UNITED STATES OF AMERICA
In the Matter of
|ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS, AND IMPOSING A CEASE-AND-DESIST ORDER|
The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted against BGI Inc. ("BGI" or "Respondent"), pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act").
In anticipation of the institution of these proceedings, the Respondent has submitted an Offer of Settlement ("Offer") that 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, the Respondent, by its Offer, admits the jurisdiction of the Commission over it and over the subject matter of these proceedings, and consents to the entry of this Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order ("Order"), without admitting or denying the Commission's findings contained in this Order.
On the basis of this Order and Respondent's Offer, the Commission makes the following findings: 1
1. BGI is an Oklahoma corporation headquartered in Austin, Texas. BGI's common stock is registered under Section 12(g) of the Exchange Act and trades on the OTC Bulletin Board ("OTC-BB"). BGI leases charity sweepstakes machines and prepaid telephone card machines, almost exclusively in Texas.
2. At all times relevant herein, BGI was a publicly traded reporting company. BGI leases throughout Texas "sweepstakes machines," offering players the chance to win a cash prize after purchasing a pre-paid long distance telephone card or making a donation to a charity. The sweepstakes machines are BGI's principal revenue-generating assets. From October 2, 2001 through December 20, 2001, Texas law enforcement authorities seized a material number of BGI's sweepstakes machines, in addition to proceeds generated by those machines. In November and December 2001, BGI issued three press releases touting BGI's growing revenues and sweepstakes operations. Throughout the relevant period, an Internet newsletter, authorized and paid for by BGI, also touted BGI's growing revenues and operations. On November 15, 2001, BGI filed with the Commission a Form 10-QSB for the third quarter of 2001 that, likewise, highlighted BGI's growing revenues and operations. The press releases, the newsletter and the Form 10-QSB all failed to disclose any information regarding the seizures of sweepstakes machines and BGI's funds. The individuals who were BGI's CEO/chairman and BGI's president during the relevant period are no longer officers or directors of BGI. Under new management, BGI has hired an in-house general counsel and outside securities counsel, and enhanced its procedures for the review of press releases. BGI cooperated with the Commission staff throughout the staff's investigation.
Seizures of BGI's Sweepstakes Machines and Proceeds
3. In the fall of 2001, Texas law enforcement agencies, on a county-by-county basis, began seizing BGI's sweepstakes machines and the proceeds from operation of the machines, for apparent violations of Texas gaming laws. On October 2, 2001, the District Attorney's Office of Hidalgo County, Texas seized 25 sweepstakes machines and proceeds from a Hidalgo venue. On October 26, 2001, the District Attorney's Office of a second Texas county, Bexar County, seized eight sweepstakes machines and proceeds. On November 4, 2001, the Bexar County sheriff's office served upon BGI a Grand Jury subpoena for documents relating to BGI's operations and bank accounts. On November 19, 2001, the District Attorney's office of a third Texas county, Tarrant County, seized 20 BGI sweepstake machines. At that point, 53 of BGI's 398 machines in operation in Texas had been seized. On or around December 27, 2001, BGI was aware that Bexar County had seized over $325,000 in BGI's bank accounts.
BGI's Misleading Press Releases and Misleading Newsletter
4. In November and December 2001, while Texas authorities were seizing BGI's sweepstakes machines and proceeds, BGI issued three press releases touting its growing revenues and expanding sweepstakes operations. In addition to disseminating them through Business Wire and other media outlets, BGI posted the press releases on its own Internet website. BGI's CEO/chairman and its president furnished the content of the releases, reviewed them and approved their public dissemination.
5. The press releases issued during this period represented that BGI's revenues were increasing substantially from prior periods (more than 100% in some instances), that BGI had experienced two "remarkable" quarters of revenue and earnings growth, and that BGI would continue to expand aggressively its operations. In BGI's November 8, 2001 press release, BGI's president stated, "We have every reason to be bullish on the outlook of our business ... and we have proven our ability to execute and deliver consistent results." He added that "our operations continue to thrive." In BGI's November 15, 2001 release reporting its third quarter 2001 results, BGI's CEO/chairman commented, "BGI's profitability has been firmly restored ...[and] the Company is now better positioned to execute its strategies to enhance shareholder value." Finally, on December 21, 2001, BGI issued a release revising upward its projected fourth quarter 2001 revenues. In that release, BGI's president stated, "our operations continue to produce strong revenue growth and profitability." During this period, BGI's stock price increased from $0.89 per share to over $5 per share.
