Thursday, August 02, 2007 11:20:24 AM
The following is the text of the SEC's response to last Friday's response to their motions for receivership and contempt.
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The consolidated response from defendants Universal Express, Inc.("Universal
Express"), Richard A. Altomare ("Altomare") and Chris G. Gunderson ("Gunderson")
(collectively herein "the Defendants") to motions filed by Plaintiff Securities and Exchange
Commission ("SEC") for the appointment of a receiver and for an order finding them in contempt can only be described as an utterly disingenuous attempt to deny the fact that the Court
has entered findings and a judgment against them. [Defendants'
Response, Docket 197.] That denial is the common thread running through all of the various motions and responses now
pending before this Court.1 The arguments raised in the Defendants' briefs do little more than rehash factual or legal arguments already vetted before, and rejected by, the Court.2 Moreover, the Defendants' briefs concede that the bases for the SEC's receivership and contempt motions exist. First, the Defendants' briefs concede that Universal Express lacks the financial resources to comply with the Court's judgment and is technically insolvent. Second, the briefs concede
that the defendants have not complied, and in fact do not intend to comply, with any of the provisions of the Court's judgment. In light of these conceded facts, the SEC's motions for the appointment of a receiver and for an order finding the Defendants in contempt should be granted.
1 Pending before the Court are: (1) the Defendants Motion to Stay and the Plaintiff's Opposition to that Motion; (2)
Defendants' Motion for jury trial on the remaining counts of the complaint and the SEC's Response to that motion; (3) the SEC's Motion to Dismiss Unadjudicated Claims as to the
Defendants and their Opposition to that motion;(4) the SEC's Motion for Appointment of a Receiver and the Defendant's
Opposition to that motion; and (5) the SEC's Motion for Entry of Civil Contempt Against Defendants and their Response to that motion.
2 The 35 paragraphs of the Gunderson affidavit contain no competent evidence and no new arguments which are relevant to any of the pending motions. Gunderson reiterates at length the Defendants' short-selling allegations, which have no evidentiary basis and are irrelevant to this case (¶¶ 1-
3, 21, 35). Gunderson also reiterates all of the "bankruptcy exemption" arguments previously rejected by the Court (¶¶
33-35). Indeed, despite the Court's entry of judgment, Gunderson suggests (without citation to evidence) that the
press releases issued by the company were not really false (¶¶ 27-29). Gunderson also devotes numerous paragraphs to Altomare's leadership of Universal Express, but fails to mention that under Altomare, the company has perpetually failed to generate any substantial revenue or net income (¶¶ 7-16). Altomare's six-paragraph affidavit details his ostensible success in leading the company since its emergence from bankruptcy (though with all of the company's operations admittedly still only in the developmental stage, (¶ 3), and his unspecified unsuccessful efforts to date to find his successor.
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I. The Defendants' Briefs Underscore the Need for a Receiver
A. Universal Express is Insolvent The Defendants' concede that Universal Express is technically insolvent given the Court's judgment. In their reply in support of their Motion to Stay all of the relief ordered by the Court against them [Docket 195], the Defendants represent that the company has total assets
"slightly in excess of approximately $11 million" with which to
satisfy the Court's judgment as to Universal Express of $21 million in total disgorgement, prejudgment interest and penalties (Reply brief at p. 6, n. 3). Thus, even assuming arguendo that this statement as to the company's current assets is true,3 the company currently has insufficient assets to satisfy the Court's judgment.
Compounding this insolvency is Universal Express' lack of legitimate income producing business operations. Defendants' Response to the Motion for Appointment of a Receiver, in
effect asks the Court to accept the incredible proposition that, some fourteen years after exiting bankruptcy, the company has prospects of making what it concedes are still no more than
"development-stage" business operations a success. Nothing in the company's public filings or its various briefs supports that argument. The company has operated at a net loss since its
inception and its independent auditors issued a "going concern"
qualification to their opinion letter for the audit of the company's year-end 2006 financial statements. (Receiver Motion, Att. A, p. 11). Although the Defendants' Response suggests that the company's revenues are increasing, it conspicuously fails to disclose that the company's net losses are escalating much more rapidly. Between fiscal 2005 and fiscal 2006, the company's net operating losses rose from approximately $10 million to nearly $19 million (Receiver
Motion, Att. A, p. 12). For the nine months ended March 31, 2007 alone, the company's reported net loss had escalated to $21 million on revenues of $2,687,262. (Receiver Motion, Att. B, p. 5).
3 Plaintiff is not aware of any independently audited figures which would support this representation by Defendants. As stated in the SEC's Receiver motion, the company's most recent
audited financial statements at year end 2006 reported assets including cash and cash equivalents of $2,102,459 and net property and equipment valued at $206,832 (Receiver Motion, Att. A, Form 10-KSB, pp. 11-14.). The company's most recent filing is an unaudited March 31, 2007 Form 10-Q filed on May 21, 2007, lists total assets of approximately $11 million, which includes current assets of $874,376 in cash and cash equivalents, $350,159 in property and equipment and approximately $4,707,383 in unspecified "other current assets" (Receiver Motion, Att. B, 3/31/07 Form 10-Q, p. 3).
