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U.S. Securities and Exchange Commission

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.

SECURITIES EXCHANGE ACT OF 1934
Rel. No. 41815 / September 1, 1999
Admin. Proc. File No. 3-9593


In the Matter of the Application of
SC&T INTERNATIONAL, INC.

c/o Gregory E. Good, Esq.
Gregory E. Good & Associates, P.C.
1100 Bank of America Plaza
33 North Stone Avenue
Tucson, Arizona 85701-1489


For Review of Action Taken by the
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.


OPINION OF THE COMMISSION

REGISTERED SECURITIES ASSOCIATION -- DELISTING FROM THE NASDAQ SMALLCAP MARKET

Failure to Comply with Filing Requirements in a Timely Manner

Where registered securities association delisted the securities of a company due its failure timely to comply with filing requirements and to comply with the terms of its exception from SmallCap Market listing standards, held, review proceeding dismissed.

APPEARANCES:

Gregory E. Good, of Gregory E. Good & Associates, P.C., for SC&T International, Inc.

Robert E. Aber, Sara Nelson Bloom, and Arnold P. Golub, for the Nasdaq Stock Market, Inc.

Appeal filed: April 28, 1998

Last brief filed: August 18, 1998

I.

SC&T International, Inc. ("SC&T" or the "Company"), an issuer formerly listed on the Nasdaq SmallCap Market ("SmallCap Market") appeals from a decision of the National Association of Securities Dealers, Inc. ("NASD"). The NASD revoked an exception granted to SC&T from SmallCap Market listing standards. It delisted SC&T after the Company failed to comply with filingrequirements in a timely manner and failed to provide the NASD notice of these failures in accordance with the terms of the exception. We base our findings on an independent review of the record.

II.

SC&T states in its opening brief that it "designs computer peripheral products related to the multimedia and gaming segments of the computer industry, and enters into contracts with manufacturers to build the products." The Company's shares began trading on the SmallCap Market on December 14, 1995.

This delisting proceeding originally arose out of Nasdaq staff concerns with a June 1996 Regulation S offering by SC&T of preferred stock convertible into common stock. 1 In a letter dated June 23, 1997 ("Delisting Letter"), Nasdaq staff informed SC&T of its intent to delist the Company from the SmallCap Market because it believed that the offering had impaired shareholder voting rights in violation of NASD Rule 4310(c)(21). 2 Nasdaq staff also believed that SC&T had not exercised "sufficient due diligence" in choosing Sovereign Equity Management Corp. ("Sovereign") as placement agent for three private placements completed before the Company's inclusion in the SmallCap Market.3 The Delisting Letter offered the public interestconsiderations set forth in NASD Marketplace Rules 4300 and 4330(a)(3) as another basis for delisting the Company. 4

SC&T sought review of the delisting determination. In a hearing before the Nasdaq Listing Qualifications Panel ("Qualifications Panel") SC&T represented that it had been on the verge of resolving the concerns arising from the Regulation S offering and requested additional time to negotiate with its shareholders. The Company defended its dealings with Sovereign.

On August 21, 1997, the Qualifications Panel granted SC&T an exception to the SmallCap listing standards it believed were violated by the Regulation S offering on condition that SC&T resolve by October 20, 1997 the issues with its shareholders arising from the offering. The exception also required the Company to "provide prompt notification of any significant events which occur" during the exception period. The Qualification Panel's ruling further stated that, in hindsight, the panel was "uncomfortable" with SC&T's choice of Sovereign as placement agent, but observed that the Company had been entitled to rely on Sovereign's status as an NASD member firm when the private placements occurred.

During the exception period, new problems developed for the Company, which ultimately became the basis for the delisting. On July 16, 1997, SC&T's chairman sent a letter to the Company's auditors, Toback CPAs, P.C. ("Toback"), terminating its relationship with Toback as of August 31, 1997. Toback confirmedthe termination of the auditor-client relationship in a letter dated September 17, 1997. 5 On October 9, 1997, SC&T filed a report with the Commission on Form 8-K stating, "Toback & Company, the certifying accountant of the Company, has resigned."6 SC&T further disclosed in the Form 8-K that it anticipated filing its annual report on Form 10-K late. Instead of filing on September 30, 1997 (90 days after the end of its fiscal year-end on June 30, 1997), the Company stated its intent to file the report on November 1, 1997. 7 SC&T did not file a required Form 12b-25 with the Commission disclosing its inability to file the Form 10-K in a timely manner and the reasons for the delay.8

SC&T did not inform Nasdaq of the Company's letter terminating its auditor, Toback's confirmation of the relationship's end, or its Form 8-K filing until Nasdaq staff inquired about the Company's delinquent Form 10-K three days before the expiration of the exception period. After Nasdaq staff learned of these events, the staff recommended delisting on the ground that the Company had failed to satisfy its reporting obligations under the securities laws.9 On October 21, 1997, after noting SC&T's failure to file timely its Form 10-K, theQualifications Panel delisted the Company from the Nasdaq SmallCap Market.

