IN THE UNITED STATES DISTRICT COURT
The United States Securities and Exchange Commission ("Commission") files this complaint against Defendant, Ira J. Gaines, individually and doing business as Wrigley Drive Partners ("Wrigley") and Morten Avenue Partners ("Morten"), and would respectfully show the Court as follows:
1. From September 1999 through March 2001, Ira J. Gaines ("Gaines") made fraudulent mini-tender offers to purchase from shareholders up to 1% of the outstanding stock of 287 public companies.
2. The term "mini-tender offer" is securities industry shorthand for a tender offer resulting in ownership by the offeror of not more than 5% of a class of securities. Mini-tender offers are not subject to the filing or procedural requirements of Section 14(d) of the Securities Exchange Act of 1934 ("Exchange Act") and Regulation 14D thereunder, but they are subject to the antifraud provisions in Sections 14(e) and 10(b) of the Exchange Act, and Rules 14e-1 and 10b-5 thereunder.
3. In his mini-tender offers, Gaines misled shareholders by failing to disclose material information and failing to ensure that material information was received by shareholders. The material information not received by shareholders included: (1) that Gaines' offer price was below the prevailing market price; (2) that Gaines reserved sole discretion to modify his offers, including the offer price and offer period; and (3) that Gaines could terminate his offers without notice, regardless of how many shareholders had tendered shares.
4. Gaines also misled shareholders by falsely implying that he had sufficient cash on hand to buy up to 1% of the outstanding shares of the targeted company.
5. Gaines knew, or was reckless in not knowing, that the shareholders were not receiving complete and accurate material information about the mini-tender offers.
6. The material information that did not reach the shareholders would have alerted them to the material terms of Gaines' unfair offers.
7. By consistently offering below-market prices, and by reserving unfettered discretion to change at any time the terms of his offers, including the offer price and the offer period, Gaines virtually guaranteed his own profits without undertaking any risk.
8. Through the use of mini-tender offers, Gaines succeeded in purchasing shares of a number of public companies at below-market prices.
9. As a result of his mini-tender offers, Gaines received profits of approximately $275,000.
10. Gaines previously came under Commission scrutiny in connection with mini-tender offers he conducted between June 1998 and mid-1999, when he controlled IG Holdings, Inc. ("IG Holdings"), an Arizona corporation.
11. On behalf of IG Holdings, Gaines consented to a Commission cease-and-desist order for violations of the tender offer antifraud provisions in Section 14(e) of the Exchange Act. In the Matter of IG Holdings, Inc., Exchange Act Rel. No. 41759 (August 19, 1999).
12. Less than 30 days after issuance of the order in IG Holdings, Gaines resumed his fraudulent tender offer scheme under the new business name, Wrigley.
13. Gaines stopped using the company name of IG Holdings and began doing business as Wrigley to avoid the taint associated with the Commission's cease-and-desist order against IG Holdings.
14. In July 2000, when he became aware of the Commission's investigation into his Wrigley-related activities, Gaines discontinued using the business name of Wrigley, but continued his fraudulent tender offer scheme using the business name Morten.
15. While the investigation of Wrigley was ongoing, Gaines continued perpetrating the fraud via Morten, and attempted to shield those activities from the Commission's investigation by (a) delaying his production of documents sought by the Commission's staff; (b) failing to produce all the documents that the staff requested; and (c) delaying his testimony.
16. By reason of these activities, the Defendant has violated Sections 10(b) and 14(e) of the Exchange Act, and Rules 10b-5 and 14e-1 thereunder. The Commission, in the interest of protecting the public from any further fraudulent activity, brings this action against Gaines, seeking permanent injunctive relief, disgorgement of illicit profits, plus accrued prejudgment interest, and a civil money penalty.
17. The Commission brings this action pursuant to the authority conferred upon it by Section 21(d) of the Exchange Act [15 U.S.C. §78u(d)], to enjoin Gaines from future violations of the federal securities laws, and to seek disgorgement, prejudgment interest, and a civil penalty.