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The company's financial statements demonstrate that, absent its
historical life blood of unregistered stock sales, Universal Express cannot generate enough revenue to survive. The
company's reported operating expenses rose from $13,053,854 for the nine months ended March 31, 2006 to $21,634,168 for the nine months ended March 31, 2007. (Receiver Motion, Att. B, p.
5). The company's audited financials for the 2006 fiscal year
reported revenues of $1,073,486 and cost of goods sold of 830,486, resulting in a gross profit of $242,603. However, this slight gross profit was dwarfed by the company's operating expenses of $19,164,811. (Receiver Motion, Att. A, p. 12). These reported figures demonstrate that the company does not have sufficient legitimate business operations to survive economically, even absent the Court's ordered financial relief. The Defendants have addressed this fundamental and recurrent
operating deficiency by continuing to issue unregistered stock into the public market in violation of the Court's judgment, as addressed herein.
B. A Receiver is Necessary to Stop Altomare's Illegal Conduct
The Defendants' Response appears to posit the startling argument that Altomare is entitled to ignore the Court's judgment because he has unique qualifications that render him
indispensable to Universal Express. That argument is refuted by the financial performance figures cited above. In addition, the Court has found that Altomare engaged in repeated illegal
and fraudulent conduct which renders him "substantially unfit" to lead a public company. The Defendants' brief simply ignores this finding. Instead, Altomare's attached affidavit recounts his ongoing search for a replacement as though the Court's imposition of an officer and director bar
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against him were merely suggestive. In addition, both the Altomare and Gunderson affidavits appear to claim that Altomare's appointment as interim CEO during the bankruptcy
reorganization created lifetime tenure for Altomare which insulates him from the reach of this Court's judgment. See, e.g., Gunderson affidavit, ¶31. These assertions, as well as Altomare's actions to date, suggest that a receivership is necessary not only to stop Altomare's illegal conduct, but to protect the interest of investors, who are the real beneficial owners of the company and its assets. 4
C. Costs of the Receivership
To the extent they are accurate, the company's most recent financial statements facially suggest that the company has enough assets to pay for a receivership to: (1) assume control of the company; and (2) conduct an initial evaluation of its assets and operations and report to the Court on its ability to satisfy the Court's April 2007 judgment. According to its most recent Form 10-Q for the quarter ended March 2007, the company has cash and cash equivalents in the amount of $874,376 and total current assets of $6,050,429 (SEC Motion, Att. B. p. 3). However, the SEC was recently contacted by the lessor for Universal Express in Boca Raton, Florida, who
informed the SEC that Universal Express is in arrears on its rent. On July 26, 2007, the lessor issued a five-day notice to Universal Express, demanding payment no later than August 2, 2007. (attached as Exhibit 2). Appointment of a receiver is necessary to ascertain the true state of Universal Express's assets and affairs, to marshal and conserve assets, and report on them to the Court. See SEC v. Koenig, 469 F.2d 198 (2d Cir. 1972); SEC v. S&P Nat'l Corp., 360 F.2d 741, 750-51 (2d Cir. 1966).
4 Altomare's public statements make clear that he does not intend to obey the Court's judgment. In fact, Altomare has publicly issued threats against the SEC and the Court. Exhibit 2.
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Although the general rule is that costs and fees associated with a receivership be paid from the property under the receiver's possession and control, the Court, sitting in equity, has discretion to assess such costs against defendants Altomare and Gunderson, whose fraudulent conduct created the necessity for the receivership. SEC v. Milan Capital Group, Inc., 2001 U.S. Dist. LEXIS 11804, * 7 (S.D.N.Y. August 14, 2001); SEC v. Presto Telcom, 2007 U.S. App. LEXIS 14177, * 6 (9th Cir. June 5, 2007).
The SEC has requested that Universal Express provide current
financial information concerning all bank accounts. To date, Universal Express has not produced the requested information. As an interim measure in support of its Motion for Appointment of a Receiver, and to fully inform the Court, the SEC requests that the Court issue an order directing Universal Express to produce to the SEC forthwith, and/or at a hearing before
the Court: (1) all of its bank records for the last six months; (2) documents sufficient to identify the nature and location of all of its current assets, as well as any encumbrances on such assets; (3) documents reflecting any current debts owed to the company by any person, including defendant Altomare or his wife; and (4) documents reflecting any current debts owed by the company.
II. Contempt
The Defendants' response to the SEC's motion for entry of civil
contempt sanctions fails to present evidence challenging the Commission's clear and convincing proof that the defendants
have not complied with the Court's preliminary injunction entered April 20, 2004 or the final judgment entered April 2, 2007. The Defendants have not met their burden of proof that they have diligently attempted to comply with the Court's orders in a reasonable manner. In fact, they admit not complying with the Court's order barring Altomare from
serving as an officer and director of a public company, and requiring them to pay disgorgement and prejudgment interest.
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As discussed below, the defendants are in contempt and appropriate sanctions should be imposed.