SC&T appealed the Qualifications Panel's determination to the Nasdaq Listing and Hearing Review Council ("Review Council"). While the matter was pending, SC&T issued a press release dated November 6, 1997, quoting the Company's counsel as stating, "[w]e believe we have successfully reinforced investor confidence in SC&T while protecting our listing on the NASDAQ [sic] Stock Market." The first sentence of the release identified the Company by its Nasdaq trading symbol. SC&T later retracted the November 6 press release and issued a revised release on November 7, 1997 that omitted any reference to the Company's listing status. The revised release, however, continued to identify the Company by its Nasdaq trading symbol. 10

The Review Council concluded that SC&T had been properly delisted from the SmallCap Market. In reaching its determination, the Review Council observed that SC&T violated Marketplace Rule 4310(c)(14) by failing to file its Form 10-K and Form 8-K in a timely manner. The Review Council also concluded that, by failing to inform the Qualifications Panel of these events and the Company's termination of its auditor, SC&T violated the terms of its exception from SmallCap Market listing standards. The Review Council further determined that the Company had issued a press release, after SC&T had been delisted, erroneously stating that the Company traded on the SmallCap Market, thereby raising additional public interest concerns.11

III.

We review the NASD's listing determinations pursuant to Section 19(f) of the Exchange Act. We must dismiss this review proceeding if the "specific grounds on which [the NASD action] is based exist in fact, [the action] is in accordance with the rules of the self-regulatory organization, and . . . such rules are, and were applied in a manner consistent with the purposes of the [Exchange Act]," unless the action imposes an unnecessary or inappropriate burden on competition.12

A. We conclude that the NASD based its delisting determination on specific grounds existing in fact. SC&T did not file its Form 8-K or Form 10-K in a timely manner and did not file a Form 12b-25 at all. SC&T also failed to inform the NASD of the delayed Form 10-K or the termination of Toback as the Company's auditor. Moreover, after the NASD delisted SC&T from the SmallCap Market, the Company issued a misleading press release.

SC&T informed Toback in July 1997 that the Company would terminate the auditor as of August 31, 1997. Toback confirmed the termination on September 17, 1997. SC&T did not file the Form 8-K within the required five days of either date. Even though the August 31 termination date and Toback's September 17 confirmation fell within the exception period set by the Qualifications Panel, SC&T did not inform Nasdaq of these events.

SC&T failed to file its Form 10-K within 90 days of its June 30, 1997 fiscal year-end and did not file a Form 12b-25 with the Commission disclosing the tardiness of the Form 10-K and the reasons for the delay. 13 Although SC&T should have filed both forms during the exception period, the Company did not inform Nasdaq of its failure to do so.

On November 6, 1997, SC&T issued a press release erroneously stating that the Company had "protected" its listing on the SmallCap Market, and identifying SC&T by its Nasdaq trading symbol. Although SC&T retracted the November 6 press release, a subsequent release continued to identify the Company by its Nasdaq trading symbol.

B. We further conclude that the delisting determination was in accordance with NASD rules and the purposes of the securities laws. Section 13 of the Exchange Act requires certain companies to file public reports. 14 NASD Marketplace Rule 4310(c)(14) requires issuers to file with the NASD "three (3) copies of all reports and other documents filed or required to be filed with the Commission." 15 The NASD may also delist any securities listed on the SmallCap Market in the event continued inclusion of the security becomes inadvisable or unwarranted. 16

Requiring public companies to file appropriate reports ensures the maintenance of fair and honest markets in securities.17 Such reports provide a valuable function by disseminating information to the investing public. Investors in securities listed on the SmallCap Market are entitled to assume that the issuers of those securities will promptly and accurately comply with their reporting obligations under the Exchange Act.18 Here, SC&T failed timely to file the requisite annual financial information and notice concerning the change in the relationship with its outside auditors.

