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U.S. Securities and Exchange Commission

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION


Securities and Exchange Commission,

Plaintiff,   

v.

RODNEY R. PROTO and
EARL E. DEFRATES,

Defendants.   


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Civil Action No.

COMPLAINT

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

SUMMARY

1. This action concerns illegal insider trading, and materially false or misleading statements made to Wall Street analysts and the investing public, by two former Waste Management, Inc. ("WMI" or the "Company") officers while employed by the Company in May and June 1999.

2. Rodney R. Proto ("Proto") and Earl E. DeFrates ("DeFrates") sold WMI stock while in possession of material, nonpublic information that WMI's previously announced pretax income for the first quarter of fiscal year 1999 included tens of millions of dollars of undisclosed, non-recurring income items. At the time of their actions, Proto was WMI's President, Chief Operating Officer, and a member of the WMI Board of Directors, and DeFrates was WMI's Chief Financial Officer.

3. The undisclosed income items inflated WMI's earnings per share ("EPS") by $0.09 or 17%. As Proto and DeFrates knew, or were reckless in not knowing, these items were not disclosed in either a May 6, 1999 press release announcing WMI's first quarter 1999 earnings or in statements they made to Wall Street analysts and the investing public in May and June 1999. Proto and DeFrates also knew, or were reckless in not knowing, that WMI did not disclose the income items in its Form 10-Q for the first quarter of fiscal year 1999 that it filed with the Commission on May 13, 1999. As a result, the press release, the quarterly filing with the Commission, and Proto's and DeFrates' statements were materially false or misleading.

4. Between June 7 and July 2, 1999, on at least six separate occasions, Proto and DeFrates also made materially false or misleading statements concerning the Company's ability to meet its previously announced earnings forecasts for the second fiscal quarter of 1999 to Wall Street analysts, investment bankers, and the investing public. Proto and DeFrates confirmed the Company's second quarter 1999 EPS guidance in these conversations with Wall Street analysts, investment bankers, and members of the public, even though they knew, or were reckless in not knowing, that the Company would fall well short of its previously stated earnings guidance. Some of these analysts, in turn, included this information in research reports, which were disseminated to investors.

5. On July 6, 1999, WMI issued a press release warning that the Company had substantially lowered its earnings expectations for the second quarter of 1999. The Company attributed the shortfall from previously stated EPS forecasts to lower than anticipated solid waste revenues. In reaction to this news, WMI's stock price dropped 37% from $53.56 per share to $33.94 per share. In late July, WMI lowered its earnings expectations a second time, resulting in an additional 17% drop in the Company's stock price to $25.94 per share. On August 3, 1999, WMI stated in a press release that the Company's previously reported first quarter pretax income may have included "approximately $95 million of non-recurring income items." On August 16, 1999, the Company filed its Form 10-Q for the second quarter of fiscal year 1999, which provided detailed disclosure of the $95 million of non-recurring income items that had been included in the Company's reported first quarter pretax income. WMI's stock closed that day at $23.13, 9.1% lower than its closing price on August 2, 1999, the day before WMI first announced that it was reviewing its previously reported first quarter 1999 financial results.

6. By selling WMI stock in May 1999, before the Company's disclosure that its previously announced first quarter 1999 pretax income included the non-recurring items, Proto avoided losses of $1,503,669.

7. By selling WMI stock in June 1999, before the Company's disclosure that its previously announced first quarter 1999 pretax income included the non-recurring items, DeFrates avoided losses of $121,217.

8. In this action, the Commission is seeking an order, pursuant to Section 20(b) of the Securities Act [15 U.S.C. 77t(b)] and Sections 21(d)(1) and (e) of the Exchange Act [15 U.S.C. 78u(d)(1) and (e)], to permanently restrain and enjoin Proto and DeFrates from, directly or indirectly, violating Section 17(a) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. 77q(a)], Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. 78j(b)], and Exchange Act Rule 10b-5 [17 C.F.R. 240.10b-5]. The Commission also is seeking disgorgement of Proto's and DeFrates' illegal losses avoided, with prejudgment interest, and civil penalties, pursuant to Sections 21A and 21(d)(3) of the Exchange Act [15 U.S.C. 78u-1 and 78u(d)(3)].

