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U.S. Securities and Exchange Commission

UNITED STATES DISTRICT COURT
DISTRICT OF COLUMBIA



SECURITIES AND EXCHANGE COMMISSION
450 Fifth Street, N.W.
Washington, DC 20549,

Plaintiff,   

-v.-

CARNEGIE INTERNATIONAL CORPORATION,
EDWARD DAVID GABLE, DAVID S. PEARL,
LOWELL FARKAS, RICHARD J. GREENE, SCOTT
CARUTHERS, and DASHIELLE LASHRA CARUTHERS,

Defendants.   

and

SCOTT CARUTHERS and DASHIELLE LASHRA
CARUTHERS,

Relief Defendants.   


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No.

COMPLAINT

Plaintiff United States Securities and Exchange Commission (the "Commission") alleges:

INTRODUCTION

1. This action arises from a financial fraud carried out by the senior management of Carnegie International Corporation ("Carnegie"), a former publicly traded holding company that owned and operated a credit-card-services company, a telephone-entertainment company, and a voice-recognition technology company. The fraud was carried out by defendant Edward David Gable ("Gable"), Carnegie's chairman, defendant Lowell Farkas ("Farkas"), Carnegie's president and chief executive officer, and defendant David S. Pearl ("Pearl"), Carnegie's former secretary. Gable, Pearl and others personally benefited from this fraud through the sale of Carnegie shares at inflated prices through an offshore trust. This fraud began no later than February 1998, and continued until at least January 2000.

2. To create the appearance of rapid financial growth in Carnegie's 1998 fiscal year, the year Carnegie registered its common stock with the Commission, Carnegie fraudulently reported revenue and income on several transactions reported in its Form 10-SB filed with the Commission on October 28, 1998 ("registration statement"), Form 10-SB/A filed with the Commission on February 13, 1999 ("amended registration statement"), Form 10-KSB for the fiscal year ending December 31, 1998, filed with the Commission on April 27, 1999 ("1998 Form 10-KSB"), and Form 10-KSB/A for the fiscal year ending December 31, 1998, filed with the Commission on January 25, 2000 ("1998 Form 10-KSB/A"). As a result, Carnegie materially overstated its revenues and earnings in these filings. In its 1998 Form 10-KSB, for example, Carnegie fraudulently reported net earnings of $2.66 million, when in fact Carnegie had a net loss that year.

3. Carnegie also materially misrepresented the terms of transactions in its public filings and press releases, and to its auditors, and failed to timely disclose adverse events that were materially impacting revenues. Carnegie's financial reporting was highly susceptible to this fraud because defendant Richard J. Greene ("Greene"), Carnegie's former chief financial officer, failed to implement an adequate system of internal accounting controls at Carnegie. Gable and Pearl, along with defendant and relief defendant Scott Caruthers ("Caruthers"), a former Carnegie director, and defendant and relief defendant Dashielle Lashra Caruthers ("Lashra"), who is Caruthers' wife, personally benefited from the fraud by selling Carnegie shares at inflated prices using an offshore trust, which they failed to disclose in required filings.

JURISDICTION

4. This Court has jurisdiction over this action pursuant to Sections 20 and 22(a) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. §§ 77t and 77v(a)] and Sections 21(d) and (e) and 27 of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §§ 78u(d) and (e) and 78aa].

5. By engaging in transactions, acts, practices, and courses of business alleged in this Complaint:

(a) Defendant Carnegie violated Securities Act Section 17(a) [15 U.S.C. § 77q(a)], Exchange Act Sections 10(b), 12(g), 13(a), 13(b)(2)(A), and 13(b)(2)(B) [15 U.S.C. §§ 78j(b), 78l(g), 78m(a), 78m(b)(2)(A), and 78m(b)(2)(B)] and Exchange Act Rules 10b-5, 12b-20, and 13a-1 [17 C.F.R. §§ 240.10b-5, 240.12b-20, and 240.13a-1];