SC&T also failed to comply with the NASD's conditions on the exception granted to SC&T. 19 The NASD granted SC&T an exception from the listing criteria of the SmallCap Market because of issues relating to the Company's Regulation S offering, and imposed appropriate conditions. Requiring SC&T to notify the NASD of any significant events occurring during the exception period was reasonably designed to enable the NASD to monitor the Company's ability to meet the SmallCap Market's listing standards during this transitional period. SC&T's indifference to the notification requirement hindered the NASD in this monitoring effort. 20

C. SC&T contends that the NASD's articulated rationales for delisting the Company are pretexts. The Company argues that its relationship with Sovereign formed the real basis for the delisting. SC&T also argues that because the Company eliminated the concerns related to the Regulation S offering by reaching aresolution with its shareholders, the NASD's determination to delist the Company for different reasons was arbitrary and capricious. We disagree.

The Delisting Letter, in which Nasdaq staff referred to SC&T's dealings with Sovereign as an example of the Company's lack of judgement, contained the only mention of Sovereign by the NASD as an appropriate basis for delisting. The Qualifications Panel concluded that SC&T's relationship with Sovereign was not a valid basis for delisting. The record contains no further mention of Sovereign by the NASD after the Qualification Panel's determination, and there is no indication that the NASD gave any further consideration to the matter.

Moreover, the NASD did not act arbitrarily or capriciously in delisting SC&T from the SmallCap Market. As discussed previously, reporting requirements perform an important public function. The record contains ample evidence of SC&T's failure to adhere to these important requirements in a timely manner.

SC&T blames Toback for the Company's tardiness in filing the Form 10-K and argues that the auditor's untimely "resignation" should not "cause" a delisting. However, the NASD did not base its determination to delist SC&T solely on the Company's tardy Form 10-K filing. Rather, the NASD considered the aggregate effect of all the Company's failures. 21 SC&T not only filed the Form 10-K late, the Company did not file a Form 12b-25 with the Commission to alert the Commission and the public to the tardiness of the Form 10-K filing and the reasons for the delay. More significantly, the Company also failed to file its Form 8-K in a timely manner. Prompt filing of the Form 8-K could have provided the Commission and the public with information relevant to the timing of the Form 10-K filing. The Company did not provide prompt notice of these events to the Qualifications Panel, although the Company's exception was expressly conditioned on the giving of such notice. The Company also issued misleading press releases. SC&T's conduct not only violated NASD Membership Rule 4310(c)(14) (obligating the Company to file all reports required by the Commission with the NASD), it deprived the public of timely and accurate information about the Company, raising serious public interest issues.

SC&T argues that, since the Company continued to discuss its Form 10-K filing with Toback after the auditor confirmed the termination, the Company's relationship with the auditor did not actually end until October, implying that the Form 8-K filing was not late. The record, however, contains an unequivocal written statement by SC&T, dated July 16, 1997, terminating the client-auditor relationship as of August 31, 1997. Toback'sconfirmation, dated September 17, 1997, contained an equally unequivocal statement that its role as the Company's auditor had ended. In light of these unambiguous documents, we are not persuaded by SC&T's unsupported assertion that the client-auditor relationship continued beyond, at the latest, September 17, 1997. 22

SC&T contends that it provided Nasdaq with timely notice of Toback's termination and of the late Form 10-K by filing a Form 8-K with the Commission on October 9, 1997. We reject SC&T's position that filing the Form 8-K with the Commission satisfied the prompt notification requirement of the exception. As we have already noted, the Company filed the Form 8-K itself late. Moreover, the terms of the exception required SC&T to provide prompt affirmative notice of "significant events" directly to Nasdaq, not the Commission.

SC&T also argues that the NASD should not have considered the press releases issued by the Company in November 1997. SC&T contends that the revised press release issued on November 7 "cured" any erroneous information contained in the first release. The November 7 release, however, simply omitted any mention of the Company's listing status instead of correcting the previous day's error by confirming that the Company remained delisted from the SmallCap Market. Moreover, the first line of the revised release displayed SC&T's Nasdaq symbol next to the Company name, creating potential confusion over the Company's listing status. The NASD justifiably concluded that this conduct and SC&T's failure to appreciate the misleading nature of the revised press release raised public interest concerns.

IV.

SC&T argues that the delisting of its securities from the SmallCap Market constitutes a "drastic penalty" for its tardy filing of Form 10-K for the year ending June 30, 1997. In support of this contention, SC&T primarily relies on Arthur Lipper Corp. v. SEC, 23 where the United States Court of Appeals for the Second Circuit upheld an order of the Commission issued in a disciplinary proceeding instituted pursuant to Section 15 of the Exchange Act. SC&T also cites to other disciplinary proceedings commenced by the Commission where cease and desist orders were imposed pursuant to offers of settlement by various respondents.