18. The Court has jurisdiction over this action pursuant to Section 27 of the Exchange Act [15 U.S.C. § 78aa].
19. Gaines, directly or indirectly, made use of the means or instrumentalities of interstate commerce, or of the mails, in connection with the transactions, acts, practices and courses of business alleged in this Complaint.
20. Certain of the transactions, acts, practices and courses of business alleged herein took place in the District of Arizona.
21. Ira J. Gaines, age 53, is a resident of Phoenix, Arizona. Since 1999, Gaines has, at various times, done business under the names Wrigley and Morten.
STATEMENT OF FACTS
A. Gaines' Mini-Tender Offer Procedures
22. From September 1999 through March 2001, Gaines made mini-tender offers to purchase the stock of 287 public companies, including AT&T Corporation, W.R. Grace & Co., and Sara Lee Corporation.
23. For each of his tender offers, Gaines prepared (a) a page setting forth the terms of the offer, and (b) a two-page assignment form with various warranties and instructions for tendering shares.
24. Gaines forwarded those documents to Northern Trust Company in Chicago ("Northern Trust"), a bank that serves as securities custodian for its bank customers.
25. Each of Gaines' offers involved an active and widespread solicitation of shareholders, because Gaines caused his offers to be communicated to all shareholders of the target company who were custodial customers of Northern Trust.
26. After determining which of its customers, if any, owned shares of the company targeted by Gaines, Northern Trust e-mailed, to contact persons or contact entities designated by those customers, a summary notice of Gaines' offer (the "Notice").
27. The Notice contained the name of the target company; offer price (to be paid "in cash"); the date and time when the offer would expire; the identity of the offeror and its contact information; that the offer sought up to 1% of the shares of the target company; that no "protect period or withdrawal privilege" was available; the name of the depositary; and that tenders of shares would be "accepted on a first come, first served basis."
28. The Notice did not recite any other terms of the offer, or include any other representations.
29. Upon election by a customer to participate in Gaines' tender offer, Northern Trust delivered the shares to the appropriate transfer agent for registration in Gaines' name, and notified Gaines of the name and address of the tendering shareholder, the number of shares tendered, and the total amount Gaines owed the shareholder for purchase of the shares.
30. Gaines then purchased the tendered shares by mailing a check to the tendering shareholder at the designated address.
B. Gaines' Purchases of Securities Pursuant to His Mini-Tender Offers
31. In response to 70 of Gaines' tender offers, a total of 175 shareholders tendered, and Gaines purchased, 137,842 shares, for an aggregate offer price of approximately $1.5 million.
32. Although Gaines terminated 10 of the offers that resulted in tenders of shares, he paid for shares that were tendered in response to at least 60 offers.
33. Gaines purchased tens of thousands of shares of public companies from 175 different shareholders.
34. Each of Gaines' offers, if fully subscribed and not terminated by Gaines, would have resulted in Gaines' acquisition of millions of shares of the target company's securities.
C. Gaines' Use of Means and Instrumentalities of Interstate Commerce and the Mails
35. For each mini-tender offer, Gaines forwarded by use of the mails, and by means and instrumentalities of interstate commerce such as electronic mail, facsimile transmissions, and commercial couriers: (a) a page setting forth the terms of the offer, and (b) a two-page assignment form with warranties and instructions for tendering shares, to Northern Trust.
36. Gaines purchased tendered shares by mailing checks to the tendering shareholders.
37. Gaines also used the mails, telephone, electronic mail, facsimile transmissions, and commercial couriers to make other communications as part of his mini-tender offer scheme.
D. Misrepresentations and Omissions
(i) The Terms of the Offers
38. The documents that Gaines forwarded to Northern Trust for each of the 287 mini-tender offers included the following terms, which were common to all 287 offers:
(a) that "the [offer] price is lower than the market";
(b) that the offer could be extended "at the sole discretion of the purchaser [Gaines]"; and
(c) that Gaines "reserves[s] the right to terminate or amend [the] offer without notice."