9. In addition, the Commission is seeking, pursuant to Section 20(e) of the Securities Act [15 U.S.C. 77t(e)] and Section 21(d)(2) of the Exchange Act [15 U.S.C. 78u(d)(2)], an order barring Proto and DeFrates each from acting as an officer or director of any issuer 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].

JURISDICTION

10. The Commission brings this action pursuant to Section 20(b) of the Securities Act [15 U.S.C. 77t(b)] and Sections 21(d) and 21(e) of the Exchange Act [15 U.S.C. 78u(d) and 78u(e)].

11. This Court has jurisdiction over this action, and venue is proper, pursuant to Section 22(a) of the Securities Act [15 U.S.C. 77v(a)] and Sections 21 and 27 of the Exchange Act [15 U.S.C. 78u and 78aa].

12. The defendants, directly or indirectly, made use of the means or instrumentalities of interstate commerce, or of the mails, or the facilities of a national securities exchange in connection with the transactions, acts, practices and courses of business alleged herein.

DEFENDANTS

13. Proto, age 55, resides in Houston, Texas. Proto was the President and Chief Operating Officer of USA Waste, Inc. ("USA Waste") from the summer of 1996 until USA Waste merged with Waste Management, Inc. ("WMX"), formerly known as WMX Technologies, Inc. After the merger, the new company was known as WMI. Thereafter, and at all relevant times, Proto was the President and Chief Operating Officer of WMI. On or around August 16, 1999, Proto resigned his position as WMI's Chief Operating Officer.

14. DeFrates, age 59, resides in Houston, Texas. DeFrates was the Chief Financial Officer of USA Waste from May 1994 until USA Waste merged with WMX. Thereafter, and at all relevant times, DeFrates was the Chief Financial Officer of WMI. On July 29, 1999, DeFrates resigned his position as WMI's Chief Financial Officer, and he left the Company in August 1999.

CORPORATION INVOLVED

15. WMI is a Delaware corporation with its principal place of business in Houston, Texas. Through its subsidiaries, WMI provides solid and hazardous waste services, energy recovery services, environmental technologies, engineering and consulting services. At all relevant times, WMI's common stock was registered with the Commission pursuant to Section 12(b) of the Exchange Act and traded on the New York Stock Exchange.

A. Background

16. On March 11, 1998, WMX and USA Waste announced that the two companies had entered into a merger agreement. Pursuant to the agreement, WMX, a company with $9 billion in annual revenues became a wholly-owned subsidiary of USA Waste, a company with $3 billion in annual revenues. After the merger, the combined company was known as WMI. The merger largely was a result of a massive accounting scandal at WMX, made public in the fall of 1998, which severely damaged WMX's stock price and resulted in the removal of most of WMX's senior management.

17. In the press release announcing the merger, WMI issued earnings guidance for 1999 of $2.90 to $3.05 per share. WMI's EPS forecast for 1999, however, represented a significant increase in the two companies previous years' combined pro forma earnings.

18. On October 8, 1998, WMI issued a press release stating that it expected its 1999 earnings to be in the range of $3.00 to $3.05 per share, a narrower range than the Company had previously announced. This press release was issued following a 17% drop in the Company's stock price on October 7th, which apparently was precipitated in part by cautious comments from two analysts about the Company's 1999 EPS guidance.

B. The First Quarter of Fiscal Year 1999

19. During the first quarter of 1999, Proto and DeFrates issued EPS estimates for the first quarter in the range of $0.60 to $0.62 per share. Although WMI reported first quarter EPS in line with estimates, the Company was unable to meet its first quarter EPS guidance through normal operations. Instead, WMI's reported first quarter pretax income included at least $95 million of undisclosed, non-recurring income items that contributed $0.09 to WMI's reported EPS. These items related to changes in estimates and reversals of reserves for environmental liabilities of certain domestic and international landfills, changes in accounting method relating to landfills and operating plants of the Company's Wheelabrator ("WTI") subsidiary, and extending the useful lives of WTI incinerators.

