SECURITIES ACT OF 1933
Release No. 7771 / November 15, 1999
SECURITIES EXCHANGE ACT OF 1934
Release No. 42139 / November 15, 1999
ACCOUNTING AND AUDITING ENFORCEMENT
Release No. 1208 / November 15, 1999
ADMINISTRATIVE PROCEEDING
File No. 3-10096
____________________________________
: ORDER INSTITUTING PUBLIC
In the Matter of : ADMINISTRATIVE PROCEEDINGS
: PURSUANT TO SECTION 8A OF THE
THE CRONOS GROUP, : SECURITIES ACT OF 1933
: AND SECTION 21C
: OF THE SECURITIES EXCHANGE ACT
Respondent. : OF 1934, MAKING FINDINGS, AND
: IMPOSING A CEASE-AND-DESIST ORDER
:
_____________________________________
I.
The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative proceedings be instituted against The Cronos Group ("Cronos" or "Respondent") pursuant to Section 8A of the Securities Act of 1933 ("Securities Act) and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act").
II.
In anticipation of the institution of these administrative proceedings, Cronos has submitted an Offer of Settlement of The Cronos Group ("Offer") that 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, without admitting or denying the findings set forth herein, except as to jurisdiction of the Commission over it and over the subject matter of these proceedings, which Cronos admits, Cronos consents to the entry of this 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 ("Order") set forth below.
Accordingly, IT IS HEREBY ORDERED that proceedings pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act be, and hereby are, instituted.
III.
FACTS
The Commission makes the following findings:1
A. Respondent and Related Individual
1. Respondent
The Cronos Group, is a Luxembourg holding company with its operational headquarters in Orchard Lea, England. Cronos' common stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act and is traded on the Nasdaq market system. Cronos made its initial public offering ("IPO") in December 1995. Cronos' common stock is traded only in the United States.2 Cronos is one of the ten largest lessors of marine cargo containers.
2. Related Individual
Stefan M. Palatin, is the former Chairman and Chief Executive Officer, and majority shareholder of Cronos.3 Palatin was removed as CEO and, in July 1998, resigned from the board of Cronos. He holds, or held, his Cronos stock through three Panamanian bearer share companies, Lambert Business, Inc. ("Lambert"), Klamath Enterprises, S.A. ("Klamath"), and Enavest Holding, S.A ("Enavest").
B. Summary
This proceeding involves Cronos' violations of the antifraud, periodic reporting and corporate record keeping provisions of the federal securities laws that began with its initial public offering in December, 1995 and continued in its periodic filings and communications with shareholders through 1997 (the "relevant period"). During the relevant period Palatin dominated and controlled the company.
Cronos consistently misrepresented, through affirmative misstatements and omissions in public statements and in filings with the Commission, transactions it had with Palatin throughout the relevant period. In doing so, it concealed, among other information, that Palatin had intercepted payments between Cronos and one of its major customers (which Palatin also controlled); Cronos had paid him millions of dollars in the year before the IPO; and Palatin had sold shares in the IPO through another entity which he controlled. Following the IPO, the company failed to disclose that it paid additional funds to Palatin immediately after the offering and that he had pledged assets he did not own as collateral for certain obligations owed to the company. In subsequent filings, the company misrepresented the nature and purpose of other payments it made to Palatin as well as the extent to which certain obligations Palatin owed to the company were secured by collateral. Palatin controlled the company's disclosures and was the beneficiary of the transactions which the company misrepresented in its filings. Cronos systematically fired or demoted employees and directors who challenged or questioned the transactions or disclosures. As a consequence, Cronos violated the antifraud, reporting and recordkeeping provisions of the federal securities laws during the relevant period.
1. Background: Cronos, Contrin and the Public Offering
In the 1970's and 1980's, Palatin and another investor formed or acquired several companies which owned and managed shipping containers and then assembled a corporate structure which became Cronos in the early 1990s. Palatin consolidated his control of these companies in 1991 when he purchased his partner's interest in these companies as well as other holdings including Contrin S.A. ("Contrin"), a related group of companies in Austria, and another privately held entity which owned containers ("TOEMT"). Palatin thereafter exercised sole control over Cronos even though the shares he purchased from his former partner were pledged to secure his obligation to pay the purchase price in installments over a period of years.
