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In the United States District Court For the District of Nevada
CV-N-03-0463-ECR-VPC
Securities and Exchange Commission
Plaintiff
Gabor S. Acs and
Penny King Holdings, Inc.
Defendants
PLEASE TAKE NOTICE that the Plaintiff Securities and Exchange Commission will take the following depositions at the times and locations indicated:
Deponent: Gary Saunders, former President and CEO of eKnowledge.
Date: January 20, 2004
Time: 1 p.m pst.
Location: Paulson Reporting
Address: 11400 W. Olympic Blvd Suite 140, LA CA 90064
Phone: 877-342-5600
Deponent: Tom Sims, former President and CEO of Quintek Technologies
Date: January 21, 2004
Time: 8 am pst.
Location: Paulson Reporting
Address: 11400 W. Olympic Blvd Suite 140, LA CA 90064
Phone: 877-342-5600
You are invited to attend and cross-examine
Dated January 2, 2004.
Elizabeth Krupa
Polly Atkinson
Attorney for Plaintiff
Securities and Exchange Commission
1801 California Street, Suite 1500
Denver, Colorado 80202
303-844-1000
Bring on the media circus!
Recent Ruling Demonstrates Importance of Carefully Drafted Non-Disclosure Agreements
A recent Federal Court of Appeals case, Marketel International, Inc. v. Priceline.com, Inc., 36 Fed. App. 423, 2002 U.S. App. LEXIS 7843 (Fed. Cir. 2002), underscores the possibility that a "non-disclosure agreement" may bring about lasting and adverse consequences.
Designed to prevent outside use or disclosure of confidential information shared between parties as they explore or enter into a business relationship, non-disclosure agreements, or "NDAs," are often executed early in a business relationship. However, as Marketel demonstrates, NDAs can significantly limit the rights of the parties who sign such an agreement.
In Marketel, a 1987 NDA signed by a Marketel consultant provided that the consultant would keep certain information confidential for a specified term. The consultant purportedly disclosed confidential information more than five years after the NDA expired. Marketel claimed trade secret misappropriation. Although acknowledging that the NDA had expired prior to the time of the consultant's alleged disclosure, the company argued that California law imposed a duty of confidentiality on the consultant that survived the expiration of the NDA. The court disagreed, holding that since the parties had chosen to negotiate their own arrangement concerning confidential information, they had effectively supplanted any state trade secret protection to which Marketel was otherwise entitled. Ironically, Marketel may have been damaged by the very NDA intended to protect it.
This case is one more example of the importance of a carefully drafted NDA. Marketel might have benefited had the confidentiality provisions in its NDA continued so long as the covered information remained confidential.
Termination provisions are only one of the significant issues that can arise in an NDA. Other examples include:
a narrow definition of "confidential information" that does not protect the information in question;
a broad definition of "confidential information" that covers information obtained outside the targeted relationship;
the exclusion from an agreement of "residual knowledge," which is, in effect, ideas, basic concepts, and other nontangible information shared or retained in human memory;
procedures to permit parties to seek protective orders prior to court-ordered disclosure;
provisions requiring the "return" of all confidential information at the end of an agreement; and
provisions more appropriately addressed in a separate document, including:
clauses designating ownership of intellectual property created during the arrangement;
noncompete/nonsolicitation provisions; and
"no shop" clauses.
As demonstrated by Marketel, seemingly innocuous NDA agreements should be reviewed with careful attention in order to avoid adverse consequences.
Famous Last Words of a Professional Liar!
REDUX: A RETROSPECTIVE OF THE SEC'S INTERNET PROGRAM FOUR YEARS AFTER ITS GENESIS.
By John Reed Stark *
* An eleven-year veteran of the Division of Enforcement of the United States Securities and Exchange Commission, John Reed Stark is Chief of the Office of Internet Enforcement and is in charge of the Enforcement Division's Internet Program. He is also an Adjunct Professor of Law at Georgetown University Law Center where he has taught a course on the Securities Laws and the Internet for the past five years and also serves as Co-Chair of the American Bar Association Subcommittee on Securities Law and the Internet. The Securities and Exchange Commission as a matter of policy disclaims any responsibility for any private publication or speech by any of its members or staff. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or the author's colleagues on the staff of the Commission.
"A new life awaits you in the Off-World colonies. The chance to begin again in a golden land of opportunity and adventure . . . New climate, recreational facilities . . . absolutely free. Use your new friend as a personal body servant or a tireless field hand--the custom tailored genetically engineered humanoid replicant designed especially for your needs. So come on America, let's put our team up there . . . ." n1
n1 The quotes contained in the headings of this Article are from the futuristic cult film BLADE RUNNER (Warner Bros. 1982), directed by Ridley Scott, produced by Michael Deelay and featuring Harrison Ford, about a jaded ex-cop forced out of retirement to hunt down a group of genetically engineered "replicants."
More than four years ago, together with the Securities and Exchange Commission's (SEC's or Commission's) Chief of the Office of Market Surveillance, I wrote an article for this publication outlining a program for the SEC Enforcement Division (Division) and the Internet. n2 Dubbed "EnForcenet," the article anticipated great changes in the Commission's enforcement program for the future and promised to tackle head-on any problems the widespread use of the Internet would engender for investors. Rather than simply reiterating the common themes among law enforcement agencies and lamenting about the magnitude of Internet fraud and the financial restraints that prevent federal agencies from effectively policing the Internet, EnForcenet set out to act immediately, using whatever resources were available.
n2 Joseph J. Cella III & John Reed Stark, SEC Enforcement and the Internet: Meeting the Challenge of the Next Millennium; A Program for the Eagle and the Internet, 52 BUS. LAW. 815 (1997).
By initiating a plan for the Internet without delay, the Commission hoped to discourage perpetrators of Internet fraud before they could find their niche. So now, after more than four years of its implementation, has that plan worked? Yes, it has--in fact, a careful study of the Commission's track record of the past four years reveals that the program has experienced success far greater than anyone originally anticipated.
After providing some background on the growth of the Internet, both as an investment resource and as a vehicle for securities fraud, this Article will: (i) discuss the overall history and development of the Commission's Internet program; (ii) examine some of the Enforcement Division's on-line surveillance methods; (iii) describe the most effective enforcement techniques the Division has employed to deter on-line securities law violations; and (iv) highlight some important cooperative enforcement efforts undertaken with outside agencies.
BACKGROUND
"Replicants are like any other machine, they're either a benefit or a hazard, if they're a benefit, its not my problem."
Before beginning any discussion of Internet fraud, it is important to note the many benefits that the Internet has created for investors--benefits that far outweigh any negative impacts on the investor community.
Quite simply, the Internet continues to have a profound effect on the way investors participate in the capital markets. n3 According to recent reports, there are approximately 160 on-line-trading broker-dealers servicing approximately 11.7 million on-line investors in the United States--nearly double the number of investors using on-line firms in 1999. n4 Through the second quarter of 2000, online brokerage accounts held approximately $ 1.08 trillion in assets--a twelve percent increase from the last quarter of 1999. n5 Average on-line trading volumes for the second quarter of 2000 were approximately 1.1 million trades per day, a decrease of approximately twenty percent from the first quarter of 2000. n6 Since that time, average daily trading volume has remained above or around 900,000, but on-line trading firms are still spending money to update their technology and to attract new customers (reports anticipate growth in the number of on-line accounts from 24 million by the end of 2001 to 33 million in 2002, and 43 million in 2003). n7 Although some reports even show that the on-line trading system is losing established investors faster than it can replace them with new traders, n8 clearly, on-line broker-dealers have had a vastly heightened presence over the last several years in terms of the number of firms offering on-line services, the number of accounts they handle, and the dollar value of these accounts. Further, reports also show that these statistics will undoubtedly increase. n9 Regardless of what the statistics show (as they tend to change like the weather), on-line trading is forever entrenched into the landscape of U.S. and global securities markets.
n3 See SEC Chairman Arthur Levitt, Testimony Concerning Appropriations for Fiscal Year 2001 Before the House Subcommittee on Commerce, Justice, State and the Judiciary Committee on Appropriations (Mar. 30, 2000), available at http://www.sec.gov/news/testimony/ts062000.htm.
n4 U.S. BANCORP PIPER JAFFRAY EQUITY RESEARCH, ONLINE FINANCIAL SERVICES UPDATE 4, 6 (Oct. 2000), available at http://www.gotoanalysts.com/piperpublic/goto/internetconference/reports/online_fin_oct2000.pdf.
n5 Id. at 8.
n6 Id. at 6.
n7 Elizabeth Lamb, Trading Takes a Breather, RED HERRING, Sept. 15, 2001, at 30.
n8 Press Release, J.D. Power and Assoc., Weakening Market Fuels Efforts by Online Brokerage Firms To Provide Consolidated Account Services (Sept. 10, 2001), available at http://www.jdpa.com/presspass/pr/pressrelease.asp?ID=153.
n9 Press Release, J.D. Power and Assoc., Online Brokerage Firms Continue to Have a Strong Hold on Current Investment Pool; Study Shows Many Online Investors Plan to Maintain, or Increase Trading Volume (Mar. 27, 2001), available at http://www.jdpa.com/presspass/pr/pressrelease.asp?ID=106.
The Internet also has changed the way investment research is conducted, making a wide array of information available to even relatively unsophisticated investors. Investors today have unprecedented access to all manner of investment-related publications, from real-time stock quotes, SEC filings, n10 and corporate news releases to the kind of spirited and provocative investment opinions found in Internet message boards, Web sites, and chat rooms. n11 It is not uncommon today to see entire communities of Internet users develop to trade information, insight, and invective about CEOs, companies, and particular industry segments or trading markets. Today's retail investor is much more likely to feel overloaded than overlooked.
n10 A wide range of Commission filings by publicly-traded issuers are available to investors free of charge through the SEC's Electronic Data Gathering, Analysis, and Retrieval System (EDGAR), available at http://www.sec.gov/edgar.shtml.
n11 See Jonathan Lansner, A New Brand of Spam: Stock Touting on Reputable Bulletin Boards Can Inflate the Value of Obscure Companies, ORANGE COUNTY REG., Feb. 12, 2000, at K01 ("Stock message boards on Internet financial sites have long been breeding grounds for rumors and stock hype. These sites are almost universally derided as bad places to get investment advice, Still, they draw plenty of online eyeballs.").
Not only are investors accessing the securities markets through the Internet more frequently than they did before the advent of on-line trading, but the technological advances of the digital age are also changing the breadth of the markets themselves. Established securities markets are moving toward extended trading hours, and alternative trading systems are creating new points of entry to those markets. n12 This increase in the scope of the trading markets means that the Commission's capacities for regulation and enforcement will likely be tested as never before in coming years. n13
n12 See SEC, SPECIAL STUDY: ELECTRONIC COMMUNICATION NETWORKS AND AFTER-HOURS TRADING (June 2000), available at http://www.sec.gov/news/studies/ecnafter.htm.
n13 See, e.g., SEC Chairman Laura S. Unger, Raising Capital on the Internet, Remarks at the 2001 Corporate Law Symposium, University of Cincinnati School of Law (Mar. 9, 2001), available at http://www.sec.gov/news/speech/spch471.htm; see also, Press Release 2001-119, SEC Historical Society to Hold Major Issues Conference on Securities Regulation in the Global Internet Economy (Oct. 25, 2001), available at http://www.sec.gov/news/press/2001-191.txt ("The theme of Securities Regulation in the Global Internet Economy was chosen because the rapid development of global marketplace requires a careful reexamination of the fundamental principles of securites regulation.").
SECURITIES FRAUD AND THE INTERNET
"I am not in the business. I am the business."
Unfortunately, "while the Internet has brought significant benefits to investors, it also has created significant dangers for the unwary. [During the late 1990s,] the Internet, coupled with the greatest bull market in history, . . . brought millions of relative novices to the markets, while also providing simple, effective, and anonymous ways for unscrupulous people to defraud them." n14 Various forms of internet media, including a single mass e-mail, "spam," a message board posting, an on-line investment newsletter, or any other form of electronic message can reach millions with the click of a computer mouse. Con artists today can exploit the benefits of cyberspace and easily and cheaply reach a more customized audience of investors far better than they could making thousands of cold calls from an old-fashioned boiler room, and the use of digital media can lend fraudulent material an air of credibility simply unachievable by a boiler room cold call. Still from their own living room, anyone with a home PC and some knowledge of the latest software (which is often available for free) can create an interactive, sleek Web site rivaling that of a Fortune 500 company--only now he or she can do so at even lesser cost and with even less training in the use of computers than four years ago. n15
n14 Levitt, supra note 3.
n15 See Cella & Stark, supra note 2, at 816 ("The entrepreneur, the inventor, and the small business owner now have a cheap and efficient alternative means to reach millions of potential interested parties without the expense of a road show, without hiring the usual cadre of lawyers and financial advisers, without hiring a printing service, and, most of all, without leaving the house.").
INITIAL EXPERIENCES: NEW MEDIUM, FAMILIAR SCAMS
In the earliest days of the Commission's Internet fraud program, the securities frauds that prevailed on-line were simply electronic versions of scams that had long been conducted through more traditional media such as paper newsletters, mass organizational meetings, and orchestrated telephone solicitations. n16 Principal among these were:
Stock manipulations: These are typically so-called "pump and dump" frauds in which false and misleading information concerning an issuer is disseminated on-line to generate interest in a stock, allowing insiders to sell their stock at artificially inflated prices. n17
Offering frauds: These include fraudulent on-line offerings of exotic investments, n18 interests in pyramid schemes, n19 and so-called "prime bank" programs. n20
Illegal touts: These are on-line securities recommendations that fail to disclose that the persons making such recommendations were paid for their positive opinions. n21
n16 See Levitt, supra note 3; see also Cella & Stark, supra note 2, at 835 ("The swindles of the Internet are no different from the confidence games of the past; the only difference is the medium.").
n17 See SEC v. Huttoe, Litig. Release No. 16,632A, 72 SEC Docket (CCH) 2194 (D.D.C. July 21, 2000) (discussing a large-scale pump and dump scheme resulting in Commission actions against more than forty defendants over a four-year period, and criminal charges against five defendants).
n18 See SEC v. Frye, Litig. Release No. 14,702, 60 SEC Docket 1882 (S.D.N.Y. Oct. 30, 1995). In the spring of 1995, Scott Frye posted a notice over the Internet soliciting investors by promising "riskless profits and above-average returns" from investments in two Costa Rican enterprises that produced coconut chips: ICP and the Jupiter Agro Development Project. According to the SEC complaint, Frye misled potential investors by telling them a bank would guarantee their principal and a fifteen percent return in one year and that one of the companies was a major distributor for A&P Supermarkets. See also SEC v. Odulo, Litig. Release No. 14,616, 60 SEC Docket 0122 (D.R.I. Aug. 24, 1995). In August 1995, the SEC filed a complaint against Daniel Odulo who solicited investors over several newsgroups of the Internet. Odulo offered for sale bonds meant to raise money for a company called Golden Waters which he claimed would yield a "whopping 20% rate of return" for a "very low risk." Odulo also assured potential investors that they would be insured against potential losses, even though there was no such insurance and made up the names of investment advisers who vouched for the bonds. According to the SEC complaint, Odulo failed to disclose that Golden Waters was a proposed new venture involving the acquisition and raising of eels and that he had no expertise in the culturing of eels. Moreover, the solicitation included several glowing endorsements from fabricated persons and entities. Odulo consented to an injunction from further violations of the securities laws but a monetary penalty was waived because of Odulo's financial condition. Id.
n19 See SEC v. Pleasure Time, Inc., Litig. Release No. 14,825, 61 SEC Docket 1189 (S.D. Ohio Feb. 26, 1996). A complaint filed by the SEC on March 15, 1995, alleged that John C. Hicks and a partner raised more than $ 3 million by selling securities to approximately 20,000 investors, contacted both on the Internet and over the telephone. Investors were told that they would reap astronomical profits from a worldwide telephone lottery and were encouraged to recruit other investors through the Internet. The complaint alleged that the sales pitch failed to disclose the legal and regulatory obstacles to starting a lottery. The Commission requested a temporary restraining order (TRO), injunctions, and civil penalties against various participants in the scam. On the day the complaint was filed, the court entered the TRO, which included a freezing of assets. Id. at 1190.
n20 See SEC v. Block, Litig. Release No. 14,828, 61 SEC Docket 1192 (D. Mass. Feb. 27, 1996). Starting in 1994, Renate Haag, of Langen, Germany, and Malibu, California, offered investors what seemed like a good deal, through a business she called Haag and Partner. Soon, Gene Block of Durham, North Carolina, operating through Block Consulting Services, and Robert T. Riley, Jr., of St. Louis, Missouri, operating through the Roberts Group, were pitching Haag and Partner investments on the Web as well. They raised over one million dollars by promising returns in some cases of 200% to 420% annually, and the promoters told investors their initial investments would be guaranteed against loss because they would be backed by "Prime Bank Guarantees." According to the Commission, however, Prime Bank Guarantees does not, in fact, exist. Id. at 1193. The court granted a TRO against Block and froze his assets; similar penalties were issued against the other defendants. Id.; see also SEC v. Octagon Tech. Group, Litig. Release No. 14,942, 62 SEC Docket 0377 (D.D.C. June 11, 1996). In Octagon Technology Group, a computer software company and two of its officers were sued for their roles in creating an elaborate sham offering of offshore debt securities on the Web. The Web site, established for the Agency for Interamerican Finance (AIF), a Panamanian shell subsidiary of Octagon, advertised AIF "Interamerican hard currency bonds" for sale to investors. The Commission alleged that this offering was essentially a fraud because no bonds ever existed, and AIF had no business operations or assets. AIF's web pages, however, promised prospective investors a risk-free investment with guaranteed returns of 11.75% annually and portrayed AIF as a successful provider of investment capital to Latin American businesses. See also SEC v. Capital Acquisitions, Inc., Litig. Release No. 15,601, 66 SEC Docket (CCH) 433 (D. Utah Dec. 23, 1997); SEC v. Interactive Prods. & Servs., Inc., Litig. Release No. 15,700, 66 SEC Docket (CCH) 2187 (N.D. Cal. Apr. 8, 1998); SEC v. Internet Casino Sports Gaming, LLC, Litig. Release No. 16,025, 68 SEC Docket 3283 (C.D. Cal. Jan. 13, 1999).
n21 See SEC v. Chelekis, Litig. Release No. 15,264, 63 SEC Docket 2900 (D.D.C. Feb. 25, 1997). In this case, the Commission's complaint alleged that Chelekis, a publisher who distributed various investment newsletters, known as the "Hot Stocks" publications, over the Internet and in print format, knowingly or recklessly made materially false and misleading statements concerning six publicly-traded companies and failed to disclose in the Hot Stocks publications that he and entities that he controlled (defendants KGC, Incorporated and Hot Stocks Review, Incorporated) received at least $ 1.1 million from more than 150 issuers and 275,000 shares of stock from ten issuers, as payment for recommending the issuers' securities in the Hot Stocks publications. Without admitting or denying the allegations in the complaint, Chelekis, KGC, and Hot Stocks Review consented to the entry of a final judgment permanently enjoining them from violating the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. Id. The final judgment ordered the defendants to pay a total of $ 162,727, representing $ 75,050 in disgorgement, $ 12,627 in prejudgment interest, and a $ 75,050 civil penalty. Id.; see also SEC v. Samblis, Litig. Release No. 15,609, 66 SEC Docket (CCH) 576 (M.D. Fla. Jan. 6, 1998); SEC v. Savage, Litig. Release No. 15,954, 68 SEC Docket 1122 (Oct. 27, 1998).
