UNITED STATES OF AMERICA
In the Matter of
|ORDER INSTITUTING PUBLIC PROCEEDINGS PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS, AND ORDERING RESPONDENT TO CEASE AND DESIST|
The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative proceedings be, and they hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Corrine Davies ("Davies").
In anticipation of the institution of these administrative proceedings, the Respondent has submitted an offer of settlement (the "Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceeding brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings contained herein, except that Respondent admits that the Commission has jurisdiction over her and the subject matter of these proceedings, the Respondent by her Offer, consents to the entry of the findings and the imposition of the cease-and-desist order set forth below.
The Commission makes the following findings:1
a. This case involves financial reporting fraud perpetrated by the senior officers of I. & J. Bagel, Inc. ("I&J"), a California-based entity and wholly-owned subsidiary of Manhattan Bagel Inc. ("Manhattan Bagel" or the "Company"), which, during the relevant period, manufactured and distributed bagel dough and cream cheese products to a network of 220 franchised, licensed and Company-owned bagel bakery stores operating in 15 states and Canada.
b. In 1995 and 1996, I&J's Chairman of the Board, Alan Boren ("Boren"), and its president, Eric Cano ("Cano"), orchestrated a scheme to inflate the Company's net income by, among other things, recording fictitious sales on I&J's books. The effect of these particular misrepresentations was to overstate Manhattan Bagel's consolidated net income before taxes by $206,000 in the year ended December 31, 1995. Boren's brother, Philip Borini ("Borini"), implemented the fraud by (i) procuring false confirmations for the Company's auditors with respect to the fictitious sales, and (ii) making payments against the fictitious bagel sales using money provided by Boren. Respondent Davies contributed to Borini's efforts by signing false audit confirmations and orally making false representations to the Company's auditors concerning bagels supposedly purchased by one of two fictitious accounts.
c. As a result of her conduct, Davies caused violations of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder and violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder.
a. Davies, age 37, was at all relevant times employed at Veatch Carlson Grogan & Nelson ("Veatch Carlson") as Borini's assistant. Veatch Carlson was a 24 person law firm and purportedly was a large customer of I&J. Davies resides in Los Angeles, California.
b. Other Relevant Entities and Individuals
c. Manhattan Bagel was incorporated in the State of New Jersey with its principal executive offices in Eatontown, New Jersey. On November 19, 1997, Manhattan Bagel filed a voluntary petition for reorganization under Chapter 11 of the federal Bankruptcy Act. On July 28, 1998, New World Coffee & Bagels, Inc. ("NWC") entered into an acquisition agreement with Manhattan Bagel whereby NWC would acquire 100% of Manhattan Bagel. NWC's acquisition of Manhattan Bagel was closed and approved by the United States Bankruptcy Court for the District of New Jersey in November 1998. Prior to becoming a wholly-owned subsidiary of NWC, Manhattan Bagel's common stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act and quoted on the National Association of Securities Dealers Automated Quotations System ("NASDAQ") under the symbol BGLS.
d. I&J was acquired by Manhattan Bagel on June 29, 1995 as a wholly-owned subsidiary of the Company. At the time of the acquisition, I&J owned and licensed approximately 17 bagel bakery stores in the Los Angeles area.
e. Boren, age 36, was employed by Manhattan Bagel as the Chairman of the Board of I&J from June 1995 to December 1995, when he resigned. Boren and his wife were the largest shareholders of Manhattan Bagel from June 1995 to March 1996.
f. Cano was employed by Manhattan Bagel as the President of I&J from June 1995 to April 1996, when he resigned. He was a consultant to the Company from April 1996 to June 1996.
g. Borini, age 46, is Boren's brother. He is not an attorney, but was, at all relevant times, the Executive Director of Veatch Carlson.
(1) Beginning in the second quarter of 1995, just prior to the acquisition, Boren and Cano implemented a scheme to inflate I&J's operating results, by, among other things, creating fictitious bagel sales for two purported wholesale customers, including Veatch Carlson.
