U.S. Securities & Exchange Commission
SEC Seal
Home | Previous Page
U.S. Securities and Exchange Commission


Litigation Release No. 20467 / February 25, 2008

Accounting and Auditing Enforcement Release No. 2790 / February 25, 2008

Securities and Exchange Commission v. Chester E. Howard, Case No. 2:08-CV-00221 (D. Nev.)

SEC Sues Former AXM Pharma, Inc. Officer for Massively Inflating the Company's Revenue

The Securities and Exchange Commission (the Commission) filed civil charges on February 21 against Chester E. Howard, the former chief executive and acting chief financial officer of AXM Pharma, Inc., based in Las Vegas, Nevada. The Commission's complaint, filed in federal district court in Las Vegas, alleges that Howard, age 65 and a resident of Las Vegas, improperly directed AXM to overstate its revenues by over 700 percent for the quarter ended June 30, 2005.

According to the complaint, Howard directed AXM to overstate its reported revenue of $3.2 million by approximately $2.8 million. The complaint alleges that the overstated revenue resulted from sales to distributors in Asia in which the distributors had a right to return the goods and were not obligated to pay for them until they re-sold the goods. Further, the complaint alleges that Howard knew that at least a portion of the goods had not been delivered to the distributors. The complaint further alleges that these sales failed to meet several of the fundamental criteria for revenue recognition under Generally Accepted Accounting Principles. In addition, the complaint alleges that Howard caused AXM to falsely report quarterly net income of approximately $179,000, when in fact AXM had a net loss of approximately $1.46 million for the quarter.

The Commission's complaint further alleges that Howard misled investors about AXM's revenue and earnings in the company's quarterly and current reports filed with the Commission, in press releases, and in a conference call with investors and analysts. The complaint also alleges that Howard falsely certified the company's quarterly report, made false statements to AXM's independent accountant in connection with the quarter review, and caused AXM's violations of the internal controls and books and records provisions of the securities laws.

The complaint seeks a permanent injunction against Howard from violating Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Exchange Act Rules 10b-5, 13a-14, 13b2-1, and 13b2-2 and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 12b-20, 13a-11, and 13a-13. The complaint also seeks an order baring Howard from serving as an officer and director of a public company and imposing civil penalties.

In a separate but related action, on February 14, the Commission instituted administrative proceedings against AXM for various violations of the antifraud, issuer reporting, books-and-records, and internal controls provisions of the federal securities laws. Simultaneously with the institution of the proceedings, and without admitting or denying the Commission's findings other than as to the Commission's jurisdiction over it, AXM consented to the issuance of the order. See Exchange Act Release No. 57330, Accounting and Auditing Enforcement Release No. 2784 (Feb. 14, 2008).

SEC Complaint in this matter



Modified: 02/26/2008