UNITED STATES OF AMERICA
|In the Matter of
MARKET AMERICA, INC. and
|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 CEASE-
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and they 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") against Market America, Inc. ("Market America") and Richard D. Hall, Jr. ("Hall") (collectively, the "Respondents") to determine whether Market America violated Section 13(a) of the Exchange Act, and Rules 12b-20 and 13a-1 thereunder, and whether Hall was a cause of violations of Sections 5 and 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
In anticipation of the institution of these administrative proceedings, the Respondents have submitted Offers of Settlement for the purpose of disposing of the issues raised in these proceedings. 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, the Respondents, without admitting or denying the findings set forth herein, except that they admit to the jurisdiction of the Commission over them and over the subject matter of these proceedings, consent to the entry of the findings and to the issuance 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 Cease-and-Desist Order ("Order").
On the basis of this Order and the Respondents Offers of Settlement, the Commission finds the following: 1
1.Market America, a North Carolina corporation with headquarters in Greensboro, North Carolina, is a direct marketing company that enters into contractual relationships with suppliers to market their products through the companys network of independent distributors. Market America was founded in April 1992 by James H. Ridinger ("Ridinger") and completed a reverse acquisition with Atlantis Ventures, Inc. ("Atlantis"), a blank check corporation, in October 1993. As of July 28, 1998, Market America had 19.95 million shares of common stock outstanding and registered with the Commission pursuant to Section 12(g) of the Exchange Act. Market Americas stock has been quoted on the NASD Bulletin Board trading system ("NASD Bulletin Board") since August 3, 1994.
2. Hall, age 57, is an attorney licensed to practice law in North Carolina, Georgia and Virginia. Hall is counsel to Ridinger, Market Americas president, and resides in Greensboro, North Carolina.
These proceedings arise from the activities of Respondents Hall and Market America in connection with a fraudulent, unregistered distribution of Market America stock. The distribution was effectuated in part through a sham "blank check" public offering ("IPO") for Atlantis, followed by a reverse acquisition between Atlantis and Market America. 2 As a result of those transactions, two individuals, Gilbert A. Zwetsch ("Zwetsch") and Ridinger (Market Americas founder and owner of all of Market Americas stock prior to the reverse acquisition), had an interest in substantially all of the new Market Americas outstanding stock, a fact that was concealed in order to obtain an NASD Bulletin Board listing for Market America, and to distribute the unregistered shares of Market America.
Respondent Hall substantially assisted in effectuating these transactions. In June or July 1993, he negotiated the terms of an agreement which, among other things, provided that Zwetsch and Ridinger together would have an interest in 100% of the stock of the corporation after the completion of the contemplated merger. Hall knowingly or recklessly provided substantial assistance to Zwetsch, who concealed from the NASD his own and Ridingers interest in the Market America stock that would be available to the marketplace, so that Market America would be listed on the NASD Bulletin Board. Hall was also aware, prior to Market Americas listing on the NASD Bulletin Board, that Zwetsch and Ridinger had agreed that they would sell their Market America stock and share the proceeds on a dollar for dollar basis. In addition, Market America filed periodic reports with the Commission that failed to disclose that, in addition to the approximately 80% of Market Americas stock Ridinger owned, he and Zwetsch respectively had an interest in and were selling substantially all of the remaining 20% of its outstanding shares.
2. The Underlying Transactions
a. Creation of the Vehicle
In 1989 Zwetsch formed a shell corporation ("shell") styled Atlantis Ventures, Inc., which had no business or appreciable assets. Although Zwetsch had various family members and acquaintances serve as Atlantis nominal officers and directors, he personally controlled Atlantis. In 1991 Zwetsch caused a Form S-1 registration statement to be filed with the Commission and, in 1992 and 1993, caused four amendments to be filed. Atlantis registration statement and amendments were materially false and misleading because, among other reasons, they failed to disclose Zwetschs association with the Atlantis shell, when in fact he was the promoter and sole beneficial owner of all of Atlantis outstanding stock. Atlantis amended registration statement further misrepresented that there were no specific plans to transfer ownership of the shell.
b. Control of the Float and Aftermarket Sales
In June 1993 Atlantis registration statement became effective. By August 1, 1993, Zwetsch and Ridinger contemplated that Atlantis and Market America would effect a reverse acquisition; and in anticipation of that merger agreed that the stock previously issued to Atlantis officers, directors and principal shareholder, as well as stock denominated "Underwriting Stock - Free Trading," would be divided equally between a Ridinger "group" and a Zwetsch "group", and that Ridinger and Zwetsch would "fund" Atlantis. Atlantis and Market America completed their reverse acquisition in October 1993, and thereafter Zwetsch arranged for Market Americas stock to be traded on the NASD Bulletin Board by concealing from the NASD the fact that Zwetsch and Ridinger had an interest in all of the Market America stock that would be available to the marketplace. Before Market America began trading on the NASD Bulletin Board, Ridinger and Zwetsch agreed that Zwetsch would handle the sales of this stock into the marketplace, and they would share the proceeds on a dollar for dollar basis. During this period, and after NASD Bulletin Board trading of Market Americas shares commenced, Zwetsch and Ridinger stimulated interest in Market Americas stock among its distributors and others, and Zwetsch paid the author of an investment newsletter to advertise the stock. When Market Americas stock began trading on August 3, 1994, Zwetsch immediately began selling the Market America stock pursuant to his agreement with Ridinger.