RECENT EXPERIENCE: ON-LINE FRAUDS BEGIN TO EVOLVE
As the Internet has evolved, so has Internet fraud. Virulent new variations on the familiar frauds have begun to emerge. Among these are:
Recommendation "scalping": an on-line version of a fraudulent practice in which the promoter of a Web site secretly acquires blocks of a security he intends to recommend and then clandestinely sells into the run-up triggered by his recommendation. This scalping can be carried out through a "momentum trading" site, an investment Web site through which a promoter attempts to create a short-term price spike in a thinly-traded stock by inducing groups of "momentum" traders to invest on a particular date at a particular time. n22 Alternatively, promoters may use a variant on the standard momentum site, a daytrading recommendation site; the daytrading site can provide investors with multiple picks per day. Frauds conducted through these Web sites are often advanced by fraudulent descriptions of the promoter's qualifications or track record. n23
"Imposter" message board frauds: an updated version of the pump and dump scheme, in which a manipulator (in a guise designed to lend the information credibility) posts false and misleading information on Internet message boards in order to influence the price of a stock. n24
"Misdirected" spam manipulations: attempts to manipulate a microcap stock's price through mass e-mails purporting to be accidentally delivered communications between investors unaffiliated with the recipient. n25
n22 See SEC v. Colt, Litig. Release No. 16,461, 71 SEC Docket 2387 (D.D.C. Mar. 2, 2000). This was a civil action and administrative proceeding alleging that Georgetown University law student Douglas Colt and a group of friends and relatives defrauded investors of nearly $ 350,000 in illicit profits by recruiting large numbers of investors to purchase small-cap stocks recommended by the Fast-Trades.com Web site at particular times and failing to disclose that they were engaged in scalping.
n23 See SEC v. Park, Litig. Release No. 16,925, 74 SEC Docket (CCH) 1183 (N.D. Ill. Mar. 8, 2001). This action involved a self-proclaimed stock-picking expert, "Tokyo Joe," who, without admitting or denying the Commission's allegations, consented to a permanent injunction against future federal securities law violations and agreed to pay $ 754,650 to settle the matter. In its complaint, the Commission alleged that Park not only engaged in unlawful stock touting and scalping, but also published on his Web site more than 200 misleading statements, including false statements about his track record as a stock-picker.
n24 In these frauds, stock manipulators may disguise their touts as press releases from established news organizations or the advice of an issuer's corporate officer or a brokerage firm analyst. See SEC v. Hoke, Litig. Release No. 16,117, 69 SEC Docket 1970 (C.D. Cal. Apr. 21, 1999) (involving a Webpage posting which provided a bogus link to Bloomberg News Service announcement); SEC v. Zbierajewski, Litig. Release No. 16,363, 71 SEC Docket 0285 (N.D. Ill. Nov. 18, 1999) (concerning a counterfeit PR Newswire release posted on Yahoo! Finance); United States v. Jakob, Litig. Release No. 16,857, 74 SEC Docket (CCH) 214 (C.D. Cal. Jan. 8, 2001) (pertaining to a false press release disseminated to news organizations via Internet newswire).
n25 See SEC v. Sheret, Litig. Release No. 16,451, 71 SEC Docket (CCH) 1787 (S.D.N.Y. Feb. 24, 2000) (involving numerous e-mail stock recommendations addressed to appear to have been transmitted to recipients by mistake); see also SEC v. Globus Group, Inc., Litig. Release No. 16,212, 70 SEC Docket 0506 (S.D. Fla. July 16, 1999). In the Globus Group case, the SEC alleged that certain defendants sent paper fax transmissions which purported to be mistakenly-sent messages from employees of banks or brokerage firms. This technique has been adopted by electronic junk-mailers, who routinely draft their stock recommendations in such a way that they appear to be misdirected communications--sometimes containing inside information--between friends or acquaintances.
THE SEC'S EFFORTS TO COMBAT INTERNET FRAUD
"More human than human is our motto."
A TEAM APPROACH
The Commission's ongoing program to combat Internet securities law violations remains a team effort, in which every Division and Office plays a significant part. n26 The Division of Corporation Finance has analyzed numerous Internet securities offerings to determine their compliance with the Commission's registration and disclosure requirements. The Division of Market Regulation has monitored the impact of the Internet on the types of services offered to investors by broker-dealers, such as on-line brokerage and day-trading, and is developing an appropriate regulatory regime as more of the functions of traditional exchanges and other market mechanisms move on-line. The Office of Compliance Inspections and Examinations (OCIE) has been working to respond, through the examination process, to the rising tide of concerns about the operations of on-line brokerages, ECNs, and daytrading firms. n27 The Office of the General Counsel has helped to develop the legal analysis applicable to new types of on-line fraud and to provide guidance on the application of federal privacy law to on-line investigations. The agency's Office of International Affairs (OIA) works with the SEC's Enforcement staff and foreign authorities to obtain information needed to investigate and prosecute SEC enforcement actions and also assists foreign authorities in obtaining information needed from persons or entities based in the United States. n28 The Office of Investor Education and Assistance (OIEA) helps to build an educated, informed investor community and advise the public on remedial strategies when investors are victims of fraud. n29
n26 Levitt, supra note 3.
n27 For example, SEC examiners review: (i) the execution quality of orders entered on-line; (ii) systems capacity and reliability; (iii) the on-line public offering process; (iv) the use of and disclosure concerning margin; (v) customer complaints; and (vi) the security of on-line trading systems. See OFFICE OF COMPLIANCE INSPECTIONS AND EXAMINATIONS, SEC, EXAMINATIONS OF BROKER-DEALERS OFFERING ONLINE TRADING: SUMMARY OF FINDINGS AND RECOMMENDATIONS (Jan. 25, 2001), available at http://www.sec.gov/news/studies/online.htm.
n28 See Press Release 2000-64, SEC, SEC and Regulators from Around the World Conduct an International Surf Day to Help Combat Internet Fraud (May 15, 2000), available at http://www.sec.gov/news/press/2000-64.txt.
n29 See, e.g., SEC, INTERNET FRAUD: HOW TO AVOID INTERNET INVESTMENT SCAMS, available at http://www.sec.gov/investor/pubs/cyberfraud.htm (last modified Mar. 16, 2001).
THE DIVISION OF ENFORCEMENT
The lead role in combating on-line fraud is played by the Enforcement Division, because it is charged with uncovering, investigating, and litigating civil actions alleging federal securities law violations. The SEC brought its first Internet enforcement action in 1995, n30 and at the same time, named its first "Special Counsel for Internet Projects" and tasked him with beginning to build an Internet enforcement program. The Division's Internet program has steadily expanded since that time n31 and, through a mixture of traditional and novel enforcement strategies, has achieved significant results.
n30 SEC v. Frye, Litig. Release No. 14,702, 60 SEC Docket 1882 (S.D.N.Y. Oct. 30, 1995).
n31 The Internet program received no formal budget allocation at its inception; rather the program generally draws from the Commission's overall appropriation from Congress. The Commission, however, reprogrammed $ 5.5 million to combat Internet fraud during fiscal 1999, and in November 1999, Congress appropriated an additional $ 7 million over the Commission's fiscal 2000 request to augment the Commission's Internet fraud program. See Levitt, supra note 3. With these new funds, the Commission created ninety-two new slots for our Internet fraud program. Seventy-five of the slots have been assigned to the Division of Enforcement. The remaining seventeen slots have been assigned to other specialized divisions and offices within the Commission to aid their Internet-related efforts. Two slots have been allocated to the Office of International Affairs, three to the Division of Market Regulation, three to the Division of Corporation Finance; four to the Office of Compliance, Inspections and Examinations, and five to the Office of Internet Enforcement. These new staff members focus on Internet enforcement and regulatory issues. Among other things, they (i) provide technical expertise to the Enforcement Division; (ii) develop policies for the securities industry's use of the Internet; (iii) inspect and examine regulated entities operating on-line; and (iv) consider the need for and, when appropriate, develop rulemaking alternatives or legislative changes necessary to prevent and address market abuses involving the Internet. The Commission has also used the funds (i) to develop its own customized search engine that surfs publicly accessible areas of the Internet for potential securities law violations; and (ii) to renovate the Commission's on-line Enforcement Complaint Center. Both technology projects are discussed herein.
The Office of Internet Enforcement
In July 1998, as a result of the Internet's growing importance and the rising incidence of Internet fraud, a formal Office of Internet Enforcement (OIE) was created within the Enforcement Division. n32 Initially, OIE acted as a coordinator of the Commission's Internet program and as a liaison with other regulatory and criminal law enforcement agencies at the federal, state, and local levels.
n32 See Press Release 98-69, SEC, SEC Creates Office of Internet Enforcement to Battle Online Securities Fraud (July 28, 1998), available at http://www.sec.gov.news/pressarchive/1998/98-69.txt. John Reed Stark, formally the Division's "Special Counsel for Internet Projects" was promoted to Chief of OIE.
Between the spring of 1999 and the present, OIE staff has grown from three to twenty, including sixteen lawyers--all professionals who together possess experience and expertise in a wide variety of areas pertinent to Internet law enforcement. OIE's current functions include: conducting surveillance and identifying new areas for future monitoring, analyzing the complaints received in the on-line Enforcement Complaint Center (ECC), formulating investigative procedures, conducting law enforcement training for SEC staff and outside agencies, engaging in special technology-related projects, ensuring staff compliance with federal privacy statutes and other applicable laws, conducting certain important Internet-related investigations, and serving as a resource on Internet matters for the entire Commission. n33
n33 See SEC, INTERNET ENFORCEMENT PROGRAM: ABOUT THE OFFICE OF INTERNET ENFORCEMENT, available at http://www.sec.gov/divisions/enforce/internetenforce.htm (last modified July 16, 2001) [hereinafter INTERNET ENFORCEMENT PROGRAM].
OIE has also constructed a state-of-the-art computer lab, warehousing a separately secure and fire-walled local area network facility that includes the latest software, hardware, and operating systems. The computer lab utilizes its own T-1 line, n34 and has the capability to warehouse Web sites, Internet protocol trails and other important electronic evidence.
n34 T-1 lines grant access at 1500 bits per second (significantly faster than the average high speed modem which only transfers 56.6 bits per second).
OIE also maintains its own internal SEC intranet Web site, that centralizes thousands of pages of useful Internet-related information, as well as an Internet Web site that catalogs all public Internet-related SEC Enforcement (and other) information.
Special Internet Investigative Branches
Within the Enforcement Division, this past year the SEC created ten new investigative branches--two in Washington, D.C., and one each in San Francisco, Los Angeles, Chicago, Miami, New York, Boston, Fort Worth, and another divided among the three offices comprising the SEC's Central Region (Denver, Fort Worth, and Salt Lake City). These branches consist of lawyers and, in some cases, non-lawyer Internet specialists. Unlike the rest of the Enforcement Division's staff, lawyers in the Internet branches are wholly devoted to conducting Internet-related investigations. This specialization--a new and different direction for the Division--has allowed the SEC to develop a cadre of Internet experts throughout the country who can respond quickly and effectively to on-line fraud when and where it happens.
The CyberForce
Alongside OIE remains the CyberForce--more than 200 Commission lawyers, accountants, and investigators nationwide--whose purpose is to conduct regular Internet surveillance as well as certain special projects such as internal "surf days." n35 CyberForce members dedicate a portion of their workweek to surfing the Internet, developing leads for potential enforcement cases. Formed in 1996, the CyberForce began as an Enforcement Division "corps of [SEC staff] volunteers who 'surf' the Web for a few hours each week in search of securities law violations." n36 The CyberForce also originally provided many of the leads for the first two Commission sweeps (the touting sweep in October 1998 and the offering sweep in May 1999). Additionally, the CyberForce participates in coordinated surveillance projects with other federal agencies, such as the joint law enforcement initiative Internet fraud "surf days" orchestrated over the past three years by the Federal Trade Commission and the International Organization of Securities Commission's (IOSCO's) "surf days." n37
n35 See infra notes 36-39 and accompanying text.
n36 Cella & Stark, supra note 2, at 836-37; see also Levitt, supra note 3.
n37 See Press Release, Fed. Trade Comm'n, Surf Day Monitors Investment Opportunities (Dec. 21, 1998), available at http://www.ftc.gov/opa/1998/9812/iosd.htm; see also Press Release 2000-64, SEC, SEC and Regulators from Around the World Conduct an International Surf Day to Help Combat Internet Fraud (May 15, 2000), available at http://www.sec.gov/news/press/2000-64.txt.
SURVEILLANCE
"If only you could see what I've seen with your eyes."
Despite the apparent anonymity offered by the Internet, the Commission has had no lack of success in finding suspect conduct on-line; by the very nature of their businesses, securities fraudsters need to be easily found. Perpetrators of online fraud want to disseminate their message to as many users as possible. Further, the Internet offers an investigator a clear set of electronic footprints (including easily captured Internet protocol) with which to trace scammers. Even more importantly, thanks to the Internet, law enforcement officials and regulators now have the opportunity to watch a fraud as it develops in front of their own eyes. The Internet offers a "window" and "plain view" into the schemes through any desktop computer, allowing for "real time" observation of fraudulent activities. Fraudsters may not realize that by sending their schemes via spam, Web site, newsgroup or otherwise, they do indeed reach a vast audience--including the Enforcement Division of the SEC. With this fact in mind, the Commission maintains an active fraud surveillance program with several important prongs.
ENFORCEMENT COMPLAINT CENTER
In June 1996, the SEC opened the Enforcement Complaint Center (ECC), an on-line mailbox through which investors can inform the agency electronically of potential securities law violations. The ECC generally receives between 300 and 400 investor complaints per day--with fluctuations resulting from heightened media activity involving the Commission--relating to virtually every type of potential securities violation occurring on-line. ECC review and analysis is resourceintensive, but very worthwhile. ECC complaints have thus far provided (and continue to provide) the Enforcement Division with many of its most promising investigative leads.
Recognizing that the ECC has evolved into probably the most critical part of the Division's Internet program, the Commission has almost completed a $ 2 million renovation of the ECC. The new system that will replace the simple ECC mailbox is internally referred to as C.H.A.R.T. (Complaint, Handling, Assignment, Response and Tracking). C.H.A.R.T. will greatly modernize the Commission's electronic complaint process, making the system far more robust and enabling lawyers throughout the SEC to process, track, and assign complaints, while assembling a comprehensive, searchable complaint database.
SURF DAYS
In order to leverage staff and resources and to focus the Commission's efforts on key investigative areas, the Office of Internet Enforcement coordinates quarterly internal "surf days." The goal of each surf day is to locate potential frauds in key program areas including market manipulation, fictitious investment schemes, momentum trading, suspicious stock offerings, false statements, and unregistered entities.
On the designated surf day, the CyberForce members from the SEC's home, regional and district offices surf the web in a precisely-targeted manner, homing in on a particular "territory" (such as a message board, Web site or web ring) or a violation type (such as so-called prime bank schemes n38 or pyramid/ponzi activities). CyberForce members send the results of their search efforts to OIE, where the material is reviewed and potential investigative leads referred to offices within the SEC or to other appropriate federal or state agencies. OIE maintains extensive records of all surf day leads and constantly convenes to improve surveillance techniques and discuss future surf day subjects.
n38 Prime bank schemes involve the sale of fraudulent investment opportunity in so-called prime bank notes, debentures, and other types of interest. The instruments, entirely fictional, purport to represent a secondary market for stand-by letters of credit. Such a market does not exist and is simply a means to defraud investors. See SEC, WARNING TO ALL INVESTORS ABOUT BOGUS "PRIME BANK" AND OTHER BANKING-RELATED INVESTMENT SCHEMES (Sept. 15, 2000), available at http://www.sec.gov/divisions/enforce/primebank.shtml. Given that many prime bank frauds now take place over the Internet, the Office of Internet Enforcement now administers the SEC's prime bank program (in addition to the Internet program).
SEC INTERNET SEARCH ENGINE
The SEC's Internet Search Engine is a customized automated search engine--the most recent of its surveillance initiatives. On August 18, 2000, the Commission awarded the contract for the Internet Search Engine to Science Applications International Corporation (SAIC). SAIC designed and developed the system from August to October 2000. In November and December 2000, the Internet Search Engine became operational, and OIE received its first trial downloads of data; these were analyzed to determine the Internet Search Engine's operational capabilities and baseline site relevance.
Using search words and phrases, the Internet Search Engine identifies relevant sites and newsgroup posts in the public areas of the Internet. In order to protect the privacy of Internet users, the Internet Search Engine surfs only public areas of the Internet, much as any other publicly-available Internet search engine might. The Internet Search Engine's battery of search terms and algorithims are constantly being updated and modified to reflect current patterns of suspect on-line conduct identified by OIE.
After searching the Internet, the Internet Search Engine filters out irrelevant material and ranks the remaining information by relevance. For each Web site the Internet Search Engine delivers (vis-a-vis a user-friendly browser enabled graphical user interface): (i) an archived version of the site; (ii) a link to the live version of site; (iii) the site's domain registration information; and (iv) Web site link information. The Internet Search Engine also captures and warehouses other sites and posts that have met the search criteria, but that may not have received a highly relevant score. As a result, the SEC has access to an even larger searchable database of potentially fraudulent sites and posts. n39
n39 See Press Release 2000-44, SEC, Chairman Levitt Issues Statement on Internet Search Engine (Apr. 5, 2000), available at http://www.sec.gov/news/press/2000-44.txt.
OIE staff can access the Internet Search Engine's database through the T-1 connection in OIE's computer lab, or through a secure Web site viewable on selected desktop computers. The Internet Search Engine delivers an average of 100 or so Web sites and newsgroup postings per month. Overall, the sites delivered to date appear to be highly relevant, and the Internet Search Engine is already providing strong leads for investigations. Future refinement of the process should yield even better leads. Though the search engine will never replace other important surveillance efforts, it is an effective complement to the Division's other monitoring efforts.
TECHNIQUES FOR ADDRESSING ON-LINE FRAUD
"It's not an easy thing to meet your maker."
ENFORCEMENT SWEEPS AND COORDINATED FILINGS
One investigative technique that has helped the agency achieve its twin goals of deterrence and education is the "sweep," the simultaneous filing of multiple enforcement actions targeting similar misconduct and presented as a cohesive package. The sweep allows the Commission to deliver its message more forcefully and effectively than the filing of individual cases might. Sweeps have served as an efficient tool of the Internet enforcement program, particularly during the programs infancy. n40
n40 To review more information about all five SEC Internet fraud sweeps, see INTERNET ENFORCEMENT PROGRAM, supra note 33.
The first enforcement sweeps targeted "touters" who recommended stocks without disclosing adequately to investors that they received compensation from the issuers. The October 1998 sweep involved the filing of twenty-three separate enforcement actions against forty-four individuals and entities. n41 A follow-up touting sweep in February 1999 included actions against an additional thirteen individuals and entities. n42
n41 See Press Release 98-117, SEC, SEC Charges 44 Stock Promoters in First Internet Securities Fraud Sweep (Oct. 28, 1998), available at http://www.sec.gov/news/headlines/netfraud.htm.
n42 See Press Release 99-24, SEC, SEC Continues Internet Fraud Crackdown (Feb. 25, 1999), available at http://www.sec.gov/news/headlines/spamcase.htm.
In an effort to stem the tide of fraudulent on-line securities offerings, a May 1999 enforcement sweep combined actions against eighteen individuals and eight entities who used the Internet to engage in securities offerings in violation of federal law. These actions generally involved alleged offerings of non-existent securities, or offerings in which exaggerated claims were made concerning expected investor returns. This sweep demonstrated that the Internet gives investigators a "window" into fraudulent activity and permits the offerings to be halted, in many cases, before any investors are harmed. Of the fourteen offerings that formed the basis of the May 1999 sweep, five were stopped before investors lost any money. n43
n43 See Press Release 99-49, SEC, SEC Steps Up Nationwide Crackdown Against Internet Fraud, Charging 26 Companies and Individuals for Bogus Securities Offerings (May 12, 1999), available at http://www.sec.gov/news/headlines/nets0599.htm.
