UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION Securities Act of 1933 Release No. 7428 / July 1, 1997 Securities Exchange Act of 1934 Release No. 38799 / July 1, 1997 Accounting and Auditing Enforcement Release No. 933 / July 1, 1997 Administrative Proceeding File No. 3-9344 In the Matter of HELEN T. CHALUT, and SALEEM NOORANI, Respondents. ORDER INSTITUTING PROCEEDINGS PURSUANT TO SECTION 8A OF THE SECURITIES ACT OF 1933 AND SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS, AND CEASE-AND-DESIST ORDER I. The Commission deems it appropriate and in the public interest that proceedings be, and hereby are, instituted pursuant to (i) Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") to determine whether Helen T. Chalut ("Chalut") violated or caused violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and to determine the appropriateness of disgorgement and prejudgment interest; and (ii) Section 21C of the Exchange Act to determine whether Saleem Noorani ("Noorani") violated or caused violations of Sections 10(b) and 15(a) of the Exchange Act and Rule 10b-5 thereunder, and to determine the appropriateness of disgorgement and prejudgment interest. II. In anticipation of the institution of these administrative proceedings, Chalut and Noorani (the "Respondents") have submitted Offers of Settlement that the Commission has determined to accept. Solely for the purposes of these proceedings and any other proceedings brought by or on behalf of the Commission or to which the Commission is a party, and prior to hearing and without admitting or denying the findings set forth herein, Respondents each consent to the entry of this Order Instituting Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Making Findings, and Cease-and-Desist Order ("Order"). The Commission has determined that it is appropriate and in the public interest to accept the Offers of Settlement of Respondents, and accordingly is issuing this Order. III. FACTS Based on the foregoing, the Commission finds that:<(1)> A. Respondents 1. Helen T. Chalut Chalut, age 70, is a resident of Sarasota, Florida. She is retired. 2. Saleem Noorani Noorani, age 51, is a resident of Marblehead, Massachusetts. He owns Mt. Vernon Capital Corporation, a consulting firm that assists companies in implementing corporate strategies for international acquisitions and growth. B. April 1992 Sham Private Placement During March and April 1992, two senior officers of Ferrofluidics Corporation ("Ferrofluidics") devised a scheme to create the false appearance that the company had sold 620,000 shares of stock. Chalut and three other individuals (the "Purchasers") were recruited to act as nominal buyers for these shares until the shares could be registered and sold to bona fide investors. Chalut understood that there would be no risk of loss to her because the shares would be resold before her payment obligations were due and that Ferrofluidics would pay her for her participation in the scheme. The Purchasers each signed a subscription agreement, a promissory note and a pledge agreement. However, none of the Purchasers paid for the subscribed Ferrofluidics stock, nor did they have the financial ability to pay for the shares. 150,000 shares were nominally placed with Chalut, and 470,000 shares were placed with the three remaining Purchasers. After documenting the phony sales, Ferrofluidics publicly announced in a press release dated April 23, 1992 that it had "$12,000,000 of added capital" as a result of the private placement. In fact, the transaction added only $1.6 million in equity from the single legitimate buyer. The Purchasers never made any payments on their notes, nor did the company expect them to. Ferrofluidics nonetheless booked interest on the notes as a receivable and thereby increased Ferrofluidics' reported net income by approximately $580,000 or 17% during fiscal 1992 and $212,000 or 22% during the first quarter of fiscal 1993. Ferrofluidics also improperly charged $735,000 of costs, purportedly related to the "sale" of shares to the Purchasers, against capital during fiscal 1992, thus enabling the company to avoid decreasing its reported net income by that amount or 22%. <(1)> The findings herein are made pursuant to the Offers of Settlement of Respondents and are not binding on any other person or entity in this or any other proceeding. ======END OF PAGE 2====== At Ferrofluidics' request, Chalut falsely confirmed to the company's outside auditors during the 1992 audit that she owed Ferrofluidics the amount payable under her note. On or about May 12, 1992, when 250,000 of shares nominally held by the Purchasers were sold, Ferrofluidics established a sham commissions payable account. That account, which was created by reducing the company's additional paid-in capital account, was used to offset the shortfall between the cash proceeds from the sale of the Purchasers' shares and the amounts due under the Purchasers' notes. By recording the transactions this way, Ferrofluidics created interest income when none in fact existed. At Ferrofluidics' request, Noorani sent the company a backdated letter, which he had been advised by Ferrofluidics might be made available to the company's auditors, outlining a commission schedule that never existed. Subsequently, at Ferrofluidics' request, Noorani sent the company a second backdated letter, which made changes to the commission schedule set forth in the first letter. Ferrofluidics provided the letters to its auditors to support the amount accrued in the sham commissions payable account. C. Stock Sales By Noorani From January to June 1992, Noorani assisted Ferrofluidics in selling 1,155,000 of its shares for which Noorani's company, Mt. Vernon, received commissions ranging from 2.5% to 7.5% of the share price. Noorani's activities included, among other things, providing written materials about Ferrofluidics to prospective investors, and arranging and attending sales presentations with prospective investors. During the relevant time, Noorani was not registered with the Commission as a broker or dealer. IV. OPINION Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit fraud