SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 16164 / May 27, 1999
SECURITIES AND EXCHANGE COMMISSION v. JOSEPH SUTTON, ISAAC
SUTTON, MICHAEL GOLDBERG, STEVEN WEISSMAN, and MITCHELL GOLDBERG, 99 Civ. 3889 (S.D.N.Y.) (RCC)
SEC Charges Former Toy Company Executives With Inflating Financial Results And Insider Trading
The Securities and Exchange Commission ("Commission") announced today the filing of a Complaint in the United States District Court for the Southern District of New York charging three former officers of Happiness Express, Inc. ("Happiness Express") with fraudulently inflating the companys sales and net income. Happiness Express designed, developed, and manufactured toys and room decorations for children, such as replicas of Mighty Morphin Power Ranger gloves. The Commission alleges that the former officers falsified the sales and net income figures included in documents used to conduct an initial public offering of Happiness Express common stock in July 1994 and in periodic financial reports filed with the Commission during the period from March 1995 through February 1996. The Commission also alleges that one of the former officers engaged in illegal insider trading in August 1995 and tipped two friends about Happiness Expresss poor financial condition. Happiness Express ceased operations and declared bankruptcy in September 1996. As a group, the defendants received more than $1 million in profits from their fraudulent schemes.
Named in the Complaint are:
Joseph Sutton, age 45, who is a resident of Great Neck, New York and was the Chairman of Happiness Expresss Board of Directors as well as its President and Chief Executive Officer;
Isaac Sutton, age 48, who is a resident of Port Washington, New York and was Vice-Chairman of Happiness Expresss Board of Directors as well as its Executive Vice President and Chief Operating Officer;
Michael Goldberg, age 33, who is a resident of Boca Raton, Florida and was Happiness Expresss Chief Financial Officer;
Steven Weissman, age 32, who is a resident of Philadelphia, Pennsylvania and was a close friend of Michael Goldberg; and
Mitchell Goldberg, age 40, who is a resident of Woodbury, New York and was Michael Goldbergs landlord.
According to the Complaint, Joseph Sutton, Isaac Sutton, and Michael Goldberg schemed to overstate Happiness Expresss sales and earnings in financial statements for the quarter ended June 30, 1994 in order to inflate fraudulently certain payments made to Joseph Sutton and Isaac Sutton by approximately $675,000. From March 1995 to August 1995, Joseph Sutton, Isaac Sutton, and Michael Goldberg further schemed to overstate Happiness Expresss sales and net income for the year ended March 31, 1995 and the quarter ended June 30, 1995 in order to deceive the investing public into believing that Happiness Express was then meeting its financial projections. For example, instead of earning profits of approximately $7.5 million for the year ended March 31, 1995, as Happiness Express claimed in an annual report, Happiness Express had actually lost nearly $1 million. From September 1995 through April 1996, Joseph Sutton, Isaac Sutton, and Michael Goldberg further schemed to overstate Happiness Expresss sales and net income for the quarters ended September 30, 1995 and December 31, 1995 in order to cover up their prior fraudulent activities.
In addition to these financial fraud schemes, the Complaint also alleges that Michael Goldberg sold Happiness Express common stock in August 1995 while knowing the truth about Happiness Expresss poor financial condition, thereby realizing approximately $310,000 in illicit profits. The Complaint also alleges that Michael Goldberg provided Steven Weissman and Mitchell Goldberg with material nonpublic information concerning Happiness Expresss poor financial condition. Steven Weissman then shorted Happiness Express common stock and realized illicit profits of approximately $79,000. Mitchell Goldberg sold the Happiness Express common stock that he already owned and avoided losses of approximately $115,000.
The Commission seeks permanent injunctions against each of the defendants, prohibiting further violations of the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. The Complaint alleges that defendants Joseph Sutton, Isaac Sutton, and Michael Goldberg are liable, as controlling persons of Happiness Express, for Happiness Expresss false and fraudulent reporting. The Complaint seeks orders requiring Joseph Sutton and Isaac Sutton disgorge the illicit gains they received from the fraudulent scheme concerning Happiness Expresss initial public offering. The Complaint also demands that Michael Goldberg, Steven Weissman, and Mitchell Goldberg disgorge their illicit insider trading profits and pay prejudgment interest on those illicit profits. The Complaint further demands that each of the defendants pay civil monetary penalties for their fraudulent conduct and insider trading activities. Finally, the Complaint demands that the Court issue an order barring Joseph Sutton, Isaac Sutton, and Michael Goldberg from serving as an officer or director of a public company.
The Commission also announced that, simultaneous with the filing of the complaint in this action, Michael Goldberg has consented, without admitting or denying the Commissions allegations, to a Final Judgment against him that includes: (i) a permanent injunction against further violations of Section 17(a) of the Securities Act and Sections 10(b), 13(b)(5) of the Exchange Act and Rules l0b-5, 13b2-1 and 13b2-2; (ii) a permanent injunction against further conduct or omissions that would cause Michael Goldberg to be liable under Section 20(a) of the Exchange Act for violations by an issuer of Section 13(b)(2) of the Exchange Act; (iii) an order barring Michael Goldberg from serving as an officer or director of a public company for a period of ten years; (iv) disgorgement of $310,350, plus prejudgment interest of $67,882; and (v) a civil penalty of $150,000.
In addition, the Commission has authorized the institution of an administrative proceeding against Michael Goldberg, pursuant to Rule 102(e) of the Commissions Rules of Practice, and, in settlement of that proceeding, Michael Goldberg consented to an Order permanently denying him the privilege of practicing as an accountant before the Commission.
The Commission acknowledges the assistance provided by the National Association of Securities Dealers Regulation, Inc. in this matter.http://www.sec.gov/litigation/litreleases/lr16164.htm