SECURITIES AND EXCHANGE COMMISSION Washington, D.C. LITIGATION RELEASE NO. 15906 / September 24, 1998 SECURITIES AND EXCHANGE COMMISSION v. CHARLES O. HUTTOE, ET AL., Civil Action No. 96-02543 (GK)(D.D.C.) SEC WINS SUMMARY JUDGMENT AGAINST INTERNET MICROCAP STOCK TOUT The Securities and Exchange Commission ("Commission") announced that on September 14, 1998, the United States District Court for the District of Columbia granted the Commission's motion for summary judgment against Shannon B. Terry ("Terry") and Dunbar Holdings, Ltd., ("Dunbar"), two defendants in the case arising out of the manipulation of the market for the securities of Systems of Excellence, Inc. ("SOE"). The Court found that Terry and Dunbar, Terry's wholly owned Bahamian shell company, violated the antitouting and antifraud provisions of the securities laws by touting and scalping the securities of SOE and seventeen other microcap issuers. The Court ordered Terry and Dunbar to disgorge trading profits of $828,448 and certain other compensation, together with prejudgment interest on that amount, and permanently enjoined them future violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In particular, the Court found the following:  From August 1993 until November 1996 Terry was employed by SGA Goldstar Research, Inc., publisher of the SGA Goldstar Whisper Stocks newsletter. That newsletter profiled and made recommendations promoting largely unknown and untested penny stock or small capitalization companies, and was distributed over the internet and otherwise.  Terry's duties included writing articles and commentaries about some of the companies, selling newsletter subscriptions and assisting in production and distribution of the newsletter.  Companies paid SGA with stock in exchange for articles promoting their stock in the Whisper newsletter. Terry got stock from SGA for companies he promoted in the articles he wrote.  Continuously over a two year period, Terry sold stocks after the Whisper newsletter recommended that its subscribers purchase those stocks. Terry sold both stock that he received as compensation for touting the issuer and stock that he purchased in the market shortly before promotional articles appeared in the Whisper newsletter.  Terry's failure to disclose that he had been given shares in exchange for promoting the companies in the newsletter violated the antitouting and the antifraud provisions of the securities laws. The Court rejected a "disclaimer" that "personnel associated with SGA may own shares in the companies mentioned herein or may act as consultants thereto for compensation" as inadequate disclosure of those facts, and held that "[i]t is inherently misleading to present articles as objective reporting when they are in fact promotions paid for by the company featured."  Terry's failure to disclose that he intended to sell his personal holdings of stock despite the recommendations to buy made in the Whisper newsletter -- a practice known as "scalping" -- separately violated the antifraud provisions of the securities laws.  Terry's undisclosed touting and scalping separately defrauded subscribers to the newsletters. The Court ordered Terry and Dunbar to disgorge the commissions he earned for selling subscriptions to the Whisper newsletter. The Court also rejected Terry's and Dunbar's claims that Section 17(b) of the Exchange Act -- requiring disclosure of compensation received from an issuer, underwriter or dealer in exchange for publishing a description of a security -- violated the First and Fifth amendments of the Constitution as applied to them. In the same decision, the Court denied the Commission's motion for summary judgment against J.S. Holdings, a relief defendant in the case. It also granted J.S. Holdings' motion to lift the preliminary injunctive relief previously imposed. In other developments in recent months, the Commission has entered into settlements with, or dismissed from the litigation, seven additional relief defendants. On August 6, 1998, the Court ordered, pursuant to a consent in which she neither admitted nor denied the Commission's allegations, Nancy Ellis, aka Nancy Ellis Davis, aka Nancy Davis ("Ellis") to pay disgorgement of $3,579,770, which is the amount of illegal proceeds that she received from the SOE fraud. The settlement provided that upon the transfer by Ellis to the Court-appointed Receiver of $2,805,047 in bank accounts that were previously frozen in this case, collection of the remaining disgorgement would be waived in light of her demonstrated inability to pay based on the representations in Ellis's sworn financial statements. On August 17, 1998, those funds were transferred to the Receiver in full compliance with the Court's order. As part of the settlement with Ellis, the Commission agreed to dismiss without prejudice Ellis's son and daughter-in-law, relief defendants William K. Daw and Sonya Daw, from the litigation. In addition, relief defendants Jack Weinstein, Nancy Weinstein, and Adobe Galleries Inc. ("Weinstein relief defendants") consented, without admitting or denying the Commission's allegations, to the entry of a final judgment in which the Court declared that they have no right, interest, or claim to three checks that they received from Ellis totaling $2,600,000 and ordered them to surrender these instruments. These three checks, drawn on accounts containing fraud proceeds, were the basis for the Commission's claims against the Weinstein relief defendants. The Court entered this final judgment on July 15, 1998. Finally, the Commission dismissed without prejudice relief defendant Lynda Lou Kane-Kraft from the ongoing litigation on April 10, 1998. Kane-Kraft's husband, Sheldon Kraft, settled on January 14, 1998 a related Commission action filed against him pursuant to which he paid to the Receiver $1,107,000 in cash, surrendered a vacation house, and assigned claims against his former employer. The Commission's settlement with Kraft, which virtually eliminated the combined assets of Kraft and Kane-Kraft, encompassed the relief that potentially could be obtained from Kane-Kraft. The Commission previously has made several announcements concerning these matters. See Lit. Rel. 15888 (September 18, 1998); Lit. Rel. 15677 (March 19, 1998); Lit. Rel. 15617 (January 14, 1998); Lit. Rel. 15600 (December 22, 1997); Lit. Rel. 15571 (November 25, 1997); Lit. Rel. 15490 (September 12, 1997); Lit. Rel. 15286 (March 12, 1997); Lit. Rel. 15490 (January 31, 1997); Lit. Rel. 15185 (December 12, 1996); Lit. Rel. 15153 (November 7, 1996); Securities Exchange Act Rel. No. 33791 (October 7, 1996). The Commission's investigation in this matter is continuing. This enforcement action is part of the Commission's four- pronged approach to minimizing Microcap fraud: enforcement, inspections, investor education and regulation. For more information about the SEC's response to Microcap fraud, visit the SEC's Microcap Fraud Information Center at: http://www.sec.gov/news/extra/microcap.htm.