UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES ACT OF 1933 Release No. 7263 / February 21, 1996 SECURITIES EXCHANGE ACT OF 1934 Release No. 36865 / February 21, 1996 ADMINISTRATIVE PROCEEDING File No. 3-8953 ------------------------------ In the Matter of ) ORDER INSTITUTING PUBLIC ) PROCEEDINGS PURSUANT TO CANDIE'S, INC., ) SECTION 8A OF THE RESPONSE USA, INC., ) SECURITIES ACT OF 1933 SALVATORE MAZZEO, and ) AND SECTIONS 15(b)(6) AND SCHNECK WELTMAN HASHMALL ) 19(h)(3) OF THE SECURITIES & MISCHEL ) EXCHANGE ACT OF 1934 AND ) FINDINGS AND ORDER OF THE Respondents. ) COMMISSION ______________________________) I. The Commission deems it appropriate and in the public interest that public administrative proceedings be, and they hereby are, instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") to determine whether Schneck Weltman Hashmall & Mischel, Salvatore Mazzeo, Candie's, Inc., and Response USA, Inc. violated or caused violations of Section 5 of the Securities Act. Proceedings are also commenced under Sections 15(b)(6) and 19(h)(3) of the Securities Exchange Act of 1934 ("Exchange Act") to determine whether Salvatore Mazzeo willfully violated Section 5 of the Securities Act or aided and abetted any such violation. In anticipation of the institution of these proceedings, the respondents have each submitted an offer of settlement which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceeding brought by or on behalf of the Commission or to which the Commission is a party, the respondents consent to the issuance of this Order Instituting Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Sections 15(b)(6) and 19(h)(3) of the Securities Exchange Act of 1934 and Findings and Order of the Commission ("Order"), without admitting or denying the matters set forth herein, and to ==========================================START OF PAGE 2====== the entry of the findings set forth below.-[1]- II. FINDINGS This matter involves four offerings of securities purportedly made in reliance on Regulation S promulgated under the Securities Act of 1933. In fact, as discussed below, the offerings involved schemes to evade the registration requirements, and therefore did not constitute offers and sales of securities outside the United States for purposes of Regulation S. All four offerings at issue in this matter were arranged and structured by respondents Schneck Weltman, a New York law firm, and Salvatore Mazzeo, the president of Westfield Financial Corp., a now defunct broker-dealer. In all four offerings, the only liquid market for the securities was in the United States. In each instance, a large block of securities was sold at a substantial discount to the prevailing market price in return for a short-term, unsecured promissory note. The respondents knew almost nothing about the foreign purchasers. Candies, Response, and Schneck Weltman had no contact with the foreign purchasers, and Mazzeo (the only respondent who had even indirect contact with the foreign purchasers) dealt solely with their representative, an attorney who resides abroad. The respondents did not know whether the foreign purchasers could afford to pay off the promissory notes, and made no inquiry into their ability to pay. In each instance the securities were transferred to the newly opened Westfield accounts of the foreign purchasers. Shortly after the expiration of the 40-day restricted period of Regulation S, Mazzeo sold the securities to U.S. customers of Westfield. In all four of the transactions, the foreign purchasers bore very little market risk because they used the proceeds from the U.S. sales to pay off their promissory notes. In essence, the foreign purchasers acted as mere conduits for the sale of unregistered securities in the United States. A. The Respondents 1. Schneck Weltman Hashmall & Mischel ("Schneck Weltman"), a law firm in New York, N.Y., arranged for certain sales of securities by respondents Candies and Response, purportedly pursuant to Regulation S. In addition, Schneck Weltman received ---------FOOTNOTES---------- -[1]- The findings herein are made pursuant to offers of settlement of Candies, Response, Schneck Weltman, and Mazzeo, and are not binding on any other person or entity named as a respondent in this or any other proceeding. ==========================================START OF PAGE 3====== unregistered stock from an issuer as compensation and sold the stock to foreign purchasers in reliance on Regulation S. Schneck Weltman had seven partners in 1993. 2. Salvatore Mazzeo, age 47, was the president and an owner of Westfield Financial Corp., a registered broker-dealer, from December 1991 to November 1994. Mazzeo handled the sales of Regulation S stock for Candies, Response, Schneck Weltman, and Westfield itself. 3. Candie's, Inc. ("Candies") is a Delaware corporation engaged in the design, marketing, importation, and distribution of women's footwear. The company's common stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act. Candies had approximately 4.8 million shares of common stock outstanding before the sale of the securities at issue in this matter. 4. Response USA, Inc. ("Response") is a Delaware manufacturer of personal emergency response systems. The company's common stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act. Response had approximately 1.9 million shares of common stock outstanding before the sale of the securities at issue in this matter. B. Other Entity Westfield Financial Corporation ("Westfield"), a New York broker-dealer, was registered with the Commission pursuant to Section 15(b) of the Exchange Act. The firm was in business from December 1991 to November 1994, when it ceased operations. C. The Respondents' Conduct This matter involves four separate transactions in which the respondents invoked the safe-harbor provisions of Regulation S to sell unregistered securities to foreign purchasers at a substantial discount in return for unsecured, short-term promissory notes. Schneck Weltman and Salvatore Mazzeo arranged all four transactions. In each instance, the securities were resold in the U.S. shortly after the expiration of the restricted period set forth in Regulation S, and the proceeds were used to pay off the promissory notes. 