(2) After the markets closed on June 20, 1996, Manhattan Bagel announced that following the installation of new management at I&J, Manhattan Bagel "ha[d] uncovered certain improper bookkeeping entries and accounting practices," and further stated that Manhattan Bagel's independent auditors had advised that, based on the findings to date, Manhattan Bagel would be required to restate its first quarter 1996 financial results.
(3) On June 21, 1996, the price of Manhattan Bagel common stock fell approximately 35%, declining from $21.25 to $13.75 on record volume.
(4) Manhattan Bagel's June 20 Announcement addressed only some of the misrepresentations then contained on its books as a result of the fraudulent scheme. Manhattan Bagel had not, at the time of the announcement, uncovered a number of other significant misrepresentations, including the fictitious sales, because Boren, Cano and Borini were then actively engaged in efforts to conceal the true facts from the Company's auditors - an effort that continued through August 1996. Davies was reckless in not knowing that her conduct contributed to these efforts.
(5) The above-referenced conduct caused Manhattan Bagel to make material misrepresentations in its financial statements for the six months ended June 30, 1995, the nine months ended September 30, 1995, and the year ended December 31, 1995. These materially inaccurate financial statements were included in periodic reports filed with the Commission, including among others the Form 10-QSB filed on August 15, 1995, Form 10-QSB filed on November 15, 1995, Form 10-KSB filed on March 19, 1996, the Form 10-QSB filed on May 15, 1996 and the Form 10-QSB filed on August 19, 1996.
b. Fictitious Sales
(1) At the year ended December 31, 1995, I&J's books showed sales to Veatch Carlson totaling $120,335, all in the last three quarters of the year. All of these sales were fictitious.
(2) To conceal the fictitious nature of the sales, Boren and Borini instructed Davies to sign two audit confirmations of the Veatch Carlson account balances and, in addition, to confirm orally to the Company's auditors that the account balance was correct. Davies carried out these instructions. In each instance, the confirmation Davies provided to the auditors was false.
(3) On or about February 12, 1996, Veatch Carlson received a request from the Company's auditors, asking that it confirm a receivable balance of $61,635 as of December 31, 1995. The auditors' request was made in connection with the 1995 year-end audit. Upon learning of the request, Boren called Davies and told her to get the confirmation signed. Davies signed it. The confirmation was false. Moreover, Davies was reckless in not knowing that the confirmation was false.
(4) On July 23, 1996, the engagement partner contacted Davies by telephone and asked whether she could confirm that Veatch Carlson owed I&J $61,635 as of June 30, 1996. Davies orally provided this confirmation to the engagement partner in the course of the conversation. This oral confirmation was false. Moreover, Davies was reckless in not knowing that the confirmation was false.
(5) The engagement partner specifically asked Davies to confirm that the balance was owed for goods and services that Veatch Carlson received from I&J, and she agreed to sign an account receivable confirmation to that effect. The engagement partner sent Davies a confirmation request that same day, which she signed at the August 8, 1996 meeting discussed below.
(6) On August 8, 1996, an attorney for the auditors visited Borini and Davies at the offices of Veatch Carlson to ask about the sales to Veatch Carlson during 1995. The engagement partner attended by conference call. During that meeting, Borini falsely stated that Veatch Carlson had purchased bagels and related products from I&J during 1995 and had owed the amounts previously confirmed. Then, in the presence of the auditors' attorney, Davies signed the account receivable confirmation that the engagement partner had sent her in July. The confirmation confirmed the balance that purportedly remained outstanding as of June 30, 1996. The confirmation was false. Moreover, Davies was reckless in not knowing that the confirmation was false.
