UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Securities Act of 1933 Release No. 7490 / December 23, 1997 Investment Advisers Act of 1940 Release No. 1689 / December 23, 1997 Administrative Proceedings File No. 3-9517 ______________________________ : ORDER INSTITUTING PUBLIC In the Matter of : ADMINISTRATIVE PROCEEDINGS, : MAKING FINDINGS, IMPOSING : REMEDIAL SANCTIONS, AND Eugene Bilotti, : ISSUING CEASE-AND-DESIST : ORDER Respondent : ______________________________: I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted against Eugene Bilotti ("Respondent" or "Bilotti") pursuant to Sections 203(f) and (k) of the Investment Advisers Act of 1940 ("Advisers Act") and Section 8A of the Securities Act of 1933 ("Securities Act"). ======END OF PAGE 1====== II. In anticipation of the institution of this administrative proceeding, Respondent has submitted an Offer of Settlement ("Offer") which the Commission has determined is in the public interest to accept. Solely for the purpose of this proceeding, and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the findings contained herein, except those set forth in Section III. A. 1. below, which are admitted, Respondent consents to the issuance of this Order Instituting Public Administrative Proceedings, Making Findings, Imposing Remedial Sanctions, and Issuing Cease-and-Desist Order ("Order") and to the entry of the findings and the imposition of the remedial sanctions set forth below. III. On the basis of this Order and the Offer, the Commission finds that:<(1)> A. FACTS 1. Since 1973, Respondent has been associated with investment advisers that were registered pursuant to Section 203(c) of the Advisers Act. Since January 1986, Respondent has been associated with an investment adviser ("the Adviser"), registered pursuant to Section 203(c) of the Advisers Act, that is headquartered in New York, New York. Since 1986, Respondent has been both chairman and 50 percent owner of the Adviser. 2. Eva-Health, USA, Inc. ("Eva-Health") was, during all relevant times, a Delaware corporation with its principal place of business in Woodbridge, New Jersey. 3. Between January 1992 and April 1994, Eva-Health issued approximately $5,550,000 million in warrants for the purchase of Eva-Health common stock ("Warrants"). These Warrants were not registered with the Commission and no exemption from registration was available. These Warrants were sold to over 55 investors in several states. 4. Eva-Health misrepresented to investors and prospective investors in the Warrants, that, among other things: a. the chief executive officer of Eva-Health ("CEO") was a medical doctor and researcher educated and licensed to practice medicine in the State of New York, when in fact the <(1)> The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. ======END OF PAGE 3====== CEO was not; b. Eva-Health owned patents that protected all of Eva-Health's product line, when in fact it did not; c. clinical trials were being conducted for Eva-Health's product medi-Pro by two reputable medical doctors in New York, New York, when in fact such trials were not being conducted; and d. employees of Eva-Health had received a research grant from the National Institute of Health to fund clinical trials of an Eva-Health product called acu-Baby, when in fact no such grant had been issued. 5. From January 1993 to April 1994, Bilotti served as a director of Eva-Health and was paid a total of $130,000 by Eva-Health. Bilotti, making use of the mails, sold an aggregate of at least $1,000,000 in Warrants, to at least 23 clients of the Adviser. Bilotti directly contacted these clients and recommended that they invest in Eva-Health Warrants. 6. Bilotti, relying upon the representations made to him by the CEO regarding Eva-Health, repeated to the Adviser's clients the misrepresentations set forth in Paragraphs III.A.4.a. through III.A.4.d. Bilotti, prior to recommending the investment in Eva- Health to the Adviser's clients, did not take reasonable steps to confirm with independent sources the veracity of those claims. 7. In the late spring of 1993, two of Eva-Health's officers resigned from the company. One of those officers, in a letter to the CEO that was copied to Bilotti and to members of the Board of Directors, cited her inability to confirm either the CEO's educational or medical credentials, while the other, Eva-Health's chief financial officer, said that he was resigning because the CEO failed to provide him access to the financial and business records of Eva-Health. Despite knowing of these resignations and the stated reasons for those resignations, Bilotti, without seeking independent verification of Eva-Health's claims, continued to recommend Eva-Health Warrants to clients of the Adviser. 8. The Adviser collected approximately $23,632 in fees based on investments made in the Warrants. ======END OF PAGE 4====== B. LEGAL DISCUSSION Violations of Sections 206(1) and 206(2) of the Advisers Act Sections 206(1) and (2) of the Advisers Act make it unlawful for any investment adviser to employ any device, scheme, or artifice to defraud clients, or to engage in any transaction, practice, or course of business that defrauds clients or prospective clients. Moreover, Section 206(1) and (2) impose upon investment advisers an affirmative fiduciary duty of utmost good faith to make full and fair disclosure of all material facts to advisory clients. SEC v. Capital Gains, 375 U.S. 180, 194 (1963). As a fiduciary, an investment adviser must discharge its duties solely in the best interests of its clients and must have a reasonable, independent basis for its investment advice. Failure to do so constitutes a violation of Sections 206(1) and (2) of the Advisers Act. In the Matter of Alfred C. Rizzo, Investment Advisers Act of 1940 Rel. No. 897, [1984 Transfer Binder] Fed. Sec. L. Rep. (CCH) 83,476 at 86,520-21 (Jan. 11, 1984). Aiding and Abetting Liability To establish aiding and abetting liability, there must be: (1) a primary violation of the securities laws; (2) substantial assistance by the aider and abettor to those committing the violation; and (3) knowledge of the primary violation by the