These cases are inapposite. They are all disciplinary proceedings that resulted in the imposition of sanctions for securities law violations. This review proceeding concerns acompany's failure to maintain compliance with the listing criteria of the SmallCap Market, and arose pursuant to Section 19(f) of the Exchange Act because the NASD denied SC&T access to the SmallCap Market.24 It is not a disciplinary proceeding as it does not involve any allegation of securities law violations, and thus, the delisting determination cannot properly be characterized as a penalty. 25

We find that a factual basis exists to delist SC&T from the SmallCap Market; that the NASD acted in accordance with its rules in delisting SC&T; and that the NASD's rules are and were applied in a manner consistent with the purposes of the securities laws. Accordingly, we have determined to dismiss this review proceeding.26

An appropriate order will issue. 27

By the Commission (Chairman LEVITT and Commissioners HUNT, CAREY and UNGER); Commissioner JOHNSON not participating.

Jonathan G. Katz
Secretary



UNITED STATES OF AMERICA
before the
SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 41815 / September 1, 1999
Admin. Proc. File No. 3-9593


In the Matter of the Application of

SC&T INTERNATIONAL, INC.

c/o Gregory E. Good, Esq.

Gregory E. Good & Associates, P.C.

1100 Bank of America Plaza

33 North Stone Avenue

Tucson, Arizona 85701-1489

For Review of Action Taken by the

NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.

ORDER DISMISSING REVIEW PROCEEDING

On the basis of the Commission's opinion issued this day, it is

ORDERED that the application for review filed by SC&T International Inc. be, and it hereby is, dismissed.

By the Commission.

Jonathan G. Katz
Secretary


Footnotes

-[1]- Regulation S under the Securities Act of 1933 governs the offers and sales of securities made outside of the United States without registration under the Securities Act. See 17 C.F.R. 230.901-230.905.

-[2]- Rule 4310(c)(21) states, in relevant part, "[v]oting rights of existing shareholders of publicly traded common stock registered under Section 12 of the [Securities Exchange] Act [of 1934] cannot be disparately reduced or restricted through any corporate action or issuance. . . ." NASD Manual (CCH) at 5274.

-[3]- In March 1995, the NASD disciplined Glen Vittor (Sovereign's President) after finding that Vittor had engaged in bad faith conduct to mitigate trading losses at Falcon Trading Group, Limited ("Falcon"), a trading affiliate of Sovereign. The NASD disciplined Philip Gurian, an associate of Vittor's and a registered representative associated with Falcon, after finding that Gurian had knowingly failed to respond to or appear for three written requests seeking on-the-record testimony. The NASD ordered Vittor and Gurian to pay a total of $410,000 in fines and $189,125 in restitution; barred Vittor from acting as a principal; suspended Vittor for one year from association with any NASD member; and required Vittor to requalify as a registered representative. The NASD barred Gurian from association with any NASD member as of March 1, 1995. NASD Notices to Members,

1995 NASD Lexis 52, "Disciplinary Actions Reported for April" (April 1995). See also Falcon Trading Group, Ltd. and Glen T. Vittor, 52 S.E.C. 554, aff'd, 102 F.3d 579 (D.C. Cir. 1996). The Delisting Letter also noted that a March 24, 1997 article in Business Week linked Gurian to Philip Abramo (a convicted tax evader) and Thomas Quinn (a disbarred lawyer and "a convicted securities swindler").

-[4]- NASD Marketplace Rule 4300 provides that the NASD "may deny initial inclusion or apply additional or more stringent criteria for initial or continued inclusion of particular securities based on any event, condition, or circumstance which exists or occurs that makes initial or continued inclusion of the securities in Nasdaq inadvisable or unwarranted . . . even though the securities meet all enumerated criteria for initial or continued inclusion . . . ." NASD Manual (CCH) at 5271. Marketplace Rule 4330(a)(3) permits additional or more stringent criteria for continued inclusion of a security, or the suspension or termination of the inclusion of an otherwise qualified security, if "Nasdaq deems it necessary to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, or to protect investors and the public interest." NASD Manual (CCH) at 5331.

-[5]- Toback's letter stated in its entirety: "This is to confirm that the client-auditor relationship between [SC&T] International Inc. (Commission File Number 0-27382) and Toback CPAs, P.C. has ceased."

-[6]- "If an independent accountant who was previously engaged as the principal accountant to audit the registrant's financial statements . . . resigns . . . or is dismissed," Form 8-K requires the reporting company to disclose that information within five days of the occurrence of the event. Form 8-K, Information to be Included in the Report, Item 4, Federal Securities Laws (CCH) 33,211 at 33,182; General Instructions, Instruction B(1), Federal Securities Laws (CCH) 33,211 at 33,179.

