Initial Decision of an SEC Administrative Law Judge
In the Matter of
In the Matter of
ERIK W. CHAN
David M. Rosen and Gregory C. Glynn for the Division of Enforcement, Securities and Exchange Commission
Erik W. Chan appeared pro se
Brenda P. Murray, Chief Administrative Law Judge
The Securities and Exchange Commission ("Commission") issued an Order Instituting Cease-And-Desist Proceeding ("OIP") on September 9, 1998, 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 Erik W. Chan. Mr. Chan appeared pro se throughout this proceeding. The hearing was delayed several months because the Commission could not locate Mr. Chan to serve him with a copy of the OIP.1 The Division of Enforcement ("Division") accomplished personal service on Mr. Chan on December 7, 1998. On January 29, 1999, Mr. Chan wrote to me in response to an Order To Show Cause issued in response to the Division's request that the proceeding be held against him for failure to file an answer. I treated Mr. Chan's letter as his answer and established a hearing date.
I held a hearing in Los Angeles, California, on June 1 and June 2, 1999. The Division filed its Pre-Hearing Brief on May 3, 1999. The Division presented four witnesses and introduced seventy-seven exhibits.2 Mr. Chan was called by the Division and testified on his own behalf. He offered one exhibit, a written statement he submitted at the start of the hearing in lieu of an opening statement. (Tr. 9-10.)
The Division filed its Post-Hearing Brief ("Div. Br.__.") on July 30, 1999. Respondent filed his Post Hearing Brief ("Resp. Br.__.") on August 19, 1999. The Division filed its Rebuttal Post-Trial Brief ("Div. Reply __.") on August 31, 1999.
I. RELATED PROCEEDINGS
On September 26, 1996, the Commission filed a Complaint for Permanent Injunction and Other Relief against Empower Telecommunications Corp. ("Empower Telecom"), William H.B. Chan, W.H.B. Chan & Co. ("Chan & Co."), Osvaldo N. Lorenzetti, and Donald E. Whorl in the United States District Court, Central District of California, Civil Action No. 96-6815. (Div. Ex. 348 at tab 1.) The Complaint alleged that in 1993-94 the defendants violated Sections 5(a), 5(c), and 17(a) of the Securities Act, and Sections 15(a) and 10(b) of the Exchange Act and Rules 10b-5 and 10b-9 thereunder in selling $6.56 million of unregistered securities of Empower Telecom to about 350 investors in supposed private offerings.3 The Complaint also alleged that many investors were unaccredited and most investors received "cold calls."
On September 27, 1996, the court entered a permanent injunction enjoining Mr. Lorenzetti from violating Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rules 10b-5 and 10b-9. The court did not assess civil penalties based on Mr. Lorenzetti's statement of financial condition. (Div. Ex. 348 at tab 3.)
On July 15, 1998, the court entered a permanent injunction on consent enjoining Empower Telecom from violating Sections 5(a), 5(c), and 17(a) of the Securities Act, and Section 10(b) of the Exchange Act and Rules 10b-5 and 10b-9. (Div. Ex. 348 at tab 2.)
On September 9, 1998, the Commission instituted a Public Cease-And-Desist Proceeding against Mr. Whorl and accepted Mr. Whorl's Offer of Settlement in which he consented to cease and desist from violating Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rules 10b-5 and 10b-9. (Div. Ex. 348 at tab 7.) This action also resolved the civil proceeding against Mr. Whorl. 72 SEC Docket 605 (Apr. 10, 2000).
On September 9, 1998, the Commission instituted a Public Administrative and Cease-And-Desist Proceeding against Gilbert Mintz and Pearle G. Mintz and accepted their Offers of Settlement in which each consented to: 1) cease and desist from violating Sections 5(a), 5(c) and 17(a) of the Securities Act and Sections 15(a) and 10(b) of the Exchange Act and Rule 10b-5; 2) pay a civil penalty of $7,500 and disgorge $7,500; and 3) be barred from associating with any broker, dealer, investment company, investment adviser or municipal securities dealer, with the right to reapply for association after three years. 67 SEC Docket 2816 (Sept. 9, 1998). (Div. Ex. 348 at tab 4.)
On April 5, 2000, the court entered a default against Chan & Co. It entered a permanent injunction on consent enjoining William Chan from violating Sections 5(a), 5(c), and 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rules 10b-5 and 10b-9; barred William Chan from serving as an officer or director of any public company registered with the Commission for five years; and ordered William Chan to disgorge $2.5 million but required payment of only $250,000 based on his financial representations of inability to pay the full disgorgement amount. 72 SEC Docket 605 (Apr. 10, 2000).
II. FINDINGS OF FACT
My findings are based on the record and my observation of the witnesses' demeanor. I applied preponderance of the evidence as the applicable standard of proof. See Steadman v. SEC, 450 U.S. 91, 102 (1981). I have considered all the posthearing findings, conclusions, and arguments raised by the parties and accept those consistent with this decision.
Empower Telecommunications Corporation
Empower Telecom was incorporated in Delaware on January 11, 1993, for the purpose of receiving assignment of two Memoranda of Understanding ("MOU(s)") that Chan & Co. had negotiated with business entities in Indonesia in December 1992.4 (Tr. 20, 35-36, 53-54; Div. Exs. 6, 8.) Chan & Co. is a corporation organized under the laws of the Bahamas and owned by William Chan, Respondent's father, a citizen of Singapore who resides in Los Angeles. (Div. Ex. 348 at tab 1.) William Chan owned about 85% of the stock of Empower Telecom. (Tr. 35-36.) William Chan controlled a number of companies, many of them with names similar to Chan & Co. (Tr. 53, 55-56, 166-67.) William Chan allegedly graduated from the University of California and earned a master of business administration degree from the University of California in 1960. (Div. Ex. 8 at 682.) His curriculum vitae represents that he co-founded National Hospital Corp., which became part of Humana, Inc., and Chanco Medical Industries, that merged with American Medical International, a New York Stock Exchange listed company, and that he was a controlling shareholder of General Interiors Corp., that merged with General Mills. (Div. Ex. 8 at 682-83.) William Chan and his wife filed a Chapter 7 bankruptcy petition on August 16, 1991, that listed $13,439,605 in debts, and $8,850 in property or assets, and $9,700 in exempt property. (Tr. 188-89; Div. Ex. 346.)