A. Defendants Violated the Court's Prohibition on Unregistered Sales. Between January 1, and June 20, 2007, Altomare and Gunderson, acting for Universal Express, instructed the company's transfer agent in various letters sent by fax through interstate commerce to issue over 20.9 billion shares to ten entities or individuals. No registration statement was in effect for these transactions. The defendants claim
they did not violate the Court's orders prohibiting unregistered offers or sales because these transactions did not involve "sales" within the meaning of Section 5 of the Securities Act. [Defendants' Response, Docket
197 at p. 5] Contrary to their claim, these transactions come
directly within the definition of a sale. Section 2(3) of the Securities Act defines the term "sale" or "sell" to include every contract of sale or disposition of a security or interest in a security for value. 15 U.S.C. §§ 77b(a)(3). In each of these transactions the defendants directly and indirectly
disposed of the shares by transferring ownership of the stock from the company to ten entities or individuals for value.
Defendants admit that the shares were issued for public relations services, an exchange for value.
Defendants' Response at p. 6.
Defendants incorrectly suggest that the staff of the commission's Division of Corporation Finance agreed in a series of letters commenting on the company's June 30, 2006
annual report, that securities exchanged for "stock rights" contained in subscriptions agreements did not constitute an offer to sell a security. Defendants fail to identify or quote any language in the letters that constitutes the agreement. Review of all the letters reveals no such agreement.5
5 The initial comment letter from the Division of Corporation Finance dated October 25, 2006, states in the first and second paragraph of page 1: "Where indicated, we think you should
revise your documents in response to these comments. If you disagree, we will consider your explanation as to why our comment is inapplicable or a revision is unnecessary. . . . Please understand that the purpose of our review process is to assist you in your compliance with the applicable disclosure requirements and to enhance the overall disclosure in your filing." Further at page 2 in comment 21, the letter states: "Note 16 – Stock Rights, page F-15 21. Disclose in more detail how many stock
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Moreover, the staff's comments could not create such a binding
agreement upon the Commission. "The obligation to file accurate reports is entirely the registrant's, and this obligation cannot be shifted to the Commission or its staff under any
circumstances." SEC v. Falstaff Brewing Corp., 1978 U.S. Dist. LEXIS 14669, *73-74 (D.D.C. 1978); see also 15 U.S.C. § 78z (prohibiting representation that examination of a statement or report filed with the SEC is a finding that the statement or report is true or accurate).
Defendants suggest without citation to evidence that the securities that they offered and sold during 2007 are restricted and exempt from the registration process. The burden is on the defendants to show that the securities transactions at issue fall within one of the exemptions from registration, a burden they have failed to meet. SEC v. Cavanagh, 2004 U.S. Dist. LEXIS 13372 at *51, Fed. Sec. L. Rep. (CCH) P92,866 (S.D.N.Y. 2004). In all but one transaction, the instruction letters from Altomare and Gunderson, direct the transfer agent that the stock "is to be free trading under the S-8 registration of the Company's 1994 Stock Option Plan." 6 Defendants' reliance on an exemption under the 1994 Stock Option Plan created during the bankruptcy proceeding has already been rejected by the Court. Defendants have
failed to meet their burden of demonstrating that the 20.9 billion shares issued during 2007 are exempt from the registration rights have been issued, the specific terms of these rights, and how you account for these rights." The letter closes at page 5 with a request that the company acknowledge that: (1) the company is responsible for the adequacy and
accuracy of the disclosure in the filings; (2) the staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with
respect to the flings; and (3) the company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States." In its response dated November 14, 2006, Universal Express acknowledges and agrees to the three provisions listed above. See USXP Exhibit 9b at pp. 2-3, carry-over paragraph [Docket 199-12]. The staff's request for information on stock rights continues in the January 24, 2007 letter, "Note 17 – Stock Rights, page F-30 16. We reissue prior comment 21. Please revise your filing to disclose the details of EACH of your stock rights issuances. Also tell us how you account for the stock rights and refer to your basis in the
accounting literature." See USXP Exhibit 9g at p. 4 [Docket 199-17].
In response counsel for Universal Express states in a letter dated March 26, 2007, that "As noted in the revised disclosure, the terms of the stock rights are only determined at the time the Subscription Agreement is entered into between the investor and the Company." See USXP Exhibit 9c at p. 6 in response to comment numbered 16 [Docket 199-13]. 6 Only one of the 84 transactions involving new stock issued in 2007 contains language that may indicate the shares were restricted. On February 14, 2007, Altomare and Gunderson directed the transfer agent to issue 670,000,000 shares to Khalid Sunaid Alsunaid and requested the
stock "bear the standard safe harbor provisions of
Rule 144."
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requirements of Section 5. They are in contempt of the Court's orders prohibiting unregistered sales.
B. Defendants Violated the Court's Prohibition on Against Fraudulent Statements.
Defendants continue to make false and misleading statements about revenues earned from the company's purported 9,000 postal store network, and the status of the company's litigation with the Commission. In a company that reported revenues of $1,212,929, cost of goods sold of $969,251, and net loss of $8,418,950 as of March 31, 2007,7 the source of the company's revenues and the extent of its business operations is a material fact that a reasonable investor would consider in buying this stock. If there is no postal store network, as the Court found in its Opinion and Order,8 but rather independent postal stores in the United States that may or may not decide to buy products offered by Universal Express, then the risk that future sales will not occur and revenues will be adversely effected is substantially higher than if a contractual obligation creates the network of postal stores and obligates them to buy products from the company. The financial status of the company is a material fact that a reasonable investor would consider in the mix of information. See SEC v. Murphy, 626 F.2d 633, 643 (9th Cir. 1980). Similarly, the statements about status of the company's litigation with the Commission are false, and entry of a judgment in excess of $21 million is a material fact. It is not nit-picking or hair-splitting to require the company to truthfully disclose its business operations and entry of judgment that exceeds the company's assets by at least $10 million. The Defendants are in contempt of the Court's orders prohibiting fraudulent statements.