In early 1994, Palatin and Cronos began the process of registering the company's common stock for sale in the United States. Although Cronos was organized under the laws of Luxembourg and had its operational headquarters in the United Kingdom, it sought to register and sell its shares exclusively in the United States. In mid-1994, the company temporarily abandoned the process but resumed the effort in mid- 1995. On December 7, 1995, the Commission declared the registration statement effective. The IPO resulted in the sale of 3,643,000 shares, inclusive of underwriters' overallotment, at $10 each, resulting in proceeds, before expenses, of $36,430,000. Following the offering, Palatin controlled 52.9% of the outstanding stock and as a result, dominated and controlled Cronos.
2. Misrepresentations and Omissions in the Offering Documents
The registration statement and offering materials Cronos used to effect the IPO contained material misstatements and omissions which concealed the following facts: in 1994, at Palatin's direction, Contrin made payments totaling $2.6 million to him which were intended for Cronos; Cronos paid him another $500,000 which it owed Contrin; Cronos disbursed $7.5 million to Palatin, purportedly as a loan to a third party, during the 11 months preceding the IPO; and Palatin, through a company he owned or controlled, sold shares in the IPO.
a. Misrepresentations and Omissions Concerning a Contingent Liability and Payments to Palatin
In 1994, Contrin, which at the time was controlled by Palatin, placed an order with Cronos to purchase containers. In connection with the order, it made partial payments totaling $2.6 million. On Palatin's instruction, Contrin paid the funds to bank accounts under Palatin's personal control rather than to Cronos. Nevertheless, he issued a receipt on behalf of Cronos acknowledging the company's receipt of the funds. Cronos' books did not reflect receipt of the payments. Some months later, other employees of the company canceled Contrin's purchase order for nonpayment. Subsequently, receivers assumed control of the Contrin affiliates which had ordered the containers and they asserted claims against Cronos for the $2.6 million.4
Similarly, in late 1994, Cronos paid Palatin $500,000 which it owed to Contrin. Cronos recorded the disbursement to Palatin as a payment to Contrin. When Contrin subsequently asserted a claim for the $500,000, Cronos paid the funds but recorded it as an "advance" or loan to Contrin rather than a past due distribution payment. When Cronos later attempted to offset the advance against an amount which it owed, Contrin disputed the offset and asserted a claim for the $500,000.5
In its registration statement and prospectus Cronos misrepresented the relationship between the company, Palatin and Contrin. The company did not disclose that Palatin, through a company he controlled, owned and controlled Contrin. Instead, it characterized Contrin as a customer with whom the company did business on an arms length basis. More importantly, Cronos failed to disclose its contingent liability of $2.6 million to Contrin created by the payments to Palatin in 1994.6
b. Payments to Palatin Mischaracterized as a Loan to a Third Party
Shortly after Palatin bought out his partner in 1991, acquiring Cronos, Contrin and TOEMT, he caused Cronos to purchase containers from TOEMT. As partial consideration for the purchase, in 1991, Cronos issued 90,000 shares of convertible preferred stock to TOEMT.7 Shortly after this transaction, Palatin directly or indirectly, formed Barton Holdings Ltd. ("Barton")8 and transferred TOEMT and the preferred shares to it.
Between January and November, 1995, Cronos disbursed approximately $7.5 million dollars directly or indirectly to Palatin which it characterized as a loan to Barton. The first two disbursements totaling $1.125 million were made to Barton's Swiss bank account. Palatin's lawyer controlled the account and the funds were disbursed from the account to discharge financial obligations of Palatin. Thereafter, between May and November, 1995, Cronos made net payments totaling $6.375 million directly to Palatin's bank accounts in the UK and Austria. It appears that at least the majority of these funds were used to pay his personal expenses. At Palatin's direction, Cronos disclosed and recorded these payments as a loan to Barton.9
Cronos' registration statement and prospectus identified Barton as a debtor of the company and therefore, a related party to the issuer, but the materials failed to disclose that Barton was owned or controlled by Palatin. The offering materials also failed to disclose that prior to the IPO Cronos had paid $7.5 million to Palatin, representing an advance of proceeds he expected from selling the shares he held in the name of Barton.10
c. Misrepresentations Concerning the Identity of the Selling Shareholder in the IPO
In connection with the IPO, Barton was identified as a selling shareholder and its 90,000 preferred shares were converted into 454,156 shares of common stock and sold, generating proceeds of $4,096,194. The offering materials identified Barton as a related party but attributed this status to its shareholdings and, as previously described, its status as a debtor of Cronos. The company failed to disclose in the offering materials that Palatin beneficially owned the shares sold in Barton's name. As a result, the company concealed the more material fact that Palatin was selling a portion of his shares in the IPO.
