UNITED STATES OF AMERICA
|In the Matter of
|ORDER INSTITUTING PROCEEDINGS,
MAKING FINDINGS AND IMPOSING A
The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Respondent Nicholas Catalano ("Catalano").
In anticipation of the institution of these administrative proceedings, Catalano 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 in which the Commission is a party, and without admitting or denying the findings herein, except that Catalano admits the Commission's jurisdiction over him and over the subject matter of these proceedings, and the findings contained in Sections II.A. and II.B., Catalano has consented to the entry of the findings and the imposition of the cease-and-desist order as set forth below.
On the basis of this Order and the Offer submitted by Catalano, the Commission finds1 that:
A. First Entertainment, Inc., n/k/a First Entertainment Holding Corp. ("First Entertainment"), a Nevada corporation headquartered in Denver, Colorado, operates businesses related to the entertainment industry. First Entertainment securities are registered with the Commission pursuant to Section 12(g) of the Exchange Act. In February 1998, Nasdaq delisted First Entertainment securities from the Nasdaq Small Cap Market for failure to meet the minimum bid requirement. First Entertainment's common stock currently trades on the Bulletin Board (a service of the NASDAQ Stock Market, Inc.).
B. Catalano, age 49, a resident of Flushing, New York, was a director of First Entertainment from March 1992 to August 1998. Since 1964, Catalano has been employed at Pace University as a professor of English literature, communications, and music.
C. In 1994, First Entertainment, at Catalano's insistence, hired a securities attorney to evaluate possible misconduct by Abraham B. Goldberg ("Goldberg"), a director of First Entertainment at the time. In March 1994, the attorney prepared a report that detailed several instances where Goldberg, through First Entertainment, created financial benefits for himself without disclosure to the board of directors or shareholders. The attorney concluded that Goldberg should resign as a director, and Catalano and another board member asked for Goldberg's resignation, whereupon Goldberg refused. Despite this, less than a year later, in February 1995, Catalano and the other directors appointed Goldberg president and chief executive officer of First Entertainment. In 1997, Catalano and the board recommended Goldberg for re-election to the board of directors.
D. First Entertainment's filings with the Commission from 1995 through 1997 contain material misrepresentations and omissions regarding Goldberg's compensation and various related party transactions in which Goldberg had an interest. From 1995 through 1997, Goldberg received almost $400,000 in money and stock through various related party transactions, usually involving his wife. First Entertainment filed Forms 10-KSB for fiscal years ended December 31, 1995 and 1996, on April 16, 1996, and April 14, 1997, respectively. First Entertainment's 1996 Form 10-KSB was incorporated by reference in a registration statement on Form S-3 filed on May 6, 1997 and in post-effective amendments filed on May 23, August 27, December 11, and December 12, 1997. On December 5, 1997, First Entertainment filed a proxy statement seeking the re-election of Goldberg as a director, among other things. Catalano signed each of the filings.
E. Notwithstanding his belief that Goldberg committed misdeeds in the past, Catalano took no additional steps in response to related party transactions of which he became aware. Specifically, NMG, LLC, an entity owned by Goldberg's wife, was mentioned in First Entertainment's Form 10-KSB for the period ended December 31, 1996, but Catalano took no steps to inquire about the company or its involvement with First Entertainment after he read and approved the 1996 Form 10-KSB. In addition, Catalano received memoranda in 1996 and again in 1997 that identified a relationship between Munchkintown, another entity owned by Goldberg's wife, and a consultant hired by First Entertainment, and approved the relationship after a discussion at a board meeting. Although Catalano knew the relationship was a related party transaction, he took no steps to insure that the relationship and potential compensation to Goldberg were disclosed in First Entertainment's filings.
F. Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, prohibit persons from directly or indirectly, in connection with the offer, purchase or sale of securities by use of the means or instrumentalities of transportation or communication in interstate commerce or by use of the mails, employing devices, schemes or artifices to defraud; obtaining money or property by means of untrue statements of material facts or omitting to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or engaging in transactions, practices, or courses of business which would or did operate as a fraud or deceit upon purchasers and sellers of First Entertainment securities. By failing to disclose fully the compensation Goldberg received through various related transactions, First Entertainment violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5. Catalano caused First Entertainment's violations of the these provisions by ignoring his knowledge of possible prior misconduct by Goldberg; ignoring related party transactions which he should have known were resulting in additional compensation to Goldberg; and failing to make inquiries in the face of that information before signing First Entertainment's filings.
G. Section 13(a) of the Exchange Act and Rule 13a-1 thereunder require all issuers with securities registered under Section 12 of the Exchange Act to file annual reports with the Commission. Rule 12b-20 requires that statements and reports contain all information necessary to ensure that statements made in them are not materially misleading.
H. Section 14(a) of the Exchange Act requires any person who solicits a proxy or consent or authorization in respect to any security registered pursuant to Section 12 of the Exchange Act, other than an exempted security, to comply with such rules as the Commission may promulgate. Rule 14a-3 provides that no solicitation of a proxy may occur unless each person solicited is concurrently furnished or has previously been furnished with a proxy statement containing the information specified by Schedule 14A. In addition, Rule 14a-9 proscribes, among other things, use of a proxy statement "containing any statement which at the time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading . . . ."
I. First Entertainment violated Sections 13(a) and 14(a) of the Exchange Act and Rules 12b-20, 13a-1, 14a-3, and 14a-9, by failing to fully disclose information required to be disclosed in First Entertainment's 1995 and 1996 Forms 10-KSB and in its proxy statement filed in 1997. Catalano signed these filings when he knew or should have known that transactions, including those involving NMG, LLC and Munchkintown, were related party transactions and that Goldberg, through his wife, was receiving additional compensation which was not disclosed. Catalano, therefore, caused First Entertainment's violations of Sections 13(a) and 14(a) of the Exchange Act and Rules 12b-20, 13a-1, 14a-3, and 14a-9 thereunder.
J. From 1992 through 1997, Catalano failed to report his beneficial ownership of First Entertainment securities and changes in his securities holdings. When Catalano became a director in 1992, he received 30,000 shares of restricted stock from the company. He sold the stock in May 1995. In 1994, First Entertainment issued 2,500 shares of stock registered on Form S-8 to Catalano. Catalano sold the stock in August 1997. In February 1996, Catalano received 5,000 shares of First Entertainment restricted stock and in February 1997, he received an additional 10,000 shares of restricted stock.
K. Section 16(a) of the Exchange Act requires officers and directors of issuers with a class of equity securities registered pursuant to Section 12 of the Exchange Act to disclose in forms filed with the Commission the amount of equity securities of the issuer they beneficially own and any changes in their equity ownership. Rule 16a-3 requires persons to file initial statements of beneficial ownership of equity securities on Form 3, statements of changes in beneficial ownership on Form 4, and annual statements on Form 5. Catalano failed to file any of the required Forms 3, 4, or 5 and therefore violated Section 16(a) of the Exchange Act and Rule 16a-3 thereunder.
In view of the foregoing, the Commission deems it appropriate to accept the Offer submitted by Catalano.
Accordingly, IT IS ORDERED that pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, Catalano cease and desist from committing or causing any violation and any future violations of Section 17(a) of the Securities Act and Sections 10(b), 13(a), 14(a) and 16(a) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 14a-3, 14a-9, and 16a-3 thereunder.
By the Commission.
Jonathan G. Katz
|1||The findings herein are made pursuant to Catalano's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.|
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