39. This material information regarding the terms of Gaines' offers failed to reach the shareholders because the Notice that Northern Trust forwarded to the designated contacts contained none of those terms.
40. As a result, shareholders did not learn, before tendering their stock to Gaines:
(a) that the offer price of the stock was below the market price of the stock;
(b) that Gaines reserved sole discretion to amend the offer price and the offer period; or
(c) that Gaines reserved sole discretion to terminate his mini-tender offers without notice.
(ii) Gaines' Ability to Purchase the Shares He Solicited
41. Each Notice that Northern Trust forwarded to targeted shareholders recited an amount to be paid "in cash" for tendered shares, implying that Gaines had sufficient cash on hand to buy up to 1% of the outstanding shares of the targeted company.
42. In many instances, however, Gaines actually did not have sufficient cash on hand to buy up to 1% of the outstanding shares of the targeted company.
43. For example, when Gaines offered to purchase up to 1% (about 3.8 million shares) of the outstanding stock of AT&T Corporation for $30.75 per share, Gaines did not have the $116,850,000 that those shares would have cost, had they been tendered in response to Gaines' offer.
E. Gaines' Knowledge of the Misrepresentations and Omissions
44. Gaines chose Northern Trust as the conduit for his mini-tender offers, chiefly because Northern Trust did not charge a fee for processing the offers.
45. Gaines began using Northern Trust after an entity he used previously, the Depository Trust Company ("DTC"), began charging Gaines a $2,700 fee for each offer.
46. Gaines learned, through his dealings with DTC, through his association with IG Holdings, and through the Commission's cease-and-desist order against IG Holdings, that custodians such as Northern Trust do not forward entire documents delivered to them by tender offerors, but rather, forward a summary notice setting forth only limited information, such as the offer price, the offer period, and the identity of the offeror.
47. Although he could have done so, Gaines never inquired whether Northern Trust was forwarding to the shareholders' designated contacts the entire document that he provided to Northern Trust.
48. Although he could have done so, Gaines never instructed Northern Trust to forward to the shareholders' designated contacts the entire document that he provided to Northern Trust.
49. Although he could have done so, Gaines did not attempt to ascertain whether shareholders received the information set forth in the document that he provided to Northern Trust.
50. Although he could have done so, Gaines did not attempt to provide shareholders with any information in addition to the Notice that Northern Trust provided.
51. Gaines therefore knew, or was reckless in not knowing, that the shareholders were not receiving complete and accurate material information about the mini-tender offers.
F. Materiality of the Facts that Gaines Misrepresented and Omitted
52. The fact that Gaines lacked sufficient cash to pay for tendered shares would have been important to a reasonable shareholder, because it increased the likelihood that Gaines would be unable to pay for the shares, and would therefore rescind his offer and return the shares - without compensating the tendering shareholder, who had, while Gaines held the shares, temporarily lost control of his or her shares, as well as his or her ability to respond to changes in the shares' market price.
53. The fact that Gaines was offering to pay less than the prevailing market price for tendered shares would have been important to a reasonable shareholder, because it meant that shareholders tendering shares to Gaines forfeited the difference between the market price and Gaines' offer price.
54. Gaines' discretion to extend the period of a mini-tender offer would have been important to a reasonable shareholder, because it allowed Gaines to deprive the shareholder of control of his or her shares, once tendered, and his or her ability to respond to changes in the shares' market price.
55. Gaines' discretion to change the offer price would have been important to a reasonable shareholder, because it permitted Gaines to shift the risk of market price fluctuation to the shareholder.
56. Gaines' power to terminate the offers at his discretion (which Gaines actually did on ten separate occasions) would have been important to a reasonable shareholder, because it shifted the risk of market price fluctuation from Gaines to the shareholders; and because it increased the likelihood that Gaines would return the shares - without compensating the tendering shareholder, who had, while Gaines held the shares, temporarily lost control of his or her shares, as well as his or her ability to respond to changes in the shares' market price.