B. LEGAL DISCUSSION
1. Violations of Exchange Act Section 10(b) and Rule 10b-5
a. Section 10(b) of the Exchange Act and Rule 10b-5 prohibit any person, in connection with the purchase or sale of securities, from making any untrue statement of a material fact, or omitting to state a material fact, using any device, scheme or artifice to defraud, or engaging in any transaction, practice, or course of business which operates as a fraud. See Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988).
b. Boren, Cano and Borini each violated Section 10(b) of the Exchange Act and Rule 10b-5 by knowingly or recklessly engaging in conduct resulting in material misstatements and omissions in, among other filings, Manhattan Bagel's Forms 10-QSB for the quarters ended June 30, 1995, September 30, 1995, March 31, 1996 and June 30, 1996 and in its Form 10-KSB for the year ended December 31, 1995.
c. By her conduct described above, Davies contributed to these violations of Section 10(b) of the Exchange Act and Rule 10b-5.
2. Violations of Exchange Act Section 13(b)(5) and Rule 13b2-1
a. Section 13(b)(5) of the Exchange Act prohibits any person from, among other things, knowingly falsifying any book, record, or account of an issuer as described in Section 13(b)(2). The knowing falsification of the books, records, or accounts of a subsidiary of an issuer is deemed to be a violation of Section 13(b)(5) of the Exchange Act. See SEC v. Larry E. Leslie, Litigation Release No. 13651 (May 26, 1993).
b. As described above, Boren, Cano and Borini knowingly or recklessly falsified the books, records, and accounts of I&J, a subsidiary of Manhattan Bagel. Thus, they each violated Section 13(b)(5) of the Exchange Act.
c. By her conduct described above, Davies contributed to these violations of Section 13(b)(5) of the Exchange Act.
d. Rule 13b2-1 prohibits any person from directly or indirectly falsifying, or causing to be falsified, any book, record, or account subject to Section 13(b)(2)(A) of the Exchange Act. Section 13(b)(2)(A) of the Exchange Act requires that every issuer of securities registered pursuant to Section 12 of the Exchange Act make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect its transactions and disposition of assets.
e. As described above, Boren, Cano and Borini directly and indirectly falsified and caused to be falsified books, records, and accounts of I&J which were subject to the requirement by Section 13(b)(2)(A) of the Exchange Act that such books, records, and accounts be accurate. These individuals thus violated Exchange Act Rule 13b2-1.
f. By her conduct described above, Davies contributed to these violations of Exchange Act Rule 13b2-1.
3. Manhattan Bagel's Periodic Reporting Violations
a. Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 require issuers to file annual and quarterly reports with the Commission. An issuer violates these provisions if it files materially false or misleading reports. GAF v. Milstein, 453 F.2d 720 (2d Cir. 1971); SEC v. Koenig, 469 F.2d 198 (2d Cir. 1972); SEC v. Great American Industries, Inc., 407 F.2d 453 (2d Cir.), cert. denied 395 U.S. 920 (1969). Rule 12b-20 requires that such reports include any additional information that may be necessary in order to make the statements made not misleading.
b. At all relevant times, Manhattan Bagel was a reporting company subject to the provisions of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13. Manhattan Bagel's reports on Form 10-QSB for the quarters ended June 30, 1995, September 30, 1995, March 31, 1996, and June 30, 1996 and on Forms 10-KSB for the year ended December 31, 1995 were materially inaccurate and misleading, as were a number of subsequent filings that incorporated the prior filings by reference. Accordingly, Manhattan Bagel violated Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13.
c. Section 13(b)(2)(A) of the Exchange Act requires issuers to make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflect its transactions and dispositions of assets. Manhattan Bagel violated Section 13(b)(2)(A) of the Exchange Act by failing to make and keep books, records, and accounts that accurately, and in reasonable detail, reflected certain revenue and expense transactions by its wholly-owned subsidiary, I&J.
d. By her conduct described above, Davies contributed to Manhattan Bagel's violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13.
Based on the foregoing, Davies caused violations of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder, and violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder.
In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions agreed to by Davies in her Offer.
Accordingly, IT IS ORDERED, that:
Pursuant to Section 21C of the Exchange Act, Davies cease and desist from committing or causing any violation and any future violations of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder, and from causing any violations and any future violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder.
By the Commission.
Jonathan G. Katz
|1||The Commission makes the findings herein pursuant to the Respondent's Offer. These findings are not binding on any other person or entity in this or any other proceeding.|
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