(b) Defendants Gable and Pearl violated Securities Act Section 17(a) [15 U.S.C. § 77q(a)], Exchange Act Sections 10(b), 13(b)(5), and 16(a) [15 U.S.C. §§ 78j(b), 78m(b)(5), and 78p(a)], and Exchange Act Rules 10b-5, 13b2-1, 13b2-2, 16a-2, and 16a-3 [17 C.F.R. §§ 240.10b-5, 240.13b2-1, 240.13b2-2, 240.16a-2, and 240.16a-3], and aided and abetted violations of Exchange Act Sections 12(g), 13(a), 13(b)(2)(A), and 13(b)(2)(B) [15 U.S.C. §§ 78l(g), 78m(a), 78m(b)(2)(A), and 78(b)(2)(B)] and Exchange Act Rules 12b-20 and 13a-1 [17 C.F.R. §§ 240.12b-20 and 240.13a-1];

(c) Defendant Farkas violated Exchange Act Sections 10(b) and 13(b)(5) [15 U.S.C. §§ 78j(b) and 78m(b)(5)] and Exchange Act Rules 10b-5, 13b2-1, and 13b2-2 [17 C.F.R. §§ 240.10b-5, 240.13b2-1, and 240.13b2-2], and aided and abetted violations of Exchange Act Sections 12(g), 13(a), 13(b)(2)(A), and 13(b)(2)(B) [15 U.S.C. §§ 78l(g), 78m(a), 78m(b)(2)(A), and 78m(b)(2)(B)] and Exchange Act Rules 12b-20 and 13a-1 [17 C.F.R. §§ 240.12b-20 and 240.13a-1];

(d) Defendant Greene violated Exchange Act Section 13(b)(5) [15 U.S.C. § 78m(b)(5)], and aided and abetted violations of Exchange Act Section 13(b)(2)(B) [15 U.S.C. § 78m(b)(2)(B)]; and

(e) Defendants Caruthers and Lashra violated Exchange Act Sections 13(d) and 16(a) [15 U.S.C. §§ 78m(d) and 78p(a)] and Exchange Act Rules 13d-1, 13d-2, 16a-2, and 16a-3 [17 C.F.R. §§ 240.13d-1, 240.13d-2, 240.16a-2, and 240.16a-3].

Unless restrained and enjoined by this Court, defendants will continue to engage in transactions, acts, practices, and courses of business that violate these provisions of the federal securities laws.

6. In connection with the transactions, acts, practices, and courses of business described in this Complaint, the defendants, directly or indirectly, used the means or instrumentalities of interstate commerce, the mails, or the facilities of a national securities exchange.

DEFENDANTS

7. Carnegie is a Colorado corporation headquartered in Laurel, Maryland. Carnegie's common stock was registered with the Commission, effective December 28, 1998, pursuant to Exchange Act Section 12(g) [15 U.S.C. § 78l(g)]. From September 1996 through April 1999, Carnegie's stock was quoted on the OTC Bulletin Board. The stock was listed on the American Stock Exchange ("AMEX") on April 29, 1999. AMEX halted trading of the stock on April 30, 1999, and delisted the stock in January 2000. Carnegie's stock most recently traded in the over-the-counter market and was quoted through the Pink Sheets.

8. Gable has been the chairman of Carnegie's board of directors since 1996. From May 1997 until March 1999, Gable also was Carnegie's chief operating officer.

9. Farkas has been the president, chief executive officer, and a director of Carnegie since May 1997.

10. Pearl was the secretary of Carnegie from May 1997 through January 1999. After resigning as secretary, Pearl was a paid consultant to Carnegie through the remainder of 1999.

11. Greene was the chief financial officer and vice president of Carnegie from September 1998 through February 15, 1999, was the secretary of Carnegie from March 1, 1999 through November 30, 2000, and was the acting chief financial officer of Carnegie from September 21, 1999 through November 30, 2000.

DEFENDANTS AND RELIEF DEFENDANTS

12. Caruthers, formerly known as Arthur Brooks Crothers, was a director of Carnegie from May 1996 through October 1998.

13. Lashra, formerly known as Dashielle Lashra and, prior to that, Irmina Marie Dzambo, is the spouse of Scott Caruthers.

