UNITED STATES OF AMERICA
In the Matter of
|ORDER INSTITUTING 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 Securities and Exchange Commission ("Commission") deems it appropriate that public administrative proceedings be, and hereby are, 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") to determine whether Teltran International Group, Ltd. ("Teltran") violated or caused violations of Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, and 13a-13 thereunder.1
In anticipation of the institution of these administrative proceedings, Teltran has submitted an Offer of Settlement 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 to which the Commission is a party, and prior to a hearing and without admitting or denying the findings set forth herein, except as to jurisdiction over it and over the subject matter of these proceedings, which Teltran admits, Teltran consents to the entry of this Order Instituting 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 ("Order"). The Commission has determined that it is appropriate to accept Teltran's Offer of Settlement, and accordingly is issuing this Order.
Based on the foregoing, the Commission finds that:2
A. Respondent and Responsible Officer
Teltran, a Manhattan-based telecommunications company, provided Internet telephony, 1-900 services and traditional carrier services in the United States and abroad. During the relevant time period, Teltran also operated a website at www.Teltran.com. Public trading started in 1996 and Teltran became a reporting company with the Commission in March 1999. Teltran's common stock is currently quoted in the "pink sheets" after having been removed from the OTC Bulletin Board in July 2000. During the relevant time period, Teltran's stock traded at a high of $15.688 per share. Teltran's shares are currently quoted at about $.05 per share.
Byron Lerner ("Lerner"), age 57, resides in New York and has been the Chairman, President and Chief Executive Officer of Teltran since June 1997.
During its fiscal year ended December 31, 1999, Teltran materially overstated its revenues and earnings contrary to Generally Accepted Accounting Principles ("GAAP"). The company incorrectly recognized revenue by recording its purchase of ChannelNet Ltd. ("CNET") on its books as of June 1, 1999, when in fact, it did not acquire CNET until August 6, 1999. The incorrect financial results were reported in various periodic reports filed with the Commission and disseminated to the investing public during 1999 and 2000.
Teltran also disseminated misleading revenue, earnings per share and stock price projections, as well as misleading information concerning its chances for being listed on the American Stock Exchange ("AMEX"). Specifically, in May 1999, Teltran began projecting 1999 revenues of $30 million and earnings per share of $.30. Teltran repeated these projections throughout the year and made false and misleading statements concerning its prospects for 1999 after it became known that the projections would not be met. During 1999, Teltran also republished analyst reports on its Internet website that projected that Teltran's stock price would increase from about $10 to $75 per share and that Teltran would earn $2 - $5 per share in 2000. These reports also stated that Teltran would be listed on AMEX "imminently" and that Teltran's stock price would massively increase when it began trading on AMEX. Teltran knew or had reason to know that there was no reasonable basis for these projections, and the company misled investors by republishing the analyst reports on its website.
C. The ChannelNet Acquisition
On May 7, 1999, Teltran issued a press release announcing that it had entered into a letter of intent to acquire CNET, a U.K. company owned by Barclay Brydon ("Barclay"), a British company headquartered in London. The press release stated that CNET specialized in internet telephony services and that the transaction was scheduled to close on June 1, 1999. The acquisition was designed to enhance Teltran's internet telephony capability abroad and help Teltran meet its revenue and earnings targets for 1999 and 2000.
By June 1, 1999, despite each side's interest in completing the deal, they had not agreed upon certain material terms of the sale. Consequently, no contract was executed as of that date. By July 1, 1999, the parties still had not finalized all material terms of the deal, and had not executed a written contract. On July 15, 1999, Teltran and Barclay executed a written contract. However, the contract specifically stated that Teltran had not completed its due diligence review and permitted Teltran to terminate the agreement. The contract also provided that the parties would enter into other related agreements, including an agreement for the purchase of Atlantic Corporation ("Atlantic"), which was another company owned by Barclay, and an agreement for the purchase of the assets needed to run the businesses.
