SEC Charges TV Azteca and Its Chairman Ricardo Salinas Pliego with Fraud
The SEC alleges in its complaint that the defendants engaged in an elaborate scheme to conceal Salinas’s role in a series of transactions through which he personally profited by $109 million. The SEC complaint also alleges that Salinas and Padilla sold millions of dollars of TV Azteca stock while Salinas’s self-dealing remained undisclosed to the market place.
In its action, the SEC is seeking injunctions from future securities law violations, civil money penalties, and disgorgement of Salinas’ and Padilla’s ill-gotten gains, plus prejudgment interest. The SEC also is seeking court-orders barring Salinas and Padilla from serving as officers or directors of any publicly-held company with securities trading in the United States.
Spencer C. Barasch, head of enforcement for the SEC’s Fort Worth office, commented, “Enhanced global cooperation among securities regulators has significantly changed the ways in which the SEC investigates and prosecutes conduct that crosses international borders. The cooperative efforts in this case of the SEC and the Comisión Nacional Bancaria y de Valores in Mexico are a testament to the efficiency and effectiveness of collaborative international enforcement.
Securities regulators share a strong and mutual resolve to combat fraud; geographic boundaries will not serve to protect those who seek to defraud investors.” The SEC and CNBV are parties to a bilateral memorandum of understanding as well as to the International Organization of Securities Commissions multilateral memorandum of understanding, both of which significantly facilitate information sharing.
The SEC’s complaint names the following entities and individuals as defendants.
TV Azteca, a Mexican corporation headquartered in Mexico City, is the second largest television broadcasting company in Mexico. TV Azteca’s American depository receipts are listed on the New York Stock Exchange. The company’s underlying ordinary participation certificates trade on the Bolsa Mexicana de Valores, the Mexican stock exchange.
Azteca Holdings, a Mexican holding company headquartered in Mexico City, beneficially owns 55% of the outstanding stock of TV Azteca. Azteca Holdings is indirectly owned and controlled by the Salinas family. Azteca Holdings’ debt securities trade on the U.S. Over-the-Counter Bulletin Board Market.
Salinas, age 49 and a Mexican citizen, has been the chairman of the board of directors and the controlling shareholder of TV Azteca since 1993. Salinas also has been chairman of the board, CEO and president of Azteca Holdings since 1997.
Padilla, age 38 and a Mexican citizen, has been a director of TV Azteca since 1993, and was the CEO of the company from October 2001 through July 2004, when he was named CEO of Grupo Salinas, a de facto holding company for various Salinas controlled entities.
Echarte, age 59 and a U.S. citizen, has been a director of TV Azteca since 1999. Echarte is also the president and CEO of Azteca America, a TV Azteca subsidiary based in New York, and is the chief financial strategist for Grupo Salinas.
According to the SEC complaint, Salinas and others caused TV Azteca or Azteca Holdings to file periodic reports that did not disclose Salinas’s involvement in related party transactions between Unefon, a subsidiary of TV Azteca, and a private entity secretly co-owned by Salinas, called Codisco. In the related party transactions, Salinas purchased from a third party—at a steep discount—approximately $325 million of indebtedness owed by Unefon to the third party. At the time that Salinas purchased the indebtedness, he was aware that Unefon was in negotiations with another large telecom company which would provide substantial cash to Unefon, and enable Unefon to pay off the full amount of the indebtedness that Salinas had purchased at a discount. Only three months later, when Unefon closed the deal with the other telecom company, Salinas profited by $109 million upon Unefon’s repayment of the debt at full value.
TV Azteca filed the false reports with the SEC, concealing Salinas’ involvement in the Unefon debt transactions, despite receiving advice from its U.S. counsel that these transactions were material, reportable transactions under U.S. federal securities laws. While the company provided general disclosure of the transactions, it refused to reveal information crucial to investors: that Salinas was behind the transactions and personally profited from them. TV Azteca’s resistance led to the eventual resignation of its U.S. counsel, who told the company’s board of directors and management that it was resigning consistent with its obligations under Section 307 of the Sarbanes-Oxley Act.
In various filings and public statements from June 2003 through January 2004, TV Azteca and its management discussed publicly the Unefon debt transactions while either failing to disclose Salinas’s involvement, or, in several instances, falsely denying Salinas’s involvement.
For example, Salinas publicly denied any connection to Codisco in response to a query by the press regarding market concern that he may have been affiliated with Codisco. TV Azteca’s U.S. legal counsel subsequently discovered the news article containing Salinas’s false denial and advised Padilla that corrective disclosure was necessary. Despite the falsity of the statement, and the advice of counsel, the defendants did nothing to correct Salinas’s false denial. Further, in communications with TV Azteca’s independent directors, Salinas, Padilla and Echarte intentionally withheld information from, and even lied to the directors about Salinas’s connection to the underlying transactions and his $109 million profit.
Salinas and Padilla compounded their fraud by executing false Sarbanes-Oxley certifications.
After the resignation of TV Azteca’s U.S. legal counsel and a Dec. 24, 2003, New York Times article concerning the matter, Echarte sent an email to Salinas and Padilla, stating, “The damage is done and the situation that we didn’t want to explain openly is now in the hands of the public.” Shortly thereafter, on Jan. 9, 2004, TV Azteca issued a press release confirming that Salinas indirectly owned half of Codisco.
The SEC alleges in its complaint that the defendants violated or aided and abetted violations of the antifraud, reporting, concealment from auditors, books and records, internal controls, beneficial interest disclosure and Sarbanes-Oxley certification provisions of the federal securities laws.
In a consent filed simultaneously with the complaint, Echarte settled the SEC’s action against him by agreeing, without admitting or denying the complaint's allegations, to the entry of a final judgment permanently enjoining him from violating, and aiding and abetting violations of the antifraud, reporting, books and records, and internal controls provisions of the federal securities laws.
Echarte also has agreed to pay a civil penalty of $200,000 and disgorgement of $1.