UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES ACT OF 1933 Release No. 7378 / January 8, 1997 SECURITIES EXCHANGE ACT OF 1934 Release No. 38141 / January 8, 1997 AAER Release No. 869 / January 8, 1997 ADMINISTRATIVE PROCEEDING File No. 3-9110 ------------------------------- : In the Matter of : : ORDER MAKING FINDINGS Carolyn Safer Kenner : AND IMPOSING REMEDIAL : SANCTIONS : : ------------------------------- I. On September 27, 1996, the Securities and Exchange Commission ("Commission") issued an Order Instituting Proceedings Pursuant to Section 8a of the Securities Act of 1933 and Section 21c of the Securities Exchange Act of 1934 ("Order Instituting Proceedings"), to determine whether the allegations contained in the Order Instituting Proceedings were true, and what remedial action, if any, was appropriate in the public interest. See Administrative Proceedings File No. 3-9110. II. Respondent Carolyn Safer Kenner ("Kenner") 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 without admitting or denying the findings set forth herein, Respondent Kenner consents to the issuance of this Order, the entry of the findings contained herein, and the imposition of the remedial sanctions set forth below. ==========================================START OF PAGE 2====== III. The Commission finds the following:-[1]- A. FACTS 1. Respondent Carolyn Safer Kenner, a resident of Staten Island, New York, was the Vice President, Secretary and a director of Ross Cosmetics Distribution Centers, Inc. ("RCDC"), a corporation that acquired and resold fragrance and cosmetics products, from its inception in June 1982 through May 1989. -[2]- 2. Issuer RCDC, at all times relevant herein, was a Delaware corporation. RCDC's principal business is the manufacture, marketing and wholesale distribution of alternatives to designer fragrances and cosmetics. Since March 1, 1984, RCDC's common stock has been registered with the Commission pursuant to Section 12(g) of the Exchange Act and quoted on the NASDAQ. 3. Other Persons a. Ross Freitas Freitas was the founder, President and Chairman of the Board of RCDC from its inception in June 1982 until mid-June 1989. Freitas also served as RCDC's Senior Vice President between June 1989 and April 1990 and as a director from June 1989 until November 1991. On February 8, 1995, the Commission filed a complaint in U.S. District Court in South Carolina alleging that Freitas violated Section 17(a) of the Securities Act and Sections 10(b), 13(d), 13(g) and 16(a) of the Exchange Act and Rules 10b- 5, 13b2-1, 13b2-2, 13d-1, 13d-2 and 16a-1 promulgated thereunder by engaging in a fraudulent scheme to prevent disclosure of related party transactions and control of RCDC, making material misstatements concerning corporate transactions, and creating ---------FOOTNOTES---------- -[1]- The findings herein are made pursuant to Respondent Kenner's Offer of Settlement and are not binding on any other person or entity in these or any other proceeding. -[2]- On March 16, 1993, Ross Cosmetics Distribution Centers, Inc. changed its name to Tristar Corp. and is now headquartered in San Antonio, Texas. For all relevant times herein, the company was known as Ross Cosmetics Distribution Centers, Inc. and will be referred to as such in this Order. ==========================================START OF PAGE 3====== misleading financial statements that were publicly disseminated and filed with the Commission. On March 31, 1995, the Court entered a Final Judgment of Permanent Injunction and an officer and director bar against Freitas, who consented to the entry of the Order and Bar without admitting or denying the Commission's allegations. Previously, on October 14, 1993, Freitas pled nolo contendere in U.S. District Court in South Carolina to one count of wire fraud in criminal proceedings brought against him for conduct relating to allegations in the Commission's complaint. b. Eugene D. Derry Derry was elected to the Board of RCDC on September 11, 1987. He succeeded Freitas as President and Chairman of the Board of RCDC and served in those capacities from June 1989 through July 1992. On February 8, 1995, the Commission filed a complaint in U.S. District Court in South Carolina alleging that Derry violated Sections 10(b), 13(d), and 16(a) of the Exchange Act and Rules 10b-5, 13b2-1, 13b2-2, 13d-1, 13d-2 and 16a-1 promulgated thereunder. On July 12, 1996, Derry pled nolo contendere in a criminal action in U.S. District Court in South Carolina to a one count information alleging a violation of Section 13(d) of the Exchange Act and was sentenced to pay a fine of $500,000 and given five years of unsupervised probation. Under the plea agreement, one condition of probation was that he promptly leave the United States and not travel to or within the U.S. for a period of five years without the Court's permission. 