3. Misrepresentations and Omissions in Annual and Other Filings
a. Cronos Advances Additional Funds to Palatin Immediately Following the IPO
Just weeks after the closing of the IPO, Cronos, on December 29, 1995, paid another $1.5 million to Palatin. The company recorded the payment in its financial records as another advance to Barton. The company did not disclose in its offering materials that it would continue to make advances to Palatin. In subsequent annual and periodic filings Cronos failed to disclose that this payment went to Palatin.
This $1.5 million payment increased substantially the preexisting unsecured receivable due nominally from Barton. Immediately prior to the IPO, the outstanding balance was $7.5 million. After offsetting the pro rata fourth quarter dividend on the preferred shares from the loan balance, the payment of IPO proceeds reduced the balance due to $3.2 million. The December 29 payment of $1.5 million increased the unsecured unpaid balance to $4.7 million.
b. Palatin Guarantees the Barton Loan and Pledges Collateral He Did Not Own
In early January 1996, Cronos' auditors learned of the $1.5 million additional advance made nominally to Barton.11 They were concerned because they had not known that the company would advance additional funds after the IPO. During the course of the audit, the auditors raised the issue of the $4.7 million unsecured receivable from Barton and requested financial information to substantiate its ability to repay the loan or, alternatively, a guarantee of the loan by a third party such as a commercial bank. No financial information or guarantee was provided in response to this request. Eventually, under pressure from the auditors and others, Palatin agreed to guarantee the loan and to pledge as collateral for his guarantee the 1,030,303 shares of Cronos he had purchased from his partner in 1991.
Palatin knew, but neither he nor Cronos disclosed, that a material defect impaired the value of the collateral: these Cronos shares were held by a bearer share Panamanian company ("Lambert") which Palatin did not own. Shares of Lambert were held by a trustee to secure Palatin's obligation to pay installments of the purchase price to his former partner. Palatin had paid less than half the purchase installments at the time of his pledge and was entitled to only a proportionate interest in Lambert and the Cronos shares it held.12 In effect, Palatin did not own the shares he pledged to secure his guarantee of the purported Barton loan. This defect raised serious questions concerning the value of the collateral, the collectibility of the purported Barton loan and the value of the loan as an asset on the company's balance sheet. Cronos failed to disclose this impairment in its annual and periodic filings with respect to 1996.
c. Cronos Fires and Demotes Employees Who Question the Accuracy of Its Disclosures
Cronos' financial employees and general counsel became concerned after a number of events including, but not limited to, the December 29 payment to Palatin, the claims asserted by Contrin and allegations in the Austrian press concerning Palatin's misuse of Contrin and ownership of Barton. They confronted Palatin and demanded that the company retain independent counsel to investigate these matters. Instead, Cronos fired the general counsel and removed the other protesting employees from the board of directors. It directed its outside securities counsel, which had represented it in the IPO, to investigate the matter. Counsel resigned immediately after issuing its final report of the investigation to the company. Cronos thereafter refused to provide a copy of the report to its auditors, the employees who demanded the investigation, or others.
d. Cronos Advances Additional Funds to Palatin and the Auditors Resign
In October, 1996, shortly after receiving counsel's final report, Cronos paid another $1.5 million to a bank account controlled by Palatin.13 At the time, the company and Palatin had engaged investment bankers in an attempt to sell either the company or Palatin's shareholdings. The agreements with the investment bankers did not call for advance payments or escrow of fees. Nevertheless, the company's accounting staff at Palatin's direction, disbursed $1.5 million to an account controlled by Palatin and recorded the payment as an escrow for investment banking fees. In fact, shortly after the funds were deposited to Palatin's account, he used the funds for personal expenses, a deposit in a private bank, and cash withdrawals.
When the company's auditors learned of the payment, they attempted to audit it. Cronos and Palatin refused to cooperate with the audit, other than to provide copies of the investment banking agreements. Cronos refused to provide any documentation concerning the payment, the account to which the funds were deposited or the status of the funds. The issue of the payment became a source of conflict within the company and between the company and its auditors.