The MOUs described Empower Telecom as a high-technology holding company. In exchange for the assignment of the MOUs, Empower Telecom issued to Chan & Co. 19.6 million shares of convertible preferred Series B stock, preference or liquidation value of $1.00, and a promissory note with a face value of $1 million. (Tr. 57-58, 102-03, 525; Div. Ex. 93.) The $1 million figure was used because William Chan represented that he had spent $1.5 million on business development activities. Neither Osvaldo Lorenzetti nor Charles Lesser, Empower Telecom's chief financial officer from August-September 1993 until February 1994, was ever able to get William Chan to provide any documents that supported his claim. (Tr. 59-60, 62, 322.)
In 1993, Empower Telecom was headquartered in Los Angeles, California, and had a project office in Bandung, Indonesia. William Chan, who was chairman of Empower Telecom's board, hired Mr. Lorenzetti to be president and chief executive officer. Mr. Lorenzetti served in these capacities from January 11, 1993, until the end of August 1993. (Tr. 20.) Mr. Lorenzetti supervised the firm's three or four employees in Los Angeles and the chief operating officer and project manager in Indonesia, Julio Fassino. (Tr. 22-23.) Empower Telecom did not have an in-house accountant, and Mr. Lorenzetti kept the company's financial records on his computer. (Tr. 22.) He entered the information and kept track of all funds received and funds spent. (Tr. 22.) He maintained a check register on a computerized spreadsheet. (Tr. 321.) Donald Whorl was treasurer of Empower Telecom from its creation until June 15, 1993, and was its chief financial officer from March 31, 1994, until November 15, 1996. (Tr. 28-29; Div. Ex. 348 at tab 7.)
In 1993-94, Empower Telecom had no sales, no revenues, and no performance record but it did have certain assets. Foremost among these assets were the two MOUs or agreements that Chan & Co. had assigned to it. (Tr. 101; Div. Ex. 8 at 673, Div. Ex. 48 at 49.) The MOUs obligated Empower Telecom to provide financing, technical expertise, technology, and to function as general project manager for the construction and operation of two telephone "exchanges" in Indonesia through a partnership with two Indonesian business entities, PT Propelat ("Propelat")5 and PT Indisi ("Indisi"), a division of Propelat.6 (Tr. 33, 35, 54, 62; Div. Exs. 6, 91.) The MOU with Propelat was for the construction of a telephone exchange in the area of Bandung, Indonesia. The MOU stated:
WHEREAS, Propelat has received from the National Telephone Company of Indonesia ("PT Telkom") a project for the telecommunication facilities under the Revenue Sharing program of the West Java local Government with a capacity of 60,000 TLU (hereinafter, the "Project"), in accordance with the Joint Operation Agreement between Propelat and PT Telkom dated September 7, 1991; and,
WHEREAS, both Propelat and [Chan & Co.] desire to join efforts for the Project, in order to benefit from their respective areas of expertise and interest.
(Div. Ex. 91 at 1.)
The MOU with Indisi was for construction of telephone lines and a 40,000 telephone line exchange in the area of Jakarta, Indonesia. (Tr. 45-50; Div. Ex. 6.) The MOU stated:
WHEREAS, Indisi has received, in conjunction with PT Tjiriadharma . . . and Bell Atlantic International, Inc., from the Direksi Pelaksana Pengendalian Pembangunan Komplek Kemayoran . . . the assignment of a contract to build telecommunication facilities under the Revenue Sharing program of the local branch of the National Telephone Company of Indonesia . . . with a capacity of 40,000 TLU (hereinafter "the Project"); and
WHEREAS, both Indisi and [Chan & Co.] desire to join efforts for the Project, in order to benefit from their respective areas of expertise and interest.
(Div. Ex. 6 at 1.)
In both locations Empower Telecom was to finance and manage the building of two telephone exchanges, including construction of the central office and the outside plant, and the installation of equipment. (Tr. 50, 52.) The exchanges would connect subscriber lines to a central office where a switch would be located. The switching system would convert analog signals from lines in place before the project began into signals compatible with the digital system. (Tr. 33-34.) These telephone projects were the only projects that Empower Telecom had. (Tr. 268.) The Indonesian entities were to provide local liaison and local personnel. (Tr. 52-53.)
In addition to the MOUs, Empower Telecom's other significant asset was the Telephone Exchange Management Information System ("TEMIS"). (Tr. 24-27, 101.) The TEMIS technology allowed a telephone provider using the older analog telephone system that was in place in Indonesia to render telephone bills that detailed the service provided.7
Empower Telecom's liabilities in addition to the $1 million promissory note to Chan & Co. included liabilities under the Propelat MOU. (Tr. 62; Div. Ex. 93.) These liabilities included a claim for $1.5 million in U.S. dollars owed to five companies: Propelat, Indisi, PT Elmesat ("Elmesat"), PT Tritech ("Tritech"), and PT Indec for engineering and project costs incurred in 1990-92, prior to the signing of the MOU.8 (Tr. 63-72, 297-300; Div. Ex. 91 at 8-11.) There was no documentation for the $1.5 million but after reviewing Propelat's books, Empower Telecom's treasurer agreed that the liability was approximately $800,000. (Tr. 66-72, 78-80, 83-84; Div. Ex. 145 at 17, 19.) Erik Chan was present at a meeting on February 27, 1993, where the amount of money that Empower Telecom had to pay to avoid cancellation of the MOU was discussed. At the meeting, the participants agreed that Empower Telecom would have sixty days to review Propelat's $1.5 million claim, and they agreed on the order in which Empower Telecom would pay the several companies. (Tr. 73-75; Div. Ex. 111.)
The MOU with Propelat provided that "[s]hould [Empower Telecom] fail to release the said liabilities, the MOU shall automatically terminate." (Div. Ex. 91 at 6.) Because the automatic cancellation provision was unacceptable to investors, Empower Telecom requested and Propelat agreed on May 7, 1993, to delete the automatic cancellation clause from the MOU based on Empower Telecom's assurance that it would pay the liability. (Tr. 90; Div. Exs. 146, 147.) Mr. Fassino followed up with a payment to Indisi of $180,000 and payments to Elmesat and Tritech of $25,000 each on their claims.9 (Tr. 300-02; Div. Ex. 111 at 5.)