C. Altomare Violated the Officer and Director Bar.
Altomare's conduct in signing the March 2007 and amended December 2006 quarterly reports filed after April 2, 2007 violated the Court's final judgment prohibiting him from serving 7 See SEC Contempt Exhibit 1 at p. 6 of 23.
8 Opinion and Order at p. 12-13 [Docket 172], citing Altomare Dep. 1 at 249-50.
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as an officer or director of a public company. Altomare admits this conduct. [Response at pp. 8-9]. Moreover, he made misleading statements in these filings, by omitting to disclose the material fact that the Court had found on February 21, 2007 that he was substantially unfit to hold office and subsequently barred him from serving as an officer and director of a public
company.
D. Defendants Failure to Pay Disgorgement and Prejudgment Interest.
Defendants bear the burden of producing evidence of their inability to comply with the Court's order requiring them to pay disgorgement and prejudgment interest. Huber v. Marine
Midland Bank, 51 F.3d 5, 10 (2d Cir. 1995). This burden, which is one of production, see U.S. v. Rylander, 460 U.S. 752, 757 (1983), is not easily met as the alleged contemnor must prove
"plainly and unmistakably that compliance is impossible." Id. The defendants have not met this burden. Their response is devoid of any evidence on their financial inability to make any
payment in satisfaction of the judgment.9 If the alleged contemnor fails to offer evidence of his inability to comply with the order, he has not satisfied his burden. Huber, 51 F.3d at 10.
Conclusory statements are inadequate to carry the burden. See Donovan v. Sovereign Security,
Ltd., 726 F.2d 55, 59 (2d Cir. 1984). The time for the defendants to submit evidence of their financial inability to pay passed with their filing of the responsive brief, which contained no financial information. No hearing is required if there are no material facts in dispute. New York State NOW v. Terry, 697 F. Supp. 1324, 1330 n.6 (S.D.N.Y. 1988). They
are in contempt of the Court's final judgment by failing to pay disgorgement or prejudgment interest as ordered.
9 Mr. Altomare's salary of $650,000 for the year ending June 30, 2006 is relevant. It creates the presumption that he was similarly compensated in the year ending June 30, 2007. His
ownership of shares of Universal Express also indicates that he has assets, which he may be able to liquidate to satisfy the judgment. Defendants complain about citation to their own statements in the annual report that "[a]s of June 30, 2006, we have advanced $906,000 to the spouse of the chief executive officer, who is also one of our employees." SEC Exhibit 3 at 44. It is not clear from this statement in the annual report whether the advance occurred in one lump-sum or several payments over time. Regardless, Mrs. Altomare's receipt of these funds, which is listed in the company's balance sheet under "Related Party Receivables," is an asset from which either Altomare or Universal Express could pay at least some part of the judgment.
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E. Reporting the Court's Judgment Defendants contend that they were not required to report entry of the Court's Opinion and
Order on February 21, 2007 or the final judgment on April 2, 2007, because the judgment was entered during the current reporting period and the company is not required to file its annual report until after June 30, 2007. This argument ignores that the defendants are required to accurately describe legal proceedings in which the company or its officers are involved. Item 103 of Regulation S-K, 17 C.F.R. § 229.103. Further, it ignores the requirement that all periodic reports filed with the Commission must "in addition to the information expressly required to be included in a statement or report, . . . also … add[ ] such further material information, if any, as may be necessary to make the required statements, in light of the
circumstances under which they are made not misleading." Exchange Act Rule 12b-20, 17 C.F.R. § 240.12b-20. Moreover,
under Generally Accepted Accounting Principles, Universal Express must account for entry of the judgment, which it has not done. The defendants' omission of information about entry of the Court's order and judgment was material information in light of Altomare's continued employment as the company's sole officer and director, and the company's inaccurate disclosures on the status of legal proceedings.
IV. Conclusion
For the reasons set forth above, Plaintiff's motion for appointment of a receiver and for entry of an order of contempt should be granted.
Dated: August 1, 2007 Respectfully submitted,
s/ Julie K. Lutz JL9404
Julie K. Lutz
Leslie J. Hughes
Attorneys for the Plaintiff
Securities and Exchange Commission
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CERTIFICATE OF SERVICE
I hereby certify that on August 1, 2007, I electronically filed the PLAINTIFF'S REPLY IN SUPPORT OF MOTIONS FOR APPOINTMENT OF RECEIVER AND FOR ENTRY OF CIVIL CONTEMPT AGAINST DEFENDANTS UNIVERSAL EXPRESS, INC., ALTOMARE, AND GUNDERSON with the Clerk of the Court for filing and uploading to the CM/ECF system which will send notification to the following as indicated to the parties listed below.
