UNITED STATES OF AMERICA
|In the Matter of
HUGH D. COOPER,
|ORDER INSTITUTING CEASE-AND-
DESIST PROCEEDINGS PURSUANT
TO SECTION 8A OF THE SECURITIES
ACT OF 1933 AND SECTION 21C OF
THE SECURITIES EXCHANGE ACT OF
1934, MAKING FINDINGS AND
IMPOSING A CEASE-AND-DESIST ORDER
The Commission deems it appropriate to institute public administrative proceedings pursuant to Section 8A of the Securities Act of 1933 (the "Securities Act") and Section 21C of the Securities Exchange Act of 1934 (the "Exchange Act") to determine whether Hugh D. Cooper (the "Respondent") was a cause of violations of Securities Act Section 17(a), Exchange Act Section 10(b), and Exchange Act Rule 10b-5.
In anticipation of the institution of these administrative proceedings, Respondent has submitted an Offer of Settlement which the Commission has determined to accept. Solely for purposes of these proceedings and any other proceedings brought by or on behalf of the Commission or to which the Commission is a party, Respondent, without admitting or denying the matters set forth herein, consents to the issuance of this Order Instituting Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Making Findings and Imposing a Cease-and-Desist Order ("the Order"), and to the entry of the findings, and the imposition of the cease-and-desist order, set forth below.
The Commission finds the following:
Hugh D. Cooper resides in Georgia and, at all relevant times, was President and a director of Surgimetrics USA, Inc. During the relevant period Surgimetrics was a Georgia company that sold medical equipment. At all relevant times the common stock of Surgimetrics traded over the counter.
2. Related Civil Action Against Other Culpable Parties
On September 17, 1997, the Commission filed a civil enforcement action in the United States District Court for the Southern District of California charging six individuals (the "Fraud Defendants") with engaging in a fraudulent stock leasing scheme. The Commission's complaint alleged, in essence, that the Fraud Defendants obtained worthless stock certificates from a number of small public companies, including Surgimetrics, and then used those certificates to fraudulently obtain property, money, or credit from unwitting third parties. To effectuate their scheme, the Fraud Defendants entered into substantially similar "subscription" or "asset contribution" agreements with each of the public companies. The agreements typically committed the public company to provide the Fraud Defendants with stock certificates purporting to represent millions of shares of the company's common stock in exchange for large monthly or up-front payments to the company and a promise that the Fraud Defendants would tender full payment for the shares a year later.
The terms of the agreements placed so many restrictions on the stock that the certificates had no economic value if legitimately held in accordance with the agreements. For example, the agreements purported to prohibit the Fraud Defendants from voting the shares or from selling, transferring, or otherwise disposing of the stock in any way. Moreover, although the agreements purported to give the Fraud Defendants an option to buy the stock after a year by tendering full payment of principal, the agreements typically allowed the issuer to reject the Fraud Defendants' tender, take back the shares, and keep all of the monthly payments made during the one-year lease period. The agreements also typically provided that the stock certificates would bear only a boilerplate Regulation S legend, thus providing no notice to third parties of the severe additional restrictions imposed by the agreements.
3. Respondent's Involvement and the Consequences
In November 1994, Respondent Hugh Cooper, acting on behalf of Surgimetrics, caused Surgimetrics to enter into two "subscription agreements" by which Surgimetrics provided certain of the Fraud Defendants with a total of 26 million shares of its stock in exchange for the promise of 12 monthly payments totaling approximately $1.5 million per month.
The Fraud Defendants who received the restricted Surgimetrics stock subsequently subleased a portion of that stock to another one of the Fraud Defendants, who in turn pledged those shares, along with similarly obtained shares of seven other issuers, as collateral to secure a $5 million line of credit from Bank Leu, a Swiss Bank. That line of credit was drawn down in excess of $4 million, and the Fraud Defendant who borrowed the funds defaulted on his obligation to repay the loan.
Certain of the Fraud Defendants subsequently bundled a portion of the remaining Surgimetrics stock with similarly obtained stock of other issuers and deposited the stock into an account at Dean Witter Reynolds. The Fraud Defendants attempted to persuade Dean Witter to issue a letter falsely stating that the securities were held "free and clear for disposition." When that attempt failed, the Fraud Defendants deposited the certificates into an account at Omni Bank in Detroit in an attempt -- also unsuccessful -- to obtain loans using the stock as collateral. In January 1995, certain of the Fraud Defendants subleased another portion of the Surgimetrics stock to an entity known as Pilgrim Financial, which attempted to use the stock as collateral to obtain credit.
B. LEGAL DISCUSSION
Securities Act Section 8A and Exchange Act Section 21C both authorize the Commission, upon finding that any person has violated any provision of either act or the rules and regulations thereunder, to issue an order requiring "any person that is, was, or would be a cause of the violation, due to an act or omission the person knew or should have known would contribute to such violation, to cease and desist from committing or causing such violation and any future violation of the same provision, rule or regulation."
The decision of Respondent Cooper to participate in the subscription agreements led to millions of shares of Surgimetrics stock entering the stream of commerce without adequate legends or other safeguards to put third parties on notice of the contractual encumbrances that rendered the stock economically valueless for any legitimate purpose. Accordingly, Respondent was a cause of the Fraud Defendants' violations of Securities Act Section 17(a), Exchange Act Section 10(b), and Exchange Act Rule 10b-5.
Based on the above, the Commission finds that Respondent Hugh D. Cooper was a cause of violations of Securities Act Section 17(a), Exchange Act Section 10(b), and Exchange Act Rule 10b-5.
Accordingly, IT IS HEREBY ORDERED, pursuant to Securities Act Section 8A and Exchange Act Section 21C, that Respondent Hugh D. Cooper cease and desist from causing any violation and any future violation of Securities Act Section 17(a), Exchange Act Section 10(b), and Exchange Act Rule 10b-5.
By the Commission.
Jonathan G. Katz
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