Private Placements of Empower Telecom Securities
Money raised from investors was the only source of Empower Telecom's funds. (Tr. 31, 33, 320-21.) From January 1993 through November 1995, it conducted four private offerings, using the mails and the telephones to sell approximately $7.6 million worth of unregistered Empower Telecom securities to between 300 and 400 investors located in the United States.10 (Tr. 59, 101, 378, 384, 503, 546-48; Div. Br. 1; Div. Exs. 8, 48, 127, 219, 243, 248.)
The first private placement of Series A Convertible Preferred Stock ("initial preferred offering") occurred from January 1993 through August 1993, and raised a total of $5 million from the offer and sale of almost 800,000 preferred shares at $6.25 per share. (Tr. 545-46; Div. Exs. 8, 48.) Empower Telecom netted about $3.2 million. (Tr. 177.) The first official version of the private placement memorandum ("PPM") dated January 22, 1993, stated that Empower Telecom had orally agreed that Bell Atlantic would be a minority partner in the venture; that it was planned that Bell Atlantic would manage the exchange; that it had discussed a joint venture with Bell Atlantic; and that Bell Atlantic had proposed forming a city planning/real estate development joint venture to take advantage of Bell Atlantic's prior pro bono advisor status. (Div. Ex. 8 at 654, 658.) When Bell Atlantic became aware of these representations, it "went through the roof" and threatened legal action unless its name was deleted. (Tr. 208-11, 458.)
The second PPM dated February 18, 1993, was identical to the January 22, 1993 version except it did not mention Bell Atlantic. (Tr. 209; Div. Ex. 48.) The PPM represented that:
The PPM did not disclose that:
William Chan did not disclose his personal bankruptcy to: (1) Mr. Lorenzetti who wrote the PPM for the initial preferred offering; (2) Annandale Securities ("Annandale") on the questionnaire he signed on February 2, 1993, that was part of Annandale's due diligence investigation of Empower Telecom when it became the selling agent for the offering in February 1993; (3) Mr. Lesser, Empower Telecom's chief financial officer; or (4) Grant Thornton, Empower Telecom's auditor who resigned on February 2, 1994, the day after the firm learned of the bankruptcy filing.11 (Tr. 188-94, 409-12; Div. Ex. 170.)
Mr. Lorenzetti became concerned by William Chan's extensive use of the proceeds of the offering for expenses unrelated to Empower Telecom's business as described in the Use of Proceeds section of the PPM. (Div. Ex. 48 at 10.) In February 1993, Mr. Lorenzetti began tracking the checks to William Chan that he believed to be inappropriate and he credited them against the $1 million promissory note that Empower Telecom owed to Chan & Co. or to William Chan or one of his companies.12 (Tr. 38-39, 257-58; Div. Ex. 181.) At the same time, Mr. Lorenzetti informed Erik Chan and others of his concerns, and he began to circulate periodically an updated list of improper payments to William Chan from the proceeds of the offering. (Tr. 109-55; Div. Ex. 181.) This record showed that between February 23 and April 27, 1993, William Chan received $1 million from the offering proceeds, and that between February 23 and June 9, 1993, William Chan received a total of $1.651 million for expenses unrelated to Empower Telecom's business purpose of building telephone exchanges in Indonesia. (Tr. 109-117; Div. Ex. 181.)
Empower Telecom issued a supplement to its PPM on July 28, 1993, that materially overstated the firm's assets. (Div. Ex. 135.) The supplement noted that the firm held a promissory note for $750,000 from William Chan dated May 21, 1993. (Div. Ex. 149.) This note was to cover the amount that William Chan had received over the $1 million note Empower Telecom gave him when he assigned the MOUs to the firm. (Tr. 175-76.) If Mr. Lesser had known of William Chan's 1991 bankruptcy, Mr. Lesser would have treated William Chan's promissory note for $750,000 payable on demand as worthless or at least as a questionable asset. (Tr. 411-12.) Before they left the company, both Mr. Lorenzetti and Mr. Lesser requested that William Chan pay the $750,000 demand note. (Tr. 176-77, 413-15; Div. Ex. 123.) The note was unpaid as of February 1, 1994. (Tr. 415.) The supplement did not show the $1.5 million Propelat claim as a liability because Mr. Lesser, who authored the supplement, did not know until September 1993, that Empower Telecom had committed to pay what Empower Telecom's treasurer believed to be an $800,000 liability. (Tr. 367-74; Div. Ex. 112, Div. Ex. 135 at 6, Div. Ex. 145 at 17, Div. Ex. 146, Div. Ex. 161 at 3.)
After Mr. Lorenzetti left the company, Mr. Lesser performed an independent review assisted by Erik Chan and concluded that Mr. Lorenzetti was correct that William Chan misappropriated Empower Telecom's funds. (Tr. 323-31, 429; Div. Ex. 122.) Mr. Lesser reported in February 1994 that of the $3.2 million net proceeds that Empower Telecom raised from its first private placement of securities William Chan misappropriated $1.2 million and had received payment of the $1 million note. (Tr. 177, 336-37, 429; Div. Ex. 122 at 7.)
Empower Telecom conducted another private placement ("initial common stock offering") from December 1993, through March 1994, in which it offered up to two million unregistered common shares at $3.125 a share.13 (Tr. 377-78, 512, 546; Div. Ex. 243.) This initial common stock offering raised approximately $910,031 by selling 293,450 shares. (Tr. 513-14.) The eighty or so investors who agreed to purchase additional shares received stock purchase agreement forms and a "Progress Report." (Tr. 380-81, 383-84; Div. Exs. 127, 243.) The offering had no PPM because the investors were Empower Telecom shareholders that were deemed to have received the original PPM. (Tr. 378, 383.) Investors were not told that by December 1993, Mr. Lesser and Erik Chan had concluded from their review that William Chan had misappropriated from the company $1.2 million over the payment of the $1 million promissory note. (Tr. 322-26, 333-39, 384; Div. Ex. 122.) In addition, while the stock purchase agreement represented that Empower Telecom would not pay commissions on sales of the offering, the company hired Gilbert Mintz, Pearle Mintz, Philip Fessler, and Noel Bordoff to solicit the almost 400 investors who participated in the earlier offering and agreed to pay each Mintz a sales commission of 12% and a 2% override on the sales made by the other two individuals with a minimum of $3,750 a month. (Tr. 385-92; Div. Ex. 127.) Mr. Fessler and Mr. Bordoff were each guaranteed $3,000 monthly. (Tr. 514.)
