Manhattan U.S. Attorney Announces Extradition Of Former Chairman And CEO Of Technology Start-Up Company Kit Digital
Preet Bharara, the United States Attorney for the Southern District of New York, today announced that KALEIL ISAZA TUZMAN, the former Chairman and CEO of KIT digital (“KITD”), was extradited from Colombia, where he had been arrested in September 2015 for market manipulation and accounting fraud charges. TUZMAN, a dual citizen of the United States and Colombia, arrived in the Southern District of New York today, and will be presented tomorrow in Manhattan federal court. The case is assigned to U.S. District Judge Paul G. Gardephe.
Manhattan U.S. Attorney Preet Bharara said: “Nearly a year ago, we charged the former Chairman and CEO of KIT digital, Kaleil Isaza Tuzman, with engaging in an elaborate scheme to mislead investors and regulators about the financial health of the publicly traded company he ran. Now, having been extradited from Colombia, Tuzman will face federal charges of market manipulation and accounting fraud in Manhattan federal court.”
According to the allegations contained in the Indictments filed in this case, TUZMAN and others engaged in the following fraudulent schemes during his tenure as KITD’s Chairman and CEO:
The Market Manipulation Scheme
Between in or about December 2008 and in or about September 2011, TUZMAN, Stephen E. Maiden, who operated an investment advisory firm called Maiden Capital, and Omar Amanat engaged in efforts to artificially inflate the share price and trading volume of KITD shares. During this time period, during which KITD shares traded on the OTC Bulletin Board and on the NASDAQ, Maiden, at TUZMAN’s and Amanat’s behest, purchased and sold shares of KITD through Maiden Capital, at times for the purpose of manipulating the stock price and at times for the purpose of creating the illusion of greater volume in the trading for KITD shares.
For instance, Maiden, with TUZMAN’s knowledge and approval, frequently engaged in match trading in which Maiden caused an account under Maiden’s control to buy or sell KITD stock, and on the same day caused an account under Maiden’s control to take the opposite position. TUZMAN also directed Maiden to make timely purchases of KITD stock in an effort to manipulate the price of KITD shares at certain critical moments, including, for example, when KITD was seeking to raise additional capital and in the weeks before KITD’s stock began trading on the NASDAQ. At times, Maiden was responsible for nearly all of the day’s trading activity in KITD stock.
Over the course of the scheme, TUZMAN caused KITD to invest approximately $1,150,000 in company cash in Maiden Capital but failed to disclose to KITD shareholders that these investments with Maiden Capital were not part of an arms-length relationship. Instead, TUZMAN portrayed these investments as efforts to safely invest assets of KITD. In reality, TUZMAN caused KITD to make these investments in order to help fund Maiden’s purchases of KITD shares, as part of the effort to manipulate the market described above. And, on one occasion, TUZMAN caused KITD to invest $250,000 in Maiden Capital so that Maiden could reimburse TUZMAN for a prior, personal investment that TUZMAN made with Maiden Capital, thereby using KITD as his personal bank.
The Accounting Fraud Scheme
From at least in or about 2010 through in or about 2012, TUZMAN and Robin Smyth, KITD’s former CFO, with others, engaged in an illegal scheme to deceive KITD shareholders, members of the investing public, KITD’s independent auditors, and others concerning KITD’s true operating performance and financial results.
TUZMAN, working with others, including Smyth, devised and executed a scheme to inflate KITD’s revenue falsely. This scheme involved two principal methods: (a) the improper recognition of revenue from so-called “perpetual license” contracts for KITD software (contracts that gave the purchasing customer the right to use the licensed software indefinitely), and (b) the execution of fraudulent “round-trip” transactions which had the effect of using KITD’s own cash, rather than payments received from customers, to pay off bills, known as accounts receivable, that were due and owed to KITD, including those resulting from KITD’s improper revenue recognition practices, rather than disclose to KITD’s auditors and the investing public the fact that the bills were uncollectible or, in some cases, had resulted from fabricated contracts. These fraudulent practices caused KITD to materially overstate its reported revenue, which had the effect of materially overstating KITD’s net income and earnings on its annual and quarterly financial reports issued from the fiscal quarter ending June 30, 2010 through the fiscal quarter ending March 31, 2012.
TUZMAN, 44, was extradited on three counts in the Indictment. For the market manipulation scheme, TUZMAN faces trial on one count of conspiracy to commit securities fraud and one count of conspiracy to commit wire fraud. For the accounting fraud scheme, TUZMAN faces trial on one count of conspiracy to commit securities fraud, make false statements in annual and quarterly reports filed with the Securities and Exchange Commission (“SEC”), and make false statements to auditors.
The conspiracy to commit securities fraud carries a maximum sentence of five years in prison and a maximum fine of $250,000 or twice the gross gain or loss from the offense. The conspiracy to commit securities fraud, make false statements in annual and quarterly SEC reports, and make false statements to auditors carries a maximum sentence of five years in prison and a maximum fine of $250,000 or twice the gross gain or loss from the offense. The conspiracy to commit wire fraud carries a maximum sentence of 20 years in prison and a maximum fine of $250,000 or twice the gross gain or loss from the offense.
The statutory maximum sentences are prescribed by Congress and are provided here for informational purposes only, as any sentencing of the defendant would be determined by the judge.
Mr. Bharara praised the work of the Federal Bureau of Investigation and the United States Postal Inspection Service, and thanked the SEC for its assistance. He also thanked the Colombian government for its help in apprehending TUZMAN. He also thanked U.S. consular officials at the U.S. Embassy in Colombia and the U.S. Department of Justice, Office of International Affairs for their assistance. He added that the investigation is continuing.
The charges were brought in connection with the President’s Financial Fraud Enforcement Task Force. The task force was established to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. With more than 20 federal agencies, 94 U.S. attorneys’ offices, and state and local partners, it is the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud. Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state and local authorities; addressing discrimination in the lending and financial markets; and conducting outreach to the public, victims, financial institutions and other organizations. Since fiscal year 2009, the Justice Department has filed over 18,000 financial fraud cases against more than 25,000 defendants. For more information on the task force, please visit www.StopFraud.gov.
This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys Damian Williams, Andrea M. Griswold, and Edward Y. Kim are in charge of the prosecution.
The allegations contained in the Indictments are merely accusations, and the defendant is
presumed innocent unless and until proven guilty.
 As the introductory phrase signifies, the entirety of the text of the Indictments and the description of the Indictments set forth below constitute only allegations, and every fact described should be treated as an allegation.