LV developer Saxton hit with fraud allegations

Grace Leong

Wednesday, Dec. 27, 2000 | 11:08 a.m.

A shareholder of Las Vegas real estate developer Saxton Inc. filed a class action lawsuit against the company and three executives Tuesday, alleging Saxton misstated its financial results to dupe him and "thousands" of other shareholders into buying its shares at "artificially inflated prices."

Saxton is battling to stay out of bankruptcy in the face of mounting lawsuits alleging unpaid bills, construction defects and other problems.

The firm, active in both commercial and residential development, reported a loss of $6.4 million on revenue of $8.8 million for the three months ending Sept. 30 vs. a profit of $547,000 on revenue of $38.7 million in the year-ago quarter.

The publicly traded company was listed on the Nasdaq stock market until June 14, when it was removed for falling below the market's listed criteria and failing to file reports with the U.S. Securities and Exchange Commission on time. The stock now trades on the over-the-counter bulletin board.

Saxton stock traded this morning at 1.56 cents compared to its 52-week high of $3.25 -- and what the lawsuit calls its high of $7 during the class action period between May 15, 1998, and May 15, 2000.

In a U.S. District Court lawsuit, Steven Komie of Chicago alleged he was among "thousands" of buyers of Saxton common stock from May 1998 through May 2000. Komie said he has suffered damages of more than $1.4 million after acquiring 319,500 Saxton shares.

He alleged the company violated federal securities laws and financial reporting principals when it capitalized as assets "certain indirect construction costs that should have been charged to expense as incurred."

The defendants were identified as James Saxton, the company's chairman and chief executive, Kirk Scherer, its former executive vice president of finance and Melody Sullivan, its former vice president and chief accounting officer.

Komie said Saxton, which allegedly delayed filing its 1999 SEC reports due to alleged unresolved asset valuation issues, revealed on May 15 its true financial results in amended reports for the first nine months of 1999.

For the third quarter ended September 1999, net income wasn't the $1.5 million allegedly reported in a Nov. 17, 1999, release -- but instead was only $547,000, an overstatement of almost 200 percent, the suit said.

The suit alleged Saxton acknowledged in its amended third-quarter 1999 report that its management "determined that certain interest and indirect construction costs capitalized should have been charged to expense as incurred, and certain capitalized interest costs were not appropriately charged to cost of revenue when sales of home and commercial properties were recognized."

Saxton, which allegedly had a $14 million government contract to start building the 272-unit South Valley Apartments project in the fourth quarter 1998, allegedly received a $3.5 million completion payment for work not even commenced, the suit said.

The suit, which alleged Saxton had its subcontractors ship supplies to the site in December 1998 to create the appearance of progress, alleged this "subterfuge" resulted in $3.5 million being prematurely recognized in 1998 instead of 1999.

Komie alleged Saxton fraudulently withheld its true financial results to allegedly reduce its payment for its November 1998 purchase of Diamond Key Homes of Arizona. The $12.9 million purchase included $1 million of Saxton's common stock to be paid Nov. 13, 1999.

"The higher the price of Saxton stock on Nov. 13, 1999, the fewer shares which would have to be used to pay the $1 million worth of Saxton stock," the suit said.

"On Nov. 12, 1999, Saxton stock closed at $2 13/16 a share, meaning Saxton paid 355,555 shares. After its true financial results were revealed, Saxton stock traded at 50 cents a share, meaning Saxton would have had to pay 2 million shares," Komie said. "Saxton saved 1.644 million shares due to its fraud."

Saxton officials declined comment on the lawsuit.