires that an Administrative Law Judge issue an initial decision no later than 300 days from the date of service of the Order.

For further information see SEC v. Pegasus Wireless Corporation, et al., Case No. CV-09-2302 BZ. (In the Matter of Pegasus Wireless Corporation - Rel. 34-59985; File No. 3-13488); In the Matter of Pollard Kelley Auditing Services, Inc. and Terance Kelley, CPA - Rel. 34-59986; AAE Rel. 2978; File No. 3-13489)

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