Though not a full-fledged sweep, the Commission's coordinated filing of four actions in July 1999 against the purveyors of so-called "free stock" proved an important blow to a potentially dangerous and unlawful on-line practice. n44 The designation "free stock" was really a "misnomer" in these offerings. n45 While cash did not typically change hands in free stock offerings, the companies that issued the stock usually received valuable benefits. n46 In an on-line environment where merchants and retailers struggle for market share, information about, and access to, potential customers are valuable commodities. Free stock giveaways were typically employed to help generate these valuable customer databases, or to stimulate other forms of commercial activity.
n44 See Press Release 99-83, SEC, SEC Brings First Actions To Halt Unregistered Online Offerings of So-Called "Free Stock" (July 22, 1999), available at http://www.sec.gov/news/press/pressarchive/1999/99-83.txt.
n45 Id. (quoting SEC Enforcement Director Richard H. Walker).
n46 Id. Issuers of these offerings offer so-called "free" shares to individuals under a variety of circumstances such as: (i) requiring an Internet user to register with or visit the issuer's Web site, typically offering more "free" shares if identified as a "reference" by future visitors to the issuer's Web site who similarly register for "free" shares; (ii) requiring cash payments for the "free" shares (as much as $ 10 per share) to "defray the printing costs of the stock certificates"; and (iii) requiring the purchase of a product, such as a phone card, or a service, such as an Internet service provider account, in order to receive one or more "free" shares.
By offering an investment opportunity that on its face appeared to involve no risk with seemingly no payment of money for the stock itself, issuers promoted an expectation of financial gain for the holders of the "free stock" that was dangerous for the investor and could be easily exploited by an issuer or promoter at a later date, for example, in a manipulation scheme.
Further, despite several regulatory pronouncements pertaining to the illegality of free stock offerings, n47 during 1999, such offerings continued to proliferate online. Thus, given the potential danger to investors, the Commission brought four matters at the same time in an effort to crackdown on the unlawful practice. n48
n47 The Division of Corporation Finance has issued several no-action letters advising that the distribution of "free stock" to individuals who visit or register on an Internet Web site constitutes an event of sale within the meaning of section 2(a)(3) of the Securities Act of 1933. Simplystocks.com, SEC No-Action Letter, 1999 WL 51836 (Feb. 4, 1999); see also Vanderkam & Sanders, SEC No-Action Letter, [1999 Transfer Binder] Fed. Sec. L. Rep. (CCH) P77,520, at 78,585 (Jan. 27, 1999); see also In re Capital Gen. Corp., Securities Act Release No. 7008, 54 SEC Docket (CCH) 1322, 1330 (July 23, 1993) ("Capital General's distributions of securities [which were purportedly for free] constituted a 'sale' within the meaning of the Securities Act since the distributions were dispositions for value . . . [which] accrued to Capital General and Yeaman by virtue of the creation of a public market for the issuer's securities . . . .").
n48 In each of the four actions, investors were required to sign up with the issuers' web sites and disclose valuable personal information in order to obtain their "free" shares. Free stock recipients were also offered extra shares, in some cases, for soliciting additional investors or, in other cases, for linking their own Web sites to those of an issuer or purchasing services offered through an issuer. Through these techniques, issuers received value by spawning a fledgling public market for their shares, increasing their business, creating publicity, increasing traffic to their Web sites, and, in two cases, generating possible interest in projected public offerings. For a discussion of all four SEC actions, see Press Release 99-83, supra note 44. Two of these free stock issuers offered stock through Web sites that featured false claims. In one action, investors were told that the free shares they received would give them interests in an aerospace company that would revive lunar exploration. In fact, the company was never incorporated and its promoter had no space exploration or aerospace engineering experience. See In re Loofbourrow, Securities Act Release No. 7700, 70 SEC Docket 0391 (July 21, 1999). In another action involving an Internet telecommunications marketing firm, the Web site informed free stock recipients that their shares could eventually exceed $ 200 each in value, even though the firm had realized less than $ 30 in gross operating revenues. See In re Web Works Marketing.Com, Inc., Securities Act Release No. 7703, 70 SEC Docket 402 (July 21, 1999).
Turning to another type of on-line fraud, in September 2000, the Commission brought a sweep consisting of fifteen enforcement actions against thirty-three companies and individuals who preyed upon investors in the volatile "microcap" market to perpetrate so-called "pump-and-dump" schemes over the Internet. The alleged perpetrators of these market manipulations "pumped" up the total market capitalization of the seventy microcap stocks involved by more than $ 1.7 billion and reaped illegal profits of more than $ 10 million. n49 This sweep reemphasized the fact that, in the digital age, frauds that used to require large amounts of time and resources could now be done in minutes by a single person using a home computer. Indeed, some of the individuals involved in these sweep cases had no securities industry experience at all--one was a bus mechanic, and another was a college student who drove for a car service.
n49 See Press Release 2000-124, SEC, SEC Continues Nationwide Crackdown Against Internet Fraud, Charging 33 Companies and Individuals With Fraud For Manipulating Microcap Stocks (Sept. 6, 2000), available at http://www.sec.gov/news/press/2000-124.txt.
Recently in a March 2001 sweep, the SEC's fifth, the SEC simultaneously filed a group of Internet fraud actions covering many aspects of on-line securities fraud already mentioned. This sweep highlighted various on-line methods used by fraudsters to lure investors to their scams: "spam" e-mails, electronic newsletters, Web sites, hyperlinks, message boards and other Internet media. This sweep included eleven enforcement actions against twenty-three companies and individuals and involved both publicly-traded and privately-held companies. In these matters, the alleged perpetrators used the Internet to "pump" the market capitalization of the stocks by more than $ 300 million and to raise $ 2.5 million in illgotten gains from investors in the United States and abroad. n50
n50 See Press Release 2001-24, SEC, SEC Charges 23 Companies and Individuals in Cases Involving Broad Spectrum of Internet Securities Fraud (Mar. 1, 2001), available at http://www.sec.gov/news/press/2001-24.txt.
These sweep efforts seem to have had a positive impact in the on-line investment community. Current surveillance suggests that touters have become more sensitive to the law's disclosure requirements, and the SEC is seeing fewer blatantly suspect on-line offerings. Further, the offering of so-called "free stock" has almost ceased entirely. And investors--now more keenly aware of the need to question what they see on-line--have been increasingly eager to notify the ECC of conduct similar to that charged in the SEC's enforcement sweeps.
SWAT TEAMS
Another innovation utilized by the Division of Enforcement during the past few years has been the "SWAT" team approach. The technique describes a method for accelerating an investigation by increasing assigned staff and having these staff members work full-time solely on a single matter.
Application of this technique in the Internet context led to the successful criminal and civil prosecutions of Gary Dale Hoke, who published on the Internet a phony Bloomberg press release designed to drive up the price of the common stock of Pair Gain Technologies, Incorporated ("Pair Gain") by falsely reporting that Pair Gain was a takeover target. n51 Within just three days of the false Bloomberg release's posting, SEC staff and criminal investigators were able to identify Hoke as the creator of the release. Within a week, Hoke was arrested and charged with securities fraud by federal prosecutors and the Commission. n52
n51 See SEC v. Hoke, Litig. Release No. 16,266, 70 SEC Docket 1604 (C.D. Cal. Aug. 30, 1999). In settling the Commission's civil action, Hoke consented to an antifraud injunction. In the criminal case, Hoke was sentenced to five months of home detention and ordered to pay over $ 93,000 in restitution. See also United States v. Jakob, Litig. Release No. 16,857, 74 SEC Docket (CCH) 214 (C.D. Cal. Jan. 8, 2001) (SEC and criminal action brought within a week of Jakob's publication of false news release).
n52 Id.
A second SWAT team investigation led, in four weeks, to the arrest of two individuals alleged to have generated over $ 300,000 in illicit profits by posting false rumors about a company to several Internet message boards over a weekend in November 1999. n53 The rumors drove the price of the company's stock from $ 0.13 per share to over $ 15 per share the following Monday, before returning to $ 0.50 the same day. n54
n53 The Commission has obtained emergency relief against the three civil defendants, including a TRO and a freeze on the defendants' assets. See SEC v. Aziz-Golshani, Litig. Release No. 16,391, 71 SEC Docket (CCH) 721, 722 (C.D. Cal. Dec. 15, 1999).
n54 Id. The U.S. Attorney for the Central District of California prosecuted criminally two of the SEC defendants, Arash Aziz-Golshani and Hootan Melamed, for their manipulation of NEI Webworld.
Aziz-Golshani pled guilty to one count of securities fraud and one count of conspiracy to commit securities fraud. Melamed pled guilty to one count of conspiracy to commit securities fraud. Aziz-Golshani was sentenced on January 22, 2001 to 15 months incarceration, and ordered to pay restitution in an amount to be determined. Melamed was sentenced on January 12, 2001 to 10 months incarceration and ordered to pay restitution in an amount to be determined.
SEC v. Aziz-Golshani, Litig. Release No. 16,867, 74 SEC Docket (CCH) 519 (C.D. Cal. Jan. 23, 2001).
Most recently, within just six days after the publication of a false press release stating that the Commission was investigating Emulex Corporation, that its CEO had resigned and that it would be restating its earnings to show a loss, and the resulting sixty-one dollar plunge in Emulex's share price, the Commission and criminal authorities had brought actions against the fraud's architect, Mark Simeon Jakob. Jakob's fraud caused an estimated $ 110 million in investor losses. In January of this year, Jakob pleaded guilty to two counts of federal securities fraud and one count of wire fraud, n55 and on August 8, 2001, the SEC announced that a district court judge sentenced Jakob to forty-four months in prison for his role in the fraud. n56
n55 Jakob, 74 SEC Docket (CCH) at 214.
n56 See SEC v. Jakob, Litig. Release No. 17,094, 75 SEC Docket (CCH) 1317 (C.D. Cal. Aug. 8, 2001).
Each of these actions demonstrates the utility of the "SWAT" concept when addressing major, high-impact securities frauds occurring over the Internet. Early experiences employing this approach have been highly successful (allowing for "real time" enforcement actions) and will likely remain an integral part of the agency's remedial arsenal in months and years to come.
TRADING SUSPENSIONS
Although the number of trading suspensions sought has declined recently, suspensions have proven to be useful during the early stages of the Internet program as a means of minimizing the damage to investors who might put funds into suspect issuers' securities. These actions alert investors to the fact that information in the marketplace about the suspended stock is materially inaccurate or incomplete.
One example of how the trading suspension can be beneficially used is the case of Uniprime Capital Acceptance Inc. (Acceptance Inc.). n57 As alleged in that action, the common stock of Uniprime, a purported owner of automobile dealerships, had risen in price from $ 0.06 to nearly $ 8 per share, along with similar increases in the stock's trading volume, on the strength of dubious claims concerning a new AIDS treatment being developed by Uniprime's principal subsidiary. Unable to find any basis for Uniprime's claims, the Commission imposed a trading suspension against the issuer on July 22, 1999. By mid-August, the Commission had filed a securities fraud complaint seeking a temporary restraining order and asset freeze against Uniprime and the president of its subsidiary. The trading halt may have saved thousands of investors from being defrauded.
n57 See SEC v. Uniprime Capital Acceptance, Inc., Litig. Release No. 16,252, 70 SEC Docket 1181 (S.D.N.Y. Aug. 13, 1999). For a complete listing of SEC trading suspensions, see http://www.sec.gov/litigation/suspension.shtml.
EARLY INTERVENTION TECHNIQUES
Not every potential securities law violation warrants a full-scale enforcement proceeding or investigation. Particularly in the case of more technical violations, a simple "warning" letter may suffice.
To date, the Commission's Division of Corporation Finance has sent more than 340 such warning letters concerning unregistered on-line securities offerings identified by the Division of Enforcement. The purpose of these letters is to induce compliance with the law without the necessity of a lengthy, resource-intensive enforcement investigation and in situations where simple ignorance or inadvertence may be the cause of a technical violation. As a result, the warning letter helps the agency's staff to address and remedy a wider range of potential misconduct than it could using only conventional investigative techniques.
Results thus far indicate this program is successful. In about seventy percent of cases, persons or entities receiving a warning letter either removed their securities offerings from the Internet, altered the terms of the offering, or opened discussions with the Division of Corporation Finance regarding the terms of their compliance with federal law. The Commission recently began a similar warning letter program within the Commission's Division of Market Regulation targeting unregistered broker-dealers. This program shows early signs of similar success, having sent out more than twenty warning letters to date, with sixteen recipients taking satisfactory steps to "cure" their violations.
EDUCATIONAL PROGRAMS
The SEC strongly believes that an educated investor provides the best defense against securities fraud, including Internet fraud. Investors who know what questions to ask and how to detect fraud will be less likely to fall prey to con artists. And, because they are more likely to report wrongdoing to the SEC and their state securities regulators, educated investors serve as an important early warning system to help regulators fight fraud.
To educate investors about the risks presented by the Internet, the SEC uses the following educational resources:
. Free Publications. The SEC publishes and distributes more than a dozen free brochures, including Internet Fraud: How to Avoid Online Investment Scams. n58
. Web site. In March 2001, the SEC significantly redesigned its Web site to make it more user-friendly, and launched a revised series of investor education webpages on the site. n59 The new Office of Investor Education pages feature information about on-line investing and Internet fraud. n60 The Commission has successfully encouraged on-line broker-dealers and others to link to the SEC's Web site.
. Investors' Town Meetings. The SEC has participated in more than forty investors' town meeting throughout the country. The last town meeting (like many others before) even included a dedicated segment on Internet fraud.
n58 See SEC, INTERNET FRAUD: HOW TO AVOID INTERNET INVESTMENT SCAMS, available at http://www.sec.gov/investor/pubs/cyberfraud.htm (last modified Mar. 16, 2001).
n59 See SEC, INVESTOR INFORMATION, at http://www.sec.gov/investor.shtml (last modified July 31, 2001).
n60 See id.
LIAISON ACTIVITIES
"I was quit when I came in here, I'm twice as quit now."
JOINT CRIMINAL/CIVIL PROSECUTIONS
The Commission is firmly committed to working with other law enforcement agencies to aggressively pursue Internet fraud. Criminal prosecutions are perhaps the most effective form of deterrence. Accordingly, joint efforts with prosecutors are another way for the Commission to leverage its resources.
The SEC's longstanding commitment to joint prosecutions in the Internet area has produced a string of important cases addressing on-line fraud. n61 The Commission is committed to building upon cases like these to forge even stronger working relationships with criminal prosecutors in the future.
n61 See generally United States v. Jakob, Litig. Release No. 16,857, 74 SEC Docket (CCH) 214 (C.D. Cal. Jan. 8, 2001); SEC v. Moldofsky, Litig. Release No. 16,493, 2000 SEC LEXIS 593 (S.D.N.Y. Mar. 30, 2000); SEC v. Aziz-Golshani, Litig. Release No. 16,391, 71 SEC Docket 846 (C.D. Cal. Dec. 15, 1999); SEC v. Hoke, Litig. Release No. 16,266, 70 SEC Docket 1604 (C.D. Cal. Aug. 30, 1999); SEC v. Uniprime Capital Acceptance, Inc., Litig. Release No. 16,252, 70 SEC Docket 1181 (S.D.N.Y. Aug. 13, 1999); SEC v. Interactive Prods. and Servs., Inc., Litig. Release No. 15,700, 1998 SEC LEXIS 630 (N.D. Cal. Apr. 8, 1998); SEC v. Huttoe, Litig. Release No. 15,237, 63 SEC Docket 2383 (E.D. Va. Jan. 31, 1997).
The Commission is also partnering with the FBI in an ongoing nationwide investigatory initiative called "Operation InvestNet," conducted through the Financial Crimes Section of the Bureau's Economic Crimes Unit. The Commission shares leads and information with FBI investigators, and provides training and legal guidance to investigators and prosecutors on securities matters the FBI is pursuing. n62
n62 See FED. BUREAU OF INVESTIGATIONS, SECURITIES AND COMMODITIES FRAUD: A PRIMER, available at http://www.fbi.gov/majcases/uptick/secprim.htm.
As the Internet program has evolved, criminal prosecutors at the state and federal levels have demonstrated a strong willingness to prosecute securities fraud over the Internet. Criminal prosecution involves four major categories of cases: (i) market manipulation; (ii) offering fraud; (iii) insider trading; and (iv) money management. Market manipulations cases comprise the bulk of on-line prosecutions, numbering nine to date. n63 In all of these types of actions, prompt, efficient and meaningful cooperative efforts clearly achieve results.
n63 See Richard H. Walker & David M. Levine, "You've Got Jail": Current Trends in Civil and Criminal Enforcement of Internet Securities Fraud, 38 AM. CRIM. L. REV. 405, 410-415 (2001).
CONTINUING TRAINING PARTNERSHIPS
Commission staff have always maintained an active schedule of training sessions for outside criminal and civil enforcement agencies. OIE staff have been regular lecturers at the FBI training facility at Quantico, Virginia. For the past two years, the Commission has sponsored yearly Internet Securities Fraud Training Programs, which are attended, in person and via videoconference link, by more than 600 representatives from a wide range of criminal and civil enforcement agencies and self-regulatory organizations (SROs). These training efforts will certainly continue, as will formal and informal liaison programs to insure that all law enforcement remains up-to-date on the latest trends or development in the securities-related Internet fraud arena.
ONGOING WORK WITH DOMESTIC CIVIL AGENCIES, SROS, AND FOREIGN SECURITIES REGULATORS
In addition to its work with criminal authorities, the Commission intends to continue its cooperation with civil enforcement agencies, such as the Federal Trade Commission, and SROs, including the National Association of Securities Dealers, Inc. and the New York Stock Exchange. The Commission is also active in a number of interagency working groups designed to fight Internet fraud. n64
n64 The SEC participated with the FTC and several other civil and criminal law enforcement agencies and cabinet departments, in the President's Working Group on Unlawful Conduct on the Internet, a body that wrote a comprehensive report on Internet fraud pursuant to executive order. In addition, the Commission is part of the National Securities and Commodities Fraud Working Group. Its Internet Securities Fraud subcommittee, co-chaired by the Commission and the FBI, is designed to focus on issues relating to on-line fraud affecting the securities markets. The SEC also is a member of the Telemarketing and Internet Fraud Working Group, a joint effort by various state and federal law enforcement, tax, and banking agencies to target unlawful financial, commercial, and securities activity on the Internet. The Commission also works closely with the states and the North American State Securities Administrators, Incorporated on an ongoing basis to address fraudulent Internet activity.
The Commission also understands that cooperation cannot stop at our shores. The Internet is inherently international and the SEC's Internet cases evidence a growing incidence of overseas conduct. The Commission is undertaking initiatives to help alleviate the problem of foreign-based Internet fraud, both by establishing relationships with foreign regulators and systematically bringing suspicious foreign-based conduct to their attention, and by participating in training programs designed to help international regulators identify and target securities frauds emanating from their countries. For example, the Commission's Office of International Affairs offers a wide range of training and liaison programs with foreign nations, including an annual Fall International Securities Institute with delegates attending from more than fifty countries.
CONCLUSION
"Too bad she won't live, but then again who does? "
The Commission is dedicated to ensuring that the Internet remains a valuable and safe medium for investors. The Commission has now brought more than 275 Internet-related securities fraud actions, charging close to 930 individuals and entities and there is no sign of a slowdown.
Of course, some of the same questions of four years ago still linger: Do we need to rewrite the securities laws in light of the Internet's onslaught? Can the SEC's Internet program reconcile its mission to root out fraud with the cherished freedom endemic to an evolving and revolutionary medium like the Internet? Only now, based on the Commission's track record in combating Internet fraud, there may indeed be some answers to these critical questions.
First, it remains as true today as it was four years ago, that the SEC's anti-fraud provisions serve the public quite well whether the violation occur in a boiler room or a chatroom. n65 After more than 275 enforcement actions charging more than 920 persons and entities, no SEC defendant or respondent has ever prevailed by arguing that the anti-fraud provisions of the securities laws (or any other provision of the securities laws) do not apply to conduct in cyberspace. n66
n65 The same holds true for the investigation and civil prosecution of securities violations committed over the Internet; the laws need not change, only their application will need to evolve. The Division's traditional firearms, embodied in the current Securities Act and Exchange Act, will likely provide adequate legal bases for prosecuting Internet securities fraud. For instance, the antifraud provisions of the section 10(b) of the Exchange Act and Rule 10b-5 thereunder obviously would apply to any fraudulent communication over the Internet, just as they apply to any information communicated on paper, or over the radio or television. Cella & Stark, supra note 2, at 835. Of course, improving the securities laws is always a goal of any Commission, and to the extent that any change in the securities laws will benefit investors and other market participants such changes will also likely result in similar benefits for the Internet program.
n66 Nor has any defendant prevailed by arguing that the First Amendment protects those who perpetrate fraud in cyberspace. See e.g., SEC v. Park, 99 F. Supp. 2d 889 (N.D. Ill. 2000).