4. Disclosures Related to the Third-Party Acquisition of 35 Percent of RCDC's Outstanding Stock a. During the period February 1986 through November 1987, RCDC was unable to make timely payments for purchases of inventory from one of its suppliers. As a result, during that time period, RCDC engaged in five transactions that resulted in the issuance of 950,000 shares, or 35 percent of RCDC's outstanding stock, in exchange for inventory. RCDC issued the stock to seven Panamanian corporations owned and controlled by a foreign third party associated with RCDC's supplier (the "Panamanian corporations"). b. On January 27, 1988, RCDC filed with the Commission a Form 10-K for its fiscal year ended August 31, 1987 ("1987 10-K"). Item 1, Business, falsely described RCDC's first transaction with the Panamanian corporations as "an arrangement with a non-affiliated overseas manufacturer." The 1987 10-K falsely described subsequent transactions with the Panamanian corporations as "a series of transactions with seven non- affiliated Panamanian corporations." Further, the 1987 10-K omitted to disclose that the foreign third party then ==========================================START OF PAGE 4====== beneficially owned approximately 23 percent of the outstanding stock of RCDC. Kenner signed the 1987 10-K. c. Kenner knew or was reckless in not knowing that RCDC had issued shares to the Panamanian corporations, rather than to independent corporations, and therefore to the foreign third party. Kenner also knew or was reckless in not knowing about the foreign third party's beneficial ownership in RCDC. d. On December 30, 1988, RCDC filed a Form 10-K for its fiscal year ended August 31, 1988 ("1988 10-K") that repeated the description of the first transaction with the Panamanian corporations. Further, RCDC failed to disclose that the foreign third party's beneficial ownership of RCDC then amounted to 35 percent of the outstanding stock. e. The 1988 10-K falsely characterized the transactions with foreign third party-controlled Panamanian corporations, effected during fiscal years 1987 and 1988, as a "series of private placements ... in exchange for cash and merchandise." Further, the 1988 10-K falsely stated that the transactions in August and October 1987 with the foreign third party-controlled Panamanian corporations constituted issuance of stock "to a major vendor," rather than to a related party. f. Further, Item 10 of the 1988 10-K, relating to directors and executive officers of RCDC, did not disclose that Derry, an RCDC director, was a nominee of the foreign third party. Kenner signed the 1988 10-K. g. Kenner knew or was reckless in not knowing of the underlying facts and transactions disclosed in the 1988 10-K. 5. False Credit Memo and Other False Accounts In 1987, RCDC's Comptroller calculated the company's profit as approximately $124,000. Also in 1987, Freitas obtained a false $180,000 credit from an intermediary. By booking the credit, RCDC reported net income of $304,000 for fiscal year 1987. RCDC reported this $180,000 overstatement in the 1987 10-K and in the 1988 10-K. Kenner knew or was reckless in not knowing about the false credit memo when she signed the 1987 and 1988 10- Ks. 6. False Representations to Auditors In connection with the preparation of RCDC's audited financials for the fiscal years ended August 31, 1987, Kenner, ==========================================START OF PAGE 5====== and two other RCDC officials, signed letters of representation to the company's auditors falsely claiming that RCDC had properly recorded or disclosed in its financial all related party transactions and that the company's accounting practices were in conformity with generally accepted accounting principles ("GAAP"). In fact, as described above, Kenner knew or was reckless in not knowing about the related-party transactions and RCDC's overstated net income. 7. Kenner's Beneficial Ownership of RCDC Stock a. When RCDC became a public company in 1984, Kenner beneficially owned 26 percent of RCDC's outstanding stock. RCDC's initial public offering and additional sale of shares, both in 1984, diluted Kenner's beneficial ownership interest. As of February 15, 1985, Kenner was obligated to disclose on Schedule 13G her beneficial ownership of 18 percent of RCDC's outstanding stock. Kenner never filed a Schedule 13G or amendments disclosing material changes in her beneficial ownership interests. b. Further, Kenner also failed to file timely a Form 3 and Forms 4 as required by Section 16(a) and Rule 16a-1. On January 25, 1988, almost four years after her filing obligation first arose, Kenner filed a Form 3, disclosing her beneficial ownership of 369,921 shares of RCDC stock. Between January 25, 1988 and July 24, 1989, Kenner filed several Forms 4, many of which were not timely. c. In connection with the execution of an agreement to sell her RCDC stock, Kenner did not file Forms 4 when beneficial ownership of shares was transferred on 24 separate but regular intervals. Instead, on December 19, 1991, two and one half years after the execution of the underlying agreement, she filed a Form 4 disclosing the transfer of her shares. d. In November 1988, RCDC filed with the Commission and disseminated to its shareholders a proxy statement for its December 1988 annual meeting ("1988 Proxy"). The 1988 Proxy did not disclose (1) RCDC's relationship with the foreign third party; (2) the relationship among the Panamanian corporations, RCDC's supplier and the foreign third party; (3) Derry's relationship with the foreign third party; and (4) the foreign third party's beneficial ownership of RCDC's outstanding stock. Kenner knew or was reckless in not knowing about these undisclosed facts when she signed the 1988 Proxy. B. APPLICABLE LAW ==========================================START OF PAGE 6====== 1. Antifraud Violations Section 17(a) of the Securities Act, and Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, prohibit the use of any means or instrumentality of interstate commerce or the mails to employ devices, schemes or artifices to defraud. These provisions also prohibit, among other things, making materially false and misleading statements in connection with the offer, purchase or sale of any security. A fact is material if a reasonable investor would consider it important in making investment decisions or would view the information as having significantly altered the "total mix" of information made available. Basic, Inc. v, Levinson, 485 U.S. 224, 2312-32 (1985). 