During the next month, the lawyers for both sides resolved most of the open issues and, on August 16, 1999 the CNET acquisition was completed. At the closing, the parties also executed a contract for the purchase of Atlantic and the related equipment. Despite the fact that Teltran and Barclay had not executed a binding contract until July 15, 1999 and the acquisition did not close until August 16, 1999, Teltran recorded the acquisition of CNET, for accounting purposes, as of June 1, 1999.3
D. Relevant Accounting Principle
Under Accounting Principles Board Opinion No. 16, "Business Combinations," a company may book an acquisition earlier than the closing date only if the buyer had "effective control" of the target company by the earlier date. As set forth above, Teltran did not obtain effective control of CNET until the closing of the CNET acquisition on August 16, 1999. As a result, Teltran could not record the CNET acquisition as of June 1, 1999, and in doing so, Teltran improperly added to its reported results CNET's pre-acquisition results from operations for June, July and part of August 1999.4
E. Teltran's Public Filings
On August 19, 1999, Teltran filed its Form 10-QSB for the quarter ended June 30, 1999. Lerner signed the Form 10-QSB as President, CEO and Principal Financial and Accounting Officer. In this filing, Teltran reported revenues of $456,720 and $540,179 for the three-month and six-month periods ended June 30, 1999, respectively. If Teltran had used the correct date for the CNET acquisition, revenue for these periods would have been $99,881 and $183,340, or 78% and 64% lower, respectively.
On November 8, 1999, Teltran filed its Form 10-Q for the quarter ended September 30, 1999. Lerner signed the Form 10-Q as President, CEO and Principal Financial and Accounting Officer. In this filing, Teltran reported revenues of $2,267,570 and $2,807,749 for the three-month and nine-month periods ended September 30, 1999, respectively. If Teltran had used the correct date for the CNET acquisition, revenues for these periods would have been $366,277 and $549,617, or 83% and 80% lower, respectively. The Form 10-Q also failed to disclose that the revenues were generated due to consolidating the CNET acquisition as of June 1, 1999 and characterized the revenues as being derived from internet telephony, when, in fact, the revenues were predominantly generated from 1-900 services.
On April 12, 2000, Teltran filed its Form 10-K for the year ended December 31, 1999. Lerner signed the Form 10-K as President, CEO and Director. In this filing, Teltran reported revenues of $2,453,189 for the year-ended December 31, 1999. If Teltran had used the correct date for the CNET acquisition, revenues for the year would have been $1,041,815, or 58% lower. The MD&A section of the Form 10-K also stated that the reason for the increase was due to "the generation of additional VOIP sales of our international telecommunications network." This misrepresented the increase in revenues as coming from VOIP (internet telephony services) rather than 1-900 services.5
F. Teltran's Press Releases
For the second quarter of 1999, Teltran issued a press release entitled "Teltran Breaks Even In Second Quarter. Preliminary Estimates Show July Revenues at $1 Million." The press release, published on August 16, 1999, quoted Lerner as stating: "We are very pleased with the progress that the company has made in the second quarter as evidenced by our steadily increasing revenue base. These figures show that Teltran International is clearly on the threshold of profitability and early third quarter numbers substantiate that fact." The press release added that preliminary figures showed Teltran generated $1 million of revenue during July. The press release also quoted Lerner as stating, "This one-month figure nearly doubles all revenues for the first half of the year and is indicative of increased traffic from ongoing operations and contracts. We remain confident that we are on schedule to reach or exceed all previously announced projections."
However, the press release failed to mention that Teltran achieved these results only because it had consolidated the CNET acquisition as of June 1, 1999 and that, without using this effective date, Teltran would not have had $1 million in revenues for July 1999. The press release also implied that the steadily increasing revenue base and telephony traffic resulted from actions brought about by Teltran; in fact, most of the revenues were from consolidating the CNET acquisition as of June 1, 1999.