THE FACTS

I. Carnegie's Formation and the Transfer of Shares to an Offshore Trust

14. In 1996, Carnegie entered into a stock exchange agreement pursuant to which it acquired Electronic Card Acceptance Corporation ("ECAC"), a Virginia company that sold credit-card-processing services, and DAR Products Corporation ("DAR"), a Maryland company that held patents on a "Non-grip Technology" originally developed for use with exercise equipment. Prior to Carnegie acquiring DAR, Caruthers and/or Lashra were, directly or indirectly, majority owners of DAR. Gable and Pearl also had been affiliated with DAR through management roles and/or ownership interests.

15. As consideration for the purchase of DAR, Carnegie transferred approximately six million Carnegie shares to offshore entities owned by Triad Consolidated Trust ("Triad"), located at Ansbacher (Bahamas) Ltd. ("Ansbacher") in the Bahamas. Lashra was Triad's named beneficiary. Pursuant to an agreement between Lashra, Caruthers, Gable, Pearl, and another individual affiliated with Carnegie, each of them had a beneficial interest in the Carnegie shares held at Triad.

II. The Financial Fraud at Carnegie

16. Carnegie materially overstated its reported financial performance in 1998 by improperly reporting revenue and income on three transactions - the sale of ECAC, the sale of part of a telephone-entertainment business, and the sale of distribution rights in Russia for MAVIS, a voice-responsive technology product.

A. The Sale of ECAC

17. ECAC, a company Carnegie purchased in September 1996, was in the business of soliciting merchants to process credit card transactions through banks with which it had commission agreements. In 1997, Carnegie arranged for the sale of most of ECAC's assets for $3.7 million. In a separate transaction, on or about January 30, 1998, Carnegie sold the stock and most remaining assets of ECAC for $100,000. Gable helped negotiate the sale of ECAC, and Farkas executed the sales agreement on behalf of Carnegie. At the time of this January 1998 sale, Carnegie represented to ECAC's purchaser that ECAC owed no debt to Carnegie.

18. After the sale of ECAC in January 1998, Carnegie issued public statements in which it fraudulently reported a gain on the sale of ECAC, based on Carnegie's false contention that ECAC owed a debt to Carnegie that ECAC's purchaser agreed to assume. For example, on February 9, 1998, Carnegie issued a press release stating "the value of the [ECAC] sale is estimated at $2.1 million, which consists of debt assumption and cash." Then in press releases Carnegie issued on May 26, 1998, and September 15, 1998, Carnegie reported financial results that included a fraudulent gain on the sale of ECAC.

19. Thereafter, in Carnegie's original and amended registration statements, which Farkas signed and Gable and Pearl reviewed, Carnegie fraudulently reported a $1.7 million gain on the sale of ECAC. And in its 1998 Form 10-KSB and 1998 Form 10-KSB/A, signed by Gable and Farkas, Carnegie fraudulently reported a gain on the sale of ECAC of $1.14 million and $1.4 million, respectively. The gain Carnegie reported on the sale of ECAC did not conform with generally accepted accounting principles ("GAAP").

20. In reporting this fraudulent gain, Carnegie falsely represented in its 1998 Form 10-KSB and 1998 Form 10-KSB/A that: (1) at the time of the sale of ECAC, ECAC owed Carnegie approximately $1.6 million on a "non-interest bearing debt," which the buyer of ECAC "assumed;" (2) ECAC's management "personally guaranteed" ECAC's debt to Carnegie; (3) ECAC's management "delivered one million free trading shares of Carnegie stock as collateral for the amount due" from ECAC to Carnegie; (4) ECAC's debt was originally due in December 1998, but Carnegie extended the due date to enhance Carnegie's "negotiating position with respect to a pending venture between Nuefield Investments, ECAC, and [Carnegie];" (5) "a 7% note was received from ECAC and Nufield Investments agreed to substitute 391,000 shares of Carnegie shares valued at $770,000 as collateral on behalf of the management of ECAC;" and (6) "[o]n March 31, 1999 the collateral was sold in satisfaction of the balance due on the note." Gable and Farkas each signed Carnegie's 1998 10-KSB and 1998 10-KSB/A, and each knew, or was reckless in not knowing, that these representations were false.

21. In addition, after Carnegie sold ECAC, Gable signed a fictitious promissory note and other agreements that purported to evidence a debt from ECAC to Carnegie. Gable also arranged for the private sale of Carnegie shares from an entity or entities that Pearl controlled, and had the proceeds from the sale transferred to Carnegie and recorded as a payment on ECAC's fictitious debt. Carnegie management provided these fictitious agreements and information to Carnegie's auditors.