While the audit continued, in early 1997, Palatin instructed company employees to disburse another $2 million to his bank account, claiming it would be added to the escrow for investment banking fees. Employees alerted the company's auditors and ultimately refused to carry out the instruction. As a consequence, Cronos fired its CFO and general counsel and demoted its chief operating officer who reported the issue to the auditors and balked at carrying out Palatin's instruction to disburse the funds.
While the controversy regarding these matters continued, Cronos appointed to its board of directors Palatin's long time associate and personal attorney. When the new board of directors met on January 16, 1997, Palatin told them that the $1.5 million had been returned to the company and he produced a forged letter from his bank confirming that the funds had been repaid. After the board meeting had adjourned and the only independent director had departed, Palatin reconvened the meeting and requested that the board authorize the company to loan him up to $4 million. Believing that the purportedly "escrowed" funds had been repaid, they authorized the loan conditioned upon a pledge of an additional 1 million shares of Palatin's Cronos stock. In fact, the $1.5 million had not been repaid and was not returned to the company until late January, 1997, after Cronos advanced $3.7 million to Palatin pursuant to the loan which the board authorized on January 16.14
The company's auditors, while attempting to audit the repayment, learned that the bank confirmation Palatin had provided to the board had been forged and that Palatin's assurances to them and the board that the funds had been repaid were false. Thereafter, Cronos and Palatin refused to cooperate with the audit. The auditors reported their concern that an illegal act may have occurred to the board and requested that it investigate the matter. The board of directors refused to investigate or resolve the related audit issues. On February 3, 1997, the company's auditors resigned and provided Cronos with the report required under Section 10A of the Exchange Act.15
Ultimately, Palatin defaulted on all amounts he owed to Cronos. The current outstanding principal balance is $6,227,423.16 The company also made a provision of $4,733,000 on December 31, 1997 with respect to Palatin's loans.
Cronos subsequently hired new auditors to complete the audit for the year ended December 31, 1996. The new auditors did not audit the circumstances surrounding the $1.5 million purported escrow payment. The company recorded the payment as of year-end as a receivable from a related party. In its 1996 Form 20-F, Cronos falsely disclosed that the funds had been escrowed for professional fees at year end.
D. Disclosure Violations and False Financial Statements
1. Disclosure Requirements for Related Party Transactions
According to Generally Accepted Accounting Principles ("GAAP"), an issuer's financial statements are complete only when they contain all material information necessary to represent validly the underlying events and conditions.17 According to Statement of Financial Accounting Standards No. 57 ("FAS 57"), financial statements are not complete and reliable unless they contain additional explanations of and information about related-party transactions. FAS 57 defines related parties to include the principal owner of an enterprise and its management, as well as their affiliates. FAS 57 requires that the disclosure of material related party transactions include: (1) the nature of the relationship involved; (2) a description of the transactions for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transaction on the financial statements; (3) the dollar amounts of transactions for each of the periods for which income statements are presented; and (4) amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, their terms and manner of settlement.
Section 210.4-08(k) of Regulation S-X states that related party transactions should be identified and the amounts stated on the face of the balance sheet, income statement, or statement of cash flows.
Item 404(a) under Regulation S-K requires a description of transactions exceeding $60,000 between the registrant and any of its directors or executive officers or any member of their immediate families.18 Item 404(a) requires disclosure of the person and the person's relationship to the registrant, the nature of the person's interest in the transaction, and, where practicable, the amount of the person's interest in the transaction.
2. Material Deficiencies in Cronos' Filings
a. Registration Statement and Prospectus
Cronos' registration statement and prospectus contained false and misleading information concerning material facts and omitted material facts with respect to Palatin's relationship with Barton and Contrin, the payments to Palatin in 1994 by Contrin and Cronos, and the disbursements to Palatin which were falsely characterized as loans to Barton. Cronos' financial statements did not reflect the contingent liability created by the 1994 payments to Palatin by Contrin.19 Moreover, it failed to disclose that Palatin, the chairman and CEO, through Barton, was a selling shareholder in the IPO.20
b. 1995 Form 20-F
Cronos' 1995 Annual Report on Form 20-F contained the same misstatements and omissions with respect to Barton, Contrin, the Barton loan, and contingent liabilities as the registration materials. The 1995 Form 20-F also failed to disclose that an additional $1.5 million had been disbursed to Palatin after the IPO closed. The filing also stated that Palatin had guaranteed the Barton loan and secured his guarantee with a pledge of Cronos shares. It failed to disclose that Palatin lacked the authority to pledge all of the shares identified in the filing. The filing also overstated the value of the collateral and the underlying loan.
