UNITED STATES OF AMERICA
In the Matter of
Gerald S. Papazian,
ORDER INSTITUTING PUBLIC 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 against Gerald S. Papazian ("Papazian") pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act").
In anticipation of the institution of these proceedings, Papazian has submitted an Offer of Settlement, which the Commission has determined to accept. Solely for the purposes of these proceedings and any other proceedings brought by or on behalf of the Commission or to which the Commission is a party, Papazian, without admitting or denying the findings set forth herein, except that he admits the jurisdiction of the Commission over him and over the subject matters set forth herein, consents to the issuance of this Order Instituting Proceedings, Making Findings and Imposing a Cease-and-Desist Order (the "Order").
On the basis of this Order and Papazian's Offer of Settlement, the Commission makes the following findings:1
A. Gerald S. Papazian, age 46, served as President and Chief Operating Officer of Aura Systems, Inc. ("Aura") from July 1997 until February 2002. During that time, Papazian had overall responsibility for Aura's day-to-day operations, and division heads responsible for purchasing and contracts reported to him. Prior to July 1997, Papazian was Aura's senior vice president for administration with oversight responsibility for Aura's purchasing, contracts, inventory control, and shipping and receiving functions. Papazian resides in Palos Verdes, California.
B. Aura Systems, Inc. ("Aura"), a Delaware corporation headquartered in El Segundo, California, formerly sold sound related and multi-media products, and now sells an induction power system for mobile power applications. Aura's common stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act and was quoted on the NASDAQ national market system until July 1999, when its stock was delisted. Aura's stock currently trades on the over-the-counter bulletin board under the symbol "AURA." Aura's fiscal year ends February 28. On October 2, 1996, the Commission entered a Cease-and-Desist Order by consent against Aura and others for 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 promulgated thereunder.
C During its 1997 fiscal year, Aura booked revenue from fictitious sales of computer monitors to Mag Innovision. The computer monitors were actually sold to Mag Innovision by Korean Data Systems Co., Ltd. ("KDS").
D. In its fiscal 1997 annual report on Form 10-K filed with the Commission on June 13, 1997, Aura reported $16.5 million in fictitious sales of KDS monitors to Mag Innovision. By recording the fictitious sales in its fiscal 1997 annual report on Form 10-K, Aura overstated its sales by $16.5 million and accounts receivable by approximately $9 million. The fictitious sales were material. Aura also inaccurately described itself as a computer monitor reseller in the text of its fiscal 1997 annual report.
E. During its 1998 fiscal year, Aura booked revenue from fictitious monitor sales to two shell entities, Micro Computer Distribution Power ("MCDP") and FYE Trading ("FYE").
F. In its fiscal 1998 annual report on Form 10-K, Aura materially overstated sales by $5.9 million attributable to the fictitious sales to MCDP and by $4.1 million attributable to the fictitious sales to FYE Trading. It also overstated accounts receivable by $5.9 million and by $4.1 million, respectively. The fictitious sales were material. Aura also inaccurately described itself as a computer monitor reseller in the text of its 1998 annual report.
G. In quarterly reports filed during its 1997 fiscal year, Aura improperly recognized $2.54 million in contract revenue that it had earned and booked in prior periods relating to contracts Aura had to install its electric value actuators in engines. The entries resulted in revenue overstatements of $1.04 million in the second quarter and $1.5 million in the third quarter. The entries were material to Aura's financial results.
H. On December 4, 1997, Aura filed with the Commission a registration statement on Form S-3 that incorporated by reference Aura's materially false annual report for fiscal year 1997. On June 25, 1998, Aura filed with the Commission a registration statement on Form S-3 that incorporated by reference Aura's materially false annual report for fiscal year 1998.
I. As Aura's President, Papazian had day-to-day responsibility for Aura's operations, including its major purchases and sales and contractual arrangements. Papazian also approved outgoing wire transfers including some of the outgoing wire transfers that Aura recorded as payments for fictitious computer monitor sales. In fiscal years 1997 and 1998, Papazian signed management representation letters to Aura's independent auditors, Aura's annual reports, and Aura's December 4, 1997 and June 25, 1998 registration statements that contained or incorporated the revenue overstatements described above. Papazian also assisted Aura's CFO in preparing the revenue recognition entries relating to contracts Aura had to install its electric value actuators in engines by providing information about the amount of work performed under those contracts. Papazian either knew or was reckless in not knowing that the management representation letters, annual reports and registration statements discussed above contained material misstatements. By authorizing outgoing wire transfers as alleged payments for monitors, Papazian also falsified or caused the falsifications of Aura's books and records. Likewise, by signing management representation letters, Papazian failed to disclose to Aura's auditors the revenue overstatements described above. Papazian also knowingly failed to implement a system of accounting controls sufficient to prevent the false entries described above.
J. Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, prohibit material misstatements or omissions, made with scienter, in connection with the purchase or sale of securities. SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 860-62 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). Section 17(a) of the Securities Act prohibits material misstatements and omissions made with scienter in the offer or sale of securities. Recklessness has been found to satisfy the scienter requirement for these provisions. See, e.g., Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 120 (2d Cir. 1982).
K. Section 13(b)(2) of the Exchange Act requires an issuer to make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of its assets. Section 13(b)(5) provides that no person shall knowingly circumvent or knowingly fail to implement a system of internal accounting controls, or knowingly falsify any accounting book, record or account. Rule 13b2-1 promulgated under Section 13(b)(2) provides that no person shall, directly or indirectly, falsify or cause to be falsified any book, record, or account subject to Section 13(b)(2). Rule 13b2-2, also promulgated under Section 13(b)(2), prohibits any officer or director from making or causing to be made any materially false or misleading statement to an accountant in connection with an audit of the issuer's financial statements or the preparation of any filing with the Commission.
Based on the foregoing, the Commission finds that Papazian committed violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
Based on the foregoing, the Commission also finds that Papazian committed violations of Section 13(b)(5) and Rules 13b2-1 and 13b2-2.
In view of the foregoing, the Commission finds that it is appropriate to impose the following relief as agreed to in the Offer of Settlement.
Accordingly, IT IS HEREBY ORDERED, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, that Papazian 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) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1, and 13b2-2 thereunder.
By the Commission.
Jonathan G. Katz
|1||The findings herein are made pursuant to Papazian's Offer of Settlement and are not binding on any other person or entity in this or in any other proceeding.|
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