Empower Telecom engaged in two other private placements between June 1994 and November 1995, under the same conditions of disclosure described above. From June through November 1994, William Chan, through Empower Telecom, offered and sold $1.3 million worth of Empower Telecom Series B preferred shares that Chan & Co. had received for assigning the two MOUs. (Tr. 525-33, 546; Div. Exs. 248, 249.) From July 17, 1995, through November 13, 1995, Empower Telecom sold an additional $438,000 worth of common stock ("second common stock offering").14 (Tr. 536-44, 546; Div. Ex. 207 at 3.)
When Mr. Fassino arrived in Indonesia in January 1993, he found that the two geographic areas covered by the MOU with Propelat already had telephone service so he had to negotiate for different territories. Empower Telecom ended up with two different locations that called for installing 32,000 rather than 60,000 telephone lines. (Tr. 282-86.) The change in geographic area made all the prior engineering work that was the basis of the $1.5 million liability to Propelat and the other firms worthless. (Tr. 286, 301.) Empower Telecom concluded detailed design work for the new areas in September 1993. Mr. Fassino requested $198,000 by September 1993, as the initial payment for the telephone switch or computer for one of the exchanges, and an additional $130,000 by that date to buy land on which to build the other exchange.15 Empower Telecom failed to provide funds for these purchases on time. (Tr. 287-88, 290-95.) Propelat was upset with Empower Telecom's failure to pay these business expenses and it cancelled both MOUs in January or February 1994. (Tr. 288-90, 293.) Empower Telecom's attempts to reinstate the MOUs were unsuccessful. (Tr. 310-11.)
Empower Telecom only spent a total of $595,000 or $615,000 in Indonesia on the projects.16 (Tr. 413.) It did not build any telephone exchanges or install any telephone systems. (Tr. 295-96.) Erik Chan testified on June 2, 1999, that Empower Telecom ceased operations in 1998, and there was no way investors could contact the company. (Tr. 443-44.) However, as of July 29, 1999, a Lexis search indicated that Empower Telecom was an active California corporation, located at 1901 Avenue of the Stars, #1925, Los Angeles, California 90067. William Chan was listed as president and Erik Chan was listed as the registered agent. (Div. Br. at Exhibit 1.)
Erik W. Chan
Erik W. Chan was born on January 19, 1970, in Los Angeles, California. (Tr. 436.) Mr. Chan received a bachelor of arts degree in economics and philosophy from Claremont McKenna College, Claremont, California, in 1992. (Tr. 441; Div. Ex. 48 at 68.) He was a Dean's List student, a Scholar-Athlete, an NCAA Tennis All-American, and a recipient of an NCAA Arthur Ashe Sportsmanship Award. (Div. Ex. 48 at 68.) Erik Chan was nearly twenty-three years of age when William Chan hired him on January 11, 1993, to be Empower Telecom's corporate secretary and some kind of administrator.17 (Tr. 214-15, 327.) Erik Chan held those positions until sometime in 1997. (Tr. 442.)
As corporate secretary Erik Chan was part of the small group that managed Empower Telecom. (Tr. 105, 121-24, 376.) He was responsible for maintaining corporate files including minutes of the board of directors' meetings and shareholder lists. Erik Chan received and reviewed subscription agreements from investors and deposited funds into Empower Telecom's trust account at Bank America. If he determined that the investor was accredited and could participate in the private offering, Erik Chan transferred the funds into the company's operating account.18 (Tr. 36-38.) Erik Chan also approved expenditures for Empower Telecom. (Tr. 39-40.) Erik Chan assisted the president and CEO, Mr. Lorenzetti, from January 1993 through August 1993, and he assisted the CFO, Mr. Lesser, from August/September 1993 until February 22 or 23, 1994. (Tr. 41-42, 326-33, 443.)
Empower Telecom paid Erik Chan a total of $97,103 over four years: $43,923 in 1993, $17,530 in 1994, $7,000 in 1995, and $28,650 in 1996. (Div. Ex. 342.) When he testified at the hearing on June 2, 1999, Erik Chan had been unemployed for two to three years, and his father had been providing his financial support. (Tr. 442.)
III. CONCLUSIONS OF LAW
The issues alleged in the OIP are the following:
1. Whether Respondent caused Empower Telecom to violate Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 from January 1993 through November 1994, (1) by acting to further William Chan's misappropriation of $2.5 million from Empower Telecom and (2) by authorizing Empower Telecom's material misrepresentations and omissions in the PPM that it distributed to prospective investors.
Sections 17(a)(1), 17(a)(2), and 17(a)(3) make it unlawful to "employ any device, scheme, or artifice to defraud," prohibit the use of false statements or omissions of material fact to obtain money or property, and forbid any person from engaging "in any transaction, practice, or course of business which operates, or would operate as a fraud or deceit" in the offer or sale of any securities by use of any means of transportation or communication in interstate commerce, directly or indirectly. Section 10(b) and Rule 10b-5 make it unlawful for any person, directly or indirectly, in connection with the purchase or sale of any security, to employ any device, scheme or artifice to defraud; to make any untrue statement of a material fact or to omit a material fact; or to engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person. A fact is material if there is a substantial likelihood that an investor would consider it significant in the "total mix" of information available in making an investment decision. Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988) (citing TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)). Scienter is required for violations of Sections 17(a)(1) and 10(b). To act with scienter, a person must possess, "a mental state embracing the intent to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976); C.E. Carlson, Inc. v. SEC, 859 F.2d 1429, 1435 (10th Cir. 1988); see also Svalberg v. SEC, 876 F.2d 181, 184 (D.C. Cir. 1989) (scienter is shown by "knowledge of what one is doing and the consequences of those actions") (quoting SEC v. Falstaff Brewing Corp., 629 F.2d 62, 77 (D.C. Cir. 1980)). The scienter of a company's officers and directors can be imputed to the company. See Gould v. American-Hawaiian S.S. Co., 535 F.2d 761, 780 (3d Cir. 1976); SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082, 1089 n.3 (2d Cir. 1972); SEC v. Manus, Fed. Sec. L. Rep. (CCH) ¶ 98,307, at 91,924 (S.D.N.Y. 1981). A person is a cause of another's violation if he or she knew or should have known that his or her act or omission would contribute to such violation. See Valicenti Advisory Servs., Inc., 68 SEC Docket 1805, 1812 n.11 (Nov. 18, 1998), aff'd, 198 F.3d 62 (2d Cir. 1999).
