UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES ACT OF 1933 Release No. 7481 / December 3, 1997 SECURITIES EXCHANGE ACT OF 1934 Release No. 39396 / December 3, 1997 ADMINISTRATIVE PROCEEDING File No. 3-9496 : ORDER INSTITUTING : PROCEEDINGS PURSUANT TO In the Matter of : SECTION 8A OF THE : SECURITIES ACT OF 1933 AND BRENT W. BERRY, : SECTION 15(b)(6) OF THE : SECURITIES EXCHANGE ACT OF Respondent. : 1934, MAKING FINDINGS AND : IMPOSING SANCTIONS AND A : CEASE-AND-DESIST ORDER I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted against Brent W. Berry ("Berry") pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 15(b)(6) of the Securities Exchange Act of 1934 ("Exchange Act"). II. In anticipation of the institution of these administrative proceedings, Berry has submitted an Offer of Settlement which the Commission has determined to accept. Solely for the purposes of these proceedings and any other proceedings brought by or on behalf of the Commission or to which the Commission is a party, and without admitting or denying the findings herein, Berry consents to the entry of this Order Instituting Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 15(b)(6) of the Securities Exchange Act of 1934, Making Findings and Imposing Sanctions and a Cease-and-Desist Order. III. On the basis of this Order and Respondent's Offer of Settlement, the Commission makes the following findings<(1)>: A. Facts From December 1989 to August 1996, Berry was employed as a registered representative at Toluca Pacific Securities Corporation ("Toluca"), a broker-dealer registered with the Commission pursuant to Section 15(b) of the Exchange Act. During 1992, Toluca acted as a market maker for Spectrum Information Technologies, Inc. ("Spectrum"), a publicly held company whose common stock traded in the NASDAQ system. In August of 1992, Berry met with Spectrum's Chairman of the Board and the Chairman's brother (with whom Berry had a business relationship). At this meeting, the Spectrum Chairman indicated that if Berry could raise money sufficient to pay the exercise price, he would be permitted to exercise options on 500,000 shares of Spectrum common stock between August and December of 1992, at an exercise price of $1.125 per share (the then- current market price of the stock). By the end of this meeting, the parties had reached the understanding that if Berry did fund the exercise of these options, he would split the profits resulting from the subsequent sales of the underlying stock with the Chairman's brother. A Spectrum representative working at the offices of the Spectrum Chairman contacted Berry soon thereafter and explained how Berry would effect those transactions. Berry learned that he was to exercise options issued in the name of other persons under the guise of Spectrum's 1991 Stock Option Plan ("Plan").<(2)> The Spectrum representative related that Berry was to submit to Spectrum option exercise forms signed by the person(s) in whose name the options were nominally issued, along with Berry's own payment of the exercise price; Spectrum would then send Berry stock certificates for the underlying shares. After discussing certain aspects of the transactions with his supervisor, Berry contacted the Spectrum representative and was given the name and telephone number of a Spectrum consultant, the person to whom Berry's stock options had nominally been issued. Berry then contacted the consultant, arranged for the consultant to open an account at Toluca, and obtained the consultant's signature on a document reciting the consultant's desire to exercise a small portion of the employee stock options issued to <(1)> The findings herein are made pursuant to Berry's Offer of Settlement and are not binding on any other person or entity named as a respondent in this or any other proceeding. <(2)> Shares issued pursuant to the Plan were registered by Spectrum in January of 1992 on Form S-8. Form S-8 is available for the registration of shares offered to "employees," as that term is defined in the Instructions to Form S-8, pursuant to an employee benefit plan. ======END OF PAGE 2====== him by Spectrum.<(3)> Berry submitted to Spectrum the option exercise document along with his own payment of the exercise price, and received Spectrum stock certificates issued in the name of the consultant. Berry then requested that the consultant sign an additional document to transfer control of the stock from the consultant to Berry. The consultant initially refused to sign this document, but after receiving assurances from Spectrum that he would be compensated for the transferred shares, the consultant agreed to transfer control of the stock. Upon receiving the transferred shares, Berry sold the Spectrum stock into the market at a profit. Soon thereafter, Berry sought the consultant's signature on forms exercising more of the options issued in the consultant's name and the consultant refused to sign the forms. Having exercised only a small portion of the 500,000 options he had agreed to exercise, and having lost the cooperation of the consultant