UNITED STATES OF AMERICA
In the Matter of
ERIC JOHN WATSON,
| ORDER INSTITUTING PUBLIC|
PROCEEDINGS PURSUANT TO
SECTION 21C OF THE SECURITIES
EXCHANGE ACT OF 1934, MAKING
FINDINGS, AND IMPOSING A
The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"), against Eric John Watson ("Watson" or "Respondent").
In anticipation of the institution of these proceedings, Watson 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, Watson, without admitting or denying the findings contained in this Order Instituting Public Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order ("Order"), except that Watson admits that the Commission has jurisdiction over him and over the subject matter of these proceedings, consents to the entry of this Order.
The Commission makes the following findings:
Eric John Watson, age 42, is a businessman, a New Zealand citizen and a resident of Auckland, New Zealand. During the relevant time period, Watson was the Chief Executive Officer of Blue Star Group, Ltd. ("Blue Star"), a New Zealand-based wholly owned subsidiary of U.S. Office Products Company ("USOP"). Watson also held the title of President of USOP's international division.
B. Other Relevant Entities
U.S. Office Products Company is a publicly traded United States corporation incorporated in Delaware and based in Washington, DC. During the relevant time period, USOP stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act and was listed on the NASDAQ.
McCollam Printers, Ltd. ("McCollam") during the relevant time period was a publicly traded New Zealand-based business supply company that was listed on the New Zealand Stock Exchange. In 1997, McCollam was acquired via tender offer by USOP through its Blue Star subsidiary.
In 1996 and 1997, Eric J. Watson was the CEO of Blue Star, a wholly-owned New Zealand subsidiary of USOP. During this period, Blue Star was the corporate vehicle through which USOP acquired a number of Australasian companies, including McCollam, a New Zealand-based business supply company. In the negotiations to acquire McCollam, Watson acted as the chief negotiator with McCollam on behalf of USOP. Before the negotiations began in November 1996, Watson personally owned McCollam shares. He did not disclose this fact to USOP. Moreover, during the course of the negotiations, Watson, along with two associates, continued to acquire McCollam shares without informing USOP. From October 1996 through May 1997, Watson and his associates purchased more than 2 million shares of McCollam.
On May 16, 1997, after months of negotiations, Blue Star publicly announced its offer to purchase McCollam in a public tender offer. After the offer was made, Watson and his associates, without disclosure to USOP, sold their shares both into the general market and directly into the tender offer at a net profit of more than NZ$530,000. Watson's material failure to disclose his purchases and sales of McCollam shares to USOP misled USOP and therefore violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
B. Watson Was USOP's Chief Negotiator In Its Purchase Of McCollam
In February 1996, USOP purchased 51 percent of Blue Star, a New Zealand business supply company that had been owned principally by Watson, and entered into a joint venture with Watson. In June 1996, USOP purchased the remaining 49 percent of Blue Star stock from Watson. As part of the Stock Purchase Agreement between Watson and USOP, Watson agreed to remain Blue Star's Chief Executive Officer. As CEO of Blue Star, Watson had general supervision, authority and responsibility over the business and operations of Blue Star and its subsidiaries and agreed to devote his time, attention and efforts to promote and further the business of Blue Star. Chief among Watson's responsibilities as Blue Star CEO was to locate potential businesses in New Zealand and Australia for USOP to acquire through Blue Star and to assist USOP with its efforts in those acquisitions. In addition, Watson was legally and contractually obligated to act in Blue Star's and USOP's best interests.
Starting in October 1996, in connection with personal business interests, Watson and two associates identified McCollam as a company that they might wish to make a bid for and began purchasing McCollam stock. In November 1996, Watson recommended McCollam to USOP's CEO as a potential acquisition target. Watson did not, however, tell USOP that he and two associates owned more than 300,000 shares of McCollam. Later in November, Watson and others at Blue Star met with a representative of the McCollam family, the major McCollam shareholders, to explore the possibility of Blue Star acquiring McCollam. During the next several months, the likelihood of the deal's success waxed and waned. Throughout, Watson acted as USOP's chief negotiator with the McCollam family on the transaction. Watson, along with the Chief Financial Officer of Blue Star, was in regular communication with USOP's management in the United States about the status and direction of the negotiations during this period. In telephone calls to the United States, Watson and USOP's CEO discussed details related to pricing and structuring the deal. In addition to these calls, Watson and USOP's CEO exchanged faxes and e-mails between New Zealand and the United States concerning the status, terms and tactics of the negotiations.
On May 15, 1997, USOP's Board of Directors authorized Blue Star to acquire McCollam at a price of NZ$2.75 cash per McCollam share for all publicly held shares and NZ$3.00 in USOP stock for each McCollam share held by the McCollam family. On May 16, 1997, Blue Star publicly announced its offer to purchase McCollam. Blue Star announced the offer by "standing in the market," i.e., by instructing a New Zealand brokerage house to offer to purchase any outstanding shares of McCollam from any shareholder at an agreed price. As a result of standing in the market, Blue Star acquired a large enough number of McCollam shares to assure success of its bid. On June 5, 1997, the McCollam family agreed to sell its shares to Blue Star for NZ$3.00 of USOP stock per McCollam share, and USOP, through Blue Star, gained effective control over McCollam.