-[7]-In fact, SC&T did not file its annual report on Form 10-K for the fiscal year ending June 30, 1997, until January 12, 1998.

-[8]- See, Rule 12b-25(a), 17 C.F.R. 240.12b-25(a).

-[9]- NASD noted on a "Compliance Worksheet" that SC&T had not filed its Form 10-K or a Form 12b-25. Marketplace Rule 4310(c)(14) provides, in relevant part, "The issuer shall file with the Association three (3) copies of all reports and other documents filed or required to be filed with the Commission. This requirement is considered fulfilled for purposes of this paragraph if the issuer files the report or document with the Commission through the Electronic Data Gathering, Analysis, and Retrieval ("EDGAR") system . . . ." NASD Manual (CCH) at 5273.

-[10]- The first sentence of the November 7, 1997 release began, "SC&T International, Inc. (NASDAQ:SCTI) announced today ..."

-[11]- The Review Council did not base its delisting determination on the voting rights concerns raised by Nasdaq staff in the Delisting Letter. That issue was not raised by the applicants on this appeal to the Commission, and we take no position on the validity of these concerns as raised by Nasdaq staff.

-[12]- 15 U.S.C. 78s(f). See also JJFN Services, Inc., Securities Exchange Act Rel. No. 39343 (November 21, 1997),65 SEC Docket 2806, 2813. SC&T does not claim, and the record does not indicate, that the NASD's action has imposed an undue burden on competition.

-[13]-13 240 C.F.R. 12b-25.

-[14]- 15 U.S.C. 78m.

-[15]- NASD Manual (CCH) at 5273.

-[16]- NASD Marketplace Rule 4300, NASD Manual (CCH) at 5271.

-[17]- See Exchange Act 2, 15 U.S.C. 78b.

-[18]- See NASD Marketplace Rule 4310(c)(14), NASD Manual (CCH) at 5273.

-[19]- The NASD may impose conditions, where appropriate, when granting exceptions to listing standards. See Marketplace Rule 4330(d), NASD Manual (CCH) at 5331; see also KLH Engineering Group, Inc., 52 S.E.C. 460 (1995) (company granted exception from SmallCap Market listing standards "subject to certain conditions").

-[20]- In addition to public reports, press releases represent another source of information for investors about a particular company. SC&T issued one misleading press release that erroneously stated that the Company had protected its listing in the SmallCap Market. It then issued another release that omitted any mention of the Company's listing status, but continued to identify SC&T by its Nasdaq trading symbol. SC&T dismissed the concerns raised by these releases as the "use of old letterhead by a public relations firm." The NASD appropriately considered SC&T's failure to appreciate the public interest concerns raised by the misleading nature of the releases in reaching its delisting determination.

-[21]- Because we view the NASD's decision as resting on an aggregation of many factors, we take no position on the merits of the Company's claim that its former auditor was to blame for the tardiness of the Form 10-K filing.

-[22]- Toback did not testify at the hearing before the Qualifications Panel.

-[23]- 547 F.2d 171 (4th Cir. 1976), cert. denied, 434 U.S. 1009 (1978).

-[24]- 15 U.S.C. 78s(f).

-[25]- SC&T also cites to Scott v. Multi-Amp Corporation, 386 F. Supp. 44 (D.N.J. 1974), a private action brought by certain shareholders against the directors and the majority shareholders of a corporation. As Scott did not involve any action of a self-regulatory organization or an administrative agency, the case has no relevance to the issues raised in this proceeding.

-[26]- On September 11, 1998, the NASD filed a request for leave to file a surreply brief. We have determined not to consider the NASD's surreply brief as SC&T's reply brief failed to raise any new issues not already addressed by the initial or opposition brief.

The NASD has also filed a motion to adduce additional evidence pursuant to our Rule of Practice 452, and seeks to supplement the record with SC&T's Form 10-QSB for the period ending July 31, 1998. The NASD contends that the document is relevant to demonstrate that the Company's net tangible assets fail to meet the SmallCap Market's listing standards. We deny the NASD's motion as this evidence postdates the NASD's determination and was not the basis for the NASD's action here.

-[27]- We have considered all of the contentions advanced by the parties. We reject or accept them to the extent that they are inconsistent or in accord with the views expressed herein.

http://www.sec.gov/litigation/opinion/34-41815.htm


Modified:02/10/1998