22. Gable, Farkas, and Pearl knew, or were reckless in not knowing, that ECAC did not owe a $1.6 million debt to Carnegie that ECAC's purchaser assumed, and that Carnegie fraudulently reported income in connection with the sale of ECAC in the public statements and filings described above.

B. The Sale of the Talidan Print Media Business

23. In 1997, Carnegie purchased Talidan Limited ("Talidan"), a British Virgin Islands company in the telephone-entertainment business, in exchange for Carnegie securities. Talidan's business was generated through advertising telephone numbers in magazines and on television in Brazil. The portion of Talidan's business generated through magazine advertising was at times referred to as Talidan "print media."

24. In September 1998, Gable and Farkas executed a sales agreement, backdated to June 22, 1998, that purported to sell Talidan print media to Westshire Trading Company ("Westshire") for a $2.34 million note. Pearl helped prepare this backdated agreement and signed it as a witness. Carnegie management provided this agreement and other backdated documents relating to this purported sale to Carnegie's auditors.

25. Contrary to Carnegie management's representations, Gable, Farkas, and Pearl each knew, or was reckless in not knowing, that Talidan print media was not sold or transferred to Westshire in June 1998, or any other time. Rather, the Talidan print media telephone numbers were released to the former owners of Talidan or their assignees in late 1998 or early 1999, in exchange for Carnegie shares. Those Carnegie shares were transferred to Westshire, which was a company owned by Triad and controlled by Pearl. Proceeds from the sale of other Carnegie shares held at Triad were then transferred to Carnegie and falsely booked as payments from Westshire for the purchase of Talidan print media.

26. Carnegie fraudulently reported revenues and income from the purported sale of Talidan print media to Westshire in June 1998, in its original and amended registration statement, and in its 1998 Form 10-KSB and 1998 Form 10-KSB/A. For example, in its registration statement, which Farkas signed and Gable and Pearl reviewed, Carnegie reported $2.34 million in operating revenues from this transaction. In its 1998 Form 10-KSB, signed by Gable and Farkas, Carnegie reported $1.6 million in income from the transaction. Carnegie's reporting of revenues and income on this transaction did not conform with GAAP.

27. Carnegie also materially misrepresented the terms of this transaction in its 1998 Form 10K-SB and 1998 Form 10-KSB/A by representing that Talidan print media had been sold to Westshire, by not disclosing the real terms of the transaction, including the transfer of Carnegie shares to Westshire, and by not disclosing the identity and nature of the relationship of the parties to the transaction.

28. Gable, Farkas, and Pearl knew, or were reckless in not knowing, that Carnegie's revenue and income recognition on this transaction was improper, and that the terms of this transaction were misrepresented in Carnegie's original and amended registration statements and in Carnegie's 1998 Form 10-KSB and 1998 Form 10-KSB/A.

C. The MAVIS Russia Transaction

29. In 1997, in the same transaction in which Carnegie acquired Talidan, Carnegie acquired Profit Thru Telecommunications (Europe) Ltd. ("PTT"), a United Kingdom company that was developing MAVIS, a voice-responsive technology product for telephone systems. Tiller Holdings Limited, a British West Indies entity, brokered this transaction and received as a commission Carnegie shares, warrants, and options, which Tiller assigned to other entities ("Tiller assignees"). The Carnegie options had a "put" feature that, subject to certain conditions, gave the holder the right to require Carnegie to purchase the shares resulting from the exercise of the options.

30. In late 1998, Gable, on behalf of Carnegie, negotiated an agreement with Tiller, which was memorialized in a "Heads of Terms" agreement dated November 28, 1998, that Farkas signed on behalf of Carnegie. The agreement provided, among other terms, that (1) a "private investor" would buy more than 4 million Carnegie shares from the Tiller assignees, along with certain Carnegie warrants and options, for $2.5 million, (2) the Tiller assignees would surrender to Carnegie the options' put feature prior to this sale, and (3) Carnegie would grant Tiller the right to sell MAVIS in Russia and supply Tiller with 1,000 copies of MAVIS. The so-called "private investor" that purchased the Carnegie shares, options, and warrants from the Tiller assignees was an entity owned by Triad and controlled by Pearl.