For the third quarter of 1999, Teltran issued a press release entitled, in part, "Company Reports Earnings Per Share of 5 Cents" and "Revenues Increase Nearly 500% During The Third Quarter." The press release, published on November 4, 1999, stated that Teltran had achieved strong, across-the-board growth, particularly from its expanding presence in broadband and Internet related services such as VOIP. The release quoted Lerner as stating: "revenues have dramatically increased each quarter reflecting increased demand for our products" and "we believe the quarter-to-quarter growth that has been reported thus far in 1999 reflects the direction in which the company is headed and we are confident this trend will continue as additional locations come online in the fourth quarter." This earnings release did not disclose that the revenues were generated due to consolidating the CNET acquisition as of June 1, 1999, and, like the Form 10-Q, falsely characterized the revenues as internet telephony related, when in fact, the revenues were predominantly generated from 1-900 services.
G. Teltran's Internet Postings
In April 1999, Teltran started an Internet website at www.teltran.com. Teltran included an investor-relations section on this site to provide shareholders and potential investors with information about the company, including all of Teltran's press releases and favorable reports written by third parties.
Between July and October 1999, Teltran republished several reports written by Stockreporter.de, an online stock newsletter based in Germany, on the investor-relations section of its website. At the bottom of each report Teltran also included a hyperlink to the Stockreporter.de website, www.stockreporter.de. The reports also contained disclaimers indicating that Stockreporter.de had created the reports on an unsolicited basis for no compensation, and noted that Stockreporter.de would accept "no claim for any kind of warranty."
Nonetheless, by posting them on its website, Teltran adopted the Stockreporter.de reports. Several of these reports included false and misleading statements concerning the status of Teltran's AMEX application. For example, on July 12, 1999, Teltran published a Stockreporter.de report on its website announcing that Teltran would be listed on the AMEX or NASDAQ "at the latest the end of September." A subsequent report was posted by Teltran on its website, entitled, in part, "Stockreporter.de discovers that Teltran is finally going to be listed at the major American Stock Exchange." The report stated that, "being listed on AMEX will massively influence the share price in a positive way" and noted interest in Teltran from institutional investors. On August 18, 1999, Teltran republished another report written by the Stockreporter.de. This report reiterated a strong buy recommendation due, in part, to Teltran's "imminent" listing on AMEX.
However, at the time Teltran republished these Stockreporter.de reports, Teltran did not meet AMEX's listing guidelines and had not received a favorable preliminary listing eligibility opinion. As a result, Teltran could not have been listed unless AMEX officials granted a waiver of its listing criteria. Such waivers had historically been granted to only about one-third of the companies needing one. Nonetheless, Teltran did not qualify the Stockreporter.de statements and materially misrepresented its potential listing status with AMEX.
The Stockreporter.de reports also contained stock price and earnings per share projections for fiscal 2000. For example, on July 6, 1999, Teltran republished a report entitled "Stockreporter.de analyzed huge new profit potentials for Teltran (TLTG) with a new price target of 60$ - 75$." On October 5, 1999, Teltran also republished a Stockreporter.de report estimating earnings per share of $2 - $5 for fiscal 2000. However, Teltran had no reasonable basis to support either of these projections.
H. Teltran's Earnings Guidance For 1999
In early 1999, Teltran began issuing press releases predicting that Teltran would generate $30 million in revenue and earn $.30 per share for 1999. One press release, dated March 24, 1999, quoted Lerner as stating "[w]ith our current contracts and others we have out for signature, it appears that my previous projection of $30 million in revenue with an earnings per share of $.30 will easily be met, if not exceeded." Another press release, dated April 23, 1999, quoted Lerner as stating "I am very comfortable with the 1999 and 2000 revenue and earnings projections published in the report as we fully expect to achieve our earnings per share estimate of $.30 for 1999 and $.65 for 2000."
On May 14, 1999, Teltran issued in its first quarter earnings release, which stated "we remain confident that we will meet or exceed our 1999 earnings projections of $.30 per share." Teltran reiterated this guidance on May 25, 1999, when it announced that the company had received another "strong buy" recommendation from Stock-Tipper.com, and stated "we feel that TLTG can achieve revenue growth of $30 million and earn .30/share for 1999 (coming from zero growth)."