as a nominee, Berry contacted Spectrum for further instructions. Within an hour of that contact, Berry was provided with the name of another nominee, a newly hired Spectrum employee. This employee, at the request of Spectrum's Chief Executive Officer, had agreed to accept a bogus option grant from Spectrum after the Chief Executive Officer told him the purpose of the grant was to raise cash for the company and assured him that the arrangement was legal. Between September and December of 1992, Berry directed the employee to execute documents exercising options on a total of approximately 467,000 shares. To avoid having to transfer the stock from the nominee to himself, Berry had the option exercise documents revised to direct Spectrum to issue the stock in the name of Toluca, instead of in the name of the nominee employee. Each time Berry exercised options issued in the name of the employee, Berry submitted to Spectrum option exercise documents signed by the nominee along with his own payment of the exercise price. Berry then directed Toluca to transfer the shares it received from Spectrum into various brokerage accounts controlled by Berry. He immediately sold the transferred shares into the market, splitting the profits from those sales with the brother of the Spectrum Chairman, as previously agreed. These transactions generated nearly one million dollars in profit, and Spectrum received approximately $500,000 in cash from Berry's exercise of the nominee employee's options.<(4)> B. Legal Analysis <(3)> Berry had decided to exercise the consultant's options in increments based on the amount of funds he had available at any one time to pay the exercise price. <(4)> In connection with this conduct, Spectrum, without admitting or denying the Commission's findings, consented to the entry of an order requiring Spectrum to cease and desist from committing any violations and any future violation of, among other things, Sections 5(a) and 5(c) of the Securities Act. See In the Matter of Spectrum Information Technologies, Inc., Securities Act Release No. 7426, Admin. Proc. File No. 3-9341. ======END OF PAGE 3====== Section 5(a) of the Securities Act provides that unless a registration statement is in effect as to the security, it is unlawful for any person, directly or indirectly, to sell the security through interstate commerce or the mails. Section 5(c) similarly prohibits the offer to sell a security unless a registration statement has been filed. Section 4(1) of the Securities Act provides that Section 5 shall not apply to transactions by any person other than an issuer, underwriter or dealer. Section 2(11) of the Securities Act defines the term underwriter to include any person who has purchased from an issuer with a view to the distribution of any security, or participates or has a direct or indirect participation in any such undertaking. No registration statement was in effect as to the common stock distributed by Spectrum into the market through Berry. Spectrum's January 1992 registration of common stock on Form S-8 does not apply to these transactions because that registration statement only covered sales of stock to "employees," as that term is defined in the Instructions to Form S-8. Here, Spectrum sold stock to Berry, who was not an "employee"; Spectrum only used the name of an employee and a consultant to disguise the true nature of these transactions. Berry, by accepting the common stock from Spectrum for the purpose of selling that stock into the market, acted as an underwriter in an unregistered distribution of the securities, thereby willfully violating Sections 5(a) and 5(c) of the Securities Act. IV. In view of the foregoing, the Commission has determined it is in the public interest to accept Berry's Offer of Settlement. Accordingly, IT IS HEREBY ORDERED, that: A. Berry, pursuant to Section 8A of the Securities Act, cease and desist from committing any violations and any future violation of Sections 5(a) and 5(c) of the Securities Act; B. Berry, pursuant to Section 15(b)(6) of the Exchange Act, be, and hereby is, censured; and C. Berry, pursuant to Section 21B of the Exchange Act, shall, within three business days of the issuance of this Order, pay a civil money penalty in the amount of $25,000 to the United States Treasury. Such payment shall be: (A) made by United States postal money order, certified check, cashier's check or bank money order; (B) made payable to the Securities and Exchange Commission; (C) hand-delivered to the Comptroller, Securities and Exchange Commission, 450 5th Street, N.W., Stop 0-3, Washington, D.C. 20549; and (D) submitted under cover letter which identifies Berry as a Respondent in these proceedings, the file number of these proceedings, and the Commission's case number, a copy of which cover letter and money order or check shall be sent to Linda Chatman Thomsen, Esq., Assistant Director, Division of Enforcement, 450 5th Street, N.W., Stop 7-8, Washington, D.C. 20549. ======END OF PAGE 4====== By the Commission. Jonathan G. Katz Secretary ======END OF PAGE 5======