UNITED STATES OF AMERICA
In the Matter of
ART H. BEROFF, :
|ORDER INSTITUTING PUBLIC ADMINISTRATIVE PROCEEDINGS PURSUANT TO SECTION 8A OF THE SECURITIES ACT OF 1933, MAKING FINDINGS, AND IMPOSING A CEASE-AND-DESIST ORDER|
The Securities and Exchange Commission ("Commission") deems it appropriate to institute public administrative proceedings against Art H. Beroff ("Respondent" or "Beroff") pursuant to Section 8A of the Securities Act of 1933 ("Securities Act").
In anticipation of the institution of these public administrative proceedings, Beroff has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings 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 as to the Commission's jurisdiction over him and over the subject matter of the proceedings, which are admitted, Beroff consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Section 8A of the Securities Act of 1933, Making Findings, and Imposing a Cease-and-Desist Order ("Order").
On the basis of this Order and the Respondent's Offer, the Commission finds that:1
Art H. Beroff ("Beroff"), age 42, is a resident of Queens, New York. Beroff is a financial consultant and investment banker.
B. OTHER RELEVANT PERSON AND ENTITY
1. Promoter was an acquaintance of Beroff.
2. Amalgamated Explorations, Inc. ("AXPL") is an oil, gas and gold exploration company. AXPL is registered with the Commission pursuant to Section 12(g) of the Securities Exchange Act of 1934 and its stock was listed on the NASDAQ bulletin board during the relevant time period.
This matter involves violations of the securities registration provisions, which were caused by Beroff. Promoter arranged for AXPL to issue 500,000 AXPL shares to Beroff's parents which, unbeknownst to the issuer, Promoter himself had paid for. Later, Beroff, at the direction of the Promoter, arranged for his parents to send 470,000 shares to the Promoter which the Promoter then sold as part of an illegal unregistered distribution of AXPL stock from January through April 1997. Beroff had his father retain 30,000 of 500,000 AXPL shares and then later, these shares were sold in his father's account in violation of the registration provisions of the securities laws.
2. The AXPL Regulation D Offering
The Promoter advised AXPL to raise capital through an offering of common stock pursuant to Rule 504 of Regulation D. On March 1, 1996, AXPL authorized 500,000 shares of stock to be issued to raise $50,000. Beroff spoke with the Promoter about his parents investing in AXPL. The Promoter then informed AXPL that he found New York investors, Beroff's parents, to purchase the shares. In May and June 1996, AXPL received bank and brokerage firm checks totaling $49,750 as payment for the 500,000 AXPL shares to be issued pursuant to the Regulation D offering. Based on statements the Promoter made to the issuer, the issuer believed Beroff's parents had purchased the stock. In mid-August 1996, 500,000 shares of AXPL stock were mailed to Beroff's parents.
The Promoter provided Beroff with subscription agreements and investment letters that Beroff's parents signed. Shortly thereafter, the Promoter contacted Beroff and asked for the shares back. Beroff had his parents return 470,000 shares of AXPL by having them execute blank stock powers and Beroff sent the 470,000 shares of AXPL, along with the executed blank stock powers, to the Promoter. Beroff had his father retain 30,000 AXPL shares.
On January 23 and January 24, 1997, 26,400 AXPL shares were sold in Beroff's father's account for approximately $246,000. From January 1997 through April 1997, the Promoter and his affiliates sold approximately 220,000 of the AXPL shares the Promoter had obtained from Beroff's parents. The Promoter and his affiliates realized approximately $2.3 million in proceeds on the sale of these shares.
D. LEGAL DISCUSSION
Sections 5(a) and 5(c) of the Securities Act prohibit any person from directly or indirectly offering to sell or selling securities unless a registration statement is in effect or has been filed as to the securities, or an exemption from registration is available. Scienter is not required to establish a violation of Section 5. Stokes v. Lokken, 644 F.2d 779, 784 (8th Cir. 1981).
Direct sellers include the owner of the securities being sold, and anyone who personally solicits purchases from investors or offers from prospective buyers. See Pinter v. Dahl, 486 U.S. 622, 642-43, 646-47 (1988). The latter category applies only to persons who have motivation "to serve [their] own financial interests or those of the securities owner." Pinter, 486 U.S. at 647. Indirect sellers include persons who did not have direct contact with potential buyers or engage in selling efforts of the securities, but instead employed or directed others to sell the securities. See generally SEC v. Holschuh, 694 F.2d 130, 140 (7th Cir. 1982).