20. DeFrates knew, or was reckless in not knowing, by early May 1999, that the Company's reported first quarter pretax income included approximately $95 million, or $0.09 per share, of undisclosed, non-recurring income items.

21. Proto knew, or was reckless in not knowing, by early May 1999, that the Company's reported first quarter pretax income included at least $77 million, or almost $0.08 per share, of undisclosed, non-recurring income items.

C. Proto and DeFrates Make Materially False or Misleading Statements to Wall Street Analysts and the Investing Public in a May 6, 1999 Press Release and Earnings Call

22. On May 6, 1999, WMI issued a press release announcing its first quarter 1999 financial results. In the release, the Company stated that diluted EPS rose 79% (to $0.61 per share from $0.34 per share in the year-ago quarter) and that income from operations increased 78% (to $820.8 million from $462.3 million a year earlier). The Company's release also disclosed a shortfall of $119 million in first quarter revenue as compared to Wall Street estimates. Despite this revenue shortfall, the Company reported EPS of $0.61, within the $0.60 to $0.62 EPS guidance that the Company had earlier provided, and $0.03 per share higher than its fourth quarter 1998 EPS.

23. Proto and DeFrates reviewed and approved the press release before it was issued and both knew, or were reckless in not knowing, that non-recurring income items, without which WMI would have missed its EPS guidance, were not disclosed in the press release.

24. During a May 6, 1999 public conference call with Wall Street analysts to discuss the Company's first quarter financial results, Proto and DeFrates claimed that the Company was able to meet its first quarter 1999 EPS guidance due to stronger than expected operating margins - in part, a result of a "very positive pricing environment" - and expressed confidence in the Company's ability to meet its second quarter 1999 EPS guidance.

25. During the May 6th earnings call, neither Proto nor DeFrates disclosed that the Company's first quarter financial results included non-recurring income items that materially boosted pretax income and EPS, even though these items boosted the Company's reported EPS for the first quarter of 1999 by 17% and contributed to the Company's stronger than expected first quarter operating margins.

26. Proto's and DeFrates' failure to disclose in the May 6th press release and public conference call with Wall Street analysts that the Company's reported first quarter pretax income and EPS figures included a material amount of non-recurring income items presented a materially false or misleading picture of the Company's first quarter operations to Wall Street analysts and the investing public. Their statements created the materially false or misleading impression that the Company was experiencing quarter-to-quarter earnings increases and margin improvement through normal operating results. If Proto and DeFrates had properly disclosed the non-recurring income items, the investing public would have learned that the Company's reported quarterly earnings from normal operations were $0.52 per share, $0.09 per share lower than its first quarter 1999 guidance and lower than its fourth quarter 1998 earnings. Also, had proper disclosure been made, the investing public would have learned that the Company's operations actually produced an Earnings Before Interest and Taxes ("EBIT") margin, an important measure of financial success, of 23.7%, as opposed to the 26.7% EBIT margin that the Company reported in the first quarter of 1999 and the 24.4% EBIT margin that the Company reported for the fourth quarter of 1998.

D. Proto and DeFrates Sell WMI Stock While in Possession of Material, Non-Public Information Regarding the Company's Reported First Quarter 1999 Income and Earnings

27. On May 11 and 12, 1999, Proto, while in possession of material, nonpublic information about the Company's first quarter financial results, sold 300,000 shares of WMI stock for net proceeds of $16,559,875. By selling WMI stock before the Company's disclosure that its previously announced first quarter 1999 pretax income included the non-recurring items, Proto avoided losses of $1,503,669.

28. On June 3, 1999, DeFrates, while in possession of material, nonpublic information about the Company's first quarter financial results, exercised WMI stock options and sold 24,272 shares of WMI stock for net proceeds of $1,334,960. By selling WMI stock before the Company's disclosure that its previously announced first quarter 1999 pretax income included the non-recurring items, DeFrates avoided losses of $121,217.

