UNITED STATES OF AMERICA BEFORE THE SECURITIES AND EXCHANGE COMMISSION SECURITIES ACT 0F 1933 Release No. 7489 / December 11, 1997 SECURITIES EXCHANGE ACT OF 1934 Release No. 39429 / December 11, 1997 ADMINISTRATIVE PROCEEDING File No. 3-9508 ____________________________________ : In the Matter of : ORDER INSTITUTING PUBLIC : ADMINISTRATIVE PROCEEDINGS, PHILLIP PEPE, : MAKING FINDINGS AND IMPOSING : REMEDIAL SANCTIONS PURSUANT Respondent. : TO SECTION 8A OF THE SECURITIES : ACT OF 1933 AND SECTIONS 15(b), : 19(h) AND 21C OF THE SECURITIES : EXCHANGE ACT OF 1934 ____________________________________: I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest to institute this administrative proceeding pursuant to Section 8A of the Securities Act of 1933 ( Securities Act ) and Sections 15(b), 19(h) and 21C of the Securities Exchange Act of 1934 ("Exchange Act"), against Phillip Pepe ("Pepe") to determine whether he violated Sections 5(a), 5(c) and 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. II. In anticipation of the institution of these proceedings, Pepe has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose 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 Commission's findings or conclusions contained herein, except as to the Commission's finding of jurisdiction over him and the subject matter, which are admitted, Pepe consents to the entry of this Order Instituting Public Administrative Proceedings, Making Findings and Imposing Remedial Sanctions Pursuant to Section 8A of the Securities Act of 1933 and Sections 15(b), 19(h) and 21C of the Securities and Exchange Act of 1934 (the Order ). ======END OF PAGE 1====== III. FACTS On the basis of this Order and Pepe s Offer, the Commission finds <(1)> that: A. SUMMARY From mid-1992 through mid-1993, a Los Angeles boiler room operation named InterLink Data Network of Los Angeles, Inc. ("InterLink Data") fraudulently sold at least $12 million of unregistered securities of InterLink Data and of two related limited partnerships (collectively, the "InterLink securities") to over 450 customers nationwide. InterLink Data was established ostensibly to develop private, fully integrated telecommunication networks and video phone systems. In fact, InterLink had no business operations and existed only to sell worthless securities. B. RESPONDENT Phillip Pepe, age 41, resides in Thousand Oaks, California. Between about July 1, 1992, and about March 1, 1993, he was a registered representative of Portfolio Asset Management/USA Financial Group, Inc. ( PAM ), a broker-dealer registered with the Commission. C. FACTS 1. The InterLink Fraud In or around July 1992, PAM entered a selling agreement with InterLink Data and began serving as the underwriter of the unregistered securities distributions of InterLink Data and its two limited partnerships, InterLink Fiber Optic Partners L.P. ( InterLink Fiber ) and InterLink Video Phone Partners L.P. ( InterLink Video ). On November 15, 1993, the Commission obtained final judgments against InterLink Data, its principal, Michael Gartner, InterLink Fiber and InterLink Video which permanently enjoined them from future violations 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. SEC v. InterLink Data Network of Los Angeles, Inc., InterLink Fiber Optic Partners L.P., InterLink Video Phone Partners L.P., and Michael Gartner, Civ. No. 93-3073 R (C.D. Calif.). The Findings of Fact and Conclusions of Law in that case found that the defendants sold over $12 million of InterLink securities through boiler rooms to approximately 450 investors nationwide by making various fraudulent statements. 2. Pepe's Participation in the InterLink Fraud <(1)>/ The findings herein are made pursuant to Pepe s Offer and are not binding on any other person or entity named as a respondent in this or any other proceedings. ======END OF PAGE 2====== Pepe sold InterLink Data's unregistered securities through the use of material misrepresentations and raised approximately $75,000 from approximately eight investors. As a result of his sales efforts Pepe received at least $7,900 in compensation from InterLink. He participated in InterLink Data's fraudulent sales operation by making representations to investors that he knew or should have known were materially false and misleading and by distributing offering materials to investors which he knew or should have known contained material misrepresentations and omissions. Pepe offered and sold such securities by making the following materially false and misleading statements: (a) that InterLink Data owned sixteen patents or exclusive licenses on technology critical to developing a fiber optic network; (b) that InterLink Data was currently installing fiber optic cable; (c) that InterLink Data's common stock would become publicly traded, when no efforts had been undertaken to list the stock for such trading; (d) that investors would receive high returns on their investments; and (e) that InterLink would use proceeds raised from securities sales to develop a fiber optic network. Pepe also: (a) did not disclose that interest payments to investors derived from other investor proceeds; (b) minimized the risk of investing in a start-up company with no revenues or business operations other than sales of securities; and (c) made projections of future business operations which lacked any reasonable basis in fact. Pepe knew that InterLink Data claimed that its securities distributions were exempt from registration with the Commission pursuant to securities registration exemptions contained in Regulation D under the Securities Act. However, he disregarded the requirements of those exemptions by soliciting unaccredited investors nationwide. D. LEGAL ANALYSIS Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit materially misleading statements "in connection with the purchase or sale of any security." Section 17(a) of the Securities Act prohibits making such statements in the "offer or sale" of securities. The antifraud provisions are violated when a person acts with scienter, Aaron v. SEC, 446 U.S. 680, 686 n.5 (1980), that is, by showing "a mental state embracing ======END OF PAGE 3====== intent to deceive, manipulate or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). Sections 5(a) and 5(c) of the Securities Act prohibit the offer or sale of unregistered securities in interstate commerce unless such securities are offered or sold pursuant to an exemption from registration. SEC v. Murphy, 626 F.2d 633, 640 (9th Cir. 1980). IV. FINDINGS A. In view of the foregoing, the Commission finds that Pepe willfully violated Sections 5(a), 5(c) and 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. B. Pepe has submitted a sworn financial statement dated May 15, 1997, and other evidence and has asserted his financial inability to pay disgorgement plus prejudgment interest and a civil penalty. The Commission has reviewed the sworn financial statement and other evidence provided by Respondent and has determined that he does not have the financial ability to pay disgorgement of $7,900 plus prejudgment inerest and a civil penalty. V. ORDER Based on the foregoing, the Commission deems it appropriate and in the public interest to accept the Offer submitted by Pepe and impose the sanctions that are consented to in that Offer. Accordingly, IT IS HEREBY ORDERED: A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, that Pepe cease and desist from committing or causing any violation and any future violation of Sections 5(a), 5(c) and 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; B. Pursuant to Section 15(b)(6) of the Exchange Act, that Pepe be barred from association with any broker, dealer, investment adviser, investment company or municipal securities dealer, with the right to reapply for association after three years to the appropriate self-regulatory organization or, if there is none, to the Commission; C. Pursuant to Section 21C of the Exchange Act, that Pepe shall pay disgorgement of $7,900 plus prejudgment interest, but that payment of such amount be waived based upon Respondent s demonstrated financial inability to pay; and D. 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 Pepe provided accurate and incomplete financial information at the time such representations were made; (2) determine the amount of disgorgement plus prejudgment interest to order and the civil penalty to be imposed; and (3) seek any additional remedies that the Commission would be authorized to impose in this proceeding if Pepe s Offer ======END OF PAGE 4====== had not been accepted. No other issues 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, the amount of disgorgement plus prejudgment interest to order and civil penalty to be imposed and whether any additional remedies should be imposed. Respondent may not, by way of defense to any such petition, contest the findings in this Order or the Commission s authority to impose any additional remedies that were available in the original proceeding. By the Commission. Jonathan G. Katz Secretary ======END OF PAGE 5======