Empower Telecom violated the antifraud provisions of the securities statutes by engaging in a scheme and course of business which operated as a fraud on investors who purchased securities where the offer of securities contained false material information and representations that omitted material facts. Erik Chan, who acknowledges that "certain disclosures should have been made," was one of the people who caused the violations to happen and he acted knowingly and deliberately to cause the violations. (Tr. 572.) I reject Erik Chan's claim that he is not responsible because he functioned as a clerk doing "solely administrative" tasks and that the Division mistakenly believes he had decision-making authority based on biased and inaccurate testimony by Mr. Lorenzetti and Mr. Lesser.19 (Resp. Br. 2.) Mr. Lorenzetti and Mr. Lesser did not criticize or blame Erik Chan, but they did acknowledge his position as an officer of the company, his presence at management meetings where decisions were made, and his participation in all of Empower Telecom's actions.
Erik Chan knew that Empower Telecom's PPM for its initial preferred offering, the supplement to the PPM, and all the information it provided to investors in connection with its private offerings did not disclose that William Chan filed for Chapter 7 bankruptcy in 1991. (Tr. 509-10.) Erik Chan caused Empower Telecom to defraud investors because he knew or was reckless in not knowing that failure to disclose this fact to investors was a material omission and he failed to cause the company to make disclosure.20 Erik Chan's claim that he did not disclose the information because he was not responsible for preparing the PPM and he was instructed to read it for "grammatical purposes, not to make judgments about material and immaterial information," does not excuse his fraudulent conduct. (Resp. Br. 9.)
Erik Chan knew in February-March-April 1993, that his father was taking Empower Telecom funds for work that did not involve installing telephone lines and exchanges in Indonesia. (Tr. 148-52, 167-68, 472-74; Div. Ex. 181.) In the period February to April 1993, Erik Chan received from Mr. Lorenzetti copies of check ledgers showing that by April 1993, William Chan had received over $1 million from Empower Telecom. (Tr. 151-53, 163, 259, 460; Div. Ex. 181.) Erik Chan knowingly assisted his father to misappropriate from Empower Telecom at least $2.2 million between January 1993 and February 1994. He did so by authorizing checks on Empower Telecom's account to William Chan, or to companies William Chan controlled and to persons, including himself, for work done for William Chan companies. (Tr. 126-29, 138-39, 258; Div. Ex. 181.) Several checks to Erik Chan indicated on their face that they were for work done for Chan & Co. (Tr. 448-51.) The PPM for its initial preferred offering did not disclose this material information.
Erik Chan assisted Mr. Lesser from October 1993 to February 1994, in reviewing every check issued by Empower Telecom. (Tr. 349-50; Div. Ex. 155.) Mr. Lesser established the following categories for improper expenditures that did not benefit Empower Telecom: Chan & Co. ($700,728), Amtellular ($244,628), Emfotron ($50,344), Chan-Philippines ($91,340) and Empower Corp. ($123,551). (Tr. 351-62; Div. Ex. 122 at 7, Div. Ex. 155.) Mr. Lesser agreed with Mr. Lorenzetti. (Tr. 321, 323, 325, 329-30.) Mr. Lesser's review was conservative in that it did not charge to William Chan the rent Empower Telecom paid for persons working for William Chan on other projects. (Tr. 338-39.) Based on my assessment of the credibility of Mr. Lesser and Erik Chan, I accept Mr. Lesser's testimony that in 1993 Erik Chan effectively agreed with the results of Mr. Lesser's review. (Tr. 331-33, 362, 430, 474-81, 493.)
In addition, Empower Telecom paid for travels to China, the Philippines, and Singapore by Erik Chan and others when Empower Telecom had no business in these locations. (Tr. 138-39, 485, 494-96.) Finally, despite Erik Chan's denial, the evidence is persuasive that in March 1993, he changed the date on checks that Mr. Lorenzetti post-dated when he went out of town, and contrary to Mr. Lorenzetti's instructions, Erik Chan issued the checks to Chan & Co. (Tr. 156-61, 258-59, 461-63.) Erik Chan's denial that he changed the printed date on one of these checks is unpersuasive since there is no question that Erik Chan signed the check, the changed date appears to bear his initials, and Mr. Lorenzetti remembered that Erik Chan changed the date and when questioned explained his actions by citing the Chans' father-son relationship. (Tr. 156-61, 461-63.) In August 1993, Erik Chan knowingly had Empower Telecom pay $55,000 owed to an employee of Chan & Co. for setting up an office in Jakarta, Indonesia, for the purpose of developing business for Chan & Co. (Tr. 169-74; Div. Ex. 122 at 23.) Erik Chan failed to have Empower Telecom disclose to investors in any private placement that William Chan had misappropriated substantial funds. (Tr. 384, 511, 534-35, 545.)
The success of the first private placement was essential for Empower Telecom to function. (Tr. 456.) Erik Chan knew that a relationship with Bell Atlantic would help the project succeed, and he knew that Empower Telecom did not have a written agreement or a business relationship with Bell Atlantic. (Tr. 456-57.) Erik Chan reviewed the PPM but did not attempt to verify the representations about Bell Atlantic. (Tr. 456-58; Div. Ex. 8.) The false information in the PPM was material because an investor would consider it significant in making an investment decision that Empower Telecom, a new company with no revenues and record of performance, had a business relationship with a well-established company like Bell Atlantic.