Rule 144 under the Securities Act offers a "safe harbor" for the resale of restricted securities of an issuer and all securities of an issuer held by affiliates (or control persons) of the issuer. Rule 144, among other things, requires that the shares be held at least one year.
A person who offers or sells a security in reliance upon an exemption from the registration requirements has the burden of establishing the availability of the exemptions. SEC v. Murphy, 626 F. 2d 633, 645 (9th Cir. 1980). Such exemptions are construed narrowly. Id.
1. The Promoter and Beroff's Father Violated Section 5 of the Securities Act
The Promoter, directly or indirectly, sold 220,000 AXPL stock while no registration statement was in effect and without a valid exemption or safe harbor and, as a result violated Section 5. AXPL's Rule 504 Regulation D offering, in effect, was a private sale of stock by the issuer to the Promoter pursuant to Section 4(2) of the Securities Act. The Promoter provided AXPL with the funds to purchase the shares and used Beroff's parents as nominees to hide his purchase. Accordingly, the Promoter acquired restricted AXPL stock directly from the issuer and was required to meet the one-year holding period for the resale of restricted securities in accordance with Rule 144, which he failed to do. In addition, Section 4(1) of the Securities Act, which exempts from registration transactions "by any person other than an issuer, underwriter or dealer," does not apply to the Promoter's resales because the Promoter, and those to whom he gave restricted stock, were "underwriters" under Section 2(a)(11) of the Securities Act.2
On January 23 and January 24, 1997, Beroff's father's account sold 26,400 shares of restricted AXPL stock that had not been returned to the Promoter. These sales resulted in profits to Beroff's father of more than $264,000. These restricted shares were not held one year in accordance with the provisions of Rule 144. Beroff's father, therefore, violated Section 5 of the Securities Act because there was no registration statement in effect for the AXPL offering and Beroff's father cannot rely on the Rule 144 safe-harbor, or the Section 4(1) exemption, for his resales.3
2. Beroff was a Cause of the Promoter's and His Father's Violations of Section 5
Beroff was a cause of the Promoter's violations of Section 5 of the Securities Act. Beroff's parents received 500,000 AXPL shares that they had not paid for. Beroff had his parents complete subscription agreements and investment letters the Promoter had given to him. Within weeks, at the direction of the Promoter, Beroff had his parents return 470,000 shares of AXPL by having them execute blank stock powers and Beroff mailed the 470,000 shares of AXPL, along with the executed blank stock powers, to the Promoter. Beroff had his father retain 30,000 AXPL shares. Beroff's participation in this transaction enabled the Promoter to acquire inexpensive shares of AXPL that the Promoter and his affiliates later sold in violation of Section 5.
Beroff also was a cause of his father's violations of Section 5 of the Securities Act. Beroff secured for his father 30,000 restricted shares of AXPL which were later sold in Beroff's father's account.
Accordingly, based on the foregoing, the Commission finds that Beroff was a cause of the Promoter's and his father's violations of Section 5 of the Securities Act.
Beroff has submitted an Offer in which, without admitting or denying the findings therein, he consents to the Commission's entry of this Order, which: (1) makes findings as set forth above; and (2) orders Beroff to cease and desist from committing or causing any violation, or any future violation, of certain provisions of the federal securities laws. As set forth in this Offer, Beroff undertakes to cooperate with the Commission staff in connection with this action and any related judicial or administrative proceedings commenced by the Commission or to which the Commission is a party.
Based on the foregoing, the Commission deems it appropriate to accept the Offer submitted by Beroff and to impose the relief specified herein.
Accordingly, IT IS HEREBY ORDERED, pursuant to Section 8A of the Securities Act, that Beroff cease and desist from committing or causing any violation, and any future violation, of Section 5 of the Securities Act.
IT IS FURTHER ORDERED, that Beroff shall comply with his undertakings described in Section IV. above.
By the Commission.
Jonathan G. Katz
|1||The findings herein are made pursuant to Beroff's Offer and are not binding on any other person or entity in this or any other proceeding.|
|2||"Underwriter" is defined by Section 2(a)(11) of the Securities Act to mean, among other things, "any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking."|
|3||Beroff's father became an "underwriter" under Section 4(1) of the Securities Act when he took shares from the Promoter who himself was an "underwriter."|
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