Second, the cherished freedoms of the Internet remain firmly intact despite a vigorous SEC Enforcement program. By focusing its on-line enforcement efforts on fraud, the Commission has reaffirmed the adage that neither the First Amendment, nor any other law on the books, confers the right to lie, cheat, or steal from investors. n67 In fact, by rooting out the small number of users who attempt to pollute the Internet with fraudulent schemes, the Commission insures that precious civil liberties remain firmly intact.
n67 Id.
Finally, e-commerce has clearly flourished because of, not in spite of, the SEC's Internet Enforcement program. By launching an Internet program that makes bringing the perpetrators of on-line fraud to justice a top priority, the Commission has made the virtual streets safer (and thereby, more profitable) for lawful on-line enterprises. From its inception, the point of the SEC's Internet program was to act swiftly and forcefully and send the message to those contemplating on-line scams that they had better think twice before doing so.
In fact, even if the perpetrated fraud has not involved major investor losses (which many have not), n68 the Commission has still remained poised to act with unequivocal resolution. The approach remains somewhat akin to New York City Mayor Rudolph Giuliani's successful implementation of the "broken window theory" during the early 1990s. Just like the New York City cops on the beat who would not ignore petty, quality-of-life crimes, the Enforcement staff would similarly not neglect petty, quality-of-cyber-life, securities frauds. In both instances, such inaction only leaves ordinary citizens, or Internet users, concerned that nobody is in charge and leads the bigger crimes, or on-line securities frauds, to thrive.
n68 For example, the Commission has brought a slew of Internet-related actions in which investor losses were not only minimal but even non-existent, such as five of the actions in the May 1999 Internet fraud offering sweep. In those sweep actions, the Commission initiated a pre-emptive strike, stopping a range of sophisticated and potentially dangerous securities frauds before investors lost a penny. See Press Release 99-49, supra note 43.
More than four years after the original EnforceNet pronouncement described in this publication (which is probably more akin to four decades ago in "Internet years") the Commission's hefty track record in the area of Internet-related securities fraud prosecution not only evinces that vigorous, robust and aggressive Internet enforcement efforts can work, but also and more importantly, that when it comes to securities frauds, policing the Internet is not just possible, it is proven.
http://www.johnreedstark.com/ClassMaterials/StarkArticles/Redux.htm
The Bankers and the Lawyers, they all fall down....
FLORIDA SECURITIES ATTORNEY PLEADS GUILTY TO SECURITIES FRAUD AND CONSPIRACY
The Commission announced that on December 11, 2003, securities attorney Lewis Van Stillman, a resident of Delray Beach, Florida, pled guilty to criminal charges brought by the Fraud Section of the Criminal Division at the Department of Justice. Stillman is also a defendant in a related lawsuit bought by the Commission involving an alleged pump-and-dump scheme designed to capitalize on the 2001 anthrax bio-terrorist attacks in the United States.
Stillman pled guilty to one count of securities fraud and one count of conspiracy based on the same misconduct that led the Commission to take action against him.
Under his plea agreement, Stillman agreed to cooperate with Department of Justice and other law enforcement agencies.
Stillman also admitted to serving as 2DoTrade's legal counsel and conspiring to fraudulently promote and manipulate 2DoTrade's stock for his personal benefit. Stillman further acknowledged his role in the implementation a "lock-up" agreement that fraudulently restricted the public supply of 2DoTrade stock in order to control and manipulate its price and volume. Finally, Stillman admitted that, in filings he made with the Commission on behalf of 2DoTrade, he made false statements and material omissions that furthered the conspiracy's purpose and the scheme to defraud. Stillman faces a maximum penalty of 15 years in prison and a $1 million fine at sentencing, at a date to be determined later.
The SEC acknowledges the efforts of the Federal Bureau of Investigation's Dallas Field Office and the Fraud Section of the Department of Justice's Criminal Division in prosecuting this matter. For more information see Litigation Release No. 18381 (September 30, 2003).
http://www.sec.gov/litigation/litreleases/lr18510.htm
SEC v Gary Saunders
On June 5, 2003 the Company, and Gary Saunders, our Chief Executive Officer, returned a signed and notorized Offer of Settlement to consent to the entry of an Order by the Securities and Exchange Commission imposing the following remedial sanction: The Company and Gary Saunders shall cease and desist from committing or causing any violations and any future violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
There are no proceedings by the Commission against the Company or Saunders. This offer was made in anticipation of public administrative and cease-and-desist proceedings.
Form 8-K for EKNOWLEDGE GROUP INC
--------------------------------------------------------------------------------
21-Feb-2003
Other Events
ITEM 5. OTHER EVENTS.
(A) REVERSE SPLIT/SYMBOL CHANGE. On January 31, 2003, the stockholders of eKnowledge Group, Inc., or the Company, approved a reverse stock split of the Company's Common Stock at a ratio of 1 for 100. The effective time of the reverse stock split is February 20, 2003. As part of the reverse stock split, the Company has changed its trading symbol from EKNO to EKWL. The reverse stock split affects all shares of Common Stock and the exercise price of and the number of shares underlying stock options and Common Stock warrants of the Company outstanding immediately prior to the effective time of the reverse stock split. The reverse stock split will reduce the number of outstanding shares of the Company's Common Stock from 153,168,597 shares to 1,531,685 shares. Fractional shares will be rounded up from .5 and above to 1 share and from .49 and below to 0 shares. Madison Stock Transfer has been retained to manage the exchange of stock certificates. The record holders of the company will receive a letter of transmittal from Madison Stock Transfer, the Company's transfer agent, for use in exchanging stock certificates.
Resignation of Director
ITEM 6. RESIGNATIONS OF REGISTRANT'S DIRECTORS.
On June 30, 2003, Mr. Gary Saunders resigned his position as Chairman of the Board and CEO and all other positions within the Company. The Board of Directors unanimously approved the appointment of Mr. Scott Hildebrandt as Chairman of the Board, President, Chief Executive Officer, Chief Financial Officer and Treasurer of the Company.
http://biz.yahoo.com/e/030703/ekwl.pk8-k.html
Form 10QSB for EKNOWLEDGE GROUP INC
--------------------------------------------------------------------------------
24-Sep-2003
Quarterly Report
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
The statements contained in this Quarterly Report on Form 10-QSB that are not historical facts may contain forward-looking statements that involve a number of known and unknown risks and uncertainties that could cause actual results to differ materially from those discussed or anticipated by management. Potential risks and uncertainties include, among other factors, general business conditions, government regulations governing medical device approvals and manufacturing practices, competitive market conditions, success of the Company's business strategy, delay of orders, changes in the mix of products sold, availability of suppliers, concentration of sales in markets and to certain customers, changes in manufacturing efficiencies, development and introduction of new products, fluctuations in margins, timing of significant orders, and other risks and uncertainties currently unknown to management.
CRITICAL ACCOUNTING POLICIES
The Company's financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States of America (GAAP). GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue and expense amounts reported. These estimates can also affect supplemental information contained in the external disclosures of the Company including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. Valuations based on estimates are reviewed by us for reasonableness and conservatism on a consistent basis throughout the Company. Primary areas where financial information of the Company is subject to the use of estimates, assumptions and the application of judgment include acquisitions, valuation of long-lived and intangible assets, and the realizability of deferred tax assets. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions.
Valuation Of Long-Lived And Intangible Assets
The recoverability of long lived assets requires considerable judgment and is evaluated on an annual basis or more frequently if events or circumstances indicate that the assets may be impaired. As it relates to definite life intangible assets, we apply the impairment rules as required by SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and Assets to Be Disposed Of as amended by SFAS No. 144, which also requires significant judgment and assumptions related to the expected future cash flows attributable to the intangible asset. The impact of modifying any of these assumptions can have a significant impact on the estimate of fair value and, thus, the recoverability of the asset.
Income Taxes
We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. We regularly review our deferred tax assets for recoverability and establish a valuation allowance based upon historical losses, projected future taxable income and the expected timing of the reversals of existing temporary differences. As of June 30, 2003, we estimated the allowance on net deferred tax assets to be one hundred percent of the net deferred tax assets.
RESULTS OF OPERATIONS
Quarter ended June 30, 2003 compared to quarter ended June 30, 2002.
Revenues for the three months ended June 30, 2003 were $0, compared to $101,840 for the three months ended June 30, 2002. The decrease in revenues resulted from the spin out of the Company's operating business in April 2003 in preparation of merging the Company with a private company. The Company's sole surviving operating business, Prevention Point, did not generate any revenues during with 2003 or 2002.
Operating expenses for the three months ended June 30, 2003 and 2002 were $151,554 and $362,962, respectively. The decrease in operating expenses is attributed to the transfer of the Company's sole revenue generating operations in April 2003.
As a result of the aforementioned factors, the Company incurred a loss of $163, 009 for the three months ended June 30, 2003, compared to a loss of $275,334 for the same three months of the prior year.
Six months ended June 30, 2003 compared to six months ended June 30, 2002.
Revenues for the six-month period ended June 30, 2003 were $79,377, compared to $221,171 for the six-month period ended June 30, 2002. The decrease in revenues resulted from the spin out of the Company's operating business in April 2003 in preparation of merging the Company with a private company. The Company's sole surviving operating business, Prevention Point, did not generate any revenues during with 2003 or 2002.
Operating expenses for the six-month period ended June 30, 2003 and 2002 were $453,334 and $607,410, respectively, a decrease of $154,066, or 25%. The decrease in operating expenses is attributed to the transfer of the Company's sole revenue generating operations in April 2003.
As a result of the aforementioned factors, the Company incurred a loss of $412,937 for the three months ended June 30, 2003, compared to a loss of $400,399 for the same three months of the prior year.
Liquidity and Capital Resources
The accompanying financial statements have been prepared in conformity with principles of accounting applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred operating losses from inception and has generated an accumulated deficit of $5,831,115. The Company requires additional capital to meet its operating requirements. These factors raise substantial doubt regarding the Company's ability to continue as a going concern. Management plans to increase cash flows through the sale of securities (see following paragraph below) and, eventually, through the development of profitable operations. There are no assurances that such plans will be successful. No adjustments have been made to the accompanying financial statements as a result of this uncertainty.
As of June 30, 2003, the Company had total cash and current assets of $10,519 and current liabilities of $2,289,244. The Company's primary available source for generating cash for operations is through the issuance of common stock and notes payable. Management plans to renegotiate and restructure the majority of the current obligations into either long-term instruments and/or reduced amounts which can be repaid either through the issuance of new debt or through capital raised through the issuance of common stock. There is no assurance that the Company will be able to raise any additional funds through the issuance of new debt or stock sales, or that any funds made available will be adequate for the Company to meet its current obligations and continue as a going concern. Further, if the Company is not able to generate positive cash flow from operations, is unable to secure adequate funding under acceptable terms, or is unable to restructure or renegotiate its current liabilities, there is substantial doubt that the company can continue as a going concern.
PART II.
Other Information
http://biz.yahoo.com/e/030924/ekwl.pk10qsb.html
Form 8-K for EKNOWLEDGE GROUP INC
--------------------------------------------------------------------------------
14-Nov-2003
Resignation of Director
Item 6. Resignation of Directors
On November 7, 2003, the Company accepted the resignation of Scott Hildebrandt as Chairman of the Board of Directors, Chief Executive Officer, and Director. The remaining board member, Wayne Saunders nominated Shane H. Traveller and Steven R. Peacock to fill the vacant positions on the Board of Directors as allowed by the Bylaws of the Corporations in the event of resignation.
Also on November 7, 2003, the Board of Directors appointed Andrew Beyer as President and Chief Executive Officer, Shane H. Traveller as Chief Financial Officer, and Kenneth C. Wiedrich as Secretary. The Board was unanimous in these appointments. None of the newly named officers or directors of the Company owns or controls, directly or indirectly, any stock of the Company.
http://biz.yahoo.com/e/031114/ekwl.pk8-k.html
A Matter of Public Record
Gabor Sandor ACS
625 Rabbit Ridge Court
Reno, Nevada 89511
Telephone No.: (775)-338-5550
FACSimile: (775)-201-1242
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEVADA
____________________________________
:
Gabor S. ACS (ACS) :
Penny King Holdings Corporation (PKH) :
: CV-N-03-0463-ECR-VPC
Defendants, : MOTION TO DISMISS
: MOTION FOR STIPULATIONS
: SUMMARY MOTIONS
v. :
:
Securities and Exchange Commission :
:
Plaintiffs. :
MOTION TO DISMISS
On October 16th, 2003 Plaintiffs sent a letter to Defendant ACS by Federal Express stating that a corporation may not appear in federal court other than through a licensed attorney. The Citation quoted by the Plaintiffs, and which this Court accepted on October 22, 2003, was Rowland v. California Men’s Colony, Unit II Men’s Advisory Council, 506 US 194, 201-02, 113 S. Ct 716, 721, (1993).
Defendants have been quoted legal fees of $100,000 by local counsel to defend itself in this matter. Defendant has assets but in order to pay for legal Counsel in this Court it must have more time to liquidate or market those assets. ACS is attorney-in-fact for Corporation PKH.
Plaintiff has noticed ACS that it had until October 31, 2003, by federal express mail and fax dated October 16th, 2003, before it would move to file a motion of default against it. Plaintiff Claims that PKH is the alter ego of ACS. ACS is in fact Attorney-in-Fact of PKH. ACS owns no shares of PKH and PKH is a wholly owned subsidiary of a legally incorporated public benefit not for profit organization.
Plaintiff agreed to extend the time for Defendant PKH to find a lawyer till November 8th but did not include that agreement made in a teleconference on Monday, October 27th, 2003 in the Stipulated Discovery Plan and Scheduling Order Case filed with the Court on October 30th, 2003.
Plaintiff may have filed certain documents with the Court in this case, which neither the Court, the clerk of the Court or the Plaintiff has provided or delivered to the Defendants or properly served upon them.
The issue of legal jurisdiction is questioned by the fact that PKH is a Delaware Corporation with a representative office in Nevada, with its main operations managed out of Gaithersburg, Maryland and Washington D.C. through a parent organization, which in turn is managed by its unincorporated upper management body which is domiciled in Budapest, Hungary.
The citation provided by the Court and the Government Attorneys applies to a case of an unincorporated organization pleading in forma pauperis.
http://supct.law.cornell.edu/supct/html/91-1188.ZO.html
In 1959 Congress passed a one-sentence provision that "section 1915(a) of title 28, United States Code, is amended by deleting the word `citizen' and inserting in place thereof the word `person.' " Pub. L. 86-320, 73 Stat. 590. For this amendment, the sole reason cited in the legislative history was to extend the statutory benefits to aliens.
Defendant ACS is a registered alien Canadian Citizen born in Budapest, Hungary living in the United States since 1967, and residing in Nevada since August 2002. Defendant ACS has not pleaded in forma pauperis, and all Free and Clear organizations and PKH are deemed persons under USC TITLE 1 > CHAPTER 1 > Sec. 1.
Sec. 1. - Words denoting number, gender, and so forth
In determining the meaning of any Act of Congress, unless the context indicates otherwise - words importing the singular include and apply to several persons, parties, or things; words importing the plural include the singular; words importing the masculine gender include the feminine as well; words used in the present tense include the future as well as the present; the words ''insane'' and ''insane person'' and ''lunatic'' shall include every idiot, lunatic, insane person, and person non compos mentis; the words ''person'' and ''whoever'' include corporations, companies, associations, firms, partnerships, societies, and joint stock companies, as well as individuals; ''officer'' includes any person authorized by law to perform the duties of the office; ''signature'' or ''subscription'' includes a mark when the person making the same intended it as such; ''oath'' includes affirmation, and ''sworn'' includes affirmed; ''writing'' includes printing and typewriting and reproductions of visual symbols by photographing, multigraphing, mimeographing, manifolding, or otherwise; further under USC TITLE 28 > PART V > CHAPTER 111 > Sec. 1654. - Appearance personally or by counsel:
In all courts of the United States the parties may plead and conduct their own cases personally or by counsel as, by the rules of such courts, respectively, are permitted to manage and conduct causes therein.
By the rules of such courts, in this case Nevada District Court, Local Rules of Practice for the United States District Court for the District of Nevada effective June 1, 1995, as amended effective May 1, 1998, and further amended effective December 1, 2000:
http://www.nvd.uscourts.gov/nvd/localrules.nsf/Local+Rules?OpenFrameset
Under LR IA 8-1. PLACE OF FILING. (a) Civil actions shall be filed in the clerk's office for the division of the court in which the action allegedly arose. The actions, which allegedly took place according to Plaintiff, occurred while Defendant ACS and PKH, were living in and doing business out of the State of Maryland. Defendant ACS relocated to Reno following the events of 911 and prior to the sniper incidents in and around Maryland, Virginia and Washington D.C.
Defendant PKH is a wholly owned Delaware subsidiary of Washington D.C. based, The Free and Clear Foundations of America, Inc. Defendant ACS is the Founder, Senior Trustee and principal benefactor of the Foundations.
Defendant ACS is also the Chairman and Chief Executive of Defendant PKH. The actual trading in securities, which Plaintiff alleges occurred in California, and the actual place of authorization and release of certain press releases, alleged to contain false and misleading information, was also composed, reviewed and authorized out of California. Neither Acs nor PKH authorized the release of information publicly concerning the transactions proposed and/or pending at the time between PKH, Eurotrend and Quintek.
Defendant PKH is a “person”. Neither Court nor Plaintiff has cited to Defendant PKH or to ACS a local rule, which is contrary to the intent of Congress in determining the right of “persons” to defend them selves in any civil or criminal action. Plaintiffs claim that Defendant PKH can be heard in Nevada District court in direct contradiction to the Courts local rules. ACS cannot determine the truth of jurisdiction without the Courts opinion.
The citation quoted applies to unincorporated organizations, which Defendant PKH is not and is therefor qualified as a “person” by definition ruled by Congress, not the Court. Where the rules of a Court contradict the rules of Congress, the Rules of Congress shall prevail upon appeal to a higher Court. Unincorporated associations or persons are not deemed “persons” under the intent of Congress, however all corporations under Congressional intent are deemed to be “persons” and all persons have the legal right to defend themselves in any civil or criminal actions in any Court in the United States, pro se.
If the Court determines that Defendant PKH is the alter ego of Defendant ACS, ACS would be allowed to defend both himself and Defendant PKH both as “persons” under the original intent of Congress. If the Court determines that Defendant PKH is not an alter ego of Defendant ACS then this Court must follow its own rules and dismiss the case against Defendant PKH as without legal jurisdiction in the State of Nevada.
On October 28th, 2003, Plaintiff filed a reply to Defendants Objection to Motion to Strike and a Response to Other Various Motions.
Defendants will take up their Claims and Counter Claims previously filed and held on record with this Court with the Court of Federal Claims in Washington D.C. as amended.
It is noticed to this Court that Elizabeth E. Krupa and Polly A. Atkinson, current legal counsel for the Plaintiff are each individually named and have been added in as Defendants in the ancillary case, lis pendens.
On October 30, 2003, a Discovery Plan and Scheduling Order was sent by facsimile and federal express to Defendants Penny King Holdings Corporation (PKH) and Gabor S. ACS (“ACS”), after teleconference with Plaintiff Attorneys Elizabeth E. Krupa and Polly Atkinson of the Denver Office of the SEC.
PKH and ACS have not agreed to the [proposed] Discovery Plan and Scheduling Order as filed by Plaintiff with this Court.
ACS as its attorney-in-fact represented PKH in fact during the teleconference. ACS was also represented by himself pro se during the teleconference. ACS has in the past paid a Washington D.C. lawyer to settle this matter and incurred costs over $8,000 however the lawyer was not able to convince the SEC to settle this matter out of Court as previous lawyers for the Plaintiff insisted on pressing fraud charges against Defendants and continue to do so but have not proven fraud despite their statements in Court filings to the contrary. Plaintiff has not proven the intent to defraud and cannot based on the merits of the pleadings alone.