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The consolidated response from defendants Universal Express, Inc.("Universal
Express"), Richard A. Altomare ("Altomare") and Chris G. Gunderson ("Gunderson")
(collectively herein "the Defendants") to motions filed by Plaintiff Securities and Exchange
Commission ("SEC") for the appointment of a receiver and for an order finding them in contempt can only be described as an utterly disingenuous attempt to deny the fact that the Court
has entered findings and a judgment against them. [Defendants'
Response, Docket 197.] That denial is the common thread running through all of the various motions and responses now
pending before this Court.1 The arguments raised in the Defendants' briefs do little more than rehash factual or legal arguments already vetted before, and rejected by, the Court.2 Moreover, the Defendants' briefs concede that the bases for the SEC's receivership and contempt motions exist. First, the Defendants' briefs concede that Universal Express lacks the financial resources to comply with the Court's judgment and is technically insolvent. Second, the briefs concede
that the defendants have not complied, and in fact do not intend to comply, with any of the provisions of the Court's judgment. In light of these conceded facts, the SEC's motions for the appointment of a receiver and for an order finding the Defendants in contempt should be granted.
1 Pending before the Court are: (1) the Defendants Motion to Stay and the Plaintiff's Opposition to that Motion; (2)
Defendants' Motion for jury trial on the remaining counts of the complaint and the SEC's Response to that motion; (3) the SEC's Motion to Dismiss Unadjudicated Claims as to the
Defendants and their Opposition to that motion;(4) the SEC's Motion for Appointment of a Receiver and the Defendant's
Opposition to that motion; and (5) the SEC's Motion for Entry of Civil Contempt Against Defendants and their Response to that motion.
2 The 35 paragraphs of the Gunderson affidavit contain no competent evidence and no new arguments which are relevant to any of the pending motions. Gunderson reiterates at length the Defendants' short-selling allegations, which have no evidentiary basis and are irrelevant to this case (¶¶ 1-
3, 21, 35). Gunderson also reiterates all of the "bankruptcy exemption" arguments previously rejected by the Court (¶¶
33-35). Indeed, despite the Court's entry of judgment, Gunderson suggests (without citation to evidence) that the
press releases issued by the company were not really false (¶¶ 27-29). Gunderson also devotes numerous paragraphs to Altomare's leadership of Universal Express, but fails to mention that under Altomare, the company has perpetually failed to generate any substantial revenue or net income (¶¶ 7-16). Altomare's six-paragraph affidavit details his ostensible success in leading the company since its emergence from bankruptcy (though with all of the company's operations admittedly still only in the developmental stage, (¶ 3), and his unspecified unsuccessful efforts to date to find his successor.
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I. The Defendants' Briefs Underscore the Need for a Receiver
A. Universal Express is Insolvent The Defendants' concede that Universal Express is technically insolvent given the Court's judgment. In their reply in support of their Motion to Stay all of the relief ordered by the Court against them [Docket 195], the Defendants represent that the company has total assets
"slightly in excess of approximately $11 million" with which to
satisfy the Court's judgment as to Universal Express of $21 million in total disgorgement, prejudgment interest and penalties (Reply brief at p. 6, n. 3). Thus, even assuming arguendo that this statement as to the company's current assets is true,3 the company currently has insufficient assets to satisfy the Court's judgment.
Compounding this insolvency is Universal Express' lack of legitimate income producing business operations. Defendants' Response to the Motion for Appointment of a Receiver, in
effect asks the Court to accept the incredible proposition that, some fourteen years after exiting bankruptcy, the company has prospects of making what it concedes are still no more than
"development-stage" business operations a success. Nothing in the company's public filings or its various briefs supports that argument. The company has operated at a net loss since its
inception and its independent auditors issued a "going concern"
qualification to their opinion letter for the audit of the company's year-end 2006 financial statements. (Receiver Motion, Att. A, p. 11). Although the Defendants' Response suggests that the company's revenues are increasing, it conspicuously fails to disclose that the company's net losses are escalating much more rapidly. Between fiscal 2005 and fiscal 2006, the company's net operating losses rose from approximately $10 million to nearly $19 million (Receiver
Motion, Att. A, p. 12). For the nine months ended March 31, 2007 alone, the company's reported net loss had escalated to $21 million on revenues of $2,687,262. (Receiver Motion, Att. B, p. 5).
3 Plaintiff is not aware of any independently audited figures which would support this representation by Defendants. As stated in the SEC's Receiver motion, the company's most recent
audited financial statements at year end 2006 reported assets including cash and cash equivalents of $2,102,459 and net property and equipment valued at $206,832 (Receiver Motion, Att. A, Form 10-KSB, pp. 11-14.). The company's most recent filing is an unaudited March 31, 2007 Form 10-Q filed on May 21, 2007, lists total assets of approximately $11 million, which includes current assets of $874,376 in cash and cash equivalents, $350,159 in property and equipment and approximately $4,707,383 in unspecified "other current assets" (Receiver Motion, Att. B, 3/31/07 Form 10-Q, p. 3).