31. In its 1998 Form 10-KSB, signed by Gable and Farkas, Carnegie fraudulently reported over $3 million in revenues on this transaction, and falsely claimed that it had delivered the MAVIS product to Tiller in 1998. Gable and Farkas each knew, or was reckless in not knowing, that the MAVIS product was not delivered to Tiller in 1998. Carnegie also fraudulently reported revenue on this transaction in a December 9, 1998 press release, which Gable and Farkas helped prepare and/or reviewed. Carnegie's revenue recognition on this transaction did not conform with GAAP.

32. Additionally, in its 1998 Form 10-KSB and 1998 Form 10-KSB/A, and in its December 9th press release, Carnegie misrepresented this transaction by not disclosing its material terms, including the transfer of Carnegie securities to a related party and the payment of $2.5 million to Tiller, and by not disclosing the identity and nature of the relationship of the parties to the transaction. Gable, Farkas, and Pearl each knew, or was reckless in not knowing, that this transaction was misrepresented in Carnegie's 1998 Form 10-KSB and 1998 Form 10-KSB/A.

33. Carnegie management also misled Carnegie's auditors by falsely representing that the MAVIS product was delivered to Tiller in 1998, and by not providing the auditors with a copy of the Heads of Terms Agreement during the audit or otherwise disclosing all the material terms of this transaction.

34. Gable, Farkas, and Pearl each knew, or was reckless in not knowing, that Carnegie should not have recorded revenue on this transaction, and that Carnegie misrepresented the terms of this transaction in its public filings and press release and to Carnegie's auditors.

35. The improper reporting of revenue and income on the foregoing transactions was facilitated by the absence of adequate internal controls. Greene, as CFO, was responsible for implementing internal controls, which he failed to do. His failure to implement internal controls made Carnegie's financial reporting system more susceptible to fraud.

D. Misleading Press Releases Concerning Other MAVIS Transactions

36. Carnegie also issued materially misleading press releases about other purported MAVIS transactions. On or about December 8, 1998, Carnegie issued a press release titled "Carnegie International Announces $2 Million European MAVIS Distribution Agreement," in which Carnegie announced a MAVIS distributor agreement with Precitel of Neuchatel, Switzerland. The press release quotes Farkas saying that "the agreement is worth in excess of $2 million (U.S.) over the next several years." The press release was misleading because Carnegie's subsidiary PTT did not execute an agreement with Precitel until January 1999, and even that agreement provided no basis to report that "the agreement is worth in excess of $2 million (U.S.) over the next several years." Gable and Farkas were both involved in preparing this press release, and each knew, or was reckless in not knowing, that it contained materially misleading statements.

37. Additionally, on December 10, 1998, Carnegie issued a press release titled "$6.5 Million MAVIS Distribution Agreement in Italy Announced by Carnegie International Corporation." In that press release Carnegie announced it had reached an agreement with Tiller to distribute MAVIS in Italy, and that "the agreement has a minimum sales requirement of 100 MAVIS units in 1999, 500 in 2000, and 750 in 2001, with an estimated minimum revenue to Carnegie of $6.5 million over the next three years." These statements were materially misleading because, among other reasons, Carnegie did not expect any payments from Tiller in the event the so-called "minimum sales requirements" were not satisfied. Gable and Farkas each helped prepare and/or reviewed this press release, and each knew, or was reckless in not knowing, that it contained materially misleading information.

E. Failure to Disclose Material Events Concerning Talidan

38. Carnegie acquired Talidan in 1997 to provide cash for developing its MAVIS product. Talidan was a large revenue producer for Carnegie. However, by the second half of 1998, Talidan's revenues began to sharply decline because several adverse events were impacting the telephone-entertainment business in Brazil, including long distance rate increases, content restrictions on advertising and recordings, and a court-ordered block of "900 numbers" in Sao Paulo, Brazil. Additionally, in August 1998, Embratel, Brazil's national telecommunications provider, stopped paying 900-number service providers, which are the entities from which Talidan received its revenues. To contain expenses as revenues dwindled, Talidan scaled back advertising in January 1999, cancelled advertising in April 1999, and suspended operations in June 1999.