During the teleconference Plaintiff’s attorneys disclosed to Defendants that it had in its possession over 6,000 pages of documents related to the SEC investigation of Defendants. Defendant has previously under oath provided cooperative testimony with the stipulation by Plaintiffs that Defendants were not the target of any investigation but rather the companies involved. Later Plaintiffs acted in bad faith, and the two original attorneys’s recused themselves from this case after it was filed in August. See original filing by Tracey Tirey et seq. Those 6,000 plus pages of documents include material which is and may be irrelevant and extraneous to the main issue of this case which is: did the Defendants commit a fraud in violation of Securities Laws, which they did not.
The Supreme Court sharply limited secondary actor liability in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1993). The Court there noted that neither the Securities Act of 1933 nor the Securities Exchange Act of 1934 expressly provided for a private cause of action against those who aid and abet primary violators of those statutes. Accordingly, the Court held that there was no basis for aiding and abetting liability for securities fraud claims under §10(b) of the 1934 Act.
Although Judge Harmon agreed that aiding and abetting a securities violation would not give rise to liability for securities fraud, she noted that the Supreme Court also acknowledges that secondary actors are not immune from primary liability. Observing that the SEC was expressly delegated the authority to promulgate rules to implement § 10(b), Judge Harmon adopted the middle-ground SEC-proposed standard. The district court rejected the Second Circuit’s bright-line test, stating that the test allowed secondary actors to escape primary liability by merely concealing their role from the public. The court concluded that the Second Circuit failed to interpret the SEC rules so as to effectuate their purpose. The “substantial participation” test was, however, too broad, according to the court. Without a more precise definition of “substantial participation” or “intricate involvement,” the test left open a large gray area between primary and accessory liability.
Judge Harmon viewed the SEC interpretation as providing sufficient flexibility of enforcement while avoiding the vagueness of the substantial participation test. Under the SEC test, the secondary actor need not be the initiator of the misrepresentation, although it must have drafted the disclosure at issue. A party who prepares a truthful statement would not be liable for misrepresentations elsewhere in the document, even if he or she knew the other statements were false, according to the SEC.
For a secondary party to be liable, the court emphasized that a plaintiff must still plead and prove scienter and reliance on the false statement (although not on the fact that the secondary actor drafted the statement). Further, the court observed that under the Private Securities Litigation Reform Act, Pub. L. No. 104-67, 109 Stat. 737 (codified in scattered sections of 15 U.S.C.), a reckless secondary actor will only be liable for the damage caused by his or her misstatement, and not for damages caused by others’ misstatements. A knowing participant in a fraudulent scheme, however, might face greater liability.
Although the court adopted the SEC interpretation, backed by the state Attorneys General, it refused to accept the Attorneys General’s argument that conspiracy liability still existed.
The burden on the plaintiff asserting a claim in a civil action is to prove every essential element of its claim by only a preponderance of the evidence. [Interstate Petroleum Corporation v. Morgan, 249 F.3d 215 (4th Cir. 05/01/2001)]
The United States Supreme Court has explained that under "[c]onventional rules of civil litigation . . . parties . . . need only prove their case by a preponderance of the evidence ...and that exceptions to this standard are uncommon. Price Waterhouse v. Hopkins, 490 U.S. 228, 253 (1989) "Because the preponderance-of-the evidence standard results in a roughly equal allocation of the risk of error between litigants, we presume that this standard is applicable in civil actions between private litigants unless particularly important individual interests or rights are at stake. "Grogan v. Garner, 498 U.S. 279, 286 (1991) (quoting Herman & McLean v. Huddleston, 459 U.S. 375, 389 (1983)).
The clear and convincing evidence standard has been applied in certain cases involving fraudulent or bad faith conduct like Grossman v. Comm'r of Internal Revenue, 182 F.3d 275, 277 (4th Cir. 1999) (clear and convincing evidence required to prove intent to defraud in civil tax fraud case under the Internal Revenue Code); Shepherd v. ABC, 62 F.3d 1469, 1477-78 (D.C. Cir. 1995) (litigation misconduct must be proven by clear and convincing evidence in order for the district court to enter default judgment as a sanction for such misconduct). But while clear and convincing evidence is required for some fraud-based claims, in many instances a heightened burden of proof is not required. Grogan, 498 U.S. at 288-89 (listing federal fraud-related statutes to which the preponderance standard applies.)
In summary, no principled reason exists to justify application of differing standards of proof for the defenses of fraud and concealment or misrepresentation. Therefore, we hold that the concealment or misrepresentation policy defense is a specie of fraud that must be proven by clear and convincing evidence. The trial court did not err by so instructing the jury.
The clear and convincing standard is reserved for cases where substantial interests at stake require an extra measure of confidence by the fact finders in the correctness of their judgment, though not to such degree as is required to convict of crime. Cf. Addington, 441 U.S. at 424, 99 S.Ct. at 1808, 60 L.Ed.2d at 330.
A common usage is in law of fraud, where the clear and convincing standard demonstrates the value society attributes to untarnished reputation. ... Similarly our supreme court now requires that factfinders be confident that a tortfeasor's culpable state of mind be shown by clear and convincing evidence before the tortfeasor is made a public example through the imposition of extra-compensatory punitive damages.
Defendants have asked Plaintiff for copies of all documents and that all previous transcripts of testimony be sent to Defendants. Plaintiff advised Defendants that it could hire a copy service to go to the Denver Office at Defendants expense to make whatever copies it chose. Plaintiff refused to supply copies to Defendants at its own expense, despite Plaintiffs earlier representations that Defendants were not the targets of an investigation. Defendants have previously filed a Freedom of Information Request and Plaintiff has failed to provide the information required under the Freedom of Information Act.
During the same teleconference Defendants asked Plaintiffs attorneys what it would take to settle this matter out of Court. Plaintiffs stated $40,000 in disgorgement, and $40,000 in punitive damages, a penny stock bar, and other regulatory stipulations. This proposed settlement is $170,000 less than the amounts previously quoted to Defendants when Defendant was represented by legal counsel in Washington D.C. Plaintiff has failed to prove fraud, and failed to prove that Defendants have profited from any actions related to the two companies which Plaintiff claims Defendants bought or sold stock positions in private or public transactions.
This Civil Suit commenced in August 2003 as SEC v. PKH and ACS. ACS is the President and CEO of PKH and its’ attorney in fact since March 4th, 2001 and represents the corporation in all legal matters brought before it in perpetuity. PKH is a Delaware Corporation with its headquarters in Gaithersburg, Maryland. The District Court of Nevada does not have jurisdiction over a Delaware Corporation.
PKH is a wholly owned subsidiary of The Free and Clear Foundations of America, Inc. a Washington D.C. not for profit organization. Gabor Sandor ACS is the Senior Trustee with his principal place of residence in Reno, Nevada. PKH is not the alter ego of ACS. ACS is not a promoter or a publicist of stocks. PKH is neither a promoter nor a publicist of stocks.
On October 28th Plaintiff filed a motion with this Court for Leave to Amend Complaint. Defendants object to the motion. Defendants have not agreed to Discovery or the Stipulated Discovery Plan and Scheduling Order. Plaintiffs Attorneys have given false and misleading information to the Court in regards to Defendants agreeing to any such Stipulated Discovery Plan and Scheduling Order as on the date such statements were filed such statements were in fact untrue, inaccurate and misleading.
Plaintiff may have understood that Defendants Acs and PKH were not represented by Counsel, however legal counsel in Washington D.C. was never formally terminated and Plaintiff should not have been talking to either Defendants without checking if Defendants were represented by Counsel.
Legal Counsel for Defendant was retained on or about October 10th, 2002 and to the best of Defendants knowledge such relationship has not been formally terminated between Defendants and Counsel. Plaintiff has acted with prejudice and assumed that Defendants were in agreement the day after the teleconference regarding the Stipulated Discovery Plan and Scheduling Order, however since Plaintiffs did not include sufficient time for Defendant to reconfirm with Counsel its representation of Defendants Acs and PKH, the Stipulated Discovery Plan and Scheduling Order filed with the Court was false and misleading and invalid. Legal Counsel for the Defendant is not licensed to practice in Nevada District Court, however Legal Counsel for Defendant is licensed to practice in Washington D.C. where the alleged actions by the Plaintiff and accusations of Plaintiff against Defendants purportedly took place. Plaintiff has to the best of Defendants knowledge not had any contact with Defendants Attorney in Washington D.C. since January 24th, 2003.
On October 31st, 2003 Plaintiff sent a Notice of Deposition to Defendants, which was received by Defendant ACS on November 1, 2003. ACS as Deponent appeared at Bonanza Reporting in Reno at 9a.m. on November 12, 2003 against his will and was asked by the Court Reporter ‘Do you swear to tell the truth, the whole truth, and nothing but the truth? to which Deponent responded, “I don’t know”. Attorney for Plaintiff then asked for Court Reporter to put Deponent’s response on the record and asked Deponent, “Are you refusing to take the oath?” Deponent responded with his answer “No”. Deponent answered the question of the Court Reporter again with “I don’t know”. Deponent does not know the truth so cannot determine if it can tell the truth, the whole truth and nothing but the truth because Deponent has previously stated his version of the truth which was not accepted by the previous lawyers of the SEC, otherwise this civil suit would not be taking place. Attorney Krupa then terminated the Deposition stating she would take the matter up with the Court. Bonanza Reporting charges $130 per day plus $3.60 per page for depositions.
On November 4th, 2003, Plaintiff under Fed R. Civ P. 26(a) sent to Defendant ACS Disclosures, which contained a list titled “Persons with Knowledge” and another list titled “Document Index”. Plaintiff did not provide to Defendants specific documents in the “Document Index” or any statements from the list of “Persons with Knowledge.” Defendants were denied access to knowledge, which Plaintiff is using to present its case to this Court.
Defendant could not answer Court Reporter’s question regarding making an oath to the Court without the knowledge and information contained in Plaintiffs “Document Index” and affidavits and/or statements of the list of “Persons with Knowledge”. The response of Deponent “I don’t know” was and remains a true statement of Defendants for this reason. Therefore Deponent answered the question of oath truthfully, accurately and with no malice aforethought. It is a wise man that knows that he does not know.
In United States v. Henke, 222 F.3d 633, 642 (9th Cir. Aug. 25, 2000), an appellate court reversed the criminal securities fraud and insider trading convictions of the former CEO and CFO of California Micro Devices, on the basis that a conflict of interest prevented their counsel from cross-examining a key government witness who had attended joint defense meetings. In preparing for a possible retrial, the appellate court also considered whether the district court judge had properly admitted the CEO's out-of-court response - "next question please" - to an accusation in a press conference that the defendants were "cooking the books." The district court had found that the response was not unduly prejudicial and that, under the circumstances, the natural response to such an accusation would be to address or deny it. It therefore admitted the statement as an adoptive admission. The appellate court agreed the district court acted within its discretion
Henke does not stand for the proposition that a non-denial automatically constitutes an admission. Nevertheless, at least one court thought that it did, albeit in the extreme circumstance of an admitted revenue recognition fraud by a company. This may raise problems for the honest executive. One can imagine that a harried or indignant CEO may snap, "next question please," under the belief that it is a denial of impropriety.
The following portions of an interview with Microstrategy's CEO "contributed significant weight to an inference of scienter in this case":
In the public world there's a difference between 11:59 and 12:01, the last day of March . . . One of them is, you go to jail if the thing gets signed at 12:01 . . . One of them is, the stock is up $500 million. And the other one is, you've just torched the life and livelihood of a thousand families. "Would you sacrifice a thousand people's lives for one minute of integrity, or would you, like, put the clock back?" It was a dilemma he [the CEO] now had to "deal with . . . every quarter."
Surely the court drew the wrong inference. Unlike the CEOs in Premiere Technologies and Henke, the Microstrategy CEO did not admit, suggest, or fail to deny that he had acted improperly. On a simple level, the CEO, at least according to this interview, recognized that he faced the ethical choices in deciding whether to follow the law. On a deeper level, the fact that a CEO would recognize that he faced choices with serious consequences, and give voice to this realization, suggests respect for the law more than it does fraud.
In re e.spire Communications, Inc. Sec. Litig., No. CIV. H-00-1140, 2001 WL 85167, ___ F. Supp. 2d ___ (D. Md. Jan. 29, 2001), illustrates how one should discuss the serious matter of compliance with the law. In this case, the Court granted a motion to dismiss with prejudice in a lawsuit alleging GAAP violations by a telecommunications company. After rejecting several arguments presented by plaintiffs, the Court asked whether the complaint was saved by a statement from the company's new CEO "[t]here's absolutely zero tolerance for any lying, cheating, or stealing in any way, shape, or form here." The Court decided that this statement would give rise to at most a "strained and tenuous" inference of fraud, not the strong inference required under the Reform Act, as it did not discuss or refer to prior practices or management.
It is possible to imagine that had the new CEO been more colorful or effusive on this topic, he could have led his company into trouble. That the CEO did not do so illustrates the benefits of serious language for serious subjects.
Financial fraud claims occupy a special place in securities litigation. One reason is that financial statements are important. According to the SEC, complete and accurate financial reporting by public companies is of paramount importance to the disclosure system underlying the stability and efficient operation of our capital markets. Investors need reliable financial information when making investment decisions Defendants were at all times acting with the intent of providing investors with reliable financial information during the period in question. Another reason is that it is difficult to reduce exposure to financial fraud claims. Consider by contrast, claims based on forward-looking statements.
A company may choose not to issue such statements at all. Or, if it chooses otherwise, it may accompany its projections with meaningful cautionary disclosures of the factors that could cause actual results to differ, and the Safe Harbor prohibits a securities fraud lawsuit. See Securities Exchange Act of 1934 § 21E(c)(1)(A)(i), 15 U.S.C. § 78u-5(c)(1)(A)(i) (written forward-looking statements); Securities Exchange Act of 1934 § 21E(c)(2), 15 U.S.C. § 78u-5(c)(2) (oral forward-looking statements). Cautionary disclosures were made in all public statements issued by the Defendants. Private emails do not qualify as public statements and all private emails were made under the understanding of confidentiality in executing a business plan for the expansion and support of the company for the benefit of the stockholders, not for the benefit of naked short sellers.
Even if a company does not do this, plaintiffs must plead and prove that the forward-looking statements were made with actual knowledge of their falsity. See Securities Exchange Act of 1934 § 21E(c)(1)(B)(i), 15 U.S.C. § 78u-5(c)(1)(B)(i) (forward-looking statement made by natural person); Securities Exchange Act of 1934 § 21E(c)(2)(1)(ii), 15 U.S.C. § 78u-5(c)(1)(B)(ii) (forward-looking statement made by business entity).
The Reform Act (and perhaps also Fed. R. Civ. P. 9(b)) require dismissal if plaintiffs do not plead the circumstances of the alleged financial fraud with sufficient detail. Courts may dismiss a financial fraud complaint against all defendants on this basis. See, e.g., Wilson v. CKS Group, No. C98-4229 MMC, slip op. at 9-11 (N.D. Cal. Mar. 21, 2000); In re Versant Object Tech. Corp. Sec. Litig., No. C 98-00299 CW, slip op. at 22-24 (N.D. Cal. May 18, 2000); Ree v. Pinckert, No. C99-0562 MMC, slip op. at 16-18 (N.D. Cal. Mar. 28, 2000); Branca v. Paymentech, Inc., No. Civ. A 3:97-CV-2507-L, 2000 WL 145083(N.D. Tex. Feb. 8, 2000).
The Reform Act also requires plaintiffs to set forth the basis of any allegations made on information and belief, although the contours of this duty are in dispute. Compare In re Silicon Graphics, Inc. Sec. Litig., 183 F.3d 970, 985 (9th Cir. 1999) (In the Ninth Circuit, a plaintiff must plead, "in great detail, all the relevant facts forming the basis of [its] belief."); and Novak v. Kasaks, 216 F.3d 300, 313 (2d Cir. 2000) (need not name sources of allegations).
For these reasons, a complaint that may have sufficed to plead financial fraud under pre-Reform Act law, e.g., Cooper v. Pickett, 137 F.3d 616 (9th Cir. 1996), may not satisfy Reform Act standards. See Hockey v. Medhekar, 30 F. Supp. 2d 1209, 1216 (N.D. Cal. 1999).
There are also special rules that apply to pleading financial fraud claims. Most courts have held that it does not suffice to allege that financial statements were not prepared in accordance with generally accepted accounting principles ("GAAP"). See In re Milestone Sec. Litig., 103 F. Supp. 2d 425, 472-73 (D.N.J. 2000) (quoting Stevelman v. Alia Research, Inc., 174 F.3d 79, 84-85 (2d Cir. 1999)); see also Head v. Netmanage, Inc., No. C 97-4385 CRB, 1998 WL 917794, *6 (N.D. Cal. Dec. 30, 1998) ("the mere fact that [a company] changed its publicly-disclosed accounting policy that may have violated GAAP, and that the change led to lower reported revenues in the following quarter, does not support any inference of scienter, let alone the required strong inference.").
This makes eminent sense, for, as one court explained, the failure to follow GAAP could have resulted from an incorrect accounting judgment rather than an intent to defraud. See Mortensen v. Americredit Corp., No. Civ. A. 3:99-CV-0789, 2000 WL 472865, *6 (N.D. Tex. Apr. 21, 2000); see also Mathews v. Centex Telemanagement, Inc., [1994-95 Tr. Binder] Fed. Sec. L. Rep. (CCH) 98,440, at 91,037 (N.D. Cal. June 8, 1994) (so long as defendants method of projection used in setting accounts receivable reserves was reasonable, summary judgment is appropriate).
At the same time, as one court opined, GAAP violations may be probative of scienter, depending on the nature of the alleged violations. In re the Baan Co. Sec. Litig., 103 F. Supp. 2d 1, 21 (D.D.C. 2000); accord, In re Reliance Sec. Litig., MDL No. 1304 (C.D. Del. Apr. 19, 2000) (alleged violations of GAAP gave rise to an inference of recklessness).
It also does not suffice to allege that a company restated its financials. Mortensen, 2000 WL 472865; In re Evans Sys., Inc. Sec. Litig., No. H-99-2182, slip op. (S.D. Tex. May 31, 2000); Alabaster v. Bastiaens, Civ. No. 99-10237-NG, slip op. (D.Mass. July 27, 2000).
Were the rule otherwise, a company could not reassess the estimates used in financial statements or its accounting methodologies, and adjust its financial statements accordingly, without being accused of fraud. This would apply to estimates of income based on signed and executed contracts that are stated as forward looking statements in a press release to the general public.
Below these aggregate level principles, the law becomes murkier when it comes to pleading claims against particular defendants. Some district courts, ruling before appellate courts had started to interpret the Reform Act, assumed without separate analysis that if a financial fraud claim had been pleaded against a company, a claim also was stated against senior executives. See Rehm v. Eagle Fin. Corp., 954 F. Supp. 1246 (N.D. Ill. 1997) (claim stated against CEO, President, and CFO); In re Wellcare Mgm't Group Sec. Litig., 964 F. Supp. 632 (N.D.N.Y. 1997) (CEO and CFO); In re Ancor Communications, Ins. Sec. Litig., No. 97-1696, 1998 U.S. Dist. LEXIS 10988 (D. Minn. July 14, 1998) (CEO and CFO); Epstein v. Itron, Inc., 993 F. Supp. 1314 (E.D. Wash. 1998) (CEO); Marksman Partners, L.P. v. Chantal Pharm. Corp., 927 F. Supp. 1297 (C.D. Cal. 1996) (CEO).
This cannot be the law. A particular officer may not have made (or even participated in the making of) financial statements. If that is the case, under Central Bank v. First Interstate Bank, 511 U.S. 164 (1994), he or she cannot be liable. See Wright v. Ernst & Young LLP, 152 F.3d 169, 175 (2d Cir. 1998) ("If Central Bank is to have any real meaning, a defendant must actually make a false or misleading statement in order to be held liable under Section 10(b).") (quotations omitted); cf. In re Software Toolworks Sec. Litig., 50 F.3d 615, 628 n.3 (9th Cir. 1994) (auditing firm that co-authored letter to SEC may be liable for statements contained therein).