Erik Chan knew that the PPM, and the second supplement, for the initial preferred offering failed to disclose a claim against Empower Telecom by Propelat and other companies for $1.5 million that was part of the MOU. (Tr. 82-92, 99, 377, 507-08; Div. Ex. 8, Div. Ex. 91 at 6.) Erik Chan was present at the meeting at which Empower Telecom and Propelat jointly agreed to a payment schedule on or about February 27, 1993, and he knew that Mr. Fassino, for Empower Telecom, paid $230,000 on the claim. (Tr. 506-08; Div. Ex. 111.) It is reasonable to conclude that Erik Chan knew that John Dab, Empower Telecom's in-house attorney, concluded in a March 17, 1993 memorandum that the failure to disclose the $1 million liability in the PPM: (1) as a risk factor, (2) in the use of proceeds section, and (3) in the financial statements, as "very problematical." (Tr. 564-65; Div. Ex. 145 at 17.) Mr. Dab repeated his concerns in two additional memoranda. (Div. Ex. 145 at 19, 20.) Erik Chan knew that on May 7, 1993, Propelat agreed to eliminate an automatic cancellation provision in the MOU based on Empower Telecom's commitment to pay this liability which its treasurer estimated was at least $800,000. (Tr. 77-92; Div. Ex. 147.) It is reasonable to conclude that Erik Chan knew that David Peteler, an attorney working for Empower Telecom, informed Mr. Lesser and William Chan in a memorandum dated September 26, 1993, that Propelat wanted the $1.5 million liability paid by December 31, 1993. (Div. Ex. 161 at 55.) Erik Chan did nothing to inform investors of these facts in any of Empower Telecom's private placements. (Tr. 384, 507-08.)
Erik Chan knew that the PPM falsely stated that Empower Telecom had and would employ its exclusive license for "TEMIS technology." (Tr. 535; Div. Ex. 8 at 647, Div. Ex. 48 at 22-23.) Erik Chan also knew that Empower Telecom was not able to use the TEMIS technology because the responsible Chan company failed to pay the licensing fee, and that the TEMIS program had to be adapted to the Indonesian telephone system and the conversion never took place. (Tr. 104-05, 499.)
Empower Telecom continued to make these false representations and omissions of material facts in all its other private offerings: the initial common stock offering, the Series B preferred offering, and the second common stock offering. (Tr. 515-16, 534-36, 543-45.) Erik Chan knew that Empower Telecom represented in the stock purchase agreement for the initial common stock offering beginning December 1993 that it would not pay commissions on sales of the offering while at the very same time, in November-December 1993, he and others agreed that Empower Telecom would pay commissions and would conceal the payments by creating a document that described the commissions as bonuses. (Tr. 385-92, 402-07, 516-25; Div. Exs. 126, 165, 166, 167, 168.) Erik Chan's denial that he knew at the time that Empower Telecom was paying commissions is unpersuasive. (Tr. 518, 520.) Erik Chan acknowledges that the subject of paying commissions was discussed and he signed checks paying commissions of $17,625 to Mr. Bordoff, commissions of $19,350 to Mr. Fessler, and commissions of $53,412.50 to Gilbert Mintz and Pearle G. Mintz. (Tr. 382, 519, 522-25; Div. Ex. 164 at 4, Div. Exs. 165-68.) William Chan hired the salespeople and set the terms of their employment; Erik Chan had a close relationship with his father. (Tr. 382-86.) Mr. Lesser disagreed that the firm should pay commissions without making proper disclosure and voiced his concerns to management which included Erik Chan. (Tr. 416-17, 518, 520, 522-25.)
I find that Erik Chan knew that William Chan did not reveal his 1991 bankruptcy in the director's questionnaire William Chan submitted to Annandale in February 1993, as part of Annandale's due diligence investigation of Empower Telecom and that Erik Chan assisted Empower Telecom in defrauding investors by not informing Annandale of this material omission.21 (Tr. 508-11.) Erik Chan knew that Annandale's due diligence review was done so that it could provide investors with full and fair information about Empower Telecom. (Tr. 509.) In addition, Erik Chan did not disclose William Chan's bankruptcy to Annandale in connection with the officer's certification that Empower Telecom submitted to Annandale for each of the intermediate closings or disbursements of proceeds that occurred between April 28 and August 20, 1993.22 Erik Chan signed the false officer's certification on June 9, 1993, for one of the breaks and he also signed for the final break on August 20, 1993. (Tr. 496-98, 500, 564; Div. Ex. 29.)
For all the reasons stated, I find that Erik Chan knew that Empower Telecom acted to defraud investors in its private placements and that he was a cause of Empower Telecom's antifraud violations.
2. Whether Respondent caused Empower Telecom to violate Section 10(b) of the Exchange Act and Rule 10b-9 thereunder in the period March 31 to August 10, 1993, when Empower Telecom extended the offering contrary to the representations in the PPM and neither offered to refund investor funds nor offered investors an opportunity to receive a refund or reaffirm their interest in the offering.
The Commission adopted Rule 10b-9 in 1962 because:
[i]t has come to the attention of the Commission that some persons distributing securities have been representing that securities are being offered on an "all or none" basis when, because of ambiguities in the contractual arrangement, it is not clear whether the conditions have been met if the underwriter finds persons who agree to purchase all of the securities within the specified time, but he is unsuccessful in collecting payment for all of the securities. It is the purpose of the proposed rule to prohibit any person from making any representation to the effect that the security is being offered on an "all or none" basis unless it is clear that the amount due the purchaser is to be refunded to him unless all of the securities being offered are sold and the seller receives the total amount due to him in connection with the distribution.
Exchange Act Release No. 6864, Fed. Sec. L. Rep. (CCH) ¶ 76,855 (July 30, 1962) (Proposing Release). The assurance of receiving a refund of funds offers investors some protection because the failure to sell the minimum amount of the offering indicates that the market has doubts about the offering's viability. See C.E. Carlson, Inc. v. SEC, 859 F.2d at 1434 (citing SEC v. Blinder, Robinson & Co., 542 F. Supp. 468, 476 (D. Colo. 1982), aff'd, Fed. Sec. L. Rep. (CCH) ¶ 99,491 (10th Cir. 1983)); Louis Loss and Joel Seligman, Securities Regulation 3893 (3rd ed. 1995).
The PPM for Empower Telecom's initial preferred offering represented that the offering would terminate on the earlier of the sale of 800,000 shares or "not later than June 30, 1993," and that investor funds held in escrow would be refunded if the minimum number of shares (40,000) were not sold by the termination date. (Div. Ex. 8 at ii, Div. Ex. 48 at 3.) This language indicates that the initial preferred offering was a "minimum-maximum" offering, also known as a "mini-max" or "part or none" offering. A minimum-maximum offering functions as an "all or none" offering until the minimum is reached. When, and if, the minimum is reached, the offering becomes a best efforts offering. See, e.g., SEC v. First Pacific Bancorp, 142 F.3d 1186, 1189 (9th Cir. 1998). The issuer is under no obligation to return investor funds if, after reaching the minimum, the offering does not reach the maximum level of subscriptions. Erik Chan knew that Empower Telecom continued the offering beyond June 30, 1993, and that it did not notify all investors who purchased before June 30, 1993, of the extension and give them an opportunity to reaffirm or rescind their purchases. (Tr. 500-01, 512.)