c. 1996 Form 20-F
The company's 1996 Annual Report on Form 20-F contained the same misstatements and omissions of material facts as the 1995 Form 20-F. In addition, the 1996 Form 20-F also contained misstatements and omissions concerning the $1.5 million purportedly escrowed for investment banking fees. In addition, the 1996 Form 20-F failed to disclose the material uncertainty as to the recoverability, and thus the value, of the receivable, reflected as an asset on the company's balance sheet as a result of the purported Barton loan. By 1996, Palatin had defaulted on his obligations to his former partner, further impairing his rights to the property he pledged. The uncertainty as to the recoverability of his loans materially increased in 1996 as a result of his default. Disclosure of the uncertainty was necessary in order to make the statements made by the company concerning the value of the receivable not misleading.21
d. 1997 Form 20-F
Cronos' 1997 Annual Report on Form 20-F contained the same or similar misstatements and omissions with respect to the $1.5 million payment, Barton, Contrin and the purported Barton loan. However, the company disclosed facts concerning the impairment of the collateral pledged by Palatin. The company disclosed that his former partner had asserted a claim against 55% of Lambert and to 55% of the 1,030,303 Cronos shares which Palatin had pledged as collateral. As a result only 463,636 shares valued at year's end at approximately $2.3 million collateralized Palatin's obligation to pay Cronos $5.5 million plus accrued interest.
e. Other Filings
The misstatements and omissions set forth above were also contained in periodic and other filings with the Commission during 1996 and 1997. Cronos filed these materials as attachments to Forms 6-K, because as a foreign private issuer, it was not required to file Form 10-Q.22 The Proxy Statement for the Annual Shareholders Meeting, which was attached to the Form 6-K filed on May 21, 1996, contained misstatements and omissions of material facts similar to those in the 1995 Form 20-F. Similarly, the Proxy Statement attached to Form 6-K, filed on June 19, 1997, contained misstatements and omissions similar to those in the 1996 Form 20-F. During 1996 and 1997, Cronos also filed other Forms 6-K, to which it attached quarterly reports. The quarterly reports also contained false and misleading financial statements because the unaudited financial statements did not disclose the transactions Palatin had with the company and the uncertainty with respect to the collateral Palatin pledged to secure his guarantee, and later assumption, of the Barton loan.
E. Cronos Failed To Make and Keep Adequate Books and Records and Failed To Maintain an Adequate System of Internal Controls
1. Cronos Failed To Make and Keep Adequate Books and Records
Cronos' books and records did not accurately reflect the transactions with Contrin and Palatin. Payments to Palatin were reflected in the books as payments to Contrin and Barton, and the $500,000 repayment to Contrin was recorded as an advance. The contingency associated with the $2.6 million in payments which Contrin made to Palatin in 1994 was not reflected in Cronos' books and records. The company's books and records also did not reflect the uncertainty as to the recoverability of the loans to Palatin. The company also inaccurately recorded the payment of $1.5 million to Palatin in October 1996 as an escrowed investment banking fee. As a result, the company's books and records did not accurately and fairly reflect the disposition of assets and transactions with related parties.
2. Cronos Failed To Maintain an Adequate System of Internal Controls
Cronos represented in its registration statement and prospectus that related party transactions, above a threshold amount of $250,000, would be entered into on an arm's length basis, reviewed and approved by the non-interested members of the board, and reviewed by the company's independent accountants as part of their audit of the company's year end financial statements. This policy was not maintained with respect to the December 1995 payment of $1.5 million to Palatin which was characterized as a loan to Barton. The payment was not approved by independent board members. Similarly, in October 1996, the company paid another $1.5 million to Palatin. The transaction was not submitted to non-interested directors for approval, and both the company and Palatin hindered the auditors review of the transaction. Thus, the company failed to maintain controls with respect to related party transactions, contrary to representations in the filings with the Commission.
