Kaleil Isaza Tuzman, the former chairman and CEO of KIT Digital and star of the 2001 documentary, Startup.com is facing charges on allegations of market manipulation and accounting fraud.
Authorities arrested Tuzman in Colombia yesterday on market manipulation charges. He is currently held in the country pending extradition proceedings.
Aside from Tuzman, Kit Digital’s former chief financial officer Robin Smythe was also arrested in Australia on accounting fraud charges. He is also currently held in the country pending extradition proceedings.
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The Office of the U.S. Attorney General for the Southern District of New York, the Federal Bureau of Investigation (FBI) and the U.S. Postal Inspection Services (USPIS) announced the arrests of Tuzman and Smythe on maket manipulation and accounting fraud charges.
Market manipulation scheme
U.S. authorities alleged that Tuzman and a co-conspirator operated a hedge fund between December 2008 and September 2011 to perform market manipulation.
Tuzman and his co-conspirators engaged in a scheme to artificially inflate the stock price and trading volume of KIT Digital.
Tuzman engaged in a scheme in which the shares of KIT Digital were purchased and sold through the hedge fund. Tuzman invested his money into the hedge fund and also arranged for KIT Digital to invest into it.
He directed the hedge fund to manipulate the stock price and create an illusion of greater trading volume of the shares of KIT Digital.
U.S. authorities alleged that Tuzman and Smythe together with other individuals engaged in an illegal scheme to deceive the shareholders and independent auditors of KIT Digital.
According to them, Tuzman and Smythe developed and executed a scheme to inflate the company’s revenue using two methods: (a) the improper recognition of revenue from so-called “perpetual license” contracts for KIT digital software and (b) the execution of fraudulent “round-trip” transactions which had the effect of using KIT digital’s own cash, rather than payments received from customers.
Tuzman and Smythe conspired to mislead investors
In a statement, U.S. Attorney General for the Southern District of New York, Preet Bharara said,” As alleged, Kaleil Isaza Tuzman and Robin Smyth engaged in an elaborate conspiracy to mislead investors and regulators about the financial health of the publicly traded company they oversaw. I want to thank the FBI and the Postal Inspection Service for helping to bring these two alleged fraudsters to justice.”
On the other hand, FBI Assistant Director Diego Rodrigues said Tuzman and Smythe colluded to make money from market manipulation and accounting fraud of tens of million of dollars.
“Despite being as far away as Australia and Colombia, we seek to bring them to justice in the United States to face their accusers and alleged victims,” said Rodrigues.
Meanwhile, USPIS Inspector-in-Charge Philip R. Barlett said Tuzman and Smythe “took extraordinary measures to conceal their deceit from auditors and clients.”