UNITED STATES OF AMERICA
In the Matter of
ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING A CEASE-AND-DESIST ORDER, PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934
The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"), against Arabian American Development Company ("Arabian" or "company") and Hatem El-Khalidi ("El-Khalidi") (collectively "Respondents").
In anticipation of the institution of these proceedings, Respondents have submitted an Offer of Settlement (the "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 findings herein, except as to the Commission's jurisdiction over them and the subject matter of these proceedings, which are admitted, Respondents consent to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order, Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below.
On the basis of this Order and Respondents' Offer, the Commission finds that:
1. Arabian, a Delaware corporation based in Dallas, Texas, is in the business of refining petrochemical products and developing mining operations in Saudi Arabia and the United States. Arabian maintains an office in Jeddah, Saudi Arabia to manage its Saudi Arabian operations. Arabian's common stock is registered under Section 12(g) of the Exchange Act, and is quoted on the Pink Sheets. Arabian is delinquent in filing its December 31, 2002, Form 10-K and March 31, 2003, Form 10-Q.
2. El-Khalidi, age 78, a United States citizen and resident of Jeddah, Saudi Arabia, helped found Arabian in 1967, and served as the Chief Executive Officer, the President and a director of Arabian during the relevant period. El-Khalidi continues to serve in these positions today.
3. In 1993, Arabian obtained a thirty-year lease from the Saudi Arabian government to mine zinc, lead and gold in the Al Masane area of Saudi Arabia (the "Al Masane Project" or "lease"). The Al Masane lease is Arabian's largest asset, accounting for approximately $36 million (65%) of Arabian's $56 million in total assets. The lease agreement requires Arabian to build the mine, and begin mining operations, pursuant to a work schedule, and if Arabian fails to comply with the work schedule, the Saudi government may have the right to terminate the lease.
4. In the late 1990's, an economic crisis in Southeast Asia caused a sharp drop in mineral prices, making it uneconomical for Arabian to comply with the work schedule set forth in the lease. As a result, in May 1999, El-Khalidi, on behalf of Arabian, petitioned the Ministry for Petroleum and Mineral Resources of Saudi Arabia (the "Ministry"), an agency of the Saudi Arabian government, for permission to delay implementation of the Al Masane Project. El-Khalidi maintained that the drop in mineral prices constituted a "force majeure" under the lease agreement, and that Arabian was not obligated to implement the Al Masane Project while the force majeure persisted.
5. In May 2000, the Ministry notified Arabian, via correspondence sent to El-Khalidi in Saudi Arabia, that Arabian must implement the Al Masane Project, as required by the lease agreement, and if Arabian failed to do so, the Ministry would begin procedures to terminate the lease. Between June 2000 and November 2002, El-Khalidi continued to receive correspondence from the Saudi government, informing Arabian that: (1) it must proceed with positive steps to implement the Al Masane Project; and (2) failure to do so could result in termination of the lease.1
6. Not withstanding the foregoing, in April 2002, El-Khalidi signed a letter to Grant Thornton, Arabian's outside auditor, representing, among other things: (1) Arabian has complied with all aspects of contractual agreements that would have a material effect on the company's financial statements in the event of non-compliance; (2) no events have occurred which would impair the company's ability to recover its investment in the Al Masane Project and other interests in Saudi Arabia; and (3) there is no impairment of the company's investment in the Al Masane Project.
7. In late November 2002, El-Khalidi disclosed to Arabian's Treasurer that the Saudi government was threatening to terminate the Al Masane lease. The Treasurer promptly informed Arabian's other officers and directors and, on December 23, 2002, Arabian filed a Form 8-K that publicly disclosed for the first time that the Saudi government was threatening to terminate Arabian's lease. The Treasurer also informed the company's outside auditor, which subsequently withdrew its audit reports for Arabian's 2000 and 2001 financial statements and resigned as Arabian's outside auditor.
