UNITED STATES OF AMERICA
In the Matter of
Arthur Lee Kunes,
|ORDER INSTITUTING PUBLIC PROCEEDINGS PURSUANT TO SECTION 8A OF THE SECURITIES ACT OF 1933, MAKING FINDINGS AND IMPOSING CEASE-AND-DESIST ORDER|
The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative proceedings be instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") against Arthur Lee Kunes ("Kunes").
In anticipation of the institution of these proceedings, Kunes has submitted an Offer of Settlement, which Offer the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceeding brought by or on behalf of the Commission, or in which the Commission is a party, prior to a hearing pursuant to the Commission's Rules of Practice, 17 C.F.R. § 201.100 et seq., Kunes admits the jurisdiction of the Commission over him and the subject matter of these administrative proceedings and consents to the entry of this Order Instituting Public Proceedings Pursuant to Section 8A of the Securities Act of 1933, Making Findings and Imposing Cease-and-Desist Order ("Order"), without admitting or denying the Commission's findings, except as for those contained in paragraph III.A below, which are admitted.
Accordingly, IT IS HEREBY ORDERED THAT proceedings pursuant to Section 8A of the Securities Act be, and hereby are, instituted.
On the basis of this Order and the Offer of Settlement by Kunes, the Commission makes the following findings:
A. Kunes resides in Fort Pierce, Florida and is a consultant for start-up manufacturing companies that intend to use environmentally friendly technologies. He conducts his consulting work under the trade name of Earthworks International, which is not a separate legal entity.
B. In 1999, Kunes contacted the founder of a developmental company located in Charlotte, North Carolina that intended to initially build five manufacturing plants throughout the country ("the Company"). These plants were to manufacture sheets of particle board using agricultural fibers. During their conversation, the Company's founder agreed to engage Kunes to help the Company obtain investors willing to partially fund this project.
C. In March 2000, the Company's founder provided Kunes with a business plan for and other information about the Company. After Kunes reviewed these documents, he created a web site describing the Company and its investment opportunities and posted similar information on another web site. The first web site identified Kunes and Earthworks International as supporting the Company's project development, and the other Internet posting directed potential investors to contact Kunes.
D. Kunes's Internet materials stated that each plant would cost $20 million to build, with over 99 percent of these funds coming from an undisclosed, long-term lender. The Internet materials initially sought a $150,000 investment per plant, but Kunes subsequently increased this amount to $250,000 after he re-evaluated the Company's initial working capital needs. The Internet materials represented that the Company would use investors' money to access a long-term loan, fund organizational and initial operating costs for the plants, and acquire a technology license.
E. According to Kunes's Internet materials, a separate corporation would own each manufacturing plant. In exchange for the cash investment, an investor would receive five percent of the corporation's stock, with the Company apparently owning the remaining 95 percent. There was no registration statement in effect or filed with the Commission for this stock. No exemption from registration was applicable. The offering materials also said that the Company would eventually merge these entities into a single corporation and take that company public.
F. The offering did not attract any investors and neither Kunes nor the Company raised any money from the offering.
G. Kunes's Internet materials misrepresented and omitted four important facts. First, the Internet materials repeatedly stated that the Company had a long-term lender that had committed to fund the construction of five manufacturing plants. In fact, no such lender had committed to fund the project.
H. Second, Kunes's Internet materials repeatedly stated that there were "standing" orders from customers for the Company's product. In truth, the Company had no existing orders for product from any actual or potential customers.
I. Third, Kunes's Internet materials stated that the Company had retained various nationally recognized firms, specifically referencing a particular accounting firm, insurance company and raw material supplier, to assist its project. However, none of these firms in fact had agreed to provide any services to the Company.
J. Fourth, although the Internet materials favorably presented the industry experience of the Company's founder, they failed to disclose that the Commission previously obtained an injunction under the antifraud provisions of the federal securities laws against the founder in 1995 in connection with a fraudulent offering of promissory notes.
VIOLATIONS OF THE FEDERAL SECURITIES LAWS
K. Section 5(c) of the Securities Act makes it unlawful for any person, directly or indirectly, to offer to sell a security by means of interstate commerce when a registration statement has not been filed with the Commission, unless an exemption from registration is applicable. Scienter is not an element of a Section 5 violation. Swenson v. Engelstad, 626 F.2d 421, 424 (5th Cir. 1980) ("The Securities Act of 1933 imposes strict liability on offerors and sellers of unregistered securities.").
L. Section 17(a)(1) of the Securities Act prohibits a person, in the offer or sale of any securities, from employing any device, scheme or artifice to defraud. Section 17(a)(3) proscribes any transaction, practice or course of business which operates or would operate as a fraud or deceit upon actual or potential purchasers. The Commission need not show scienter to prevail on a claim under Section 17(a)(3). Aaron v. SEC, 446 U.S. 680, 701-02 (1980)
M. By the acts and omissions alleged in paragraphs III.B through III.J, Kunes violated Section 5(c) of the Securities Act. Kunes offered securities through the Internet, a means of interstate commerce, without filing a registration statement with the Commission when no exemption from registration was available.
N. By the acts and omissions alleged in paragraphs III.B through III.J, Kunes violated Sections 17(a)(1) and 17(a)(3) of the Securities Act. In offering securities, Kunes knowingly or recklessly misrepresented that the Company had a lender that had committed to funding the construction project, had standing orders for its products and had retained several nationally recognized firms to assist in its project. Kunes also failed to disclose that the Commission had previously obtained an injunction against the Company's founder for violating the federal securities laws.
In view of the foregoing, the Commission deems it appropriate to accept Kunes's Offer of Settlement.
ACCORDINGLY, IT IS HEREBY ORDERED, pursuant to Section 8A of the Securities Act, that Kunes cease and desist from committing or causing any violation and any future violation of Sections 5(c) and 17(a) of the Securities Act.
By the Commission.
Jonathan G. Katz
|Home | Previous Page||