1. The First Offering The first transaction occurred in early March 1993. Schneck Weltman obtained 50,000 unregistered shares of Candies stock as compensation for legal work, and sold the shares to a foreign entity in return for a short-term, unsecured promissory note. Mazzeo negotiated the sale of the stock exclusively with the foreign purchaser's London attorney, and no one from Schneck ==========================================START OF PAGE 4====== Weltman or Westfield spoke with any principal of the purchaser. Moreover, no one at Schneck Weltman or Westfield, including Mazzeo, knew whether the foreign entity had assets or whether it was able to pay off the promissory notes. Schneck Weltman sold the Candies stock at a 14% discount from the market price. In payment, the foreign purchaser provided Schneck Weltman with an unsecured $150,000 promissory note, on which no interest would accrue for 51 days. After the transaction closed, Schneck Weltman delivered the stock certificate to Westfield, and Westfield deposited the securities into the account of the foreign purchaser. Shortly after the end of the restricted period, Mazzeo caused the securities to be sold from the account of the foreign entity to some of Westfield's U.S. customers. Mazzeo thereafter transferred proceeds from the sale to Schneck Weltman as payment on the promissory note. 2. The Second Offering Two months later, in May 1993, Schneck Weltman and Mazzeo arranged for a second purported Regulation S offering, this time on behalf of Candies. Candies sold 727,272 shares of stock to four foreign entities for $2 million, a 40% discount from the market price.-[2]- Payment for the securities was made with $200,000 in cash and the remainder in the form of unsecured promissory notes, due between 40 and 70 days later. Mazzeo again dealt with the London lawyer who had represented the foreign purchaser in the previous offering. Mazzeo, Schneck Weltman, and Candies did not know whether the foreign entities possessed assets sufficient to ensure payment of the promissory notes. One of the foreign entities, a Liberian company, provided Candies with the simple address of "P.O. Box 26, Moscow 117049" and no other address information. Candies transferred the securities to Schneck Weltman without ensuring that it would be protected in the event that the foreign purchasers defaulted on the notes. Schneck Weltman thereafter transferred the securities to Westfield, which deposited the securities into the purchasers' accounts. Shortly after the end of the restricted period, Mazzeo began selling the stock into the United States market, bringing in $2.8 million. The foreign entities then used part of the proceeds from the sale of the unregistered stock to pay their debt to Candies. ---------FOOTNOTES---------- -[2]- Schneck Weltman did furnish Candies' transfer agent with an opinion letter stating that the stock was being sold in reliance on Regulation S and did not need to be registered under the Securities Act. To the extent that Candies relied upon Schneck Weltman's opinion letter, its reliance was not reasonable in the light of all of the attending facts and circumstances. ==========================================START OF PAGE 5====== 3. The Third Offering The third purported Regulation S offering occurred later in May 1993. Schneck Weltman had obtained unregistered Candies stock as a finder's fee for having arranged the Candies offering. Relying on Regulation S, Schneck Weltman sold 25,000 shares of its Candies stock to a foreign purchaser in return for an unsecured, 60-day promissory note. The sales price of $75,000 represented a 33% discount from the market price. Once again, Mazzeo negotiated the sale exclusively with the London attorney for the foreign purchaser. No one at Schneck Weltman or Westfield communicated directly with any principal of the purchaser, and Schneck Weltman had no knowledge of the foreign purchaser's assets or its ability to pay off the promissory note. As in the other transactions, the securities were deposited at Westfield where, shortly after the end of the restricted period, Mazzeo sold the stock into the U.S. market. The foreign entity used proceeds from the sale of the unregistered stock to pay off its debt to Schneck Weltman. 4. The Fourth Offering The fourth purported Regulation S offering occurred in early July 1993. Response sold 600,000 unregistered shares of its stock to five foreign entities for $1.5 million, or 20% less than the market price. The five foreign purchasers provided Response with an initial payment of $150,000 and unsecured promissory notes, due in 40 days, for the remaining $1,350,000. As in the other transactions, Mazzeo negotiated with the London attorney who represented the foreign purchasers. Response's management did not know whether the foreign entities had any assets available to pay off the notes. Further, Response did not create adequate arrangements to protect itself against default on the notes, but simply gave the securities to its counsel, Schneck Weltman. Schneck Weltman transferred the securities to Westfield and, shortly after the end of the restricted period, Mazzeo sold the stock into the U.S. market. Mazzeo thereafter delivered funds from the proceeds to Schneck Weltman, which transferred the proceeds to Response to pay the amount due on the promissory notes. D. Violations of Section 5 of the Securities Act 1. Section 5 Section 5 of the Securities Act prohibits any person, directly or indirectly, from using instrumentalities of interstate commerce or the mails to offer or sell a security unless a registration statement has been filed or is in effect as to such security. Exemptions from the registration provisions are set forth in Sections 3 and 4 of the statute, and the related ==========================================START OF PAGE 6====== rules promulgated under the Securities Act. A person who offers or sells a security in