Despite numerous setbacks and delays in implementing its Internet telephony contracts, on August 16, 1999, Teltran issued an earnings release for the quarter ended June 30, 1999, that quoted Lerner as stating "we remain confident that we are on schedule to reach or exceed all previously announced projections." The next day, Teltran republished on its website a Stockreporter.de. report containing an interview between Stockreporter.de and Lerner, during which Lerner was asked if he was going to increase his $.30 earnings per share estimate for 1999. The release quoted Lerner as stating that he preferred to remain conservative in his estimates, but the possibility of exceeding them existed.
In September 1999, Teltran's investor-relations department e-mailed investors information confirming previous statements that had been made by Lerner. For example, on September 9, 1999, Teltran's investor-relations manager stated in an e-mail, "our projection was for 30 cents per share in 1999 and we continue to stand behind it." On September 16, 1999, the investor-relations manager also stated in an e-mail, "Teltran continues to stand behind all previously announced projections including earnings of 30 cents per share this year and $1 per share next year." As late as November 8, 1999, the investor-relations manager told an investor that "At present we still expect to meet all projections."
In mid-November 1999, Lerner found out that WorldCom, the owner of Ozemail, was selling its Internet telephony network to ITXC Corp. ("ITXC"). Because of this sale, Teltran could not continue to transmit calls because it had to modify its Internet telephony gateways to work on ITXC's system, which resulted in a delay of several months before it could recommence processing calls.
On November 29, 1999, Teltran issued a press release stating that CNET would run 3.5 million minutes of calls per month with Norweb Telecom beginning in December 1999. The next day, Teltran's investor-relations manager sent an e-mail about the ITXC deal to investors and told one of them that "there is no cause for concern. The effect is only positive for Teltran." In addition, on December 6, 1999, Teltran issued a press release stating that the ITXC acquisition of Ozemail "immediately accelerates Teltran's opportunities." It was not until March 23, 2000, when Teltran announced revenues of only $5.6 million for the year-ended December 31, 1999, that Teltran disclosed that the equipment and network transition resulted in a 60 to 90 day period where the equipment was operating at limited capacity.
Despite these statements and assurances, by June 30 and September 30, 1999, Teltran had only reported revenues of $540,179 and $2,807,749, respectively, more than $25 million short of its $30 million revenue projection. Teltran also continued to publish its 1999 earnings guidance on its Internet website until April 2000.
I. Teltran's Deficient Internal Controls
During 1999, Teltran had no system to evaluate the collectibility of its accounts receivable balances. In fact, nobody from Teltran examined the receivables to determine whether they were collectible. Teltran's deficient internal controls resulted in a double-booked accounts receivable of $796,134 during the quarter ended September 30, 1999.
A. Violations of the Antifraud Provisions
Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit materially false or misleading statements or omissions made in connection with the offer or sale, or purchase or sale, of any security. An issuer violates these provisions by, intentionally or with reckless disregard for the truth, making material misstatements or omissions in Commission filings. SEC v. Great American Industries, 407 F.2d 453 (2d Cir.), cert. denied, 395 U.S. 920 (1968); SEC v. Geotek, 426 F. Supp. 715 (N.D. Cal. 1976), affirmed, 590 F.2d 785 (9th Cir. 1979). Scienter is required for a violation of the antifraud provisions, Aaron v. SEC, 446 U.S. 680, 691 (1980), which the Supreme Court has defined as "a mental state embracing intent to deceive, manipulate, or defraud," Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). The scienter of a company's management is imputed to the company. See, e.g., SEC v. Manor Nursing Centers, 458 F.2d 1082 (2d Cir. 1972). Recklessness generally satisfies the scienter requirement. Rolf v. Blyth Eastman Dillon & Co., 570 F.2d 38, 44 (2d Cir. 1978); cert. denied, 439 U.S. 1039 (1978); SEC v. Blavin, 760 F.2d 706, 711 (6th Cir. 1985).
Teltran violated the antifraud provisions by knowingly, or recklessly, misrepresenting reported revenues in its June 30, 1999 and September 30, 1999 Forms 10-Q and in its December 31, 1999 Form 10-K. Teltran also disseminated earnings press releases for those quarters that contained materially false and misleading statements about its reported revenues.
