In the United States District Court
Plaintiff, United States Securities and Exchange Commission ("Commission"), alleges as follows:
1. From approximately 1989 through March 2001, Defendants George E. Kline, Erich A. Kline and Christian T. Kline ("defendants") collectively engaged in scheme to trade equity securities of various corporations on which George Kline served as a member of the board of directors while in possession of material, non-public information regarding these corporations. Defendants also collectively engaged in a scheme to conceal this trading activity by submitting false documents to the Securities and Exchange Commission and failing to file other reports required by federal statutes and regulations. Defendants also engaged in scheme whereby George Kline sold equity securities of an issuer while serving as a director of the issuer and not owning the security sold that is engaging in a short sale of the issuer's stock in violation of federal statute and regulations.
2. On March 15, 2001 the United States Attorney's Office for the District of Minnesota obtained a multiple count criminal indictment against George E. Kline, Erich A. Kline and Christian T. Kline as well as others. On July 3, 2001, the United States District Court for the Minnesota accepted a plea of guilty from each of the defendants.
3. On July 3, 2001, the United States District Court for the District of Minnesota accepted George Kline's plea of guilty to multiple counts of the indictment including one count of conspiracy to commit securities fraud and mail fraud, two counts of securities fraud, two counts of mail fraud, and one count of engaging in a prohibited short sale of securities, in violation of 18 U.S.C. § 371, 15 U.S.C. §§ 78j(b) and 78ff(a), 18 U.S.C. § 1341, and 15 U.S.C. §§ 78p(c) and 78ff(a), respectively, as well as one count of engaging in a monetary transaction in property derived from specified unlawful activity, in violation of 18 U.S.C. § 1957.
4. On the same date, the United States District Court for the District of Minnesota accepted Erich Kline's plea of guilty to three counts of the indictment consisting of one count of conspiracy to commit securities fraud and mail fraud and two counts of securities fraud, in violation of 18 U.S.C. § 371, and 15 U.S.C. §§ 78j(b) and 78ff(a), respectively.
5. Finally, on that same date, the United States District Court for the District of Minnesota accepted Chris Kline's plea of guilty to one count of willfully aiding and abetting George E. Kline's violations of Rule 16a-3 of the Securities Exchange Act of 1934 ("Exchange Act"), 17 C.F.R. Section 240.16a-3, in violation of Section 32(a) of the Exchange Act and 15 U.S.C. § 78ff(a) and 18 U.S.C. § 2.
6. As part of the plea agreements which each of the defendants reached with the United States Attorney's Office for the District of Minnesota, each of the defendants agreed to consent to the entry of a permanent injunction against them in a civil action to be brought by the Commission for violations of Sections 10(b), 16(a) and 16(c) of the Exchange Act and Rules 10b-5 and 16a-3 promulgated thereunder. In addition, George Kline consented to the entry of an Order barring him from acting as an officer or director of any issuer required to file reports pursuant to Sections 12(b), 12(g) or 15(d) of the Exchange Act [15 U.S.C. §§ 78l(b), 78l(g), and 78o(d)].
7. As part of the plea agreements reached with the United States Attorney's Office for the District of Minnesota, each of the defendants agreed to the following monetary penalties: George Kline shall pay fines and restitution totaling approximately $5 million; Erich Kline shall pay fines and restitution totaling approximately $ 450,000; and Chris Kline shall pay fines and restitution totaling approximately $ 475,000.
8. In light of the monetary penalties required under the plea agreements, as described above, the Commission is not seeking disgorgement or penalties in this civil action.
9. Defendants, directly and indirectly, have engaged and, unless enjoined, will continue to engage in acts, practices and courses of business which constitute and will constitute violations of Sections 10(b), 16(a) and 16(c) of the Exchange Act [15 U.S.C. §§ 78j(b), 78(p)(a() and 78(p)(c)] and Rules 10b-5 and 16a-3 [17 C.F.R. §§ 240.10b-5 and 240.16a-3] promulgated thereunder.
10. The Commission brings this action to enjoin such acts, practices and courses of business pursuant to Sections 21(d), 21(e) and 21A of the Exchange Act [15 U.S.C. §§ 78u(d), 78u(e) and 78u-1(a)].