Moreover, the Reform Act requires plaintiffs to plead and prove fraud on an individualized basis; that is, defendant-by-defendant. See Brinker Capital Holdings, Inc. v. Imagex Services, Inc., No. 96-CV-0038 (FJS), 1998 WL 139416, *2 (N.D.N.Y. Mar. 26, 1998) ("Additionally, to create a strong inference of scienter on the part of a defendant the [Reform Act] requires that facts be alleged with particularity as to that defendant.").
Absent particularized allegations against a particular defendant, no claim may be stated against that defendant.
At about the same time, a trilogy of Second Circuit court cases, relying in part on pre-Reform Act law, held that financial fraud within an organization may not automatically be attributed to a corporate defendant. In Chill v. General Electric Co., 101 F.3d 263 (2d Cir. 1996), Glickman v. Alexander & Alexander Services, Inc., No. 93 Civ. 7594 (LAP), 1996 WL 88570 (S.D.N.Y. Feb. 29, 1996), and In re Baesa Securities Litigation, 969 F. Supp. 238 (S.D.N.Y. 1997), plaintiffs sought to hold parent corporations liable for financial frauds at their subsidiaries. In each case, the fraud resulted in improper revenue recorded on the parent’s consolidated financial statements. In each case, the court dismissed the complaint because it did not plead facts giving rise to an inference that the parent companies knew of, or consciously disregarded, the subsidiaries’ frauds.
This initial period of post-Reform Act financial fraud jurisprudence culminated in In re Comshare, Inc. Securities Litigation, 183 F.3d 542 (6th Cir. 1999). In that case, the complaint alleged that a foreign subsidiary had committed financial fraud by issuing side letters that precluded revenue recognition of certain contracts. The Court held that the complaint did not plead a securities claim against the parent company and its officers and directors. In reaching this conclusion, the Court explicitly followed Chill and Baesa in holding that scienter could not be presumed from the parent’s purported reliance on its subsidiary’s internal financial controls; and found that the complaint had not pled specific facts that "illustrate ‘red flags’ that should have put Defendants on notice of the revenue recognition errors, or that demonstrate reasons for Defendants to have questioned the revenue reporting of its . . . subsidiary." 183 F.3d at 553-54.
Under Comshare, at a minimum, a complaint must plead, with factual specificity, that each defendant either intentionally published materially false financial statements, or published financial statements with awareness of facts that put them on notice of the falsity of those statements. This is not to say that it is impossible to plead a financial fraud claim against either individual or corporate defendants, at least in some courts’ assessments of Reform Act pleading standards. For example, In re Imperial Credit Indus., Inc. Sec. Litig., Nos. CV 98-8844 SWV et al., slip op. (C.D. Cal. Feb. 23, 2000), was, like Chill and its progeny, a suit brought by shareholders of the parent company.
In this case, however, the subsidiary had made its own statements directly to the public. The court found that the complaint pleaded a strong inference of scienter because it quoted alleged e-mail messages showing the parent’s actual awareness of the true financial facts. In In re System Software Associates, Inc., No. 97 C 177, 2000 WL 283099, *14 (N.D. Ill. Mar. 8, 2000), the court found that the complaint pleaded scienter by alleging that the officers had rejected the company’s outside auditors’ advice that the company’s revenue recognition practices and decisions did not conform to GAAP.
Nor is Comshare the final word. The decision may be questioned to the extent that it allows a lawsuit based on what a defendant objectively "should have" known about financial statements, as distinguished from the subjective, actual intent to defraud that is in the author’s opinion the only form of recklessness that may qualify as intentional misconduct, i.e., scienter. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). In this case SEC v Gabor S. Acs and Penny King Holdings Corporation made every effort to get Quintek to publish amended and updated information after the deal with Eurotrend fell apart in an attempt to adhere to the laws relating to the foreign corrupt practices act on the part of the Defendants. Clearly scienter is unprovable.
And Comshare did not need to distinguish between the company and the individual defendants in dismissing the complaint at bar.
Assume that, based on whatever standard a court has applied; a financial fraud claim has been pleaded against a company and certain of its officers. If no person at the company (including the defendants) engaged in financial fraud, then liability is an easy question: no one may be held liable. This almost certainly also would apply to any independent auditors named or corporate attorneys as defendants; it is difficult to imagine a company and its officials that did not intend to defraud, with auditors or attorneys who did and who were able to effect their intent.
Now assume that a financial fraud claim has been pleaded, and at least one person did intend to defraud and accomplished his or her intention. If plaintiffs cannot prove that a particular defendant possessed the intent to defraud, then he or she cannot be held liable. But when may the company be held liable? This question raises the difficult topic of corporate scienter law. A corporation’s knowledge and action can encompass only the knowledge and action of its directors, officers and employees; that is, it cannot encompass any other person’s knowledge or actions. Gould v. American-Hawaiian S.S. Co., 535 F.2d 761, 780 (3d Cir. 1976).
But no court has analyzed precisely which persons’ knowledge and actions may be imputed to a corporation, and when they may be imputed. Indeed, there are questions as to whether this enterprise is legitimate. As one commentator noted, even before Central Bank eliminated all non-statutory forms of secondary liability, "it [was] unclear whether agency concepts will be invoked to impute to a corporation knowledge of its officers, board of directors or employees." 5 Arnold S. Jacobs, Litigation & Practice Under Rule 10b-5, §63 at 3-339 (1982).
Under Central Bank, one may argue that the (non-statutory) agency basis for imputing liability no longer exists. The same commentator also opined that even if the knowledge of a corporation’s officers, directors, or employees may be imputed to a corporation, the specific intent to defraud — i.e., the conscious element of scienter — probably cannot be imputed. Jacobs, §63 n.76 (discussing Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281 (2d Cir. 1973)). This assumes for heuristic purposes only that recklessness suffices as scienter. In this instance the attempts of Defendants to accurately inform the investing public dismisses any act or intent of recklessness.
With this background in mind, as an analytical construct, this argument examines outcomes based on two variables:
1. The state of mind – either (a) no intent to defraud, (b) recklessness, or (c) an actual intent to defraud – of and for each of
2. Three particular persons: the (a) the Chief Executive Officer of Quintek, (b) the Chief Executive Officer of Defendant, or Acs or (c) any lower-level officer, agent, or the Chief Executive Officer of Eurotrend ( a foreign corporation) or its agents and employees.
The permutation of these variables produces a matrix of 27 different outcomes. For example, the Chief Executive Officer of Quintek or any of its agents or employees may have acted with recklessness, (who has previously settled with the Plaintiff for $25,000 without admitting or denying guilt in this case) the Chief Executive Officer of Defendant and Defendant Acs, with no intent to defraud, and the CEO of Eurotrend with actual intent to defraud; the CEO of Quintek, agents or employees and the CFO may have acted with no intent to defraud, while the CEO of Eurotrend or its agents acted recklessly; and so on.
Fortunately, many of the outcomes may be grouped together for analytical purposes. In recognition of this point, the remainder of this argument analyzes the matrix of outcomes in what is believed to be sufficient detail, by first examining outcomes based on the second variable above. This method is deemed a "partial derivative" approach.
The first partial derivative subset of outcomes in the matrix depends on the state of mind of the Chief Executive Officer of Quintek or any of its agents or employees allegedly engaged in financial fraud. There are good reasons to conclude if the Chief Executive Officer of Quintek or any of its agents or employees acted with recklessness or an actual intent to defraud, that variable may affect that person’s individual liability, but cannot by itself render the Defendants liable. These same variables apply in the case of eKnowledge and Gary Saunders. As shown in the final subsection, the Chief Executive Officer of Quintek or any of its agents or employees state of mind may affect the extent of the company's liability.
First, to the extent case law has imputed scienter from an individual to a company, courts appear to have restricted this mechanism to senior officers and directors. See, e.g., Nordstrom v. Chubb & Son, Inc., 54 F.3d 1424, 1435 (9th Cir. 1995) (insurance dispute following settlement of securities case) ("a corporation may be liable for actions by senior management personnel that are 'intrinsically corporate and bear the imprimatur of the corporation itself.'") (quotation omitted).
This makes sense. As contended below, there is a more focused and natural target than the Chief Executive Officer of Quintek or any of its agents or employees in ascertaining a company’s conscious intent to issue true or false financial statements or press releases containing false or misleading statements. In the case of Quintek, the pro forma financial projections announced in the press releases were based on potential and contracted for orders, signed and executed by a foreign buyer who needed to obtain credit in order to conclude its obligations under a contract with a third party, namely the Defendants.
Second, the significance of focusing on senior executives has been buttressed by the Reform Act. In deciding how to treat forward-looking statements made on behalf of an entity, Congress decided that a plaintiff must prove that the statement was "made by or with the approval of an executive officer of that entity . . . with actual knowledge by that officer that the statement was false or misleading." Securities Exchange Act of 1934 § 21E(c)(1)(B)(ii), 15 U.S.C. § 78u-5(c)(1)(B)(ii) (emphasis added).
There is no reason why this reasoning should not apply to financial statements, press releases and forward-looking statements too. Congress apparently decided that even though many persons within a company may be responsible for preparing forward-looking statements, it is not fair to blame the company if lower-level officers, agents, or employees made false representations (either within the company, to the persons who actually made the forward-looking statements; or directly to the public, or from outside agents as in the case of Mr. Ferenc Galgocsy who represented to both Quintek and Defendants that Eurotrend was in agreement with the issuance of the press release and both Quintek and Defendants were relying on Galgocsy’s statements and the evidence of a signed contract with Eurotrend indicated that such a statement was for all intents and purposes accurate and not misleading) in that context.
But financial statements, as are press releases, are the responsibility of many employees within a company, and in the case of a development stage company such as Quintek or eKnowledge, due to lack of resources, manpower, and cheap capital, oftentimes the duty and responsibility for the creation of accurate statements which reflect the current status of a company in development as in this case must be delegated to outside sources to execute, conclude and disseminate to stockholders.
Thus, if there is no scienter on the part of any executive officer of the company, or its outside agents, or its outsourced service providers who made or approved the financial statements or press releases and forward looking statements– i.e., if only lower-level officers or employees possessed either recklessness or an actual intent to defraud – then there should not be liability for the company.
The Plaintiff did not charge Quintek and/or eKnowledge as a corporate entities for this reason, yet both CEO’s of each company agreed to resign and accept a settlement with Plaintiff without admitting or denying the charges for two main reasons:
1. They could not afford to defend themselves if a civil action were brought against them.
2. They did not believe that justice would be served by going to Court nor did they understand the laws that would have prevented them from neither admitting or denying the allegations of Plaintiff, but rather provide them with equal protection under the law.
Third, it would be anomalous under corporate governance law to hold senior officers responsible for their good faith reliance on the representations of lower level officers, outside agents and employees – even if those lower level officials misled the senior officers, and as a result caused false financial statements or misleading press releases to be issued. As one court stated, where high level officials of a corporation were not aware of the improprieties committed by lower-level officials, they "cannot be faulted," even if the improprieties severely harmed the corporation. In re Caremark Int'l Inc. Derivative Litig., 698 A.2d 959 (1996) (approving settlement of derivative claim for zero dollars during pendency of motion to dismiss). See related information at http://www.10b-5.com/caremark.html.
If senior management’s lack of knowledge of improprieties cannot give rise to a breach of fiduciary duty claim, it should not suffice to establish liability for securities fraud (which, after all, requires scienter). Then, if there are no individually liable senior managers, there is no sufficiently senior person whose liability may be imputed to the company (assuming that liability may be imputed at all). The only exception to this syllogism may be if a senior officer issued financial statements in reckless disregard of the lower level officials’ financial fraud – which is probably the type of liability Comshare attempted to acknowledge.
This moved the focus of the company’s liability towards where it should be: the state of mind of the CFO who in both the cases of Quintek and eKnowledge, those hats were worn by the CEOs of each company respectively under the guidance of outside legal counsel and outside certified public accountants. In both instances, all public press releases and their content were represented to be as approved by the CEO’s and their official agents, employees and those responsible for overseeing the implementation and release of the information to the public in a timely and accurate fashion. The fact that information changed, or that someone backed out of a contract the following day or week, and thereafter was not officially and publicly made known to the public, was the duty and responsibility of the CEO’s who also doubled as CFO’s.
It makes sense to assign this primacy to the CFO. If it ever may be proper to impute the conscious element of scienter from an individual to a company, the company’s conscious intent to issue financial statements and press releases that are either true or false should depend on the person charged with preparing the financial statements or press releases: the CFO or PRO (Public Relations Officer) and in most instances of development stage companies such functions are completely outsourced under the guidance of the CEO.
This functionalist principle corresponds with investors’ expectations: investors know that a company’s CFO is charged with the responsibility for preparing its financial statements. They know that Press Releases are typically approved by legal counsel and the CEO of the company and prepared by outside public relations firms particularly with development stage companies where a full time in house PR person would be cost prohibitive.
It also corresponds with the pre-Reform Act group pleading doctrine, now abrogated, which allowed plaintiffs to plead a claim against particular individuals based on the functional roles that those individuals fulfilled within the company. The best analyses confirm that as the Reform Act requires that falsity and scienter be pleaded on an individualized basis, it "codifies a ban against group pleading." Coates v. Heartland Wireless Communications, Inc., 26 F. Supp. 2d 910, 916 (N.D. Tex. 1998); Calliot v. HFS, Inc., No. Civ. A. 3:97CV0924I (N.D. Tex. Mar. 31, 2000) (doctrine does not survive Reform Act); Branca v. Paymentech, Inc., No. Civ. A.3:97-CV-2507-L, 2000 WL 145083, *8 (N.D. Tex. Feb. 8, 2000) (same); Marra v. Tel-Save Holdings, Inc., Master File No. 98-3145, 1999 WL 317103, *5 (E.D. Pa. May 18, 1999) (same); In re Ascend Communications Sec. Litig., No. CV 97-8861 MRP, slip op. at 12 (C.D. Cal. Feb. 2, 1999) (same); see also Allison v. Brooktree Corp., 999 F. Supp. 1342, 1350 (S.D. Cal. 1998) ("To permit a judicial presumption as to particularity simply cannot be reconciled with the statutory mandate that plaintiffs must plead specific facts as to each act or omission by the defendant."). When the group pleading doctrine was the law, it applied only to a "narrowly defined group of officers who had direct involvement not only in the day-to-day affairs of [the company] in general but also in [the company's challenged] financial statements in particular." Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1440 (9th Cir. 1987).
If a claim is based on false financial statements or false and misleading public press releases containing missing, inaccurate or misleading information, it makes sense to look at the Finance and public relations and legal advisory officials. It further is consistent with the SEC’s administrative mission to regulate accounting practices and the accounting profession as well as its enforcement of the Act. While the SEC may sanction any person who issues false financial statements, the Commission appears to pay particular attention to the accountant or auditor who engages in such misconduct.
A recent uncontested enforcement action illustrates this point. In In the Matter of Micro Warehouse, Inc., 1999 WL 548531 (S.E.C. July 28, 1999), charges were brought against a company's corporate controller \ chief accounting officer, and a senior accounting manager. The SEC found by consent decree that these persons "knew, or were reckless in not knowing, that they were engaged in a fraudulent scheme that caused the financial statements to be materially false and misleading. Their state of mind may be imputed to [the company]." Id. at *5. While it is doubtful that a court would impute scienter from such lower-level officials to a company in a private securities action, this SEC case shows that when it comes to financial statements, a company's Finance department is crucial. In a private securities action against any development stage company that can ill afford a full time CFO let alone a Controller, the intersection of the sets "Finance department" and "senior executives" is one person: the CEO.
And the Commission recently directed companies to adopt Audit Committee charters, again signaling the special significance of the Finance function in a company (and up through its directors).
The primacy of the CFO also makes sense because another actor is important in insuring the integrity of a company’s financial statements: the independent auditors. Investors often look to a company’s independent auditors (among others) to fulfill this role; and case law establishes that if a company follows the informed advice of its independent auditors, it may not be liable because it lacks scienter. In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1426 (9th Cir. 1994). There undoubtedly are other questions regarding auditors' responsibility for financial fraud that are not discussed in this article. The same would hold true if press releases which a CEO or outside legal counsel or the PRO approved prior to their official public dissemination. The significance of the independent auditors buttresses the primacy of the company officer most likely to be responsible for the company’s relationship with the auditors, i.e., the CFO, or in development stage companies, the CEO.
It follows from the primacy of the CFO that if a company issued false financial statements and liability is proven against the CFO individually, this is the situation in which it is most likely that a company also may be responsible for financial fraud. In contrast, if the CFO had no intent to defraud, the company should not be liable for issuing false financial statements, even if someone else at the company was reckless or had the actual intent to defraud. Where that other, fraudulent person is a lower-level officer or employee (i.e., both the CFO and the CEO lacked an intent to defraud), this should be a relatively non-controversial conclusion for the reasons set forth in the previous section. Where that other person is the CEO, the question is more difficult. It is to that question that this argument now turns.
Another subset of partial derivative outcomes in the matrix depends on the state of mind of the company’s Chief Executive Officer. If CEO had no intent to defraud, he or she may not be liable, and liability rests solely on the state of mind of the CFO, outside agents and employees or the contracting other foreign party. But what if the CEO intended to defraud, via either recklessness or the actual intent to defraud? How should this affect the company’s liability?
It may seem counterintuitive that a CEO may be liable for issuing false financial statements but his or her company may not be liable. In an ideal(istic) world, it is never appropriate to say that it is someone else’s responsibility to follow proper accounting policies, or to conduct sufficient due diligence prior to issuing a press release. Rather, if an employee or outside agent has any information relevant to insuring that the company’s rules are followed, that employee or agent should communicate that information to the persons responsible for preparing or reviewing the financial statements or in this case, public statements to the investing community. This renders the CEO important, for the CEO is in a superior position to make it clear that responsibility and honesty in the preparation of financial statements and press releases is an integral part of a company’s ethics. Moreover, a purpose of the private securities lawsuit is to compensate investors damaged by fraud. If a company is not liable for issuing false financial statements, then there is one fewer defendant from whom compensation may be obtained.
But as counterintuitive as it may be to find that a company is not automatically responsible for financial fraud when the CEO is liable, the converse proposition is worse. For it may be the case that while the CEO intended to issue false financial statements or make false statements in press releases, or was negligence in not knowing that statements made were false and misleading, even though both contributed to the preparation of such publicly disseminated news articles, the Defendants did not, and could not have known the internal financial impact on the financial statements of the company as Defendants were not privy to such information and maintained at all times an arms length association with the CEO.
Some would argue that financial frauds require the intervention of a CFO (although, in any event, a CFO’s complicity must be pleaded and proven, not assumed). Yet it is easy to imagine an alternative scenario. Consider, for example, Comshare under a slightly different set of facts. In reality, the complaint did not plead any specific facts from which it could be inferred that any person within the company’s management was aware of the subsidiary’s side letters. But what if it could be pleaded and proven that the CEO authorized the side letters, but that the CFO did not? What if it also was the case that CFO had no specific reason to suspect that there were side letters, or even that the CFO had been told by the CEO that there were no side letters? In all of these scenarios, the most logical conclusion is that the company – through the CFO charged with preparing its financial statements – did not intend to issue false financial statements, and hence may not be liable for lack of scienter. If false financial statements nevertheless were issued, it was only by the CEO’s circumvention of the intent of the CFO and the company’s internal controls.
Put in other terms, the reasons why the CFO’s state of mind should be paramount in a financial fraud case also mean that the CEO’s state of mind is not dispositive of the company’s liability. To find the intent underlying a company’s financial statements, look to the head Finance officer. At the very least, it should be the case that as between the CEO and CFO, the CFO’s state of mind is more important. To be certain, one of a CEO’s responsibilities is to insure that a company issues true financial statements. But for a CFO, issuing true financial statements is the prime responsibility, and both investors and the SEC expect a CFO to fulfill this responsibility. The same holds true when the hat of the CFO is worn from above by the CEO, outside counsel or outside auditors.