C. While Negotiating the McCollam Transaction, Watson Purchased McCollam Shares
Although Watson and his associates owned more than 300,000 shares in McCollam at the time he recommended McCollam to USOP as a takeover candidate, he failed to disclose this fact to USOP. Moreover, while negotiating the McCollam transaction for USOP, Watson failed to disclose that he and two associates continued to purchase McCollam shares. From December 1996 until the deal was approved by USOP's Board of Directors, Watson and his associates purchased another 1.7 million shares through 19 separate transactions. None of these transactions was made in Watson's name. Instead, Watson's purchases were conducted through corporate nominee accounts, including foreign accounts, which he owned or controlled at several different brokers. Since the purchases by Watson and his associates were executed through nominee accounts, USOP could not have known of their beneficial interest in McCollam.
D. After Blue Star Publicly Announced Its Intent To Acquire McCollam, Watson Sold His Shares
In May and June 1997, after USOP through Blue Star publicly announced its intention to acquire McCollam, Watson and his associates sold all of their McCollam shares. Some of these sales were made at the time Blue Star "stood in the market" for McCollam shares. The remainder of the shares was tendered directly into the offer. In total, Watson and his associates made NZ$533,446.10 in profit from the sale of their undisclosed beneficial interests in McCollam shares. USOP first learned of Watson's interest in McCollam after its acquisition of McCollam was consummated.
E. Watson's Omissions Were Material To USOP
Any purchases Watson made of McCollam shares while he was acting as USOP's chief negotiator on the McCollam deal should have been disclosed to USOP.
During the McCollam negotiations, USOP was unaware that Watson owned McCollam shares. Had Watson told USOP about his McCollam trading, USOP may not have gone forward with the acquisition at all. At a minimum, USOP would have immediately shut down the transaction pending review of Watson's actions by USOP's attorneys. According to USOP's Chairman and CEO, if Watson had informed USOP that he was trading in McCollam shares, USOP would have treated the issue as an emergency situation, immediately shut down the McCollam negotiations, and referred the matter to legal counsel to determine the impact of the trading on the future of the transaction.
F. Watson Established A Fund To Return Profits To McCollam Shareholders
After the Commission began investigating Watson's conduct, Watson decided to create a fund entitled "Fund for Certain Trading in McCollam Printers Limited." Watson established this fund to distribute Watson's and his associates' proceeds from their McCollam trading to the shareholders from whom they purchased their McCollam shares. On November 17, 1998, Watson deposited NZ$680,704.99 into this fund and renounced any claim of ownership over these funds. Most of these funds have already been distributed. Any remaining funds not claimed by former McCollam shareholders will be distributed to charity.
Section 10(b) of the Exchange Act and Rule 10b-5 thereunder make it unlawful for any person "to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances in which they were made, not misleading" in connection with the purchase or sale of any security. An individual violates Section 10(b) and Rule 10b-5 when, in connection with the purchase or sale of a security and acting with scienter, he or she omits to inform a person or entity of a material fact that the individual has a duty to disclose. Grandon v. Merrill Lynch & Co., 147 F.3d 184, 189 (2d Cir. 1998). In the case of an omission, the duty to disclose generally "arises when one party has information that the other [party] is entitled to know because of a fiduciary or other similar relation of trust and confidence between them." Chiarella v. United States, 445 U.S. 222, 228 (1980) (internal quotation and citation omitted). An omission is material if there is "a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the `total' mix of information available." TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976).
Eric Watson violated Section 10(b) of the Exchange Act and Rule 10b-5 by buying and selling McCollam shares without telling USOP about his actions. As CEO of USOP's Blue Star subsidiary and chief negotiator for USOP on the McCollam transaction, Watson, as agent, had a duty to disclose material facts to USOP, his principal. Watson's trading in McCollam was a material fact, and his failure to disclose it to USOP was a breach of his duty. Furthermore, Watson's failure to disclose his trading to USOP was material to USOP's decision whether to go forward at all with the McCollam transaction. Through his material omission, Watson and his associates reaped a profit of more than NZ$530,000.
Even though Watson is a New Zealand citizen and his purchases and sales of McCollam shares occurred in New Zealand, Watson engaged in conduct that had the effect of defrauding a U.S. issuer and its shareholders. The Commission will hold accountable all violators of the U.S. federal securities laws, including foreign entities and individuals, when their actions adversely impact U.S. issuers and shareholders.
Based on the foregoing, the Commission finds that Watson violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
Based on the foregoing, the Commission deems it appropriate to accept the Offer of Settlement submitted by Eric John Watson and accordingly,
IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act, that Eric John Watson cease and desist from committing or causing any violation and any future violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
By the Commission.
Jonathan G. Katz
|Home | Previous Page||