a. Hall Negotiated the Terms of Ridingers Agreement With Zwetsch
By August 1993, Hall had negotiated the terms of Ridingers agreement with Zwetsch, and had drafted the document evidencing their agreement which was executed on August 1, 1993 ("Agreement"). The Agreement provided for the "funding of Atlantis Ventures" and "a proposed merger of Market America" into it, and provided that Ridinger would contribute $40,000 and Zwetsch would contribute $10,000 of the $50,000 necessary for the "funding of Atlantis Ventures." The "funding" identified in the Agreement referred to money that was used to create the appearance that Atlantis IPO had successfully closed. The Agreement provided that after the contemplated merger between Atlantis and Market America two groups, identified as the Ridinger "group" and the Zwetsch "group", would have issued to them "100% of the outstanding stock of the surviving corporation upon completion of the merger," and that each group would have an equal amount of the stock described as "Underwriting Stock - Free Trading." Also, Hall was aware that Zwetsch and Ridinger had orally agreed that once Market America began trading, Zwetsch would sell the Market America stock in which he and Ridinger respectively had interests and divide the proceeds with Ridinger on a dollar for dollar basis.
b. Halls Role in Obtaining Market Americas Bulletin Board Listing
Hall assisted Ridinger in establishing an offshore trust to hold the free trading Market America shares in which Ridinger had an interest. In or about August 1993, shortly after the Agreement was executed, Hall accompanied Ridinger to Bermuda and assisted him to establish the AAA Plus Trust ("AAA")(a Bermuda trust Ridinger created in August 1993, of which he and his family are beneficiaries). The AAA trust instrument identified Hall as "protector" of the trust, a position which empowered Hall to remove the trustee and request an accounting of the trusts assets. Ridingers portion of the free trading shares referred to in the Agreement were placed in AAAs name.
After the reverse acquisition was consummated, Zwetsch sought an NASD Bulletin Board listing for Market Americas stock. At this juncture, Hall substantially assisted Zwetsch in concealing from the NASD that Zwetsch and Ridinger had an interest in the Market America stock that would be available to the marketplace. While Market Americas listing application was pending, in a November 23, 1993 letter the NASD asked Public Securities, Inc. ("Public"), the broker-dealer sponsoring the application, to identify the beneficial owners of the Market America stock held in the names of certain entities identified in the letter, including AAA. (These names had previously been identified to the NASD as Atlantis IPO subscribers.) The letter further inquired whether the beneficial owners were related to the shareholders, officers or directors of Market America or Atlantis. Hall was made aware of the letter and its contents. Notwithstanding the fact that he knew of Ridingers interest in the Market America shares held in the name of AAA, and Zwetschs and Ridingers interest in all of the other outstanding shares, Hall did not disclose this to Publics president. Instead, Hall simply referred Publics president to Zwetsch for a response to the NASDs query knowing, or recklessly disregarding the likelihood that Zwetsch would provide a response that would not reveal Ridingers and Zwetschs interest in Market Americas stock.
Upon learning that the NASD wanted to know who beneficially owned the Market America shares held by AAA and others, Zwetsch engineered the creation of fraudulent correspondence and other documentation that purported to establish that the entities were not affiliated with Ridinger or himself. Public in turn forwarded that documentation to the NASD. Halls activities described above contributed to Market Americas obtaining a listing on the NASD Bulletin Board.
4. Market Americas Failure To Disclose That Ridinger and Zwetsch Had An Interest in All of Market Americas Shares
Commission filings by Market America similarly failed to disclose Ridingers and Zwetschs interest in substantially all of Market Americas stock. Specifically, while Market Americas NASD Bulletin Board listing application was pending, Market America filed its first Form 10-K on July 28, 1994 ("First Annual Report"). 3 The First Annual Report disclosed only that Ridinger owned 80% of Market Americas stock, and that an entity called Janz Studio owned 10.67%. The First Annual Report failed to identify Zwetsch or AAA, disclose Zwetschs relationship to Janz Studio, disclose Ridingers interest in the Market America shares held in AAAs name, or disclose the agreement with Ridinger that Zwetsch would sell most of the remaining 20% of the stock (all of the stock not issued to Ridinger as part of the merger, which included the Janz Studio stock and the remaining 9.33% of the outstanding shares) and divide the proceeds with Ridinger.
Market Americas failures to disclose continued after its stock became listed on the NASD Bulletin Board, and Zwetsch had commenced the unregistered sales of Market America shares in which he and Ridinger had an interest. Market Americas 1995 Form 10-K failed to disclose Zwetschs and Ridingers interest in, and sales of, the Market America stock in the names of Janz Studio and AAA. The Forms 10-K for the fiscal years 1996 through 1998 disclosed, for the first time, that AAA owned 5.94% of Market Americas outstanding shares. However, those filings failed to disclose Ridingers relationship with AAA. 4
C. LEGAL ANALYSIS
1. Hall Was a Cause of Violations of the Registration and Antifraud Provisions
Sections 5(a) and 5(c) of the Securities Act prohibit the offer or sale of securities as to which no registration statement has been filed or is in effect and no exemption from registration is available. Section 17(a) of the Securities Act prohibits the employment of fraudulent devices in the offer or sale of securities, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit fraudulent schemes in connection with the purchase or sale of securities.