There is one other factor by which to fine-tune the analysis of a company’s liability for financial fraud. Securities fraud liability is no longer an all-or-nothing proposition. The Reform Act now distinguishes between knowing violators of the securities laws – those persons who "make[] an untrue statement of a material fact, with actual knowledge that the representation is false; or omit[] to state a fact necessary in order to make the statement not misleading, with actual knowledge that, as a result of the omission, one of the material representations of the person is false; Securities & Exchange Act of 1934 §21D(g)(10)(A)(i), 15 U.S.C. § 78u-4(g)(10)(A)(i). It must also be the case that "persons are likely to reasonable rely on that misrepresentation or omission."
And non-knowing violators, which is everyone else. Only knowing violators are jointly and severally liable. Securities & Exchange Act of 1934 §21D(g)(2)(A), 15 U.S.C. § 78u-4(g)(2)(A).
Non-knowing violators are liable solely for that portion of the judgment that corresponds to their percentage of responsibility. Securities & Exchange Act of 1934 §21D(g)(2)(B)(i), 15 U.S.C. § 78u-4(g)(2)(B)(i).
Each defendant is entitled to pose special interrogatories on these topics to the trier of fact. Therefore the defendants first question to the trier of fact in this case is:
“What is all the information do you have regarding this matter and may we have a copy in order to analyse the facts in the matter so as to validly be able to state the truth, the whole truth and nothing but the truth. Securities & Exchange Act of 1934 §21D(g)(3)(A), 15 U.S.C. § 78u-4(g)(3)(A).
While there is little, if any, analysis of these terms in the legislative history of the Reform Act, it would not be surprising to find courts concluding that the distinction between knowing and non-knowing violators is analogous to the distinction between liability based on the actual intent to defraud and recklessness liability. In either case Defendants did not act recklessly nor with any intent to defraud but were relying on facts and data which Defendants believed to be true at the time such statements were made.
The distinction between types of liability means that if the CFO is found personally liable for issuing false financial statements, and the company’s liability derives from the CFO’s liability, it matters if the CFO was reckless or possessed an actual intent to defraud. If the CFO was reckless, a company may contend that a lower-level officer or employee also was involved in and responsible for the financial fraud, and hence that the company’s liability should be apportioned to reflect the lower-level employee’s responsibility. Securities & Exchange Act of 1934 §21D(g)(3)(A)(ii), 15 U.S.C. § 78u-4(g)(3)(A)(ii) (defendant entitled to special jury interrogatories with respect to each defendant "and each of the other persons claimed by any of the parties to have caused or contributed to the loss incurred by the plaintiff" concerning "[t]he percentage of responsibility of such person, measured as a percentage of the total fault of all persons who caused or contributed to the loss incurred by the plaintiff"); Harold S. Bloomenthal, Private Securities Litigation Reform Act: Special Update 61 (Clark Boardman Callaghan 1996) (under this provision, defendants may "try the empty chair").
The empty chair in this instance is the foreign corporation, which duly signed a contract and failed to perform, and its agents, including the Hungarian government agencies, which assisted in the introduction and negotiations of the contract on behalf of the foreign corporation that sought to purchase the products of Quintek. The fact that the foreign empty chair failed to place its first order as agreed to in the contract, and that foreign buyer attempted to coerce and extort funds from Defendants prior to placing its first order under a bona fide and notarized contract, which payment by Defendants would have been a violation of the Foreign Corrupt Practices Act, does not conclude that Defendants intended to defraud or intended to commit any fraud or were in any way negligent in its duties or the carrying out of its real intent, which was to assist in production and sales for the benefit of stockholders, not for its sole benefit let alone profit which did not materialize and is yet to materialize in this case of Quintek.
(Thus, while the state of mind of a lower-level officer or employee should not influence whether the company may be responsible, it may affect the extent of liability.) Conversely, a court may conclude – and this is a particularly difficult question – that under particularly egregious factual circumstances, if the CEO had the intent to defraud and the CFO was reckless in issuing false financial statements that reflected the CEO’s dishonest intent, the company’s state of mind reflected an actual intent to defraud.
The final question (and the analysis in this argument) may well lead us to a reversal in the common perspective of corporate scienter. Typically, plaintiffs are the party who contends that scienter may be pleaded and proved under "collective scienter" analysis. Thus, plaintiffs contend that Nordstrom , 54 F.3d 1424, endorsed such an analysis, when it did not.
Under plaintiffs' approach, a company's scienter is defined to be the collective product of all of its directors', officers', and employees' states of mind (or, in some variants, of the directors and officers); and, hence, if any one of those directors, officers, or employees intended to defraud, then so did the company. But if the question in financial fraud cases is whether a company's key Finance officials intended to defraud; or, as theorized in the previous paragraph, whether the company's internal controls intentionally or recklessly allowed false financial statements or false and misleading statements, which could not have been known to the Defendants to be false and misleading unless Defendants were insiders, meaning Officers or Directors of the company; then "collective scienter" has a very different meaning. A company's scienter (if that theory applies at all) may well be ascertained on a collective basis -- not in plaintiffs' sense, in which any single person's intent to defraud dooms the company to liability; but in a new sense, in which the company's core or majority intent not to issue false financial statements or misleading press releases saves the company and the Defendants from any liability.
In Plaintiffs filing of Disclosures on November 4th, 2003 Plaintiff States that “Fed R Civ P 26(a)(1)(c) and (D) are not applicable in this action.”
Fed. R. Civ. P. 26(a)(1): Initial Disclosures. Unless otherwise stipulated by the parties or ordered by the court, or unless a party objects to making the disclosures or to the timing of the disclosures, the parties must make the Federal Rule of Civil Procedure 26(a)(1) initial disclosures within 14 days after the conference held pursuant to Federal Rule of Civil Procedure 26(f) and section (d) of this rule. Any objections to making the initial disclosures or to the timing of the initial disclosures must be made during the Rule 26(f) conference and memorialized with particularity in a document served and filed within 10 days after the scheduling order and discovery plan is filed. The Parties have not stipulated to anything to date.
Initial disclosures must not be filed with the Clerk of Court unless filing is required specifically by the Federal Rules of Civil Procedure, LR 37.1(b), LR 56.1, or an order of the court. Defendants have asked the Court to Order the Defendant to product evidence and documents, which Motion for Defendant Acs has not been denied. Plaintiff has not complied with this request.
The Clerk of Court will return any initial disclosures submitted for filing to the submitting party promptly, together with a copy of LR 5.2. Initial disclosures are not required in cases where, under LR 16.1(d), no scheduling order and discovery plan is required to be submitted.
b. Fed. R. Civ. P. 26(a)(2)(A) and (B): Disclosure of Expert Testimony. Unless otherwise stipulated by the parties or ordered by the court, the parties must, on or before the deadlines for disclosing expert witnesses established by the Rule 16(a) and 26(f) scheduling order and discovery plan, disclose their expert witnesses in accordance with the requirements of Federal Rule of Civil Procedure 26(a)(2)(A) and (B).
The list of “Persons with Knowledge” is not a list of expert witnesses and any one or all of them may become enjoined in this action on behalf of the Defendants. Plaintiff has not called upon the expert independent witnesses of public relations counsel, outside securities counsel, and/or a certified public accountant in its disclosure of “Persons with Knowledge”. The parties have not stipulated or disclosed any expert witnesses.
Expert witness disclosures must not be filed with the Clerk of Court unless filing is required specifically by the Federal Rules of Civil Procedure, LR 37.1(b), LR 56.1, or an order of the court. The Clerk of Court will return any expert disclosures submitted for filing to the submitting party promptly, together with a copy of LR 5.2. The Defendants are asking the Court to order expert witnesses, namely independent counsel, independent certified public accountants, and independent public relations personnel in order to serve proper Justice.
c. Fed. R. Civ. P. 26(a)(3): Pretrial Disclosures. The Federal Rule of Civil Procedure 26(a)(3)(A), (B), and (C) witness and exhibit disclosures must be served at least 21 days before the final pretrial conference, as required by LR 16.2(c). Unless otherwise ordered by the court, these disclosures need not be filed. Objections to these disclosures must be made in the proposed final pretrial order submitted pursuant to LR 16.2(b).
d. Fed. R. Civ. P. 26(f): Meeting of Parties. At least 14 days before the proposed scheduling order and discovery plan is due pursuant to LR 16.1(a), the parties must, as required by Federal Rule of Civil Procedure 26(f), confer to do the following:
1. Consider the nature and bases of their claims and defenses and the possibilities for a prompt settlement or resolution of the case;
2. Make or arrange for the disclosures required by Federal Rule of Civil Procedure 26(a)(1); and
3. Develop a proposed discovery plan.
The parties in this action have not done 1-3 above as of the date of this motion to dismiss.
Unless otherwise stipulated by the parties, the Rule 26(f) discovery plan conference should be combined with the Rule 16(b) scheduling order conference. This has not been done.
e. Discovery Plan. The Federal Rule of Civil Procedure 26(f) requirement that the parties submit to the court a written report outlining their discovery plan is satisfied by the submission to the Clerk of Court of a properly completed scheduling order and discovery plan form. The parties have not stipulated this.
Rule 26. General Provisions Governing Discovery; Duty of Disclosure
(a) Required Disclosures; Methods to Discover Additional Matter.
(1) Initial Disclosures. Except in categories of proceedings specified in Rule 26(a)(1)(E), or to the extent otherwise stipulated or directed by order, a party must, without awaiting a discovery request, provide to other parties:
(A) the name and, if known, the address and telephone number of each individual likely to have discoverable information that the disclosing party may use to support its claims or defenses, unless solely for impeachment, identifying the subjects of the information;
Plaintiff failed to disclose and/or provide the names of the initial complainants and all information obtained from Hartley T. Bernstein et ux, a disbarred securities lawyer, Stock Patrol, StockPatrol.com, Bernstein and Wasserman. Defendants hereby ask the Court to issue subpoenas to the above named parties for depositions on behalf of the Defendants in seeking justice at the expense of the Plaintiff. Defendants cannot discover the truth or swear to tell the truth without all relevant facts, witnesses and the ability to face their accusers being brought to bear in this case. Plaintiff has failed to clearly identify the subjects which each individual having discoverable information may have.
Plaintiff was aware of the involvement of Ferenc Galgoczy, an agent of both PKH and Eurotrend Informatics in reference to the negotiations and authorization of Eurotrend to issue a press release on behalf of Quintek and its intended business dealings and orders for Quintek products for the Central European Market, but failed to include that person on the list of “Persons with Knowledge”. Plaintiff is prejudiced in its claims and actions against Defendants.
Plaintiff has named Amber T. Samaroo as a person with knowledge on the basis of interaction with ACS, whereas Defendants object to this person testifying on behalf of Plaintiff in Court and will request that said person testify on behalf of Defendants and as an expert witness.
(B) a copy of, or a description by category and location of, all documents, data compilations, and tangible things that are in the possession, custody, or control of the party and that the disclosing party may use to support its claims or defenses, unless solely for impeachment; Plaintiff has failed to list certain documents, particularly those which would lead to a conclusion and finding by this Court and a Jury that Defendants did not engage in any fraud nor did Defendants intend to engage in any fraud or issue any false and misleading statements on behalf of any public company, including certain depositions taken under oath in its possession.
(C) a computation of any category of damages claimed by the disclosing party, making available for inspection and copying as under Rule 34 the documents or other evidentiary material, not privileged or protected from disclosure, on which such computation is based, including materials bearing on the nature and extent of injuries suffered; Plaintiff has failed to provide any computation of damages claimed and in fact the only persons who were damaged by any action on the part of Defendants in connection with business dealings with Quintek and Eknowledge were broker/dealers who illegally and nakedly shorted the stock of both firms, and some of which have since gone out of business as a result of a failure to cover their naked short positions and to which issue the Plaintiff has finally come around to correcting through Regulation SHO. The public stockholders were not damaged in any way by the actions of Defendants and therefore no claim for damages are valid; Plaintiffs claims for damages, both punitive and compensatory are without merit and based solely on arbitrary conclusions which are prejudiced against the Defendants; and
(D) for inspection and copying as under Rule 34 any insurance agreement under which any person carrying on an insurance business may be liable to satisfy part or all of a judgment which may be entered in the action or to indemnify or reimburse for payments made to satisfy the judgment.
(E) The following categories of proceedings are exempt from initial disclosure under Rule 26(a)(1):
(i) an action for review on an administrative record;
(ii) a petition for habeas corpus or other proceeding to challenge a criminal conviction or sentence;
(iii) an action brought without counsel by a person in custody of the United States, a state, or a state subdivision;
(iv) an action to enforce or quash an administrative summons or subpoena;
(v) an action by the United States to recover benefit payments;
(vi) an action by the United States to collect on a student loan guaranteed by the United States;
(vii) a proceeding ancillary to proceedings in other courts; and
(viii) an action to enforce an arbitration award.
This proceeding is ancillary to pending proceedings in other courts, specifically the Court of Federal Claims; therefore the Defendants Request to order the Plaintiffs to provide information as filed with this Court under Defendants Objection to Plaintiffs Motion to Strike et seq. dated October 17th, 2003, which has not been denied by this Court in relation to Defendant Acs has not been complied with.
These disclosures must be made at or within 14 days after the Rule 26(f) conference unless a different time is set by stipulation or court order, or unless a party objects during the conference that initial disclosures are not appropriate in the circumstances of the action and states the objection in the Rule 26(f) discovery plan. Defendants have hereby stated their objections.
In ruling on the objection, the court must determine what disclosures if any are to be made, and set the time for disclosure. Any party first served or otherwise joined after the Rule 26(f) conference must make these disclosures within 30 days after being served or joined unless a different time is set by stipulation or court order. A party must make its initial disclosures based on the information then reasonably available to it and is not excused from making its disclosures because it has not fully completed its investigation of the case or because it challenges the sufficiency of another party's disclosures or because another party has not made its disclosures. Defendants hereby request this Court to enjoin all of the persons listed on Plaintiffs “Persons with Knowledge” list except Amber T. Samaroo, who has agreed to state his knowledge of Defendants if requested. Defendants reserve the right to add their own list of “Persons with Knowledge” in reference to counter claims previously filed and made with this Court.
(2) Disclosure of Expert Testimony.
(A) In addition to the disclosures required by paragraph (1), a party shall disclose to other parties the identity of any person who may be used at trial to present evidence under Rules 702, 703, or 705 of the Federal Rules of Evidence. Plaintiff has not provided this information to Defendants.
(B) Except as otherwise stipulated or directed by the court, this disclosure shall, with respect to a witness who is retained or specially employed to provide expert testimony in the case or whose duties as an employee of the party regularly involve giving expert testimony, be accompanied by a written report prepared and signed by the witness. The report shall contain a complete statement of all opinions to be expressed and the basis and reasons therefor; the data or other information considered by the witness in forming the opinions; any exhibits to be used as a summary of or support for the opinions; the qualifications of the witness, including a list of all publications authored by the witness within the preceding ten years; the compensation to be paid for the study and testimony; and a listing of any other cases in which the witness has testified as an expert at trial or by deposition within the preceding four years.
(C) These disclosures shall be made at the times and in the sequence directed by the court. In the absence of other directions from the court or stipulation by the parties, the disclosures shall be made at least 90 days before the trial date or the date the case is to be ready for trial or, if the evidence is intended solely to contradict or rebut evidence on the same subject matter identified by another party under paragraph (2)(B), within 30 days after the disclosure made by the other party. The parties shall supplement these disclosures when required under subdivision (e)(1).
(3) Pretrial Disclosures. In addition to the disclosures required by Rule 26(a)(1) and (2), a party must provide to other parties and promptly file with the court the following information regarding the evidence that it may present at trial other than solely for impeachment:
(A) the name and, if not previously provided, the address and telephone number of each witness, separately identifying those whom the party expects to present and those whom the party may call if the need arises;
(B) the designation of those witnesses whose testimony is expected to be presented by means of a deposition and, if not taken stenographically, a transcript of the pertinent portions of the deposition testimony; and
(C) an appropriate identification of each document or other exhibit, including summaries of other evidence, separately identifying those which the party expects to offer and those which the party may offer if the need arises.
Unless otherwise directed by the court, these disclosures must be made at least 30 days before trial. Within 14 days thereafter, unless a different time is specified by the court, a party may serve and promptly file a list disclosing (i) any objections to the use under Rule 32(a) of a deposition designated by another party under Rule 26(a)(3)(B), and (ii) any objection, together with the grounds therefor, that may be made to the admissibility of materials identified under Rule 26(a)(3)(C). Objections not so disclosed, other than objections under Rules 402 and 403 of the Federal Rules of Evidence, are waived unless excused by the court for good cause.
(4) Form of Disclosures. Unless the court orders otherwise, all disclosures under Rules 26(a)(1) through (3) must be made in writing, signed, and served.
(5) Methods to Discover Additional Matter. Parties may obtain discovery by one or more of the following methods: depositions upon oral examination or written questions; written interrogatories; production of documents or things or permission to enter upon land or other property under Rule 34 or 45(a)(1)(C), for inspection and other purposes; physical and mental examinations; and requests for admission.
(b) Discovery Scope and Limits. Unless otherwise limited by order of the court in accordance with these rules, the scope of discovery is as follows:
(1) In General. Parties may obtain discovery regarding any matter, not privileged, that is relevant to the claim or defense of any party, including the existence, description, nature, custody, condition, and location of any books, documents, or other tangible things and the identity and location of persons having knowledge of any discoverable matter. For good cause, the court may order discovery of any matter relevant to the subject matter involved in the action. Relevant information need not be admissible at the trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence. All discovery is subject to the limitations imposed by Rule 26(b)(2)(i), (ii), and (iii).
(2) Limitations. By order, the court may alter the limits in these rules on the number of depositions and interrogatories or the length of depositions under Rule 30. By order or local rule, the court may also limit the number of requests under Rule 36. The frequency or extent of use of the discovery methods otherwise permitted under these rules and by any local rule shall be limited by the court if it determines that: (i) the discovery sought is unreasonably cumulative or duplicative, or is obtainable from some other source that is more convenient, less burdensome, or less expensive; (ii) the party seeking discovery has had ample opportunity by discovery in the action to obtain the information sought; or (iii) the burden or expense of the proposed discovery outweighs its likely benefit, taking into account the needs of the case, the amount in controversy, the parties' resources, the importance of the issues at stake in the litigation, and the importance of the proposed discovery in resolving the issues. The court may act upon its own initiative after reasonable notice or pursuant to a motion under Rule 26(c).
(3) Trial Preparation: Materials. Subject to the provisions of subdivision (b)(4) of this rule, a party may obtain discovery of documents and tangible things otherwise discoverable under subdivision (b)(1) of this rule and prepared in anticipation of litigation or for trial by or for another party or by or for that other party's representative (including the other party's attorney, consultant, surety, indemnitor, insurer, or agent) only upon a showing that the party seeking discovery has substantial need of the materials in the preparation of the party's case and that the party is unable without undue hardship to obtain the substantial equivalent of the materials by other means. In ordering discovery of such materials when the required showing has been made, the court shall protect against disclosure of the mental impressions, conclusions, opinions, or legal theories of an attorney or other representative of a party concerning the litigation.
A party may obtain without the required showing a statement concerning the action or its subject matter previously made by that party. Upon request, a person not a party may obtain without the required showing a statement concerning the action or its subject matter previously made by that person. If the request is refused, the person may move for a court order. The provisions of Rule 37(a)(4) apply to the award of expenses incurred in relation to the motion. For purposes of this paragraph, a statement previously made is (A) a written statement signed or otherwise adopted or approved by the person making it, or (B) a stenographic, mechanical, electrical, or other recording, or a transcription thereof, which is a substantially verbatim recital of an oral statement by the person making it and contemporaneously recorded.
(4) Trial Preparation: Experts.
(A) A party may depose any person who has been identified as an expert whose opinions may be presented at trial. If a report from the expert is required under subdivision (a)(2)(B), the deposition shall not be conducted until after the report is provided.