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The company's financial statements demonstrate that, absent its
historical life blood of unregistered stock sales, Universal Express cannot generate enough revenue to survive. The
company's reported operating expenses rose from $13,053,854 for the nine months ended March 31, 2006 to $21,634,168 for the nine months ended March 31, 2007. (Receiver Motion, Att. B, p.
5). The company's audited financials for the 2006 fiscal year
reported revenues of $1,073,486 and cost of goods sold of 830,486, resulting in a gross profit of $242,603. However, this slight gross profit was dwarfed by the company's operating expenses of $19,164,811. (Receiver Motion, Att. A, p. 12). These reported figures demonstrate that the company does not have sufficient legitimate business operations to survive economically, even absent the Court's ordered financial relief. The Defendants have addressed this fundamental and recurrent
operating deficiency by continuing to issue unregistered stock into the public market in violation of the Court's judgment, as addressed herein.
B. A Receiver is Necessary to Stop Altomare's Illegal Conduct
The Defendants' Response appears to posit the startling argument that Altomare is entitled to ignore the Court's judgment because he has unique qualifications that render him
indispensable to Universal Express. That argument is refuted by the financial performance figures cited above. In addition, the Court has found that Altomare engaged in repeated illegal
and fraudulent conduct which renders him "substantially unfit" to lead a public company. The Defendants' brief simply ignores this finding. Instead, Altomare's attached affidavit recounts his ongoing search for a replacement as though the Court's imposition of an officer and director bar
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against him were merely suggestive. In addition, both the Altomare and Gunderson affidavits appear to claim that Altomare's appointment as interim CEO during the bankruptcy
reorganization created lifetime tenure for Altomare which insulates him from the reach of this Court's judgment. See, e.g., Gunderson affidavit, ¶31. These assertions, as well as Altomare's actions to date, suggest that a receivership is necessary not only to stop Altomare's illegal conduct, but to protect the interest of investors, who are the real beneficial owners of the company and its assets. 4
C. Costs of the Receivership
To the extent they are accurate, the company's most recent financial statements facially suggest that the company has enough assets to pay for a receivership to: (1) assume control of the company; and (2) conduct an initial evaluation of its assets and operations and report to the Court on its ability to satisfy the Court's April 2007 judgment. According to its most recent Form 10-Q for the quarter ended March 2007, the company has cash and cash equivalents in the amount of $874,376 and total current assets of $6,050,429 (SEC Motion, Att. B. p. 3). However, the SEC was recently contacted by the lessor for Universal Express in Boca Raton, Florida, who
informed the SEC that Universal Express is in arrears on its rent. On July 26, 2007, the lessor issued a five-day notice to Universal Express, demanding payment no later than August 2, 2007. (attached as Exhibit 2). Appointment of a receiver is necessary to ascertain the true state of Universal Express's assets and affairs, to marshal and conserve assets, and report on them to the Court. See SEC v. Koenig, 469 F.2d 198 (2d Cir. 1972); SEC v. S&P Nat'l Corp., 360 F.2d 741, 750-51 (2d Cir. 1966).
4 Altomare's public statements make clear that he does not intend to obey the Court's judgment. In fact, Altomare has publicly issued threats against the SEC and the Court. Exhibit 2.
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Although the general rule is that costs and fees associated with a receivership be paid from the property under the receiver's possession and control, the Court, sitting in equity, has discretion to assess such costs against defendants Altomare and Gunderson, whose fraudulent conduct created the necessity for the receivership. SEC v. Milan Capital Group, Inc., 2001 U.S. Dist. LEXIS 11804, * 7 (S.D.N.Y. August 14, 2001); SEC v. Presto Telcom, 2007 U.S. App. LEXIS 14177, * 6 (9th Cir. June 5, 2007).
The SEC has requested that Universal Express provide current
financial information concerning all bank accounts. To date, Universal Express has not produced the requested information. As an interim measure in support of its Motion for Appointment of a Receiver, and to fully inform the Court, the SEC requests that the Court issue an order directing Universal Express to produce to the SEC forthwith, and/or at a hearing before
the Court: (1) all of its bank records for the last six months; (2) documents sufficient to identify the nature and location of all of its current assets, as well as any encumbrances on such assets; (3) documents reflecting any current debts owed to the company by any person, including defendant Altomare or his wife; and (4) documents reflecting any current debts owed by the company.
II. Contempt
The Defendants' response to the SEC's motion for entry of civil
contempt sanctions fails to present evidence challenging the Commission's clear and convincing proof that the defendants
have not complied with the Court's preliminary injunction entered April 20, 2004 or the final judgment entered April 2, 2007. The Defendants have not met their burden of proof that they have diligently attempted to comply with the Court's orders in a reasonable manner. In fact, they admit not complying with the Court's order barring Altomare from
serving as an officer and director of a public company, and requiring them to pay disgorgement and prejudgment interest.
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As discussed below, the defendants are in contempt and appropriate sanctions should be imposed.