E. Proto and DeFrates Learn that WMI Will Likely Fall Short of its Second Quarter 1999 Earnings Guidance

29. Although it was still early in the second quarter, in late April 1999, Proto received projections of large second quarter 1999 EPS shortfalls from four of WMI's five Area Vice Presidents ("Area VPs"), the officers responsible for the Company's North American solid waste operations.

30. On May 3, 1999, Proto and DeFrates met with WMI's Area VPs. At that meeting, there was another discussion regarding earnings projections for the second quarter of 1999. Four of the five Area VPs again projected large earnings shortfalls for their Areas. Proto also initiated a discussion about opening a trading window, in which WMI insiders would be permitted to sell WMI stock.

31. After the May 3rd meeting, Proto and DeFrates met with the Company's General Counsel to discuss the possibility of opening a trading window. The General Counsel asked Proto and DeFrates if the Company expected to meet its financial guidance for the second quarter, and they each indicated to him that the Company was on track to meet its second quarter earnings guidance. As a result, the General Counsel agreed with Proto and DeFrates that a trading window could be opened.

32. Adverse financial information concerning second quarter results continued to accumulate during May and early June. The Company's corporate accounting department created spreadsheets on May 19 and May 26, 1999, reflecting actual April financial results from the five operating areas. These spreadsheets indicated that four of the Areas had fallen short of their April revenue and EBIT budget targets. The total EBIT shortfall for the Company's solid waste operations for April was $90.5 million, which was equal to $0.08 per share. Proto and DeFrates received these spreadsheets.v

33. Later in May, Bruce E. Snyder, Jr. ("Snyder"), WMI's Vice President and Chief Accounting Officer, directed WMI's accounting department, to collect new projections of second quarter operating results from each of the five operating areas. By May 28, 1999, the accounting department summarized these projected results, which included actual results for April and projected results for May and June, on a spreadsheet and compared them with the Company's targets. WMI's operating areas projected a total revenue shortfall of approximately $220 million and a total EPS shortfall of $0.12 per share for the second quarter. Proto and DeFrates received the May 28th spreadsheet created by the accounting department.

34. Proto and DeFrates received a memorandum from WMI's Treasurer, dated June 2, 1999, concerning the Company's second quarter cash flow and debt balances. The spreadsheet analysis attached to this memorandum showed that WMI's operating receipts (i.e., cash collections) were declining from the first quarter, despite the fact that the normal trend in the waste industry is for the second and third quarters to be the most profitable quarters of a fiscal year due to the seasonality of the waste business. This cash flow trend was an indication to Proto and DeFrates that the Company was experiencing significant difficulties in converting its billing systems and that price increases the Company had instituted in the first quarter of 1999 were not making up projected shortfalls.

35. Proto and DeFrates also received a memorandum from the Southern Area VP and the Southern Area Controller, dated June 2, 1999, regarding systems problems and financial reporting. The memorandum stated, "We as a corporation do not have the ability to produce accurate and timely financial information through our accounting systems." The memorandum went on to state, "[u]nder the current structure, over 5,000 man hours and the creation of over 10,000 reports would be required (within the Southern Area Operations) to provide each operation with the financial reports they need to assist in making business decisions and to accommodate the company's reporting requirements."

36. On the morning of June 9, 1999, while attending the Waste Expo industry trade conference, Proto and DeFrates participated in a meeting, previously scheduled by Proto, with the Area VPs and Area controllers. During the meeting, they discussed two main topics: systems problems and updated earnings projections. Proto initiated a discussion of systems problems that the Company was experiencing. The June 2nd Southern Area memorandum was discussed at this meeting, and the conversation revolved around issues such as the Company's inability to get bills out on time, difficulties in paying vendors promptly, and how the systems problems were adversely impacting revenues. The Area VPs and Area controllers generally agreed that systems problems were causing company-wide problems and were adversely impacting revenues.