The Division cites as authority for its position Interpretative Release on Regulation D ("Interpretive Release"), 27 SEC Docket 561, 570 (Mar. 15, 1983), and Judge Blair's initial decision in Jones & Ward Sec., Inc., 56 SEC Docket 265, 273 (Feb. 17, 1994).23 Jones & Ward is inapplicable because there the issuer failed to sell the stated minimum by the set date and it did not return investor funds. That did not happen here. The Interpretative Release is also inapplicable to these facts because the Commission staff was responding to a question concerning how an issuer in an "all or none" offering desiring to extend the offering beyond the "specified time" in order to sell the specified amount of securities should proceed. I interpret the "specified time" to mean the deadline for the issuer to meet the minimum subscription requirement. In the Empower Telecom preferred offering, it was required to meet the minimum on June 30, 1993, and it did.
I find that Empower Telecom's extension of the offering did not violate Section 10(b) of the Exchange Act or Rule 10b-9 because the PPM represented that Empower Telecom would return investor funds if it did not meet the 40,000 shares ($250,000) minimum by June 30, 1993, when the offering was to end. Empower Telecom met that minimum. The initial preferred offering raised $4.4 million, far exceeding the minimum required, by June 30, 1993.24 (Div. Ex. 8 at i, Div. Ex. 29 at 3, Div. Ex. 48 at i.) The Division has not cited any authority for the proposition that failing to give notice to investors that the offering is being continued beyond the time stated in the PPM is per se a violation of Section 10(b) and Rule 10b-9.25 It is obvious that Empower Telecom was not forthcoming to investors by unilaterally extending the date when the offering documents represented it would close, but Rule 10b-9 was not adopted to remedy this type of conduct.
IV. PUBLIC INTEREST
Cease and Desist
Section 8A of the Securities Act and Section 21C of the Exchange Act provide that the Commission may order a person who was a cause of a violation of the statutes or the regulations, due to an act or omission the person knew or should have known would contribute to such violation, to cease and desist from committing or causing the violation or any future violation.
In making its determination, the Commission has indicated that it will be guided by the factors cited by the court in Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981).26 See Joseph J. Barbato, 69 SEC Docket 178, 200 & n.31 (Feb. 10, 1999). Erik Chan's actions were egregious in that his actions caused only $595,000 to $615,000 out of a $5 million offering to be spent on what the offering was suppose to fund, providing telephone service in Indonesia, and he enabled William Chan to take for his own use at least $2.2 million of the $3.2 million net offering proceeds. (Tr. 278-81, 292-93, 299-304, 336-37, 429, 548; Div. Ex. 122 at 7.) Erik Chan's many illegal activities were not isolated but continued for almost three years during which he received $97,000 from the offering proceeds. Erik Chan has a college education and knew from the outset that he was involved in a fraudulent scheme to defraud investors. He knew his father did not disclose his bankruptcy filing when full disclosure was required, but he remained silent even though he was an officer of the issuer. He issued checks to his father when the president of the corporation told him it was wrong to do so. (Tr. 156-61, 259.) He admittedly had ultimate responsibility for transferring Empower Telecom shares that his father sold from his father's company to investors in Empower Telecom's third private offering from June through November 1994. (Tr. 530-33.)
The following factors indicate that it is highly likely that Erik Chan will violate the antifraud provisions in the future if given the opportunity. Despite the independent opinions of Mr. Lorenzetti, Mr. Lesser, and the Division, Erik Chan denies that his father diverted to his personal use Empower Telecom funds. (Tr. 568-70.) Erik Chan accepts no responsibility for the illegal acts of Empower Telecom even though he was a corporate officer but excuses his actions because he was a recent college graduate who wrote checks under the guidance of older, more experienced company officers.27 (Resp. Ex. 1 at 6.) Erik Chan gave no indication of remorse or recognition that he committed illegal actions that resulted in investor losses of more than $7.6 million.
For all these reasons, I find it in the public interest to order Erik Chan to cease and desist from committing or causing any violations or any future violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5.
V. RECORD CERTIFICATION
Pursuant to Rule 351(b) of the Commission's Rules of Practice, 17 C.F.R. § 201.351(b), I certify that the record includes the items described in the record index issued by the Secretary of the Commission on June 26, 2000.
Based on the findings and conclusions set forth above:
I ORDER, pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, that Respondent Erik W. Chan shall cease and desist from committing or causing any violations or any future violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.
This order shall become effective in accordance with and subject to the provisions of Rule 360 of the Commission's Rules of Practice, 17 C.F.R. § 201.360. Pursuant to that rule, a petition for review of this initial decision may be filed within twenty-one days after service of the decision. It shall become the final decision of the Commission as to each party who has not filed a petition for review pursuant to Rule 360(d)(1) within twenty-one days after service of the initial decision upon such party, unless the Commission, pursuant to Rule 360(b)(1), determines on its own initiative to review this initial decision as to any party. If a party timely files a petition for review, or the Commission acts to review as to a party, the initial decision shall not become final as to that party.