G. Gaines' Failure to Pay Promptly for Tendered Shares
57. Gaines materially misled the shareholders by giving them no warning of possible delay in payments for tendered shares.
58. The time that elapsed between shareholders' tenders of their shares and Gaines' payment for the shares varied widely. On average, 14 days elapsed between the tender of shares and Gaines' payment. In one instance, Gaines took over seven months to pay for tendered securities.
H. Gaines' Illicit Profits
59. Gaines obtained net profits of approximately $275,000 by way of the foregoing conduct.
Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5:
60. Plaintiff Commission repeats and incorporates paragraphs 1 through 59 of this Complaint by reference as if set forth verbatim.
61. Gaines, directly or indirectly, singly or in concert with others, in connection with the purchase and sale of securities, by use of the means and instrumentalities of interstate commerce and by use of the mails (a) has employed devices, schemes and artifices to defraud, (b) has made untrue statements of material facts and has omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading and (c) has engaged in acts, practices and courses of business which operate as a fraud and deceit upon purchasers, prospective purchasers and other persons.
62. As a part of and in furtherance of his scheme to defraud, Gaines, directly and indirectly, in connection with tender offers and purchases and sales of securities, misrepresented material facts, and omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, including, but not limited to, those set forth in paragraphs 1 through 59 above.
63. Gaines knowingly or recklessly engaged in the conduct described in this Claim.
64. By reason of the foregoing, Gaines violated and, unless enjoined, will continue to violate the provisions of Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder.
Section 14(e) of the Exchange Act: Fraud In Connection with Tender Offers
65. Plaintiff Commission repeats and incorporates paragraphs 1 through 59 of this Complaint by reference as if set forth verbatim.
66. By engaging in the conduct alleged herein, Gaines in connection with a tender offer, a request for invitation for tenders, or a solicitation of security holders in favor of such offer, request or invitation: (a) made untrue statements of material fact, or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and/or (b) engaged in fraudulent, deceptive or manipulative acts or practices.
67. Gaines knew or recklessly disregarded the fact that his statements and/or conduct with respect to the tender offers described herein included the material false statements and omissions described herein.
68. By reason of the foregoing, Gaines violated, and unless enjoined, will continue to violate Section 14(e) of the Exchange Act [15 U.S.C. § 78n(e)] and Rule 14e-1 [17 C.F.R. § 240.14e-1] thereunder.
Exchange Act Rule 14e-1: Failure to Pay Promptly for Tendered Shares
69. Plaintiff Commission repeats and incorporates paragraphs 1 through 59 of this Complaint by reference as if set forth verbatim.
70. By engaging in the conduct alleged herein, Gaines failed to pay the consideration he offered promptly after termination of the tender offer.
71. By reason of the foregoing, Gaines violated, and unless enjoined, will continue to violate Section 14(e) of the Exchange Act [15 U.S.C. § 78n(e)] and Rule 14e-1(c) [17 C.F.R. § 240.14e-1(c)] thereunder.
PRAYER FOR RELIEF
WHEREFORE, the Commission respectfully requests that this Court enter a judgment:
(i) permanently enjoining Gaines, and his agents, servants, employees, attorneys, and those in active concert or participation with him, who receive actual notice by personal service or otherwise, from violating Sections 10(b) and 14(e) of the Exchange Act [15 U.S.C. §§ 78j(b) and 78n(e)] and Rules 10b-5 and 14e-1 [17 C.F.R. §§ 240.10b-5 and 240. 14e-1] thereunder.
(ii) ordering Gaines to provide an accounting of all ill-gotten gains from the conduct alleged herein;
(iii) ordering Gaines to disgorge all ill-gotten gains from the conduct alleged herein, with prejudgment interest;
(iv) ordering Gaines to pay civil money penalties pursuant to Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)];
(v) granting such other relief as this Court may deem just and appropriate.
Dated: August 28, 2002
SPENCER C. BARASCH