in connection with the offer, purchase or sale of securities. A person violates these provisions by making false and misleading statements if the individual speaks with knowledge and awareness that the statements were to be communicated to, and reasonably could be expected to be relied upon by, purchasers and sellers of a security. See SEC v. Savoy Industries, Inc., 587 F.2d 1149, 1171 (D.C. Cir. 1978), cert. denied, 440 U.S. 913 (1979). Through the scheme described above, the false and misleading press releases relating to it, and the misrepresentations in its financial statements, Ferrofluidics violated these provisions. By her conduct as one of the Purchasers, Chalut caused Ferrofluidics' violations. By providing the false commission schedule that he had been advised might be made available to the company's auditors, Noorani caused Ferrofluidics' violations. Section 15(a) of the Exchange Act provides that "[i]t shall be unlawful for any broker or dealer . . . to effect any transactions in, or ======END OF PAGE 3====== to induce or attempt to induce the purchase or sale of, any security . . . unless such broker or dealer is registered in accordance with subsection (b) of this section." Noorani violated Section 15(a) of the Exchange Act by acting as a broker and receiving commissions in connection with the sale of Ferrofluidics stock without registering with the Commission. V. FINDINGS Based on the above, the Commission finds that: A. Chalut caused violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; B. Noorani violated Section 15(a) of the Exchange Act and caused violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; C. Chalut has submitted a sworn financial statement and other evidence and has asserted her financial inability to pay disgorgement of $32,000 plus prejudgment interest. The Commission has reviewed the sworn financial statement and other evidence provided by Chalut and has determined that Chalut does not have the financial ability to pay disgorgement of $11,000 plus prejudgment interest; and D. Noorani has submitted a sworn financial statement and other evidence and has asserted his financial inability to pay disgorgement of $419,736.50 plus prejudgment interest. The Commission has reviewed the sworn financial statement and other evidence provided by Noorani and has determined that Noorani does not have the financial ability to pay disgorgement of $354,736.50 plus prejudgment interest. VI. ORDER Accordingly, IT IS HEREBY ORDERED that: A. Chalut: 1. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, cease and desist from committing or causing any violations of, and committing or causing any future violations of, Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; 2. Shall pay disgorgement of $32,000 plus prejudgment interest, but that payment of all but $21,000 of such amount be waived based upon Chalut's demonstrated financial inability to pay; and ======END OF PAGE 4====== 3. Shall pay disgorgement in the total amount of $21,000 as follows: $15,000 within ten (10) days of the entry of this Order, and four payments of $1,500 each, on September 30, 1997, December 31, 1997, March 31, 1998 and June 30, 1998, by U.S. Postal money order, certified check, bank cashier's check, or bank money order, made payable to the Securities and Exchange Commission and shall transmit the payment by certified mail (return receipt requested) to the Office of the Comptroller, U.S. Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312, under cover of a letter that identifies the respondent and the name and file number of this proceeding. A copy of the cover letter and of the form of payment shall be simultaneously transmitted to counsel for the Commission. B. Noorani: 1. Pursuant to Section 21C of the Exchange Act, cease and desist from committing or causing any violations of, and committing or causing any future violations of, Sections 10(b) and 15(a) of the Exchange Act and Rule 10b-5 thereunder; 2. Shall pay disgorgement of $419,736.50 plus prejudgment interest, but that payment of all but $65,000 of such amount be waived based upon Noorani's demonstrated financial inability to pay; and 3. Shall pay disgorgement in the total amount of $65,000 as follows: $46,000 within twenty (20) days of the entry of this Order and $19,000 by December 31, 1997, by U.S. Postal money order, certified check, bank cashier's check, or bank money order, made payable to the Securities and Exchange Commission and shall transmit the payments by certified mail (return receipt requested) to the Office of the Comptroller, U.S. Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312, under cover of a letter that identifies the respondent and the name and file number of this proceeding. A copy of the cover letter and of the form of payment shall be simultaneously transmitted to counsel for the Commission. IT IS FURTHER ORDERED that the Division of Enforcement may, at any time following the entry of this Order, petition the Commission to: (i) reopen this matter to consider whether Respondents provided accurate and complete financial information at the time such representations were made; (ii) determine the amount of disgorgement and prejudgment interest to order; (iii) determine the amount of the civil penalty to be imposed; and (iv) seek any additional remedies that the Commission would be authorized to impose in this proceeding if the offers of settlement of Respondents had ======END OF PAGE 5====== not been accepted. No other issues shall be considered in connection with this petition other than whether the financial information provided by Respondents was fraudulent, misleading, inaccurate or incomplete in any material respect, the amount of disgorgement and prejudgment interest to order, the amount of civil penalty to be imposed, and whether any additional remedies should be imposed. Respondents may not, by way of defense to any such petition, contest the findings in this Order or the Commission's authority to impose any additional remedies that were available in the original proceeding. By the Commission. _______________________ Jonathan G. Katz Secretary ======END OF PAGE 6======