11. The Court has jurisdiction over this action pursuant to Sections 21 and 27 of the Exchange Act [15 U.S.C. §§ 78u and 78aa].
12. The acts, practices and courses of business constituting the violations herein occurred within the jurisdiction of the United States District Court for the District of Minnesota and elsewhere.
13. The Defendants will, directly and indirectly, unless enjoined, have the opportunity to engage in the acts, practices and courses of business set forth in this Complaint and in acts, practices and courses of business of similar purport and object.
14. The Defendants, directly and indirectly, have made use of the mails and of the means and instrumentalities of interstate commerce in connection with the acts, practices and courses of business alleged herein in the District of Minnesota and elsewhere.
15. George Kline, age 66, resides in Bloomington Minnesota and Scottsdale, Arizona. George Kline conducted the bulk of his various business activities from an office located at 4750 IDS Center, Minneapolis, Minnesota. He was the owner, Chief Executive Officer, and sole shareholder of Protective Mouthguard(s), Inc. ("PMI"), an investment company through which he engaged in securities transactions since 1990. He also was President and Managing Partner of Emerging Growth Ventures Limited, LLC, and a General Partner of Emerging Growth Ventures ("EGV") Limited Partnership I, through which he engaged in securities transactions since 1995. He also was the owner and served as President of Venture Management, a financial management services company, since 1966. He also was a General Partner of Brightstone Capital, Ltd., a venture capital firm, since 1985.
In addition, George Kline served as a member of the board of directors of a number of publicly-held companies in the Minneapolis area. As a board member, George Kline had access to material, confidential, non-public information regarding these companies.
16. Erich A. Kline, age 33, a resident of Dayton, Minnesota, was a licensed stockbroker with Dougherty & Co. and Summit Investment Corporation, from approximately September 1996 until January 31, 2000. His clients included his father, George Kline and other members of his family. From February 2000 until March 2001, Erich Kline was employed as a stockbroker by R.J. Steichen & Co., now known as Miller Johnson Steichen Kinnard Inc., in the brokerage firm's Wayzata, Minnesota office, working under the supervision of Bruce Le Duc.
17. Christian T. Kline (Chris Kline), age 38, a resident of Eden Prairie, Minnesota, was employed by Venture Management, from approximately April 1996 until this year. From September 1, 1996 until recently, he also has identified himself as the President of PMI. During his employment, Chris Kline regularly assisted his father, George Kline, with bookkeeping and other administrative functions regarding George Kline's investment activities involving PMI and other entities.
18. The Defendants entered criminal pleas in July 2001 in which they admitted the conduct set forth in paragraphs 19 through 39 below.
George Kline's Admitted Conduct
19. In his plea, Kline admitted that he served as a member of the board of directors of many publicly-held companies in the Minneapolis area. He admitted that he knew trading the stock of those companies, by him or others, based on inside information was unlawful. He also conceded that he was aware that he was required by law to file forms, Form 4 and Form 5, with the SEC and that directors of publicly-traded companies were prohibited by law from engaging in short sales of their companies' stock.
20. Among other things, George Kline admitted that, between 1995 and March 2001 he conspired with Erich Kline and Robert Hibbs to commit securities and mail fraud. George Kline admitted that on numerous occasions, he provided Erich Kline, Robert Hibbs, and others with "code words" or directives that reflected material, non-public information obtained by him from companies on which served as a member of the board of directors. George Kline admitted that he provided the equivalent of his companies' inside information to Erich Kline, Robert Hibbs, and others with the understanding that they then would purchase and sell his companies securities based on that inside information to obtain illegal stock profits. George Kline typically provided this type of inside information to Erich Kline in the course of instructing him to conduct securities transactions through Protective Mouthguard(s), Inc. ("PMI"), an investment company which he owned and controlled.
21. George Kline admitted that for many years, he knowingly utilized PMI, with the assistance of Erich Kline and others, to conduct unlawful securities transactions involving CyberOptics, Rimage, and various other corporations to which he owed fiduciary and other duties. George Kline conceded that he engaged in these securities transactions in knowing breach of those duties and in violation of the federal securities laws and regulations involving insider reporting requirements and the prohibition on short sales of stock by insiders of publicly-traded companies. He admitted that his activities provided him with substantial illegal stock profits.