8. Between June 30, 2000 and September 30, 2002, Arabian omitted material information about the possible termination of the Al Masane lease from quarterly and annual reports that Arabian filed with the Commission. El-Khalidi caused those omissions by failing to disclose the material information to Arabian. In addition, El-Khalidi certified the accuracy of Arabian's Form 10-Q for the quarter ended September 30, 2002, even though he knew that that 10-Q failed to disclose material information about the possibility of termination of the Al Masane lease.
9. Arabian failed, and El-Khalidi caused it to fail, properly to keep records relating to the disposition of the Al Masane lease, and, as a result, Arabian's books, records and accounts did not, in reasonable detail, accurately and fairly reflect its transactions and dispositions of assets.
10. Arabian failed, and El-Khalidi caused it to fail, to devise and maintain a system of internal accounting controls that were sufficient to provide reasonable assurances that Arabian's transactions were recorded as necessary to permit preparation of financial statements in conformity with Generally Accepted Accounting Principles ("GAAP") and to maintain accountability for assets. For example, Arabian did not have written internal accounting controls requiring important documents, such as contracts and agreements, located in Arabian's Jeddah office, to be copied, translated from Arabic to English, and delivered to Arabian's headquarters in Dallas.
11. El-Khalidi knowingly circumvented Arabian's system of internal accounting controls by withholding information and documents relating to the Al Masane Project from Arabian and Grant Thornton.
12. As a result of the conduct described above, Arabian violated, and El-Khalidi caused Arabian to violate, Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder, which required Arabian to file annual and quarterly reports, as prescribed by the Commission, and to include in those reports any material information that might be necessary to make the required statements in those reports not misleading, in light of the circumstances under which the statements were made.
13. As a result of the conduct described above, Arabian violated, and El-Khalidi caused Arabian to violate, Section 13(b)(2)(A) of the Exchange Act, which requires reporting companies to make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflect their transactions and dispositions of their assets.
14. As a result of the conduct described above, Arabian violated, and El-Khalidi caused Arabian to violate, Section 13(b)(2)(B) of the Exchange Act, which requires all reporting companies to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain accountability for assets.
15. As a result of the conduct described above, El-Khalidi violated Section 13(b)(5) of the Exchange Act by knowingly circumventing Arabian's system of internal accounting controls.
16. As a result of the conduct described above, El-Khalidi violated Exchange Act Rule 13a-14 by certifying Arabian's September 30, 2002 Form 10-Q, when he knew the Form 10-Q contained an untrue statement of material fact or omitted to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading.
17. As a result of the conduct described above, El-Khalidi violated Exchange Act Rule 13b2-2, which prohibits a director or officer of an issuer from, directly or indirectly, making or causing to be made a materially false or misleading statement, or omitting to state any material fact necessary in order to make statements made, in light of the circumstances under which such statements were made, not misleading to an accountant in connection with an audit or examination of the issuer's financial statements.
Respondent Arabian has undertaken:
18. Within 30 days of the date of this order, to hire an outside examiner: (i) to review Arabian's record keeping procedures and its internal accounting controls; and (ii) to propose improvements thereto.
19. Within 45 days of the date of this order, to provide written notification to the Commission's enforcement staff (the "Staff") of the identity, including name, business affiliation and contact information, of the outside examiner retained by Arabian.
20. Within 90 days of the date of this order, to provide written notification to the Staff of the outside examiner's recommendations.
21. Within 120 days of the date of this order, to implement the outside examiner's recommendations.
22. Within 150 days of the date of this order, to submit an affidavit to the Staff stating that Arabian has complied with all of the recommendations of the outside examiner.
23. To file its delinquent annual and quarterly reports as soon as reasonably possible.
In view of the foregoing, the Commission deems it appropriate to impose the sanctions specified in Respondents' Offer.
Accordingly, it is hereby ORDERED that:
A. Respondent Arabian cease and desist from committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder.
B. Respondent Arabian comply with the undertakings enumerated in Section III paragraphs 18-23 above.
C. Respondent El-Khalidi cease and desist from causing any violations and any future violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder; and cease and desist from committing or causing any violations and any future violations of Section 13(b)(5) of the Exchange Act and Rules 13a-14 and 13b2-2 thereunder.
By the Commission.
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