2. Reporting and Recordkeeping Violations Section 13(a) of the Exchange Act and Rule 13a-1 promulgated thereunder require issuers of registered securities to file with the Commission annual, current (Form 8-K), and quarterly reports. Rule 13b2-2 prohibits officers and directors from, directly or indirectly, making or causing to be made materially false or misleading statements, or omitting to state, or causing another person to omit to state, any material fact in order to make statements made not misleading to an accountant in connection with any audit or examination of the financial statements required to be filed with the Commission, or the preparation or filing of any document or report to be filed with the Commission. Rule 12b-20 requires that these periodic reports contain all information necessary to ensure that statements made in them are not materially misleading. 3. Beneficial Ownership Disclosure Violations Section 13(d) of the Exchange Act and Rule 13d-1 promulgated thereunder require any person who acquires the beneficial ownership of more than five percent of any equity security of a class which is registered pursuant to Section 12 of the Exchange Act to file a Schedule D with the Commission within 10 days. Section 13(d)(2) of the Exchange Act and Rule 13d-2 promulgated thereunder require a person to promptly file an amendment to the statement filed pursuant to section 13(d)(1) "[i]f any material change occurs in the facts set forth in the statement." Section 13(g) of the Exchange Act requires the direct or indirect beneficial owner of more than five percent of any class of any equity security registered pursuant to Section 12 of the Exchange Act, who otherwise is not obligated to file a Schedule 13D, to file a Schedule 13G with the Commission within 45 days after the end of the calendar year in which such direct or indirect beneficial owner became obligated to report his beneficial ownership. ==========================================START OF PAGE 7====== Section 16(a) of the Exchange Act and Rule 16a-1 promulgated thereunder required that beneficial owners of more than ten percent of any class of any equity security registered pursuant to Section 12 of the Exchange Act file a Form 3 by the effective date of a registration statement filed pursuant to Section 12, or within ten days of becoming such a beneficial owner. Until May 1, 1991, Rule 16a-1 implemented the statutory filing requirements under Section 16 of the Exchange Act. On January 10, 1991, the Commission adopted a comprehensive revisions of the rules under Section 16, which became effective on May 1, 1991. See Rel. 34- 28869, 56 Fed. Reg. 7242 (Feb. 21, 1991). These amendments, inter alia, place the implementation of the former Rule 16a-1 filing requirement in new Rules 16a-2 and 16a-3. 4. Proxy Violations Section 14(a) of the Exchange Act prohibits any person from soliciting a proxy in contravention of the rules and regulations prescribed by the Commission. Rule 14a-9 promulgated thereunder prohibits the making of any false or misleading statement, or the omission of any material fact, in any proxy solicitation. C. Violations by Kenner 1. As described above, Kenner violated Sections 10(b) and 14(a) of the Exchange Act, Rules 10b-5, 14a-9 and 13b2-2 promulgated thereunder, and Section 17(a) of the Securities Act by: a. signing two RCDC annual reports and one proxy statement that contained false disclosures and omitted to state material facts; b. failing to file a Schedule 13G and amendments thereto, and failing to file timely a Form 3 and Forms 4, reflecting her ownership, purchases and sales of RCDC stock; and c. signing the letter of representation to RCDC's auditors, falsely claiming that the company had properly recorded or disclosed in its financials all related party transactions and that the company's accounting practices were in conformity with GAAP. 2. As described above, Kenner violated Sections 13(d), 13(g) and 16(a) of the Exchange Act and Rules 13d-1, 13d-2 and 16a-1 promulgated thereunder by failing to disclose on Schedule 13G, by February 15, 1985, her beneficial ownership of 18 percent of RCDC's outstanding stock. As her beneficial ownership decreased in the six following years to less than five ==========================================START OF PAGE 8====== percent of the outstanding stock of RCDC, Kenner also failed to file amendments disclosing material changes in her ownership. Kenner also failed to file timely Forms 3 and 4. 3. As described above, Kenner caused RCDC to violate Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1 promulgated thereunder by signing RCDC's 1987 and 1988 10-Ks and 1988 Proxy when she knew or was reckless in not knowing that these filings with the Commission contained materially false and misleading information and omitted to state material facts. V. According, IT IS HEREBY ORDERED THAT Kenner cease and desist from committing or causing any violation or future violations of Sections 10(b), 13(d), 13(g), 14(a) and 16(a) of the Exchange Act and Rules 10b-5, 13d-1, 13d-2, 14a-9 and 16a-1, and 13b2-2 promulgated thereunder and Section 17(a) of the Securities Act and causing violations or future violations of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1 promulgated thereunder. For the Commission, by its Secretary, pursuant to delegated authority. Jonathan G. Katz Secretary