22. George Kline became acquainted with Robert Hibbs in the mid-1990's and over a period of time they met to discuss investment opportunities. He was aware that Hibbs worked for Hidden Creek Industries, which controlled Tower Automotive, Inc. ("Tower") and Dura Automotive Systems, Inc. ("Dura"). George Kline also knew that Hibbs' job mainly involved corporate acquisitions. In his plea agreement, George Kline admitted that from approximately January 1997 through December 1999, he periodically exchanged with Robert Hibbs the equivalent of material, non-public information obtained by him or Hibbs. With the assistance of Erich Kline and others, George Kline purchased and sold Tower and Dura securities based on inside information obtained by him from Hibbs in order to obtain illegal stock profits, and in some cases, he knowingly provided the equivalent of inside information to his banker (and PMI's banker) for his personal use and profit.
23. In particular, George Kline admitted that, in mid-September 1998, Hibbs provided him material, non-public information regarding Tower in the form of a strong recommendation to promptly purchase Tower stock, which he understood to represent inside information. George Kline thereafter contacted Erich Kline, who made multiple purchases of Tower stock, including on September 23, 1998, a purchase of 10,000 shares of Tower stock made by George in his wife's brokerage account. George Kline conceded that he knew that his purchases of Tower stock in September 1998 were based on inside information and that they generated over $80,000 in illegal stock profits to him.
24. George Kline also admitted that in late December 1998 - early January 1999, Hibbs provided inside information regarding Excel Industries, Inc. ("Excel"), a company which Hibbs previously had informed him was a possible acquisition candidate by one of Hibbs' companies. In late December 1998 - early January 1999, Hibbs again raised Excel with George and made a strong recommendation to promptly purchase Excel stock. George admitted that he understood that recommendation to represent inside information which could produce stock profits. Once again, George Kline contacted his son Erich and instructed him to purchase Excel stock in various brokerage accounts that he controlled, including a January 12, 1999 a purchase of 2,500 shares in PMI's brokerage account. George admitted that he knew that his purchases of Excel stock in January 1999 were based on inside information and that they generated over $180,000 in illegal stock profits to him.
25. George Kline further admitted in his plea that from 1995 through 2001 he knowingly and intentionally devised and executed a scheme to conceal his trading activity through his secret and unreported purchase and sale of various securities through PMI. George Kline admitted that he purposefully did not disclose to the SEC or officials of the companies on whose boards he served of his securities transactions through PMI. He further admitted that, on many occasions, he was advised by company attorneys and officers of the statutory requirement that he report to the SEC any transactions of company securities in which he had beneficial ownership. In addition, he conceded that as the owner of PMI, he knew that the securities laws required that he report PMI's securities transactions involving companies for which he was a director.
26. George Kline also admitted that on or about February 26, 1998, he knowingly and willfully utilized the PMI brokerage account to engage in a short sale of 5,000 shares of Rimage stock, while serving as a member of Rimage's board of directors. Kline admitted that he knew this transaction was prohibited by law.
Erich Kline's Admitted Conduct
27. In his plea agreement, which he gave the same day as his father and brother, Erich Kline admitted that he willfully and knowingly conspired with George Kline to commit securities and mail fraud. He admitted that between October 1995 and March 2001, he was employed as a licensed stockbroker in the Twin Cities area. During that time, he served as a broker for various persons, including George Kline, Robert Hibbs, and Chris Kline as well as entities that he knew were controlled by George Kline, including PMI.
28. In his plea, Erich admitted that on numerous occasions, following communications with George Kline or Chris Kline (on behalf of George Kline), he conducted securities transactions through PMI's brokerage accounts . These transactions involved the stock of companies on which he knew George Kline was a member of the Board of Directors. Erich further admitted that he knew that his father had access to material, non-public information regarding those companies at the time he conducted those transactions.
29. At the time of the transactions, Erich knew that his father would financially benefit from the securities trades conducted in the name of PMI. He admitted that his trading activity in the name of PMI in the stocks of companies such as CyberOptics and Rimage assisted his father in concealing his involvement in and personal benefit from those transactions.
