United States of America
In the Matter of
|ORDER INSTITUTING PUBLIC ADMINISTRATIVE PROCEEDINGS PURSUANT TO SECTION 8A OF THE SECURITIES ACT OF 1933 AND : SECTIONS 15(b) AND 21C OF THE SECURITIES EXCHANGE : ACT OF 1934, MAKING FINDINGS AND IMPOSING REMEDIAL SANCTIONS AND A : CEASE-AND-DESIST ORDER|
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest to institute public administrative proceedings pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Sections 15(b) and 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Respondent John Vailati ("Respondent" or "Vailati").
In anticipation of the institution of these proceedings, Vailati has submitted an Offer of Settlement ("Offer") to the Commission which the Commission has determined to accept. Solely for the purpose of this proceeding 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. § 201.1 et seq., and without admitting or denying the findings contained herein, except as to the jurisdiction of the Commission over Respondent and over the subject matter of this proceeding, and except as to paragraph III.B, below, which is admitted, Vailati, by his Offer, consents to the entry of the findings and the cease-and-desist order set forth below.
Accordingly, IT IS ORDERED that proceedings pursuant to Section 8A of the Securities Act and Sections 15(b) and 21C of the Exchange Act be, and, they hereby are, instituted.
On the basis of this Order and the Offer submitted by Respondent, the Commission finds1 that:
A. Between November 1999 and August 2001 (the "relevant time period"), Respondent John Vailati willfully violated the federal securities laws in connection with a fraudulent scheme to defraud investors through the offer and sale of unregistered securities of Advanced Wound Care, Inc. ("AWC") and Nutrition Superstores.com, Inc. ("NSS"). These securities were sold through an unregistered broker-dealer, Franchise Direct, Inc. ("Franchise Direct").
B. During the relevant time period, Respondent was associated with Franchise Direct as its president, sole director and shareholder.
C. Franchise Direct was used as the selling agent for AWC and NSS to conceal the fact that both companies were paying commissions to unlicensed broker-dealers.
D. Respondent was responsible for the operations of Franchise Direct. Respondent recruited unlicensed sales agents, supervised the sales agents and directed the sale of AWC and NSS stock. Franchise Direct paid Respondent a 5% commission and paid sales agents a commission of between 10% and 13% on all securities sold by Franchise Direct. AWC and NSS reimbursed Franchise Direct for all commissions paid.
E. In approximately June 1999, Franchise Direct was retained to sell stock in NSS' common and preferred stock offerings. NSS obtained leads for Franchise Direct by mass mailing thousands of letters to physicians throughout the United States inviting them to join the company's advisory board. In return for serving on the advisory board, the doctors received 100 shares of the company's stock per year for a period of two years. In reality, the advisory board was nothing but a ruse to provide NSS investor leads.
F. When a physician responded to the letter and provided NSS with a telephone number and address, NSS forwarded the information to Franchise Direct to be used as an investor lead. The sales agents of Franchise Direct called physicians on the lead list and solicited them to invest in NSS stock. The sales agents used high-pressure boiler room tactics designed to create a sence of urgency about investing in NSS. The sales agents were provided prepared scripts that contained false and misleading information concerning the financial condition and business prospects of NSS. Sales agents told prospects that NSS' stock "will go through the roof" and that they would "hit a home run" if they invested. Investors were warned that there were only "a few" investment units left and if they did not act immediately, the units would be "snatched up" by "giant investment firms." The sales agents also told investors that an initial public offering of NSS stock was "imminent," and that investors were "guaranteed" a 200% return on their investment when the company went public.
G. The sales agents misled investors regarding the risks associated with investing in NSS stock. Although the written offering materials contained disclosures stating that investing in NSS was a highly speculative venture, the sales agents contradicted those disclosures by telling prospects that NSS expected to generate enormous profits and that these profits were "guaranteed."
H. NSS sold approximately $8.5 million of NSS stock to approximately 700 investors nationwide, approximately $6.5 million of which was sold through Franchise Direct under Vailati's direction. By Spring 2001, NSS was an inactive shell and Franchise Direct began promoting AWC's offering. Franchise Direct used the NSS shareholder's list and advisory board list to solicit investors in AWC.
I. At Respondent's direction, sales agents for Franchise Direct called NSS shareholders and members of the NSS advisory board and solicited investors to buy stock in AWC. As with NSS, the written offering materials contained disclosures stating that investing in AWC was a highly speculative venture. However, the sales agents contradicted those disclosures by falsely telling prospects that AWC had entered into lucrative distributorship agreements, both domestically and abroad. In addition prospects were provided with false information regarding, among other things, pending mergers and acquisitions, the existence of beneficial sales contracts, and celebrity endorsements.
J. AWC sold approximately $2 million of AWC stock to approximately 70 investors nationwide, approximately $1.1 million of which was sold through Franchise Direct under Vailati's direction.
K. Respondent willfully committed or caused the violations of Sections 5(a), 5(c) and 17(a) of the Securities Act and Sections 10(b) and 15(a)(1) of the Exchange Act and Rule 10b-5 thereunder by participating in the fraudulent scheme described above.
L. Respondent has submitted a sworn Statement of Financial Condition dated June 13, 2002 and other evidence and has asserted his inability to pay a civil penalty, and disgorgement plus prejudgment interest.
Based on the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified by Respondent in his Offer. In determining to accept the Offer, the Commission considered the meaningful cooperation of Respondent in connection with the Commission's investigation.
Accordingly, IT IS ORDERED that:
Respondent cease and desist, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, from committing or causing any violation and any future violation of Sections 5(a), 5(c) and 17(a) of the Securities Act and Sections 10(b) and 15(a) of the Exchange Act and Rule 10b-5 thereunder.
IT IS FURTHER ORDERED that Respondent be, and hereby is, barred from association with any broker or dealer.
IT IS FURTHER ORDERED that Respondent shall pay disgorgement of $119,574 plus prejudgment interest, but the payment of such amount is waived based upon Respondent's sworn representations in his Statement of Financial Condition dated June 13, 2002 and other documents submitted to the Commission.
IT IS FURTHER ORDERED that, based upon Respondent's sworn representations in his Statement of Financial Condition dated June 13, 2002 and other documents submitted to the Commission, the Commission is not imposing a penalty against Respondent.
IT IS FURTHER ORDERED that the Division of Enforcement ("Division") may, at any time following the entry of this Order, petition the Commission to: (1) reopen this matter to consider whether Respondent provided accurate and complete financial information at the time such representations were made; and (2) seek an order directing payment of the maximum civil penalty allowable under the law and disgorgement and prejudgment interest. No other issue shall be considered in connection with this petition other than whether the financial information provided by Respondent was fraudulent, misleading, inaccurate, or incomplete in any material respect. Respondent may not, by way of defense of such petition: (1) contest the findings in this order; (2) assert that payment of a penalty, disgorgement and prejudgment interest should not be ordered; (3) contest the amount of penalty, disgorgement and interest to be ordered; or (4) assert any defense to liability or remedy, including, but not limited to, any statute of limitations defense.
By the Commission.
Jonathan G. Katz
1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.
|Home | Previous Page||