SEC staff recommends civil injunction against SulphCo over securities violations

Diesel Fuel News, April 29, 2002 by Jack Peckham

U.S. Securities & Exchange Commission (SEC) staff investigators recommend a civil injunction for federal securities violations against SulphCo, controversial promoter of a novel diesel desulfurization technology (see Diesel Fuel News 10/1/01, p3; 7/9/01, p1)

SEC investigators allege violations of Section 5 (transactions on unregistered exchanges), Section 17 (clearance and settlement of transactions), Rule 10b-5 (manipulative and deceptive practices) and Rule 101 (unlawful distribution of securities), SulphCo disclosed this month in its Form 8-K report to SEC.

Earlier, former SulphCo president Stan McLelland ripped SulphCo's majority stock owner (and current CEO) Rudy Gunnerman and the current board of directors "who demonstrate little, if any, regard for appropriate corporation governance," citing a cozy SulphCo stock deal for race car driver Mark Neuhaus (see Diesel Fuel News 10/1/01, p3).

The April 5 resignation of SulphCo's independent accountant, Tanner & Co., triggered SulphCo's filing of an 8-K report to SEC on April 16. Tanner had told SEC that it "may not be able to rely on [SulphCo's] management's representations" because of "issues raised by an investigation being conducted by the SEC that have not been resolved to our satisfaction."

SEC asked SulphCo and Gunnerman to respond by letter to the charges, but SulphCo didn't include the letter responses in its 8-K.

In a separate letter to SulphCo's board of directors, Tanner & Co. cited problems with "internal control and operation" of SulphCo that "we consider to be reportable conditions" under standard accounting practices.

These include "significant deficiencies in the design or operation of the internal control that, in our judgement, could adversely affect the organization's ability to record, process, summarize and report financial data consistent with the assertions of management in the financial statements."

Tanner also cited SulphCo's internal control scheme that "does not reduce to a relatively low level the risk that errors or fraud in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period." Tanner also charged that "press releases are not reviewed by appropriate responsible parties to ensure accuracy prior to issuance" as well as "inadequate segregation of duties over cash receipts and disbursements." Tanner al o cited problems with managing contracts, agreements and other documents.

In response, SulphCo contends it is "taking steps to alleviate these conditions" cited by Tanner.