Securities Act of 1933
Release No. 7780 / November 22, 1999
Securities Exchange Act of 1934
Release No. 42165 / November 22, 1999
File No. 3-10107
|In the Matter of
|ORDER INSTITUTING PUBLIC
MAKING FINDINGS, IMPOSING
REMEDIAL SANCTIONS AND
ISSUING CEASE-AND-DESIST ORDER
The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative proceedings be instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Windswept Environmental Group, Inc. ("Windswept" or the "Company").II.
In anticipation of the institution of this administrative proceeding, Windswept 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 proceeding brought by or on behalf of the Commission or in which the Commission is a party, Windswept, without admitting or denying the findings contained herein, except admitting the jurisdiction of the Commission over it and the subject matter of this proceeding, consents to the issuance of this Order Instituting Public Administrative Proceedings, Making Findings, Imposing Remedial Sanctions and Issuing Cease-and-Desist Order ("Order") and the entry of findings set forth below.III.
Accordingly, IT IS ORDERED that public administrative proceedings pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act be, and hereby are, instituted.IV.
On the basis of this Order and the Offer, the Commission finds1 that:
A. Windswept, f/k/a Comprehensive Environmental Systems, Inc. f/k/a Integrated Resource Technologies, Inc., is a waste remediation company headquartered in Bay Shore, New York and incorporated in Delaware.
B. Since September 1987, Windswept's common stock has been registered with the Commission pursuant to Section 12(g) of the Exchange Act, and it was listed on the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), until it was delisted on October 22, 1996.
C. From 1994 through October 1996 (the "Relevant Period"), Windswept fraudulently issued more than four million shares of stock, in most instances for little or no consideration, to a group of individuals who exercised undisclosed control over the Company. The vast majority of this stock was later retailed to the public. As more fully detailed below, Windswept failed to disclose the true circumstances surrounding the issuance of this stock in any of its periodic filings during the Relevant Period. In its public filings with the Commission, Windswept made numerous untrue statements of material fact and omitted to state material facts necessary to make the statements made, in light of the circumstances under which they were made, not misleading.
D. During the Relevant Period, Windswept was controlled by three individuals, Timothy H. Masley ("Masley"), Leo Mangan ("Mangan"), and Grant Curtis ("Curtis") (collectively "the Trio"), who made all important decisions regarding business transactions, including stock issuances, funding and acquisitions.
E. Windswept's periodic filings during the Relevant Period failed to disclose that Masley and Curtis controlled the Company. Although Mangan was identified as the chief operating officer in Windswept's periodic filings, his extensive criminal history, including convictions for cocaine distribution, was not disclosed.
F. In July 1994, Windswept issued an option to purchase 200,000 shares of stock at $5 per share to Abet Investments Ltd. ("Abet"), a Bahamian shell corporation controlled by the Trio. The shares were registered on a Form S-8 Registration Statement filed with the Commission on July 14, 1994 ("the July Form S-8") and issued to Abet a week later. The July Form S-8 stated that the option was issued in exchange for services that benefited Windswept. Form S-8 can be used to register securities issued to consultants only if those securities are issued in exchange for bona fide services. In fact, Abet performed no services in exchange for the option, and never paid the $5 per share exercise price under the option.
G. In August 1994, Windswept issued 500,000 shares of unregistered stock to Sampson Leasing Inc. ("Sampson Leasing"), purportedly in return for equipment that Sampson Leasing provided to a wholly-owned subsidiary of the Company. The stock was not registered in purported reliance on Regulation S, which provides a safe harbor from the registration requirements of the Securities Act for offers and sales of securities to qualified persons outside the United States. In fact, Sampson Leasing was a non-operational Venezuelan shell company controlled by the Trio and it never provided any equipment to the Company or its subsidiaries. Windswept's quarterly report for its fiscal quarter ended October 31, 1994 and its Form 10-K for its fiscal year ended April 30, 1995 failed to disclose that Windswept had issued 500,000 shares of stock to Sampson Leasing in return for equipment which it never received. These public filings also failed to disclose that Sampson Leasing was a nominee of the Trio.
H. In September 1994, Windswept issued 200,000 shares of stock to Rang Tuck Morgan, Ltd. ("Rang Tuck"), a non-operational Venezuelan shell company and a nominee of the Trio. The stock was "registered" pursuant to a Form S-8 Registration Statement filed with the Commission on September 19, 1994 ("the September Form S-8"), although Rang Tuck performed no services for Windswept. The September Form S-8 did not disclose that Rang Tuck was the Trio's nominee and that the members of the Trio were the true beneficial owners of the stock. Windswept's public filings, including its Form 10-Q for its fiscal quarter ended October 31, 1994 and its Form 10-K for its fiscal year ended April 30, 1995, failed to disclose the same information, as well as the fact that Rang Tuck did not perform any work for Windswept.
I. In March 1995, Windswept issued 200,000 shares of stock to Piedmont Securities, Ltd. ("Piedmont"), an Irish company controlled by the Trio. Although the stock was "registered" pursuant to a Form S-8 Registration Statement filed with the Commission on March 9, 1995 (the "March Form S-8"), Piedmont performed no services for Windswept. The March Form S-8 did not disclose that Piedmont was the Trio's nominee or that the members of the Trio were the true beneficial owners of the stock. Windswept's Form 10-K for its fiscal year ended April 30, 1995 failed to disclose the same information, as well as the fact that Piedmont did not perform any work for Windswept.