37. With regard to second quarter earnings, the Area VPs reiterated the EBIT and revenue shortfalls that they had projected in late April and early May 1999, and the projections the Area accounting departments had sent to the corporate accounting group in mid to late May 1999. As a result of these discussions, Proto and DeFrates learned that WMI's poor second quarter financial condition had not improved, and was actually deteriorating.

F. Proto and DeFrates Make Materially False or Misleading Statements in Conference Calls and Meetings with Wall Street Analysts, Investment Bankers, and the Investing Public

38. From June 7th to 10th, Proto and DeFrates, while at the Waste Expo industry conference, participated in discussions with Wall Street analysts and members of the public. During these discussions, Proto and DeFrates confirmed the Company's second quarter EPS guidance of $0.78 to $0.82 per share and spoke optimistically about the Company's financial situation. Proto and DeFrates told analysts, among other things, that: (1) WMI management was comfortable with its second quarter EPS guidance of $0.78 to $0.82; (2) landfill volumes for the second quarter of 1999 were "tracking on plan"; (3) WMI was well on track to improve its pricing growth to 3% in the second quarter from 2.6% in the first, consistent with analysts' expectations; and (4) WMI was on track to generate more than $500 million in free cash flow from operations in the second quarter of 1999.

39. When Proto and DeFrates spoke to Wall Street analysts and other members of the investing public at Waste Expo, they knew, or were reckless in not knowing, that the Company would fall well short of its second quarter EPS guidance. Proto and DeFrates had no reasonable basis for publicly confirming the Company's previous second quarter guidance and, therefore, their statements were false or misleading. Specifically, Proto and DeFrates knew that: (1) the Company, based on estimates from the five Area VPs (including actual results for the first month of the quarter), was projecting a revenue shortfall of approximately $220 million and an EPS shortfall of $0.12 for the second quarter of 1999; (2) volumes at the Company's landfills in April and May 1999, the first two months of the second quarter, were below expectations; (3) price increases implemented by the Company at the end of the first quarter of 1999 were being rolled back; and (4) difficulties in the conversion of the Company's billing systems were adversely impacting revenues and cash flow.

40. Several Wall Street analysts repeated Proto's and DeFrates' statements in analyst reports they issued in the days after Waste Expo. Also, these analysts maintained their "buy" ratings for WMI and forecasted that the Company would produce second quarter 1999 EPS of $0.79.

41. Following the Waste Expo conference, Proto and DeFrates both participated in conference calls and meetings with investment bankers and Wall Street analysts on June 15th, 18th, and 23rd. Proto, alone, attended a meeting with analysts on June 25th, and DeFrates, alone, attended a meeting with analysts on July 2nd. In these meetings, Proto and DeFrates each confirmed the Company's second quarter EPS guidance even though they knew, or were reckless in not knowing, that the Company would fall well short of that guidance. Proto and DeFrates each made these statements about WMI's projections with no reasonable basis and, therefore, their statements were false or misleading.

42. In addition, WMI's accounting department created at least five spreadsheets between June 17th and June 25th, of a type that were regularly distributed to Proto and DeFrates, which projected that the Company would fall approximately $0.14 per share short of its second quarter EPS guidance. Regardless of when they actually received the spreadsheets, neither Proto nor DeFrates asked any accounting department employees for updated second quarter projections before speaking with investment bankers and Wall Street analysts between June 15th and July 2nd, despite receiving earlier projections of significant second quarter earnings shortfalls. Instead, Proto and DeFrates expressed confidence, in their respective late June discussions with investment bankers and Wall Street analysts, that the Company would meet its second quarter EPS projections.

G. WMI Announces that It Has Lowered its Earnings Expectations for the Second Quarter

43. On July 6, 1999, after the market closed, WMI issued a press release announcing that it was lowering its earnings expectations for the second quarter and for the full year. The Company stated that it expected second quarter EPS to be in the range of $0.67 to $0.70, compared to its previous EPS guidance of $0.78 to $0.82. WMI stated that its failure to meet its EPS forecast was due to a $250 million shortfall in revenue. In reaction to this news, WMI's stock price plunged 37%, from $53.56 per share to $33.94 per share.