2. Statements on Teltran's Internet Website
Under certain circumstances an issuer that disseminates false or misleading third party reports may adopt the contents of those reports and be fully liable for the misstatements contained in them, even if it had no role whatsoever in the preparation of the report. If an issuer knows, or is reckless in not knowing, that the information it distributes is false or misleading, it cannot be insulated from liability because management was not actively involved in the preparation of that information. Adoption occurs "when a company conveys the suggestion that the analysts' forecasts are accurate or at least in accordance with its views." In re Cypress Semiconductors, 891 F. Supp. 1369, 1377 (N.D. Cal. 1995), aff'd sub nom. Eisenstadt v. Allen, 1997 U.S. App. LEXIS 9587 (9th Cir. 1997). See also Use of Electronic Media, 65 FR 25843, 25849 (May 4, 2000).
As set forth above, Teltran republished and adopted several analyst reports that contained materially false or misleading statements. As a result, Teltran violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
3. Teltran's Earnings Guidance for 1999
As set forth above, beginning early in the first quarter of 1999 and continuing through December 1999, Teltran issued numerous public statements concerning prospects for 1999. However, by June 30 and September 30, 1999, Teltran had only reported revenues of $540,179 and $2,807,749, respectively, more than $25 million short of its $30 million revenue projection. Consequently, Teltran made false and misleading statements, and, as a result, violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
B. Teltran Violated the Reporting Provisions of the Exchange Act
Section 13(a) of the Exchange Act and Exchange Act Rules 13a-1 and 13a-13 require issuers with securities registered under Section 12 of the Exchange Act to file annual and quarterly reports with the Commission and to keep this information current. The obligation to file such reports embodies the requirement that they be true and correct. See, e.g., SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1165 (D.C. Cir. 1978), cert. denied, 440 U.S. 913 (1979). Exchange Act Rule 12b-20 further requires that such reports contain any additional information necessary to ensure that the required statements in the reports are not, under the circumstances, materially misleading. Information regarding the financial condition of a company is presumptively material. SEC v. Blavin, 760 F.2d 706, 711 (6th Cir. 1985). Financial statements in a Commission filing that do not comply with GAAP are presumed to be misleading. Regulation S-X, 17 C.F.R. 210.4-01(a)(1).
As described above, Teltran filed annual and quarterly reports with the Commission that materially overstated Teltran's revenues. As a result, Teltran violated Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder.
C. Teltran Violated the Record-Keeping and Internal Controls Provisions of the Exchange Act
Section 13(b)(2)(A) of the Exchange Act requires Section 12 registrants to make and keep books, records, and accounts that accurately and fairly reflect the transactions and dispositions of their assets. Section 13(b)(2)(B) of the Exchange Act requires such registrants to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that, among other things, transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain the accountability of assets.
As described above, Teltran failed to keep accurate books and records, and its internal accounting controls were inadequate. Among other things, Teltran recorded the CNET acquisition prior to the date the transaction occurred and, therefore, failed to ensure that revenue recognition was in conformity with GAAP. As a result, Teltran violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act.
Based on the foregoing, the Commission finds that Teltran violated Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder.
Accordingly, IT IS HEREBY ORDERED that Teltran:
Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, cease and desist from committing or causing any violation and any future violation of, Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder.
By the Commission.
Jonathan G. Katz
|1||This matter is related to SEC v. Byron R. Lerner, Case Number 1:02CV00748 (D.D.C.) (April 22, 2002).|
|2||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.|
|3||Although a contract for the purchase of Atlantic was executed on August 16, 1999, the transaction never closed. Approximately 10% of the revenues recorded by Teltran as of June 1, 1999 were from Atlantic.|
|4||In June 1999, Teltran submitted a listing application to the AMEX. In connection with its review of Teltran's application, the AMEX asked to see Teltran's financial results for the second and third quarters of 1999.|
|5||Based upon the Division of Enforcement's investigation, Teltran restated its June 30 and September 30, 1999 Forms 10-Q and December 31, 1999 Form 10-K to reflect the CNET acquisition on August 16, 1999.|
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