aider and abettor. Armstrong v. McAlpin, 699 F.2d 79, 91 (2d Cir. 1983). Because Bilotti recommended the Warrants to the Adviser's clients without seeking independent verification of the CEO's claims, Bilotti willfully aided and abetted, and has caused a violation of Sections 206(1) and 206(2) of the Advisers Act by the Adviser. Violations of Sections 5(a) and 5(c) of the Securities Act Section 5(c) of the Securities Act prohibits the use of the mails or the means or instruments of transportation or communication in interstate commerce to offer to sell or to offer to buy any security unless a registration statement has been filed with the Commission as to that security, or an exemption from the registration provisions applies. Section 5(a) of the Securities Act prohibits the use of the mails or the means or instruments of transportation or communication in interstate commerce to sell any security or to deliver any security after sale, unless a registration statement is in effect, or an exemption from the registration provisions applies. See SEC v. Holschuh, 694 F.2d 130, 137 (7th Cir. 1982); SEC v. Hansen, [1984 Transfer Binder] Fed. Sec. L. Rep. (CCH) 91,426 at 98,115 (S.D.N.Y. 1984). ======END OF PAGE 5====== C. FINDINGS Based on the foregoing, the Commission finds that Bilotti willfully aided and abetted, and caused a violation of Sections 206(1) and 206(2) of the Advisers Act by the Adviser by recommending the Warrants as an investment to clients of the Adviser without having a reasonable, independent basis for that recommendation; and Bilotti willfully committed and caused violations of Sections 5(a) and 5(c) of the Securities Act by selling unregistered Warrants when no exemption from registration was available. IV. Bilotti has submitted the Offer, which the Commission has determined to accept. Under the Offer, Bilotti, without admitting or denying the findings herein, consents to the findings set forth above and to an order of the Commission (i) requiring Bilotti to cease and desist from committing or causing any violation and any future violation of Sections 206(1) and 206(2) of the Advisers Act and Sections 5(a) and 5(c) of the Securities Act; (ii) suspending Bilotti from association with any broker, dealer, investment adviser, investment company or municipal securities dealer for a period of six months, effective on the second Monday following the entry of this Order; (iii) requiring that Bilotti shall, within 10 days of the date of this Order, pay $31,251.77, which shall represent disgorgement of $23,632, plus prejudgment interest of $7,619.43; (iv) requiring Bilotti to, within thirty (30) days of the date of this Order, pay a civil money penalty in the amount of $10,000 to the United States Treasury; and (v) requiring Bilotti to provide to the Commission, within seven days after the end of the six month suspension period described above, an affidavit that he has complied fully with the sanctions described above. In determining to accept the Offer, the Commission considered remedial acts promptly undertaken by Bilotti and cooperation afforded the Commission staff. Accordingly, it is HEREBY ORDERED, pursuant to Section 203(f) of the Advisers Act and Section 8A of the Securities Act, that Respondent cease and desist from committing or causing any violation and any future violation of Sections 206(1) and 206(2) of the Advisers Act and Sections 5(a) and 5(c) of the Securities Act. It is FURTHER ORDERED that Respondent be, and hereby is, suspended from association with any broker, dealer, investment adviser, investment company or municipal securities dealer for a period of six months, effective on the second Monday following the entry of this Order. It is FURTHER ORDERED that Respondent shall, within 10 days of the entry of this Order, pay disgorgement and prejudgment interest in the total amount of $31,251.77 to the United States Treasury. Such payment shall be: (A) made by United States postal money order, certified check, bank cashier's check or bank money order; (B) made payable to the Securities and Exchange Commission; (C) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green ======END OF PAGE 6====== Way Stop 0-3, Alexandria, VA 22312; and (D) submitted under cover letter that identifies Eugene Bilotti as a Respondent in these proceedings, the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Eric M. Schmidt, Assistant Regional Director, Division of Enforcement, Securities and Exchange Commission, 7 World Trade Center, New York, New York 10048. The disgorgement and prejudgment interest paid by Respondent shall be held by the Secretary, to be utilized for payment to persons eligible to receive such funds pursuant to a plan of distribution, which shall be submitted by the Division of Enforcement within 60 days from the date of the payment by Respondent. In the event that all or any portion of these funds remain after adjudication of any claims and disbursements of any funds, the remainder shall be disbursed to the United States Treasury. In no event shall any portion of these funds be returned to Respondent or his agents, successors, or assigns. It is FURTHER ORDERED that Respondent shall, within thirty days of the entry of this Order, pay a civil money penalty in the amount of $10,000 to the United States Treasury. Such payment shall be: (1) made by United States postal money order, certified check, bank cashier's check or bank money order; (2) made payable to the Securities and Exchange Commission; (3) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under cover letter that identifies Eugene Bilotti as Respondent in these proceedings, the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Eric M. Schmidt, Assistant Regional Director, Northeast Regional Office, Securities and Exchange Commission, 7 World Trade Center, 13th Floor, New York, New York 10048. It is FURTHER ORDERED that Respondent shall provide to the Commission, within seven days after the end of the six month suspension period described above, an affidavit that he has complied fully with the sanctions described above. By the Commission. Jonathan G. Katz Secretary ======END OF PAGE 7======