30. In particular, Erich admitted that, in early February 1999, his brother Chris contacted him and instructed him to engage in a short sale of 2000 shares of CyberOptics stock, which Erich immediately executed. At the time he received the call from Chris Kline, Erich knew and understood that Chris was acting at the request of their father regarding this short sale transaction. Erich conceded that he knew that it was unlawful for George Kline, a director of CyberOptics, to be involved in a short sale of the company's stock through PMI. Erich also admitted that he knew that his father possessed material, non-public information regarding CyberOptics at the time of the short sale and that George Kline was involved in the short sale based on that inside information.
31. Following the execution of PMI's short sale of CyberOptics stock on February 3, 1999, Erich Kline contacted Robert Hibbs and other select clients and advised them to engage in short sales of CyberOptics stock, which they all did. Erich admitted that these short sale transactions by his clients also constituted insider trading for which he was responsible.
32. On other occasions, after receiving instructions from his father or through Chris, Erich conducted securities transactions in the name of PMI and others, including sometimes himself. These transactions included the stock of various automotive companies including Tower, Dura, and Excel. During this time period, Erich Kline knew that Robert Hibbs had access to confidential, non-public information concerning those companies. Erich also knew that Hibbs was an investor in his father's Brightstone Capital venture capital partnership and that they had offices near each other in the same building.
33. Based on his communications with George Kline over time, Erich became aware that his father had access to material, non-public information relating to the automotive industry, and that this information was the reason for his father's trading in automotive companies' securities. Although George Kline never identified Robert Hibbs by name as the source of his inside information, Erich came to believe that Hibbs was George Kline's source.
34. In particular, Erich admitted that in early January 1999, George Kline instructed him to purchase Excel Industries, Inc. stock for Venture Management, Inc.'s Pension/Profit Sharing Plan, and then several times for his mother and PMI. Erich admitted that it was his understanding in early January 1999 that George Kline had obtained inside information about a potential acquisition of Excel and that George Kline wanted to illegally profit from the use of that information. Erich executed the trades in Excel stock sought by his father, including the purchase of 10,000 shares of Excel stock in the name of his mother on or about January 12, 1999.
35. Erich Kline also admitted that he executed numerous trades in Excel stock for himself, his spouse, his mother, his brother, his sister-in-law, and various select clients all based on the inside information that he had received from his father. Erich has admitted that he was responsible for all of these illegal securities transactions.
Chris Kline's Admitted Conduct
36. In his plea agreement, Chris Kline admitted that he willfully aided and abetted George Kline's violations of Section 16(a) of the Securities Exchange Act of 1934, and Rule 16a-3 thereunder. He admitted that he helped his father conceal his trading by conducting trades through PMI's brokerage accounts. However, Chris Kline stated that he had no knowledge of Rule 16a-3's requirements at the time he assisted his father.
37. Chris Kline stated in his plea that in approximately April 1996, he went to work for his father through Venture Management, a financial management services company. Chris also assisted George Kline with bookkeeping and other administrative functions regarding his father's investment activities involving PMI and other entities. In September 1996, Chris and George Kline executed a private agreement that named Chris as President and Secretary of PMI and provided Chris with authority to trade investments and administer all corporate affairs of the company.
38. Chris Kline admitted that, between April 1996 and April 1999, at the direction of George Kline, he engaged in numerous securities transactions involving Applied Biometrics, Inc., CyberOptics Corporation, NM Holdings, Inc., and Rimage Corporation stock through the PMI brokerage accounts. Chris admitted that he knew that his father was a member of the Board of Directors of those companies. However, Chris maintained that he had no knowledge that George Kline had not publicly reported any of the transactions as required by law.
39. Chris Kline also admitted that, during 1997, 1998, and 1999, he engaged in various securities transactions in his own brokerage accounts at the same time that his father was directing him to engage in securities transactions on behalf of PMI. Chris knew that some of these transactions involved the stock of companies on which George Kline served on the Board of Directors and had access to material, non-public information. Chris conceded that he received approximately $200,000 in stock profits from these transactions and his wife received approximately $38,000 in stock profits from one transaction during this same time period. He also admitted that, over time, he paid no attention to the growing evidence that his father was committing securities fraud and that as such, that he engaged in wrongful conduct.
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