39. In its 1998 Form 10-KSB, Carnegie represented that "Talidan expects . . . revenues on its retained business in 1999 will be comparable to 1998." Carnegie's representations were materially misleading because it failed to disclose known adverse events and uncertainties that were materially impacting revenues at Talidan. Farkas knew, or was reckless in not knowing, that Carnegie's statements concerning Talidan's future anticipated performance were materially misleading.

III. The Sale of Carnegie Shares By Gable, Pearl and Others

40. During the financial fraud at Carnegie, Carnegie's per share price climbed from under a dollar in 1998, to a high of $8.75 in 1999. During the fraud, Gable, Pearl, Caruthers and Lashra sold Carnegie shares they beneficially held at Triad. Pearl directed these sales for Caruthers and Lashra, Gable, and himself, through Triad's named trustees at Ansbacher. On Pearl's instructions, Triad and/or its shell entities sold more than 1.8 million Carnegie shares in market transactions during the financial fraud at Carnegie. Additionally, on at least one occasion, Gable arranged for a private sale of Carnegie shares from Triad during the fraud.

41. Proceeds from the sale of these Carnegie shares were disbursed in several ways to Gable and Pearl, participants in the fraud, and to Caruthers and Lashra. Money was wired from Ansbacher in the Bahamas to a domestic bank account in the name of Quantum Financial Corporation ("Quantum"), a shell company owned by Lashra. From Quantum the money was dispersed, often in the guise of loans, to Caruthers and Lashra, Gable, Pearl, and related entities. In one instance, money was also dispersed to Farkas. Cash was also withdrawn from Ansbacher in the Bahamas, brought back to the United States, and split-up between Caruthers and Lashra, Gable, and Pearl. Gable, Pearl and Caruthers also had overseas credit card accounts paid directly by a Triad owned entity, which they used to make purchases and cash advances. Proceeds from the sale of Carnegie shares at Triad also helped fund the transactions Carnegie used to fraudulently overstate its financial performance. Gable, Pearl, Caruthers and Lashra each knew that the proceeds they received came from the sale of Carnegie shares.

42. By at least early 1999, Caruthers and Lashra beneficially owned more than ten percent of Carnegie's outstanding shares. As a result, Caruthers and Lashra were required to file with the Commission on Schedule 13D and Forms 3 and 4, disclosures concerning their beneficial ownership and transactions in Carnegie securities. Caruthers and Lashra did not make these required filings.

43. As an officer and/or director of Carnegie, Gable and Pearl were each required to file with the Commission on Forms 3 and 4, disclosures concerning their beneficial ownership and transactions in Carnegie securities. In the Forms 3 and 4 Gable and Pearl filed with the Commission, each failed to disclose their beneficial ownership and transactions in Carnegie securities held at Triad.

FIRST CLAIM

(Securities Act Section 17(a))

44. Paragraphs 1 through 43 are realleged and incorporated by reference.

45. By engaging in the foregoing conduct, Carnegie, Gable, and Pearl violated Securities Act Section 17(a) [15 U.S.C. § 77q(a)].

SECOND CLAIM

(Exchange Act Section 10(b) and Exchange Act Rule 10b-5)

46. Paragraphs 1 through 43 are realleged and incorporated by reference.

47. By engaging in the foregoing conduct, Carnegie, Gable, Pearl, and Farkas violated Exchange Act Section 10(b) [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5].

THIRD CLAIM

(Exchange Act Sections 12(g) and 13(a) and Exchange Act Rules 12b-20 and 13a-1)

48. Paragraphs 1 through 43 are realleged and incorporated by reference.

49. By engaging in the foregoing conduct, Carnegie violated Exchange Act Sections 12(g) and 13(a) [15 U.S.C. §§ 78l(g) and 78m(a)] and Rules 12b-20 and 13a-1 [17 C.F.R. §§ 240.12b-20 and 240.13a-1].