44. On July 29, 1999, WMI again revised its earnings guidance for the second quarter. The Company indicated that it now expected earnings to be in the range of $0.58 to $0.60 per share. The Company's stock price dropped another 17% in reaction to this news. On July 29th, DeFrates resigned his position as WMI's Chief Financial Officer.

45. On August 3, 1999, WMI announced its second quarter results. The Company's second quarter EPS was revised for the third time to $0.58, which was approximately $0.20 per share lower than the guidance that Proto and DeFrates had previously confirmed throughout the second quarter. In this press release, WMI also announced that the Company and its independent auditors were reviewing its reported first quarter earnings, and that the "review may demonstrate that approximately $95 million of non-recurring pretax income items were included in operating income for the quarter ended March 31, 1999."

46. On August 16, 1999, the Company disclosed, in its Form 10-Q for the second quarter, the nature of the $95 million of non-recurring income items and explained how they affected first quarter pretax income. On August 16th, WMI's stock closed at $23.13 per share, approximately 9.1% lower than its closing price on August 2, 1999, the day before WMI first announced that it was reviewing its previously reported first quarter 1999 financial results. Proto resigned his position as WMI's President and Chief Operating Officer on August 16, 1999.

FIRST CLAIM FOR RELIEF

Violations of Section 17(a) of the Securities Act
(Insider Trading)

47. The Commission realleges and incorporates herein by reference the allegations contained in paragraphs 1 through 46 above.

48. Proto and DeFrates sold WMI stock while in possession of material, nonpublic information that WMI's reported and announced pretax income for the first quarter of fiscal year 1999 included tens of millions of dollars of undisclosed, non-recurring income items. Proto's and DeFrates' sales of WMI stock were in breach of a fiduciary duty or other relationship of trust and confidence that they owed to WMI and its shareholders.

49. As a result of the conduct described above, Proto and DeFrates, in the offer or sale of securities, by the use of means or instruments of transportation or communication in interstate commerce, or by the use of the mails, directly or indirectly: (a) employed devices, schemes or artifices to defraud; (b) obtained money or property by means of untrue statements of material fact or omissions to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or (c) engaged in transactions, practices, or courses of business which operated or would operate as a fraud or deceit upon any purchasers of securities in violation of Section 17(a) of the Securities Act [15 U.S.C. 77q(a)].

50. By reason of the foregoing, Proto and DeFrates violated Section 17(a) of the Securities Act [15 U.S.C. 77q(a)].

SECOND CLAIM FOR RELIEF

Violations of Section 10(b) of the
Exchange Act and Exchange Act Rule 10b-5
(Insider Trading)

51. The Commission realleges and incorporates herein by reference the allegations contained in paragraphs 1 through 46 above.

52. Proto and DeFrates sold WMI stock while in possession of material, nonpublic information that WMI's reported and announced pretax income for the first quarter of fiscal year 1999 included tens of millions of dollars of undisclosed, non-recurring income items. Proto's and DeFrates' sales of WMI stock were in breach of a fiduciary duty or other relationship of trust and confidence that they owed to WMI and its shareholders.

53. As a result of the conduct described above, Proto and DeFrates, directly or indirectly, by use of the means or instrumentalities of interstate commerce, the mails, or of any facility of any national securities exchange, in connection with the purchase or sale of securities: (a) employed devices, schemes or artifices to defraud; (b) made untrue statements of material fact or omitted to state material facts necessary to make the statements made, in light of the circumstances under which they were made, not misleading; (c) engaged in transactions, acts, practices, and courses of business which operated as a fraud or deceit upon various persons, in violation of Section 10(b) of the Exchange Act [15 U.S.C. 78j(b)] and Exchange Act Rule 10b-5 [17 C.F.R. 240.10b-5].