A. Defendants Violated the Court's Prohibition on Unregistered Sales. Between January 1, and June 20, 2007, Altomare and Gunderson, acting for Universal Express, instructed the company's transfer agent in various letters sent by fax through interstate commerce to issue over 20.9 billion shares to ten entities or individuals. No registration statement was in effect for these transactions. The defendants claim
they did not violate the Court's orders prohibiting unregistered offers or sales because these transactions did not involve "sales" within the meaning of Section 5 of the Securities Act. [Defendants' Response, Docket
197 at p. 5] Contrary to their claim, these transactions come
directly within the definition of a sale. Section 2(3) of the Securities Act defines the term "sale" or "sell" to include every contract of sale or disposition of a security or interest in a security for value. 15 U.S.C. §§ 77b(a)(3). In each of these transactions the defendants directly and indirectly
disposed of the shares by transferring ownership of the stock from the company to ten entities or individuals for value.
Defendants admit that the shares were issued for public relations services, an exchange for value.
Defendants' Response at p. 6.
Defendants incorrectly suggest that the staff of the commission's Division of Corporation Finance agreed in a series of letters commenting on the company's June 30, 2006
annual report, that securities exchanged for "stock rights" contained in subscriptions agreements did not constitute an offer to sell a security. Defendants fail to identify or quote any language in the letters that constitutes the agreement. Review of all the letters reveals no such agreement.5
5 The initial comment letter from the Division of Corporation Finance dated October 25, 2006, states in the first and second paragraph of page 1: "Where indicated, we think you should
revise your documents in response to these comments. If you disagree, we will consider your explanation as to why our comment is inapplicable or a revision is unnecessary. . . . Please understand that the purpose of our review process is to assist you in your compliance with the applicable disclosure requirements and to enhance the overall disclosure in your filing." Further at page 2 in comment 21, the letter states: "Note 16 – Stock Rights, page F-15 21. Disclose in more detail how many stock
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Moreover, the staff's comments could not create such a binding
agreement upon the Commission. "The obligation to file accurate reports is entirely the registrant's, and this obligation cannot be shifted to the Commission or its staff under any
circumstances." SEC v. Falstaff Brewing Corp., 1978 U.S. Dist. LEXIS 14669, *73-74 (D.D.C. 1978); see also 15 U.S.C. § 78z (prohibiting representation that examination of a statement or report filed with the SEC is a finding that the statement or report is true or accurate).
Defendants suggest without citation to evidence that the securities that they offered and sold during 2007 are restricted and exempt from the registration process. The burden is on the defendants to show that the securities transactions at issue fall within one of the exemptions from registration, a burden they have failed to meet. SEC v. Cavanagh, 2004 U.S. Dist. LEXIS 13372 at *51, Fed. Sec. L. Rep. (CCH) P92,866 (S.D.N.Y. 2004). In all but one transaction, the instruction letters from Altomare and Gunderson, direct the transfer agent that the stock "is to be free trading under the S-8 registration of the Company's 1994 Stock Option Plan." 6 Defendants' reliance on an exemption under the 1994 Stock Option Plan created during the bankruptcy proceeding has already been rejected by the Court. Defendants have
failed to meet their burden of demonstrating that the 20.9 billion shares issued during 2007 are exempt from the registration rights have been issued, the specific terms of these rights, and how you account for these rights." The letter closes at page 5 with a request that the company acknowledge that: (1) the company is responsible for the adequacy and
accuracy of the disclosure in the filings; (2) the staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with
respect to the flings; and (3) the company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States." In its response dated November 14, 2006, Universal Express acknowledges and agrees to the three provisions listed above. See USXP Exhibit 9b at pp. 2-3, carry-over paragraph [Docket 199-12]. The staff's request for information on stock rights continues in the January 24, 2007 letter, "Note 17 – Stock Rights, page F-30 16. We reissue prior comment 21. Please revise your filing to disclose the details of EACH of your stock rights issuances. Also tell us how you account for the stock rights and refer to your basis in the
accounting literature." See USXP Exhibit 9g at p. 4 [Docket 199-17].
In response counsel for Universal Express states in a letter dated March 26, 2007, that "As noted in the revised disclosure, the terms of the stock rights are only determined at the time the Subscription Agreement is entered into between the investor and the Company." See USXP Exhibit 9c at p. 6 in response to comment numbered 16 [Docket 199-13]. 6 Only one of the 84 transactions involving new stock issued in 2007 contains language that may indicate the shares were restricted. On February 14, 2007, Altomare and Gunderson directed the transfer agent to issue 670,000,000 shares to Khalid Sunaid Alsunaid and requested the
stock "bear the standard safe harbor provisions of
Rule 144."
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requirements of Section 5. They are in contempt of the Court's orders prohibiting unregistered sales.
B. Defendants Violated the Court's Prohibition on Against Fraudulent Statements.
Defendants continue to make false and misleading statements about revenues earned from the company's purported 9,000 postal store network, and the status of the company's litigation with the Commission. In a company that reported revenues of $1,212,929, cost of goods sold of $969,251, and net loss of $8,418,950 as of March 31, 2007,7 the source of the company's revenues and the extent of its business operations is a material fact that a reasonable investor would consider in buying this stock. If there is no postal store network, as the Court found in its Opinion and Order,8 but rather independent postal stores in the United States that may or may not decide to buy products offered by Universal Express, then the risk that future sales will not occur and revenues will be adversely effected is substantially higher than if a contractual obligation creates the network of postal stores and obligates them to buy products from the company. The financial status of the company is a material fact that a reasonable investor would consider in the mix of information. See SEC v. Murphy, 626 F.2d 633, 643 (9th Cir. 1980). Similarly, the statements about status of the company's litigation with the Commission are false, and entry of a judgment in excess of $21 million is a material fact. It is not nit-picking or hair-splitting to require the company to truthfully disclose its business operations and entry of judgment that exceeds the company's assets by at least $10 million. The Defendants are in contempt of the Court's orders prohibiting fraudulent statements.