(B) A party may, through interrogatories or by deposition, discover facts known or opinions held by an expert who has been retained or specially employed by another party in anticipation of litigation or preparation for trial and who is not expected to be called as a witness at trial, only as provided in Rule 35(b) or upon a showing of exceptional circumstances under which it is impracticable for the party seeking discovery to obtain facts or opinions on the same subject by other means.
(C) Unless manifest injustice would result, (i) the court shall require that the party seeking discovery pay the expert a reasonable fee for time spent in responding to discovery under this subdivision; and (ii) with respect to discovery obtained under subdivision (b)(4)(B) of this rule the court shall require the party seeking discovery to pay the other party a fair portion of the fees and expenses reasonably incurred by the latter party in obtaining facts and opinions from the expert.
(5) Claims of Privilege or Protection of Trial Preparation Materials. When a party withholds information otherwise discoverable under these rules by claiming that it is privileged or subject to protection as trial preparation material, the party shall make the claim expressly and shall describe the nature of the documents, communications, or things not produced or disclosed in a manner that, without revealing information itself privileged or protected, will enable other parties to assess the applicability of the privilege or protection.
(c) Protective Orders. Upon motion by a party or by the person from whom discovery is sought, accompanied by a certification that the movant has in good faith conferred or attempted to confer with other affected parties in an effort to resolve the dispute without court action, and for good cause shown, the court in which the action is pending or alternatively, on matters relating to a deposition, the court in the district where the deposition is to be taken may make any order which justice requires to protect a party or person from annoyance, embarrassment, oppression, or undue burden or expense, including one or more of the following:
(1) that the disclosure or discovery not be had;
(2) that the disclosure or discovery may be had only on specified terms and conditions, including a designation of the time or place;
(3) that the discovery may be had only by a method of discovery other than that selected by the party seeking discovery;
(4) that certain matters not be inquired into, or that the scope of the disclosure or discovery be limited to certain matters;
(5) that discovery be conducted with no one present except persons designated by the court;
(6) that a deposition, after being sealed, be opened only by order of the court;
(7) that a trade secret or other confidential research, development, or commercial information not be revealed or be revealed only in a designated way; and
(8) that the parties simultaneously file specified documents or information enclosed in sealed envelopes to be opened as directed by the court.
If the motion for a protective order is denied in whole or in part, the court may, on such terms and conditions as are just, order that any party or other person provide or permit discovery. The provisions of Rule 37(a)(4) apply to the award of expenses incurred in relation to the motion.
(d) Timing and Sequence of Discovery. Except in categories of proceedings exempted from initial disclosure under Rule 26(a)(1)(E), or when authorized under these rules or by order or agreement of the parties, a party may not seek discovery from any source before the parties have conferred as required by Rule 26(f). Unless the court upon motion, for the convenience of parties and witnesses and in the interests of justice, orders otherwise, methods of discovery may be used in any sequence, and the fact that a party is conducting discovery, whether by deposition or otherwise, does not operate to delay any other party's discovery.
(e) Supplementation of Disclosures and Responses. A party who has made a disclosure under subdivision (a) or responded to a request for discovery with a disclosure or response is under a duty to supplement or correct the disclosure or response to include information thereafter acquired if ordered by the court or in the following circumstances:
(1) A party is under a duty to supplement at appropriate intervals its disclosures under subdivision (a) if the party learns that in some material respect the information disclosed is incomplete or incorrect and if the additional or corrective information has not otherwise been made known to the other parties during the discovery process or in writing. With respect to testimony of an expert from whom a report is required under subdivision (a)(2)(B) the duty extends both to information contained in the report and to information provided through a deposition of the expert, and any additions or other changes to this information shall be disclosed by the time the party's disclosures under Rule 26(a)(3) are due.
(2) A party is under a duty seasonably to amend a prior response to an interrogatory, request for production, or request for admission if the party learns that the response is in some material respect incomplete or incorrect and if the additional or corrective information has not otherwise been made known to the other parties during the discovery process or in writing.
(f) Conference of Parties; Planning for Discovery. Except in categories of proceedings exempted from initial disclosure under Rule 26(a)(1)(E) or when otherwise ordered, the parties must, as soon as practicable and in any event at least 21 days before a scheduling conference is held or a scheduling order is due under Rule 16(b), confer to consider the nature and basis of their claims and defenses and the possibilities for a prompt settlement or resolution of the case, to make or arrange for the disclosures required by Rule 26(a)(1), and to develop a proposed discovery plan that indicates the parties' views and proposals concerning:
(1) what changes should be made in the timing, form, or requirement for disclosures under Rule 26(a), including a statement as to when disclosures under Rule 26(a)(1) were made or will be made:
(2) the subjects on which discovery may be needed, when discovery should be completed, and whether discovery should be conducted in phases or be limited to or focused upon particular issues;
(3) what changes should be made in the limitations on discovery imposed under these rules or by local rule, and what other limitations should be imposed; and
(4) any other orders that should be entered by the court under Rule 26(c) or under Rule 16(b) and (c).
The attorneys of record and all unrepresented parties that have appeared in the case are jointly responsible for arranging the conference, for attempting in good faith to agree on the proposed discovery plan, and for submitting to the court within 14 days after the conference a written report outlining the plan. A court may order that the parties or attorneys attend the conference in person. If necessary to comply with its expedited schedule for Rule 16(b) conferences, a court may by local rule (i) require that the conference between the parties occur fewer than 21 days before the scheduling conference is held or a scheduling order is due under Rule 16(b), and (ii) require that the written report outlining the discovery plan be filed fewer than 14 days after the conference between the parties, or excuse the parties from submitting a written report and permit them to report orally on their discovery plan at the Rule 16(b) conference.
(g) Signing of Disclosures, Discovery Requests, Responses, and Objections.
(1) Every disclosure made pursuant to subdivision (a)(1) or subdivision (a)(3) shall be signed by at least one attorney of record in the attorney's individual name, whose address shall be stated. An unrepresented party shall sign the disclosure and state the party's address. The signature of the attorney or party constitutes a certification that to the best of the signer's knowledge, information, and belief, formed after a reasonable inquiry, the disclosure is complete and correct as of the time it is made.
(2) Every discovery request, response, or objection made by a party represented by an attorney shall be signed by at least one attorney of record in the attorney's individual name, whose address shall be stated. An unrepresented party shall sign the request, response, or objection and state the party's address. The signature of the attorney or party constitutes a certification that to the best of the signer's knowledge, information, and belief, formed after a reasonable inquiry, the request, response, or objection is: Plaintiff called for a Deposition, a process of discovery, without prior consultant with Defendants.
(A) consistent with these rules and warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law;
(B) not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation; and
(C) not unreasonable or unduly burdensome or expensive, given the needs of the case, the discovery already had in the case, the amount in controversy, and the importance of the issues at stake in the litigation. Plaintiff can save the Court, the Government, and the taxpayers needless expense by providing copies at a cost 1/10th the cost quoted by “approved outside copying agencies” in order to deliver Defendants previously requested and ordered documents.
If a request, response, or objection is not signed, it shall be stricken unless it is signed promptly after the omission is called to the attention of the party making the request, response, or objection, and a party shall not be obligated to take any action with respect to it until it is signed. The Defendants request that this Court Order all filings made by Plaintiff after October 27th, 2003 be STRICKEN.
(3) If without substantial justification a certification is made in violation of the rule, the court, upon motion or upon its own initiative, shall impose upon the person who made the certification, the party on whose behalf the disclosure, request, response, or objection is made, or both, an appropriate sanction, which may include an order to pay the amount of the reasonable expenses incurred because of the violation, including a reasonable attorney's fee. Plaintiff has failed to provide previously requested information, which would have saved Plaintiff unnecessary expense. Defendants hereby request this Court deny any motions of Plaintiff for recovery of any expenses expended to date in this matter. Plaintiff has rejected all previous offers of settlement with Defendants. Further Plaintiff has spent in excess of $250,000 in taxpayer money in its investigation of this case, and collected less than 10% of that sum from the President of Quintek and the President of Eknowledge, both of whom settled out of court without admitting or denying any of the allegations of the Plaintiff.
On October 17th, 2003 Defendants requested an Expedited Hearing. The intent of that request was to save both the Court and the Plaintiff additional costs in this matter and to bring the case to a quick resolution according to the intent of the Rules of Civil Procedure.
On October 22, this Court Ordered that the request for expedited hearing filed on behalf of Defendant Acs be denied. Defendants hereby object to this denial on the basis that the Court and the taxpayers would have saved money by having a fair and quick hearing before the Judge to accurately establish the merits or lack thereof in this case.
On October 28, 2003 Plaintiff filed a Response to ACS’ Request for Expedited Hearing wherein Plaintiff stated that it “has no objection to the trial in the matter commencing as soon as possible”. Plaintiff on the other hand did not schedule in advance a deposition with Defendants or give adequate time for Defendants to prepare for such Deposition, and Plaintiff has refused to provide evidence it is using to state its claims of fraud and damages against the Defendants in a timely fashion to be consistent with the above statement.
Defendants hereby requests a face-to-face meeting with the Judge in this Court at the Courts convenience in order to adjudge the merits of the Plaintiffs claims, to determine proper jurisdiction and venue, and to present documents before the Judge which are of a highly sensitive and confidential nature but which cannot be filed with this Court or made public under the existing rules of the United States Securities and Exchange Commission.
On November 7th, 2003, Plaintiff filed with this Court a Motion for Discovery and Scheduling Order and a [Proposed] Discovery Plan and Scheduling Order. Defendants are not in agreement with said Motion and object thereto and are further not in Agreement with any Proposed Discover Plan and Scheduling Order unless Plaintiff first provides at its own expense copies of the 7,000 plus pages of documents regarding this matter to Defendants. The burden of proof in this matter is upon the Plaintiff.
On October 22, 2003 this Court denied Defendant PKH Objection to Document #15 dated October 17th, 2003 and the document was ordered STRICKEN insofar as it was filed on behalf of Defendant PKH, the document nevertheless was ordered retained in the file of the Court.
Defendants hereby ask the Court to dismiss the case against PKH as the Court has no jurisdiction over a “person” legally domiciled under the laws and jurisdiction of the State of Delaware and this Court should order Plaintiff to file its case against Defendant PKH in the proper jurisdiction, and or remand the case under its own rules to the District Court of California and or Delaware where the alleged fraud took place according to Plaintiff.
Defendants hereby object to the Motion for Leave and to the Amended Complaint filed by Plaintiff in this Court on October 28th, 2003.
Insofar as the Motion to Dismiss ACS in this case, the court has not ruled on this motion. Defendant ACS hereby requests this Court to dismiss this case against ACS, an individual, under the following stipulations:
STIPULATIONS
That ACS and PKH agree to settle this matter outside this Court with Plaintiff for the sum of one Lincoln Penny ($.01) payable to Plaintiff within 24 hours of the dismissal of ACS.
That PKH, through its affiliate, the Bank Activities Reform Commission, shall over the course of twelve (12) months from the date of the dismissal of ACS in this case turn over to Plaintiff all information it has developed or shall further develop during that same period related to investigations of the United States Government, the Securities and Exchange Commission, and the present and former employees of Plaintiff, and shall provide 69 hours of services to Plaintiff in concluding those investigations related to stock market manipulations by Pension Funds, Stock Brokers and Dealers, Mutual Funds, Money Managers, past and present attorneys working under the employ of the Plaintiff at its regular hourly consulting rate of $1.00 per second, or $3,600 per hour which shall be the equivalent of $250,000 in services to Plaintiff.
That Plaintiff will agree to this settlement without prejudice and no further stipulations except those stated below, and shall retain the right to file any action against Defendant PKH, but not Defendant ACS in the District Court of Delaware or California.
Without admitting or denying any guilt or innocence in this case, and with prejudice, the Defendants ACS and PKH will agree to a permanent injunction restraining and enjoining ACS and PKH from violating Section 17(b) of the Securities Acs and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
Plaintiff will agree to provide copies of all 7,000+ pages of information gathered in the investigation of this case at no further expense to Defendants within ten (10) business days by regular mail, postage prepaid, to the Defendants address first stated above.
Dated: November 13th, 2003 Respectfully submitted
_________________________
Gabor Sandor ACS
For Defendants Gabor S. ACS
Ticker Symbol Changed:
http://www.pcquote.com/stocks/QuoteDirect.php?ticker=ekwl
This was terminated. It is posted here for the public record. Gary Saunders resigned. All contracts were rescinded. The company failed to announce this to the public. EKNO did a 100 for 1 reverse split. For more specific details PM.
This was terminated but EKNO failed to announce it publicly. For the record. It is hereby announced. For specific details PM.
Penny King Holdings Corporation Finalizes Acquisition of 3,000,000 Shares of eKnowledge
WASHINGTON, D.C. & CORONA, Calif.--(BUSINESS WIRE)--March 11, 2002--
Penny King Holdings Corporation Finalizes Acquisition of 3,000,000
Shares of eKnowledge and Facilitates a $50 Million Contract for
eKnowledge Group to Help Build a Free and Clear America
Penny King Holdings Corporation, (PKH) one of the fastest growing private investment holding companies in America and eKnowledge Group, Inc. (OTCBB:EKNO - news) jointly announced today that PKH has acquired 3,000,000 shares of eKnowledge Group, Inc. common voting stock in a private transaction valued at $1.5 million.
EKNO announced today that it has entered into a 10 year development agreement with The Free and Clear Foundations of America, Inc., a non profit charitable organization headquartered in Washington D.C. which will compensate EKNO with a projected minimum revenue of $5 million per year with projected EBITDA earnings of at least .10 cents per share annually.
PKH and EKNO have continued their discussions for a licensing arrangement for a new technology known as ThoughtWare as it applies to the field of education. ``This technology will allow users of any handheld or desktop device to communicate commands to computer networks without a keypad, mouse, keyboard or voice recognition,'' a spokesperson for PKH stated. Background on this type of technology may be found at www.ibva.com.
Both companies acknowledged that they are in serious discussions about financing plans for a stock buyback, acquisitions, and long term funding through the Free and Clear Bancorporation, a development stage financial services holding company controlled by PKH which will underwrite Zero Interest Mortgages, Zero Interest Credit Cards, and Zero Interest Auto Loans from applications on the Foundations web site and syndicate them to various global investors internationally.
About Penny King Holdings Corporation
Penny King Holdings Corporation is a private Delaware Investment Holding Company owned and controlled by Hungarian born financier Gabor Sandor Acs who has 22 years experience in the finance, real estate, venture capital, and world financial markets. PKH is in the process of facilitating over $2 billion in capital investments to a diverse set of publicly owned companies in the United States, Canada and Hungary.
About the Free and Clear Foundations of America, Inc.
The Free and Clear Foundations of America, Inc. was founded by Gabor Sandor Acs, a retired international financier. The Foundations intend to market two eBooks online through www.freeandclearfoundations.org written by the Founder called, ``50 Ways to Leave Your Landlord'' and ``Freenomics: The Modern Science of Free Economics'' as well as provide online applications to anyone who wishes to own their home free and clear in less than a decade using a Zero Interest Mortgage.
About eKnowledge
eKnowledge Group, Inc. is a multifaceted e-learning provider with content in the corporate and local government compliance areas as well as other e-learning offerings. eKnowledge also facilitates customized e-learning by designing or implementing other organizations' training, education, marketing, and other programs for delivery over the Internet or on CD-ROM or DVD. Recently eKnowledge launched www.preventionpoint.com a Human Resources Training and Vendor resource solution in conjunction with Fisher & Phillips LLC.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: This news release contains forward-looking information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements that include the words ``believes,'' ``expects,'' ``anticipates'' or similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of eKnowledge Group Inc. (the company) to differ materially from those expressed or implied by such forward-looking statements (such factors include, among others, the risk factors contained in the company's Annual Reports and other filings with the Securities and Exchange Commission). Actual results could differ materially from those anticipated due to risk factors that include, but are not limited to, lack of timely development of products and services; lack of market acceptance of products, services and technologies; inadequate capital; adverse government regulations; competition; inability to earn revenue or profits; dependence on key individuals; inability to obtain or protect intellectual property rights; inability to obtain listing for the company's securities; lower sales and higher operating costs than expected; technological obsolescence of the company's products; limited operating history and risks inherent in the entertainment, telecommunications, technology and education industries.
--------------------------------------------------------------------------------
Contact:
eKnowledge Group, Inc.
Investor Relations: Current Capital
Robert Kennedy, 877/859-5200
or
Penny King Holdings Corporation
Gabor Sandor Acs, 240/274-4040
www.thepennyking.com
Penny King Holdings Corporation, a Delaware Investment Holding Company.
Penny King Holdings Corporation to Acquire 3,000,000 Shares Of eKnowledgeGroup, Inc. for $1.5 Million
WASHINGTON and CORONA, Calif., Jan 2, 2002 /PRNewswire via COMTEX/ -- Penny King Holdings Corporation, (PKH) a Delaware private investment holding company and eKnowledge Group, Inc. (OTC Bulletin Board: EKNO) jointly announced today that (PKH) has entered into a letter of intent to acquire 3,000,000 shares of eKnowledge Group, Inc. common voting stock in a private transaction valued at $1.5 million.
The transaction is subject to a Definitive Agreement being signed by no later than January 16th, 2002 and a Closing Date of January 31st, 2002.
PKH and EKNO have entered into discussions for a licensing arrangement for a new technology commonly known as ThoughtWare as it applies to the field of education. "This technology will allow users of any handheld or desktop device to communicate commands to their computers without a keypad, mouse, keyboard or voice recognition," a spokesperson for PKH stated.
Background research on present applications of older versions of this new advanced technology may be found at http://www.ibva.com .
"We have chosen to invest in eKnowledge Group, Inc. because of their track record of excellence, their commitment to modernizing the systems of education, and the outstanding integrity of the Board of Directors and its Officers", said Mr. Acs, President of PKH.
"Mr. Acs is a truly one-of-a-kind figure with an immensely bold vision for the future," said Gary S. Saunders CEO of eKnowledge Group, Inc., "We are excited to work with Penny King Holdings and expect great things to develop out of this relationship."
About Penny King Holdings Corporation
Penny King Holdings Corporation is a private Delaware Investment Holding Company owned and controlled by Hungarian born financier Gabor Sandor Acs who has 21 years experience in the finance, real estate, venture capital, and world financial markets.
PKH has exclusive Western Hemisphere distribution rights to a whole new series of technologies under agreements with The Free and Clear Foundations of America, Inc. a DC-based non-profit organization.
PKH is continuing its process of facilitating over $200 million in capital investments to 50 different publicly and privately owned companies in the United States, Canada and Hungary and most recently acquired 2.3 million shares of Quintek Technologies, Inc., (OTC Bulletin Board: QTEK) another California technology company.
More information may be found by visiting http://www.thepennyking.com .
About eKnowledge
eKnowledge Group, Inc. is a multifaceted e-learning provider with content in the corporate and local government compliance areas as well as other e- learning offerings. eKnowledge also facilitates customized e-learning by designing or implementing other organizations' training, education, marketing, and other programs for delivery over the Internet or on CD-ROM or DVD.
For additional information, visit the company's website at http://www.eknowledge.com .
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: This news release contains forward-looking information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements that include the words "believes," "expects," "anticipates" or similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of eKnowledge Group Inc. (the company) to differ materially from those expressed or implied by such forward-looking statements (such factors include, among others, the risk factors contained in the company's Annual Reports and other filings with the Securities and Exchange Commission). In addition, a description of anyone's past success, either financial or strategic, is no guarantee of future success.
The company will remain dependent upon future financing for its growth and development, and for it to successfully implement its business plan. No statement contained herein should be construed as indicating that such financing is or will be available, and if available, will be on terms favorable to the company.
This news release speaks as of the date first set forth above and the company assumes no responsibility to update the information included herein for events occurring after the date hereof.
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SOURCE Penny King Holdings Corporation
CONTACT: Robert Kennedy, Investor Relations, of Current Capital,
+1-877-859-5200 or Robert@currentcapital.com, for eKnowledge Group, Inc.
URL: http://www.ibva.com
http://www.prnewswire.com
Copyright (C) 2002 PR Newswire. All rights reserved.
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