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U.S. Regulators Target SouthPeak Amid SEC Violation Accusations

U.S. Regulators Target SouthPeak Amid SEC Violation Accusations

November 29, 2010 | By Kris Graft

November 29, 2010 | By Kris Graft
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The U.S. Securities and Exchange Commission has recommended legal action against top management at Two Worlds publisher SouthPeak Interactive, as other legal matters mount at the publisher.

A SouthPeak regulatory filing from November 19 said company chairman Terry Philips and CEO Melanie Mroz both received Wells Notices in September from SEC staff, meaning the staff will recommend that the SEC initiate enforcement proceedings against the two executives and the company.

The SEC staff will recommend that regulators implement a cease and desist proceeding against Mroz and SouthPeak in regards to allegations that the parties violated SEC law that requires books, records and accounts to "accurately and fairly reflect" a company's finances.

SEC staff also alleged SouthPeak violated the SEC's requirement to follow government rules and regulations intended to protect investors, and to "maintain a system of internal accounting controls" that ensures accounting guidelines are followed.

The regulatory filing came just four days after the official resignation of SouthPeak CFO Reba McDermott, who left the company on "amicable" terms, according to a company statement to Gamasutra.

But the SouthPeak CFO who was in the position during the time of the SEC infringement, Andrea Jones, is now threatening the publisher with "allegations of discrimination and retaliation against a whistle blower and wrongful termination." The former CFO seeks lost wages, benefits and punitive damages -- claims that SouthPeak said it will defend against as they are "without merit." Jones was terminated in August last year.

The SouthPeak filing also said SEC staff will recommend that the SEC "bring a civil injunctive action against Mr. Phillips for abiding and abetting" SouthPeak's alleged SEC violations. SEC staff also said it would recommend the SEC seek a civil penalty against Philips.

The alleged SEC violations stem from when SouthPeak needed to file an amended quarterly report for the fiscal quarter ended March 31, 2009, after management found "material operational deficiencies" in the way the publisher prepared and reviewed financial information.

Additionally, SouthPeak's filing noted a May lawsuit in which game developer Spidermonk Entertainment accused the publisher of "various breach of contract" and other claims related to a publishing agreement for the Roogoo video game. SouthPeak said it would "vigorously" defend against all claims.

The Spidermonk and Jones lawsuits and the SEC notices are just the latest conflicts for SouthPeak, which seems to always find itself embroiled in some type of legal matter. In the SEC filing's "Legal Proceedings" section there are five different legal matters listed that are in various stages with companies including Nobilis, TimeGate and an unnamed developer that filed a demand for arbitration against SouthPeak subsidiary Gamecock.

[UPDATE: A previous version of this story said McDermott is threatening legal action against SouthPeak. A rep for the company clarified that the former CFO referenced is Andrea Jones.]


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