Protective Capital Structures Corp. (fka PCSO)

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U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 18716 / May 18, 2004
Accounting and Auditing Enforcement
Release No. 2017 / May 18, 2004
Securities and Exchange Commission v. Ed Johnson and Merl Holdings, Inc.Com, Civil Action No. 02-5490 (D.N.J.)(GEB)(filed November 18, 2002).
MERL HOLDINGS INC.COM FOUND IN CIVIL CONTEMPT FOR VIOLATION OF A PRIOR ANTIFRAUD INJUNCTION
On April 16, 2004, the Honorable Garrett E. Brown, Jr. of the U.S. District Court for the District of New Jersey entered a consent order ("Order") regarding the SEC's application to hold New Jersey-based MERL Holdings Inc.com ("MERL") in civil contempt ("Contempt Motion"). The Contempt Motion alleged that MERL violated the final judgment of permanent injunction ("Final Judgment"), entered by the Court against MERL on April 3, 2003, which permanently enjoined MERL from violating the anti-fraud provisions of the federal securities laws. The SEC alleged that MERL violated the Final Judgment by issuing three materially false and misleading press releases.

MERL, without admitting or denying the allegations against it, consented to the entry of the Order, which found that three of MERL's press releases contained materially false and misleading statements and omissions. The first press release, issued by MERL on August 1, 2003, announced that MERL had entered into a software licensing agreement with Heritage Capital Credit Corporation. According to the Contempt Motion, the August 1 press release omitted to state that Heritage was a wholly-owned subsidiary of MERL Financial Group, Inc. which, in turn, was controlled by the same individuals who held a controlling interest in MERL. The second press release, issued by MERL on September 5, 2003, announced that MERL had received a $50 million financing proposal from a private equity fund. In fact, according to the Contempt Motion, the private equity fund had withdrawn the financing proposal on August 28, 2003, prior to the issuance of the press release. Finally, the third press release, issued by MERL on November 10, 2003, announced that the company had signed a $50 million letter of interest. In fact, according to the Contempt Motion, the investment banking firm that issued the letter of interest had not yet begun its formal due diligence of MERL, and the letter of interest was subject to a number of significant conditions in addition to extensive due diligence. The November 10 press release described the investment banking firm as "an investor," but in fact, according to the Contempt Motion, the firm's role was going to be to attempt to raise $50 million among its investors. This was a "best efforts" proposal only, meaning that there was no assurance that the investment banking firm could raise all or any portion of the $50 million for MERL.

In addition, the Order directed MERL to issue a corrective press release within ten days of entry of the Order or it would be subject to a prospective fine of $10,000 for each day that it does not issue the corrective press release. Further information regarding the Final Judgment may be found at Litigation Release No. 18085 (April 14, 2003).



http://www.sec.gov/litigation/litreleases/lr18716.htm