reliance upon an exemption from the registration requirements of Section 5 has the burden of establishing the availability of the exemption. SEC v. Murphy, 626 F.2d 633, 645 (9th Cir. 1980). Such exemptions are construed narrowly. Id. at 641. No such exemptions were available for these offerings. Regulation S, which interprets the reach of Section 5 of the Securities Act, provides that Section 5 is not applicable to offers and sales of securities outside the United States. What constitutes an offering outside the United States under Rule 901 of Regulation S is a question of facts and circumstances. Regulation S contains two non-exclusive safe harbors, one for primary offerings (Rule 903) and the other for resales (Rule 904). Preliminary Note 2 to Regulation S provides that "Regulation S is not available with respect to any transaction or series of transactions that, although in technical compliance with these rules, is part of a plan or scheme to evade the registration provisions of the Act." Accordingly, neither Rule 901 nor the safe harbors cover any transaction that is part of a plan or scheme to evade the registration requirements of Section 5. As stated in Securities Act Release No. 7190 (June 27, 1995), it has come to the Commission's attention that some market participants are conducting placements of securities, purportedly offshore pursuant to Regulation S, under circumstances that indicate that the securities are in essence being placed offshore temporarily to evade registration requirements. As a result, the incidence of ownership of the securities never leaves the U.S. market, or a substantial portion of the economic risk relating thereto is left in or is returned to the U.S. market during the restricted period, or the transaction is such that there is no reasonable expectation that the securities can be viewed as actually coming to rest abroad. These transactions are of the type that run afoul of Preliminary Note 2, would not be covered by the safe harbors, and would not constitute offers and sales outside the United States for purposes of the general statement under Rule 901 of Regulation S. 2. The Respondents' Violations The offerings in this case involved schemes to evade the registration requirements of the federal securties laws, and the transactions therefore do not fall within the safe harbors of Regulation S. Indeed, each respondent sold or participated in the sale of unregistered stock to the foreign purchasers under circumstances in which they knew, or should have known, that the purchasers were acting as conduits for the distribution of securities to U.S. investors without registration or valid exemption from registration. ==========================================START OF PAGE 7====== The total mix of factors surrounding the offerings indicates that the incidence of ownership of the securities never left the U.S. market. Each respondent sold or participated in the sale of unregistered stock to an unknown foreign entity in exchange for a short-term, unsecured promissory note.-[3]- In all four offerings, the only liquid market for the securities was in the United States, and a large block of securities was sold at a substantial discount to the market price. The stock certificates were delivered to the foreign purchasers before the issuer received payment on the notes, and the foreign purchasers paid off their promissory notes by selling the stock back into the U.S. market just after the expiration of Regulation S's 40-day restricted period.-[4]- Under these circumstances, the economic or investment risk in each transaction never shifted to the offshore purchaser, and the sale of the unregistered stock plainly served as the first step in an illegal distribution. Accordingly, the Commission finds that the respondents violated, and respondent Mazzeo also willfully violated, Section 5 of the Securities Act. See Securities Act Release No. 7190 (June 27, 1995), page 8. III. Respondents Schneck Weltman, Mazzeo, Candies, and Response have submitted Offers of Settlement in which each consents, while neither admitting nor denying the facts and allegations contained herein, to the Commission's issuance of this Order making findings and ordering each permanently to cease and desist from committing or causing any violation, and any future violation, of Section 5 of the Securities Act. In addition, respondent Mazzeo offers to consent to a finding that he willfully violated Section 5 of the Securities Act and to an order that suspends him from association with any broker, dealer, municipal securities dealer, ---------FOOTNOTES---------- -[3]- The promissory notes that the purchasers issued in this matter were not, by their terms, non-recourse. Nevertheless, the facts and circumstances surrounding the sales transactions make it apparent that the seller's ability to sue the purchasers, obtain judgments, and collect on the notes was minimal at best. 4/ Although the Respondents obtained representations from the foreign entities in the Regulation S purchase agreements that they would not sell the stock without registration or an exemption from registration, the letters do not protect the proposed respondents from a finding that they were involved in a distribution of securities. See In the Matter of Skiatron Electronics and Television Corporation, 40 S.E.C. 236 (1960). ==========================================START OF PAGE 8====== investment company, or investment adviser for a period of five months. IV. ORDER Accordingly, IT IS HEREBY ORDERED, pursuant to Section 8A of the Securities Act, that Schneck Weltman, Mazzeo, Candies, and Response permanently cease and desist from committing or causing any violation, and any future violation, of Section 5 of the Securities Act. IT IS FURTHER ORDERED, pursuant to Sections 15(b)(6) and 19(h)(3) of the Exchange Act, that effective immediately, Mazzeo be, and he hereby is, suspended from association with any broker, dealer, investment adviser, investment company or municipal securities dealer for a period of five months. By the Commission. Jonathan G. Katz Secretary