The sales of Market America stock described above were part of a fraudulent distribution of unregistered securities by Ridinger and Zwetsch. Hall substantially assisted the violative distribution by negotiating the terms of Ridingers Agreement with Zwetsch, which provided that the two would "fund" Atlantis, and further provided that Ridinger and Zwetsch would control all of Market Americas outstanding stock after the reverse acquisition between Atlantis and Market America. Hall knew, or was reckless in not knowing, that the Agreement he negotiated was part of an IPO for Atlantis. Hall also contributed to Market Americas obtaining an NASD Bulletin Board listing by failing to disclose to Publics president, when informed of the NASDs query, Ridingers interest in the Market America shares held in the name of AAA, or Zwetschs and Ridingers interest in all of the other outstanding shares of Market America; and by referring Publics president to Zwetsch for response to the query knowing, or recklessly disregarding the likelihood that Zwetsch would provide a response that would not reveal Ridingers and Zwetschs interest in Market Americas stock. Hall was thus a cause of Zwetschs and Ridingers violations of the registration and antifraud provisions.
2. Market Americas Violations of the Reporting Provisions
Section 13(a) of the Exchange Act requires all issuers with securities registered under Section 12 of the Exchange Act to file such periodic reports as the Commission shall prescribe by its rules and regulations. Rule 13a-1 requires issuers to file annual reports. Item 403 of Regulation S-K requires disclosure of beneficial owners of more than five percent of the shares and any group as defined by Section 13(d)(3) of the Exchange Act to include two or more persons acting together for the purpose of acquiring, holding or disposing of securities of an issuer. Moreover, Rule 12b-20 requires that periodic reports contain, in addition to all expressly required disclosures, such other information as is necessary to ensure that the statements made in the reports are not materially misleading.
Market America violated Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder by failing fully to disclose, in its annual reports, Zwetschs and Ridingers interest in Market America stock, omissions which were materially misleading. The First Annual Report disclosed that Ridinger owned 80% of Market Americas stock, but neither it nor the 1995 Form 10-K disclosed that he and Zwetsch had an interest in the remaining outstanding shares, had acted together to acquire those shares, and had entered into an agreement to dispose of them. Moreover, both the First Annual Report and the 1995 Form 10-K omitted to disclose that AAA beneficially owned more than five percent of Market Americas outstanding stock, or Ridingers relationship with AAA. Market Americas Forms 10-K for the years 1996 through 1998 similarly failed to disclose that Ridinger and Zwetsch had acted as a group to acquire and dispose of more than five percent of Market Americas outstanding shares. Although these annual reports did finally disclose that AAA owned more than five percent of Market Americas stock, they did not disclose Ridingers relationship with AAA, or that with respect to AAAs shares, Ridinger and Zwetsch were acting as a Section 13(d) group.
That Zwetsch and Ridinger, who were publicizing investment opportunities in Market America to investors, had an interest in substantially all of the initial public supply and thus stood to profit directly by investors purchases were material facts, as was the fact that Market Americas supply was restricted by Zwetschs coordinated sales of the stock in which he and Ridinger had an interest. Moreover, that Market Americas president was a significant seller at precisely the time he was encouraging interest in the purchase of the stock, was likewise material. Market Americas Forms 10-K for the years 1994 through 1998 were thus materially false and misleading in violation of the reporting provisions.
On the basis of this Order and the Offers of Settlement submitted by the Respondents, the Commission finds that:
A. Market America violated Section 13(a) of the Exchange Act, and Rules 12b-20 and 13a-1 thereunder; and
B. Hall was a cause of violations of Sections 5(a), 5(c) and 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
In view of the foregoing, the Commission has determined that it is in the public interest to accept the Respondents Offers of Settlement. Accordingly, IT IS HEREBY ORDERED, effective immediately, that
A. Market America, pursuant to Section 21C of the Exchange Act, cease and desist from committing or causing any violation and any future violation of Section 13(a) of the Exchange Act, and Rules 12b-20 and 13a-1 thereunder; and
B. Hall, 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 Sections 5(a), 5(c) and 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
By the Commission.
Jonathan G. Katz
|1||The findings herein are made pursuant to Hall’s and Market America’s Offers of Settlement and are not binding on any other person or entity in these or any other proceedings.|
|2||After the merger Atlantis changed its name to Market America.|
|3||That report was denominated a Form 10-KT transition report, and covered the period October 1, 1993, the date of the reverse acquisition, to April 30, 1994, the close of Market America’s fiscal year.|
|4||This disclosure of the principal shareholders’ stock ownership is incorporated into these Forms 10-K by reference to Market America’s Schedule 14C Information Statements to shareholders.|
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