Brenda P. Murray
Chief Administrative Law Judge
|1||The Division of Enforcement believes that Mr. Chan evaded service. (Tr. 437-38.) Mr. Chan indicates that it is simply a matter of miscommunication and his unavailability due to frequent travels to Singapore. (Tr. 437, 440.)|
|2||"(Tr.__.)" refers to the transcript of the hearing. I will refer to the Division's exhibits and Respondent's exhibit as "(Div. Ex.__.)," and "(Resp. Ex.__.)" respectively. An additional list describing the Division's exhibits shall be referred to as "Counsel's Ex. 1."|
|3||Each defendant was not charged with violating each provision.|
|4||An MOU is a document that is similar to a contract in the United States. (Tr. 25-26.)|
|5||PT is the equivalent term for corporation. (Tr. 46.)|
|6||Mr. Lorenzetti uses the term exchange to refer to a facility that connects subscriber lines to a computer that routes telephone calls, known as a "switch." (Tr. 33-34.) According to Mr. Lorenzetti, even though the Indonesian telephone companies had been privatized, a government corporation still owned the telephone system; "concessionaires, people like Empower [Telecom], for example, would build the facilities and would operate the facility for a certain period of time until all the monies invested plus a reasonable profit was obtained and then the facilities would revert to the ownership of the telephone company." (Tr. 35.)|
|7||Older analog systems based their billing on the number of pulses that went over the telephone line and bills were rendered on the number of pulses. (Tr. 26-28.) TEMIS technology got rid of the pulse counters by placing a sensor on the line that would connect to a computer that would analyze the signal for purposes of billing to determine the number being called, the duration of the call, the time of the call, etc. (Tr. 26-27.)|
|8||There is one reference that the claim was for $1.35 million. (Tr. 88-89.)|
|9||Mr. Fassino promised Elmesat and Tritech each a second payment of $25,000 at a later date, but never made these payments. (Tr. 301-02.)|
|10||The record is confused about the dates of the last private offering. The weight of the evidence is that it occurred in 1995, not 1994. (See Tr. 536-38; Div. Ex. 207.)|
|11||Mr. Lesser, a certified public accountant, was working with Grant Thornton on a Commission request for a "use of proceeds audit" of the preferred offering. (Tr. 349-50.)|
|12||Mr. Lorenzetti believed that William Chan was using Empower Telecom's assets to develop new businesses that he would privately own and then sell to Empower Telecom. (Tr. 249-50.) Later Mr. Lesser came to the same conclusion. (Tr. 351-57.)|
|13||Most of the revenue from the $5 million initial preferred offering was gone by July 1993, and the company needed additional revenues. (Tr. 378.)|
|14||The total raised from the offerings appears to be $7,648,031. The initial preferred offering raised a total of $5 million and the initial common stock offering raised $910,031. The last two offerings raised $1.3 million, and $438,000, respectively.|
|15||Empower Telecom's main bank account was at Bank of America in Los Angeles. Money could be transferred from this account to an account in Bandung, Indonesia, that it maintained with Propelat and to an account in Singapore. (Tr. 30-33, 269-70.) Until August or September 1993, Erik Chan, Mr. Lorenzetti, and Mr. Whorl, had authority to sign checks and one signature was sufficient. (Tr. 28-29, 156, 234-35.)|
|16||Mr. Fassino's salary for two years was $150,000, his expenses were about $50,000, he paid seven people that Propelat provided $150,000, he paid $15,000 as a deposit on land, and he paid a total of $230,000 on the Propelat claim. (Tr. 278-81, 292-93, 299-304.)|
|17||Mr. Lorenzetti denies Erik Chan's claim that Mr. Lorenzetti hired him. (Tr. 214-15; Resp. Br. 3.)|
|18||On the first private offering, Erik Chan performed these duties prior to February 1993 when Annandale became Empower Telecom's selling agent.|
|19||Mr. Lorenzetti characterized his relationship with Erik Chan as "like a father and son." (Tr. 160.)|
|20||Almost every appellate court that has ruled on the issue has held that recklessness suffices to show the required state of mind for a violation of Section 10(b) of the Exchange Act. See Novak v. Kasaks, 216 F.3d 300, 308-10 (2d Cir. 2000); Greebel v. FTP Software, Inc., 194 F.3d 185, 198-201 (1st Cir. 1999); Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1281-82 (11th Cir. 1999); In re Comshare, Inc. Sec. Litig., 183 F.3d 542, 549-51 (6th Cir. 1999); In re Advanta Corp. Sec. Litig., 180 F.3d 525, 534-35 (3d Cir. 1999).|
|21||Erik Chan's close relationship with his father and the fact that he knew William Chan did not disclose his bankruptcy in the PPM causes me to conclude that Erik Chan knew that his father did not disclose his bankruptcy to Annandale. Erik Chan was living with his parents in 1991 when they filed for bankruptcy, and he resides with family when he is in the United States and when he is in Singapore. (Tr. 437; Resp. Br. 9.) William Chan has been supporting Erik Chan financially since 1997. (Tr. 438-39, 442.) Erik Chan's mother refused to accept service when the Division tried to serve Erik Chan with a copy of the OIP in October-November 1998. (Tr. 437-38.)|
|22||Each of the officer's certifications represented that the PPM for the offering and any supplements "contain all statements required to be stated therein, and all statements contained therein are true and correct." (Tr. 182-83, 199, 496-98; Div. Ex. 29.)|
|23||The Interpretive Release states that it is Commission staff's position that there would be no violation of Rule 10b-9 if (a) prior to extension, all subscribers received a reconfirmation offer disclosing the extension and all material information, (b) subscribers who do not reconfirm their investment receive a refund of funds, and (c) the reconfirmation offer is made sufficiently in advance of the expiration date so investors who ask for refunds receive them promptly after the expiration date. 27 SEC Docket at 570.|
|24||Annandale distributed $221,875 to Empower Telecom on or about April 28, 1993, as the PPM provided that the $250,000 minimum was met when the issuer received $220,000. The offering raised between $4 million and $5.1 million when it closed about August 20, 1993. The first page of Div. Ex. 29 shows $4.4 million but that number does not appear to include $515,625 from the break on August 11, 1993, and $156,250 from the final distribution of August 20, 1993. These additions make the total $5,112,250. (Div. Ex. 29 at 29, 33.)|
|25||In Bormann v. Applied Vision Systems, Inc., 800 F. Supp. 800, 808-09 (D. Minn. 1992), the Court in ruling on a motion for summary judgment appears to have found unpersuasive defendants' argument that a Rule 10b-9 violation did not occur because plaintiffs purchased after the minimum had been satisfied. The Court refers to a Commission staff declaration that a number of activities will terminate an offer and require a refund of subscriber funds, and one of the activities is an extension of the offering period. I do not find Bormann determinative on the issue before me here. The ruling does not fully analyze the positions of the parties and appears to raise two "no-action" letters by the Commission staff to the level of official Commission policy.|
|26|| The factors cited are:
603 F.2d at 1140; see also Donald T. Sheldon, 51 S.E.C. 59, 86 (1992), aff'd, 45 F.3d 1515 (11th Cir. 1995).
|27||Erik Chan answered in the affirmative when asked if he accepted responsibility for causing violations of the federal securities laws, but he argued that the Division was wrong in its allegations. (Tr. 572.)|
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