54. By reason of the foregoing, Proto and DeFrates violated Section 10(b) of the Exchange Act [15 U.S.C. 78j(b)] and Exchange Act Rule 10b-5 [17 C.F.R. 240.10b-5].

THIRD CLAIM FOR RELIEF

Violations of Section 10(b) of the
Exchange Act and Exchange Act Rule 10b-5
(Materially False or Misleading Statements)

55. The Commission realleges and incorporates herein by reference the allegations contained in paragraphs 1 through 46 above.

56. Proto and DeFrates knowingly or recklessly made materially false or misleading statements in a May 6, 1999 press release announcing WMI's first quarter 1999 earnings and in discussions with investment bankers, Wall Street analysts, and the investing public in May and June 1999 regarding the Company's first quarter earnings. Proto and DeFrates also knowingly or recklessly made materially false or misleading public statements in June 1999 concerning WMI's ability to meet its previously announced earnings forecasts for the second quarter of 1999.

57. As a result of the conduct described above, Proto and DeFrates, directly or indirectly, by use of the means or instrumentalities of interstate commerce, the mails, or of any facility of any national securities exchange, in connection with the purchase or sale of securities: (a) employed devices, schemes or artifices to defraud; (b) made untrue statements of material fact or omitted to state material facts necessary to make the statements made, in light of the circumstances under which they were made, not misleading; (c) engaged in transactions, acts, practices, and courses of business which operated as a fraud or deceit upon various persons, in violation of Section 10(b) of the Exchange Act [15 U.S.C. 78j(b)] and Exchange Act Rule 10b-5 [17 C.F.R. 240.10b-5].

58. By reason of the foregoing, Proto and DeFrates violated Section 10(b) of the Exchange Act [15 U.S.C. 78j(b)] and Exchange Act Rule 10b-5 [17 C.F.R. 240.10b-5].

PRAYER FOR RELIEF

WHEREFORE, the Commission respectfully requests that this Court:

I.

Issue a Final Judgment of Permanent Injunction and Other Relief restraining and enjoining Proto and DeFrates each from, directly or indirectly, violating Section 17(a) of the Securities Act [15 U.S.C. 77q(a)]; Section 10(b) of the Exchange Act [15 U.S.C. 78j(b)] and Exchange Act Rule 10b-5 [17 C.F.R. 240.10b-5].

II.

Order Proto and DeFrates each to disgorge all losses avoided, plus prejudgment interest thereon, from their illegal conduct as alleged herein.

III.

A. Order Proto and DeFrates each to pay civil penalties pursuant to Section 20(d) of the Securities Act [15 U.S.C. 77t(d)] and Section 21(d)(3) of the Exchange Act [15 U.S.C. 78u(d)(3)].

B. Order Proto and DeFrates each to pay civil penalties pursuant to Section 21A of the Exchange Act [15 U.S.C. 78u-1], for their illegal insider trading.

IV.

Order, pursuant to Section 20(e) of the Securities Act [15 U.S.C. 77t(e)] and Section 21(d)(2) of the Exchange Act [15 U.S.C. 78u(d)(2)], that Proto and DeFrates each be barred from acting as an officer or director of any issuer 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)], as a result of his violations of Section 17(a) of the Securities Act [15 U.S.C. 77q(a)], Section 10(b) of the Exchange Act [15 U.S.C. 78j(b)], and Exchange Act Rule 10b-5 [17 C.F.R. 240.10b-5].

V.

Grant such other and additional relief as this court may deem just and proper.

Dated: October ____, 2003

Respectfully submitted,


_____________________________________
Thomas C. Newkirk
Associate Director, Division of Enforcement


_____________________________________
Carleasa A. Coates
Assistant Chief Litigation Counsel
Attorney-in-Charge, Plaintiff
U.S. Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0911
Phone: (202) 942-4514 (Coates)
Fax: (202) 942-9569 (Coates)

Of Counsel:
Christopher R. Conte
Noel A. Gittens
Andrew M. Lawrence


http://www.sec.gov/litigation/complaints/comp18422.htm


Modified: 10/22/2003