C. Altomare Violated the Officer and Director Bar.
Altomare's conduct in signing the March 2007 and amended December 2006 quarterly reports filed after April 2, 2007 violated the Court's final judgment prohibiting him from serving 7 See SEC Contempt Exhibit 1 at p. 6 of 23.
8 Opinion and Order at p. 12-13 [Docket 172], citing Altomare Dep. 1 at 249-50.
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as an officer or director of a public company. Altomare admits this conduct. [Response at pp. 8-9]. Moreover, he made misleading statements in these filings, by omitting to disclose the material fact that the Court had found on February 21, 2007 that he was substantially unfit to hold office and subsequently barred him from serving as an officer and director of a public
company.
D. Defendants Failure to Pay Disgorgement and Prejudgment Interest.
Defendants bear the burden of producing evidence of their inability to comply with the Court's order requiring them to pay disgorgement and prejudgment interest. Huber v. Marine
Midland Bank, 51 F.3d 5, 10 (2d Cir. 1995). This burden, which is one of production, see U.S. v. Rylander, 460 U.S. 752, 757 (1983), is not easily met as the alleged contemnor must prove
"plainly and unmistakably that compliance is impossible." Id. The defendants have not met this burden. Their response is devoid of any evidence on their financial inability to make any
payment in satisfaction of the judgment.9 If the alleged contemnor fails to offer evidence of his inability to comply with the order, he has not satisfied his burden. Huber, 51 F.3d at 10.
Conclusory statements are inadequate to carry the burden. See Donovan v. Sovereign Security,
Ltd., 726 F.2d 55, 59 (2d Cir. 1984). The time for the defendants to submit evidence of their financial inability to pay passed with their filing of the responsive brief, which contained no financial information. No hearing is required if there are no material facts in dispute. New York State NOW v. Terry, 697 F. Supp. 1324, 1330 n.6 (S.D.N.Y. 1988). They
are in contempt of the Court's final judgment by failing to pay disgorgement or prejudgment interest as ordered.
9 Mr. Altomare's salary of $650,000 for the year ending June 30, 2006 is relevant. It creates the presumption that he was similarly compensated in the year ending June 30, 2007. His
ownership of shares of Universal Express also indicates that he has assets, which he may be able to liquidate to satisfy the judgment. Defendants complain about citation to their own statements in the annual report that "[a]s of June 30, 2006, we have advanced $906,000 to the spouse of the chief executive officer, who is also one of our employees." SEC Exhibit 3 at 44. It is not clear from this statement in the annual report whether the advance occurred in one lump-sum or several payments over time. Regardless, Mrs. Altomare's receipt of these funds, which is listed in the company's balance sheet under "Related Party Receivables," is an asset from which either Altomare or Universal Express could pay at least some part of the judgment.
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E. Reporting the Court's Judgment Defendants contend that they were not required to report entry of the Court's Opinion and
Order on February 21, 2007 or the final judgment on April 2, 2007, because the judgment was entered during the current reporting period and the company is not required to file its annual report until after June 30, 2007. This argument ignores that the defendants are required to accurately describe legal proceedings in which the company or its officers are involved. Item 103 of Regulation S-K, 17 C.F.R. § 229.103. Further, it ignores the requirement that all periodic reports filed with the Commission must "in addition to the information expressly required to be included in a statement or report, . . . also … add[ ] such further material information, if any, as may be necessary to make the required statements, in light of the
circumstances under which they are made not misleading." Exchange Act Rule 12b-20, 17 C.F.R. § 240.12b-20. Moreover,
under Generally Accepted Accounting Principles, Universal Express must account for entry of the judgment, which it has not done. The defendants' omission of information about entry of the Court's order and judgment was material information in light of Altomare's continued employment as the company's sole officer and director, and the company's inaccurate disclosures on the status of legal proceedings.
IV. Conclusion
For the reasons set forth above, Plaintiff's motion for appointment of a receiver and for entry of an order of contempt should be granted.
Dated: August 1, 2007 Respectfully submitted,
s/ Julie K. Lutz JL9404
Julie K. Lutz
Leslie J. Hughes
Attorneys for the Plaintiff
Securities and Exchange Commission
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CERTIFICATE OF SERVICE
I hereby certify that on August 1, 2007, I electronically filed the PLAINTIFF'S REPLY IN SUPPORT OF MOTIONS FOR APPOINTMENT OF RECEIVER AND FOR ENTRY OF CIVIL CONTEMPT AGAINST DEFENDANTS UNIVERSAL EXPRESS, INC., ALTOMARE, AND GUNDERSON with the Clerk of the Court for filing and uploading to the CM/ECF system which will send notification to the following as indicated to the parties listed below.
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