6. Throughout the relevant time period, an Internet publication specializing in researching OTC-BB companies distributed a newsletter about BGI in exchange for a fee. The newsletter was freely available to anyone perusing the publisher's Internet website. Among the representations made in the newsletter was BGI's "estimate" that the Texas market could support 25,000 sweepstakes machines. The newsletter also touted BGI's potential for growth, specifically representing that BGI would have 2,500 operating machines within 36 months. BGI's CEO and president jointly decided to engage the publisher, supplied information to the publisher for the newsletter, reviewed the newsletter, and authorized its dissemination to the public on the publisher's Internet website.
7. The press releases and newsletter were materially misleading, because while giving an optimistic account of BGI's business fortunes in 2001, they contained no counterbalancing reference to the ongoing seizures of BGI's sweepstakes machines and proceeds throughout Texas.
BGI's Misleading Form 10-QSB
8. On November 15, 2001, BGI filed with the Commission its Form 10-QSB for the third quarter ending September 30, 2001. The filing, like the press releases and newsletter, projects unqualified optimism about BGI's financial outlook, while omitting reference to the seizure by that time of 28 sweepstakes machines. Specifically, BGI highlights in the filing the following: a purported 75% increase in the number of sweepstakes machines placed in Texas in the third quarter; BGI's "success" in "diversifying its revenue flows by supplying machines to 15 new locations"; BGI's "positive results [in] the third quarter," attributed to "the continued deployment of the Charity station [sweepstakes machines]"; and an increase in total revenue of 10.2%, attributed to "the increased revenue from the [sweepstakes] machines." BGI's CEO, while aware of the seizure of the 28 machines, reviewed and signed the materially misleading Form 10-QSB.
BGI's Violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder
9. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit employing a fraudulent scheme or making material misrepresentations and omissions in connection with the purchase or sale of securities. To violate these provisions, the alleged misrepresentations or omitted facts must be material. Information is deemed material upon a showing of a substantial likelihood that the omitted facts would have assumed significance in the investment deliberations of a reasonable investor. Basic, Inc. v. Levinson, 485 U.S. 224 (1988).
10. Establishing violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder requires a showing of scienter. Aaron v. SEC, 446 U.S. 680 (1980). Scienter is the "mental state embracing intent to deceive, manipulate or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976). The Fifth Circuit has held that scienter is established by a showing that the defendants acted intentionally or with severe recklessness. See Broad v. Rockwell International Corp., 642 F.2d 929 (5th Cir.) (en banc), cert. denied, 454 U.S. 965 (1981).
11. Respondent knew, or was reckless in not knowing, that the press releases, newsletter and Form 10-QSB described above, were materially misleading.
12. Respondent violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, as a result of the actions described in paragraphs 1-8, above.
BGI's Violations of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder
13. Section 13(a) of the Exchange Act requires issuers such as BGI to file periodic reports with the Commission containing such information as the Commission prescribes by rule. Exchange Act Rule 13a-13 requires issuers to file quarterly reports. Implied in the obligation to file reports is the requirement that the reports be true and correct. United States v. Bilzerian, 926 F.2d 1285, 1298 (2d Cir. 1991), cert. denied, 112 S. Ct. 63 (1991). Exchange Act Rule 12b-20 requires, in addition to information required in periodic reports by Commission rules, such further material information as may be necessary to make the required statements not misleading. The reporting provisions are violated if false and misleading reports are filed. SEC v. Falstaff Brewing Corp., 629 F.2d 62, 67 (D.C. Cir. 1980). Scienter is not required to prove a violation of these provisions. SEC v. Savoy Industries, Inc., 587 F.2d 1149, 1167 (D.C. Cir. 1978).
14. Respondent violated Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder, as a result of the actions described in paragraphs 1-8, above.
In view of the foregoing, the Commission deems it appropriate to impose the sanctions that are set forth in the Offer submitted by BGI.
Accordingly, IT IS HEREBY ORDERED that Respondent BGI Inc. cease and desist from committing or causing any violation and any future violation of Sections 10(b) and 13(a) of the Exchange Act, and Rules 10b-5, 12b-20, and 13a-13, thereunder.
By the Commission.
Jonathan G. Katz
1 The findings herein are made pursuant to Respondent's Offer and are not binding on any other person or entity in these or any other proceedings.
2 In a related matter, the Commission filed a civil action against BGI's former chairman and CEO, its former president, and its operations manager. SEC v. Reid Funderburk, Edward Reckdenwald and Todd Priddy, Civil No. 03-CA-162, S.D. Tex. (Austin Division) (March 18, 2003). See Lit. Rel. #18041.
|Home | Previous Page||