J. From May 1995 through May 1996, Windswept issued a total of 2,800,000 shares of unregistered stock to Hersilia Investments, Ltd. and the Hersilia Trust (collectively "Hersilia"), offshore shell corporations controlled by the Trio, in three transactions purportedly falling within the Regulation S safe harbor. Windswept received proceeds of $1,584,000 for these shares. Windswept's quarterly reports for its fiscal quarters ended July 31, 1995 (the "July 1995 Form 10-Q") and October 31, 1995 and its Form 10-K for its fiscal year ended April 30, 1996 (the "1996 Form 10-K"), failed to disclose that the Trio controlled Hersilia. In addition, Windswept's 1996 Form 10-K and July 1995 Form 10-Q indicate that a Windswept director acted as the agent for the Hersilia private placements, but failed to state that the director was also a beneficial owner of Hersilia, and thus a party to the transactions.
K. In July 1996, Windswept issued 115,000 shares to Broadcast Communications ("Broadcast"), a Liberian company, under a Form S-8 Registration Statement filed with the Commission on December 21, 1995 ("the December Form S-8"), allegedly for "services." In fact, Broadcast, a nominee of Donald Kessler ("Kessler"), who at the time was Windswept's president and CEO, did not provide any services to Windswept. Mangan, Windswept's COO, received part of the proceeds when the stock issued to Broadcast was retailed to the public. Neither the December Form S-8, nor Windswept's Form 10-Q for its fiscal quarter ended July 31, 1996, disclosed that Broadcast was Kessler's nominee, that Broadcast did not perform any work for Windswept, that Kessler was the true beneficiary of the stock or that Mangan received part of the proceeds when the stock was retailed to the public.
L. During the Relevant Period, Windswept's books and records, including corporate resolutions, falsely reflected stock issuances to fictitious investors and shell companies, as described in subparagraphs F through K hereof, when, in fact, Windswept knew that the members of the Trio and/or Kessler were the true recipients of the stock, and that Windswept received little, and in some instances, no consideration for the stock.
M. During the Relevant Period, Windswept failed to adopt internal accounting controls sufficient to accurately reflect that Windswept stock was issued, for little or no consideration, to various nominees and aliases of the Trio and/or Kessler in related party transactions.
N. None of the stock issuances described in subparagraphs F, H, I, and K hereof were properly registered with the Commission pursuant to a Form S-8 registration statement, because in no instance were any bona fide services rendered to Windswept in consideration for the stock.
O. None of the stock issuances described in subparagraphs G and J hereof fell within the safe harbor provided by Regulation S of the Securities Act because each of the entities to whom the stock was issued was in fact a nominee for, and under the control of, one or more U.S. persons.
P. By engaging in the conduct described above, Windswept committed or caused the violation of Sections 5(a), 5(c), and 17(a) of the Securities Act, and Sections 10(b), 13(a) and 13(b) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13, and 13b2-1 thereunder.
Q. Since October 1996, Windswept represents that it has taken the following remedial measures: Windswept has terminated all employment and consulting arrangements with the Trio, Kessler, and other individuals responsible for the fraudulent transactions described in subparagraphs F through K hereof; new management has been hired, including a new chief financial officer; a new board of directors has been elected; new outside accountants have been retained; an independent audit committee has been created; various accounting and internal control procedures have been implemented; and Windswept has ceased all stock promotion activities and all Regulation S private placements.V.
In view of the foregoing, the Commission deems it appropriate to accept Windswept's Offer of Settlement ("Offer"). In determining to accept the Offer, the Commission considered remedial acts undertaken by Windswept and cooperation afforded the Commission staff.
Accordingly, IT IS HEREBY ORDERED that Windswept cease and desist from committing or causing any violation and any future violation of Sections 5(a), 5(c), and 17(a) of the Securities Act, and Sections 10(b), 13(a) and 13(b) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13, and 13b2-1 thereunder.
IT IS FURTHER ORDERED that, within 120 days of the date hereof, Windswept shall comply with its undertakings to:
1. Arrange for a secure off site storage facility to store backup data files and system software;
2. Adopt a formal conflict of interest policy;
3. Develop an Audit Committee charter that describes roles and responsibilities, and have it approved by the Board of Directors;
4. Develop a formal employee handbook that clearly defines lines of employee authority, areas of responsibility, duties and benefits; and
5. Disclose in its next periodic filing with the Commission all salaries, bonuses, stock and stock options received from Windswept over the past three fiscal years by each member of Michael O'Reilly's immediate family (as defined in Item 404 of Regulation S-K, 17 C.F.R. 229.404), and thereafter provide Windswept's independent auditors comparable information for the current fiscal year and for each of the next five fiscal years; provided, however, that nothing herein shall be construed to limit any disclosure obligation Windswept now has, or may hereafter have, by virtue of any law, rule or regulation.
IT IS FURTHER ORDERED that, within 130 days of the date hereof, Windswept shall provide an affidavit, signed by its President and Chief Executive Officer, via certified mail to David Rosenfeld, Senior Counsel, Securities and Exchange Commission, Northeast Regional Office, 7 World Trade Center, New York, NY 10048, setting forth with particularity the details of its compliance with the undertakings described above.
By the Commission.
Jonathan G. Katz
|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.