FOURTH CLAIM

(Exchange Act Section 13(b)(2)(A))

50. Paragraphs 1 through 43 are realleged and incorporated by reference.

51. By engaging in the foregoing conduct, Carnegie violated Exchange Act Section 13(b)(2)(A) [15 U.S.C § 78m(b)(2)(A)].

FIFTH CLAIM

(Exchange Act Section 13(b)(2)(B))

52. Paragraphs 1 through 43 are realleged and incorporated by reference.

53. By engaging in the foregoing conduct, Carnegie violated Exchange Act Section 13(b)(2)(B) [15 U.S.C. § 78m(b)(2)(B)].

SIXTH CLAIM

(Exchange Act Section 13(b)(5))

54. Paragraphs 1 through 43 are realleged and incorporated by reference.

55. By engaging in the foregoing conduct, Gable, Pearl, Farkas, and Greene violated Exchange Act Section 13(b)(5) [15 U.S.C. § 78m(b)(5)].

SEVENTH CLAIM

(Exchange Act Rule 13b2-1)

56. Paragraphs 1 through 43 are realleged and incorporated by reference.

57. By engaging in the foregoing conduct, Gable, Pearl, and Farkas violated Exchange Act Rule 13b2-1 [17 C.F.R. § 240.13b2-1].

EIGHTH CLAIM

(Exchange Act Rule 13b2-2)

58. Paragraphs 1 through 43 are hereby realleged and incorporated by reference.

59. Gable, Pearl, and Farkas, while officers of Carnegie, directly or indirectly, made or caused to be made materially false and misleading statements, or omitted to state or caused another person to omit to state material facts necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading, to an accountant in connection with an audit of Carnegie's financial statements required to be filed with the Commission.

60. By engaging in the foregoing conduct, Gable, Pearl, and Farkas violated Exchange Act Rule 13b2-2 [17 C.F.R. § 240.13b2-2].

NINTH CLAIM

(Exchange Act Section 16(a) and Exchange Act Rules 16a-2 and 16a-3)

61. Paragraphs 1 through 43 are realleged and incorporated by reference.

62. By engaging in the foregoing conduct, Gable, Pearl, Caruthers, and Lashra violated Exchange Act Section 16(a) [15 U.S.C. § 78p(a)] and Rules 16a-2 and 16a-3 [17 C.F.R. §§ 240.16a-2 and 240.16a-3].

TENTH CLAIM

(Exchange Act Section 13(d) and Rules 13d-1 and 13d-2)

63. Paragraphs 1 through 43 are realleged and incorporated by reference.

64. By engaging in the foregoing conduct, Caruthers and Lashra violated Exchange Act Section 13(d) [15 U.S.C. § 78m(d)] and Rules 13d-1 and 13d-2 [17 C.F.R. §§ 240.13d-1 and 240.13d-2].

ELEVENTH CLAIM

(Aiding and Abetting Violations of Exchange Act Sections 12(g), 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rules 12b-20 and 13a-1)

65. Paragraphs 1 through 43 are realleged and incorporated by reference.

66. By engaging in the foregoing conduct, Gable, Pearl, and Farkas aided and abetted Carnegie's violations of Exchange Act Sections 12(g), 13(a), 13(b)(2)(A), and 13(b)(2)(B) [15 U.S.C. §§ 78l(g), 78m(a), 78m(b)(2)(A), and 78m(b)(2)(B)] and Rules 12b-20 and 13a-1 [17 C.F.R. §§ 240.12b-20 and 240.13a-1], and Greene aided and abetted Carnegie's violation of Exchange Act Section 13(b)(2)(B) [15 U.S.C. § 78m(b)(2)(B)].

RELIEF REQUESTED

WHEREFORE, the Commission respectfully requests that this Court enter judgments against Carnegie, Gable, Pearl, Farkas, Greene, Caruthers, and Lashra that:

1. enjoin Carnegie from violating Securities Act Section 17(a) [15 U.S.C. § 77q(a)], Exchange Act Sections 10(b), 12(g), 13(a), 13(b)(2)(A), and 13(b)(2)(B) [15 U.S.C. §§ 78j(b), 78l(g), 78m(a), 78m(b)(2)(A), and 78m(b)(2)(B)], and Exchange Act Rules 10b-5, 12b-20, and 13a-1 [17 C.F.R. §§ 240.10b-5, 240.12b-20, and 240.13a-1];

2. enjoin Gable and Pearl from violating Securities Act Section 17(a) [15 U.S.C. § 77q(a)], Exchange Act Sections 10(b), 13(b)(5), and 16(a) [15 U.S.C. §§ 78j(b), 78m(b)(5), and 78p(a)], and Exchange Act Rules 10b-5, 13b2-1, 13b2-2, 16a-2, and 16a-3 [17 C.F.R. §§ 240.10b-5, 240.13b2-1, 240.13b2-2, 240.16a-2, and 240.16a-3], and from aiding and abetting violations of Exchange Act Sections 12(g), 13(a), 13(b)(2)(A), and 13(b)(2)(B) [15 U.S.C. §§ 78l(g), 78m(a), 78m(b)(2)(A), and 78m(b)(2)(B)] and Rules 12b-20 and 13a-1 [17 C.F.R. §§ 240.12b-20 and 240.13a-1];

3. enjoin Farkas from violating Exchange Act Sections 10(b) and 13(b)(5) [15 U.S.C. §§ 78j(b) and 78m(b)(5)], and Exchange Act Rules 10b-5, 13b2-1, and 13b2-2 [17 C.F.R. §§ 240.10b-5, 240.13b2-1, 240.13b2-2], and from aiding and abetting violations of Exchange Act Sections 12(g), 13(a), 13(b)(2)(A), and 13(b)(2)(B) [15 U.S.C. §§ 78l(g), 78m(a), 78m(b)(2)(A), and 78m(b)(2)(B)] and Rules 12b-20 and 13a-1 [17 C.F.R. §§ 240.12b-20 and 240.13a-1];

4. enjoin Greene from violating Exchange Act Section 13(b)(5) [15 U.S.C. § 78m(b)(5)], and from aiding and abetting violations of Exchange Act Section 13(b)(2)(B) [15 U.S.C. § 78m(b)(2)(B)];

5. enjoin Caruthers and Lashra from violating Exchange Act Sections 13(d) and 16(a) [15 U.S.C. §§ 78m(d) and 78p(a)], and Exchange Act Rules 13d-1, 13d-2, 16a-2, and 16a-3 [17 C.F.R. §§ 240.13d-1, 240.13d-2, 240.16a-2, and 240.16a-3];

6. order Gable and Pearl to pay appropriate civil penalties pursuant to Securities Act Section 20(d) [15 U.S.C. § 77t(d)] and Exchange Act Section 21(d)(3) [15 U.S.C. § 78u(d)(3)];

7. order Farkas, Greene, Caruthers, and Lashra to pay appropriate civil penalties pursuant to Exchange Act Section 21(d)(3) [15 U.S.C. § 78u(d)(3)];

8. order each of Gable, Pearl, and Farkas to disgorge the ill-gotten gains they received as a result of their violations of the federal securities laws, and to pay prejudgment interest on all such gains, which include, but are not limited to (a) the amounts by which Gable, Pearl, and Farkas were unjustly enriched from the sale of Carnegie securities; and (b) all compensation received by Gable, Pearl, and Farkas from Carnegie subsequent to their fraudulent acts and omissions, including salary and bonuses;

9. order each of Caruthers and Lashra, in their capacity as relief defendants, to disgorge the amounts by which they were unjustly enriched as a result of the fraudulent conduct of Gable, Pearl, and Farkas, and to pay prejudgment interest on all such amounts, including, but not limited to, the proceeds from the sale of Carnegie securities;

10. prohibit Gable, Pearl, and Farkas from acting as an officer or director of any issuer of securities that has a class of securities registered pursuant to Section 12 of the Exchange Act [15 U.S.C. § 78l], or that is required to file reports pursuant to Section 15(d) of the Exchange Act [15 U.S.C. § 78o(d)]; and

11. grant such other and further relief as is just and proper.

Dated: July 14, 2003

Respectfully submitted,

______________________

Mark A. Adler
Paul R. Berger, D.C. Bar No. 375526
Russell G. Ryan, D.C. Bar No. 414472
Nina B. Finston, D.C. Bar No. 431825
Brian O. Quinn, D.C. Bar No. 450013


Attorneys for Plaintiff
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0911
(202) 942-4770 (Adler)
(202) 942-9581 (fax)

 

http://www.sec.gov/litigation/complaints/comp18229.htm


Modified: 07/14/2003