LEGAL DISCUSSION
A. Violations of the Antifraud Provisions of the Securities Act and the Exchange Act
Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5 prohibit the making of materially false and misleading statements in connection with the purchase or sale of any security. Section 17(a) of the Securities Act prohibits the making of false and misleading statements in the offer or sale of securities. Violations of the antifraud provisions require proof of scienter. See Aaron v. SEC, 446 U.S. 680 (1980). To violate Section 17(a)(2), or Section 17 (a)(3) of the Securities Act, however, a defendant need not act with scienter. Aaron v. SEC, 446 U.S. at 701-702. In the case of a corporation, the scienter of officers and employees is imputed to the corporation. See SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082 (2nd Cir. 1972). Here, Palatin's scienter is imputed to Cronos for the purpose of establishing Cronos' violations.
Cronos failed to accurately disclose transactions the company had with Palatin. These false and misleading disclosures appeared in registration materials and periodic filings with the Commission during the years 1995, 1996 and 1997. The false and misleading disclosures were material because an investor would consider the related party transactions important to making an investment decision. Certain of Cronos' filings also contained misrepresentations concerning the security Palatin pledged to secure his loan from the company. The loan constituted a material asset on the company's balance sheet and the impairment of that asset would have been important to an investor.
Accordingly, Cronos' nondisclosure and false disclosures in its registration materials with respect to related party transactions and the contingent liability resulting from Palatin's receipt of payments from and due to Contrin violated Section 17(a) of the Securities Act and these and subsequent false disclosures concerning related party transactions and the value of collateral pledged to the company violated Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5.
B. Violations of the Reporting Requirements
Under GAAP, Cronos' transactions with Palatin were material related party transactions that should have been reported. The disclosures and financial statements in Cronos' Forms 20-F for 1995 and 1996 and Forms 6-K filed in 1996 and 1997 contained material misstatements concerning the related party transactions. Further, Cronos' 1997 Form 20-F did not contain audited financial statements for the year ended December 31, 1995. In addition, the company did not disclose the uncertainty associated with the collateral pledged by Palatin and the contingencies associated with the Contrin payments intercepted by Palatin. Consequently, Cronos violated Section 13(a) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1 and 13a-16.
C. Violations of Books and Records and Internal Controls Provisions
Cronos' books and records did not accurately reflect the disposition of assets with respect to Contrin, Barton and Palatin. By maintaining false and misleading books and records, Cronos violated Section 13(b)(2)(A) of the Exchange Act and Exchange Act Rule 13b2-1.
In addition, Cronos failed to maintain an adequate system of internal accounting controls sufficient to provide reasonable assurance that its related party transactions were recorded as necessary to permit the preparation of its financial statements in conformity with GAAP. As a result, Cronos violated Section 13(b)(2)(B) of the Exchange Act.
V.
FINDINGS
Based on the foregoing, the Commission finds that Cronos committed violations of Section 17(a) of the Securities Act, Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13a-16, and 13b2-1.
VI.
ORDER
Based on the foregoing, the Commission deems it appropriate to accept the Offer of Settlement submitted by the Respondent and accordingly,
IT IS HEREBY ORDERED, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, that:
A. Cronos cease and desist from committing or causing any violation or future violation of Section 17(a) of the Securities Act, Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13a-16, and 13b2-1.
IT IS FURTHER ORDERED, that Cronos shall comply with the following undertakings:
B. Cronos undertakes to:
(1) designate an agent for service of process in the United States within 10 business days of the date of the Order; and
(2) upon reasonable request by the Commission or its staff, and on reasonable notice, and without service of a subpoena, provide documents or other information, and accept service and take all reasonable actions to make its officers, directors, employees and agents available to testify truthfully at any interview, investigative testimony, deposition, at any judicial proceeding related to the Order, and at any administrative proceeding arising as a result of the Commission's investigation entitled In the Matter of The Cronos Group, and in any future investigations or inquiries from the staff or the Commission. Cronos agrees that this ongoing and future cooperation commitment shall be a condition of employment or continued employment of its officers, directors, employees and agents and that these persons shall be apprised of such commitment within 10 business days of the date of the Order, or, if in the future, at the outset of their employment. This provision shall not be construed to waive applicable attorney-client, work product or other privileges recognized under federal law of Cronos and its officers, directors, employees and agents, if asserted timely and in good faith.
By the Commission.
Jonathan G. Katz
Secretary
Footnotes
1 The findings herein are made pursuant to the Offer that Cronos submitted and are not binding on any other person or entity in this or any other proceeding.
2 From December 1995 through December 1998, Cronos reported as a "foreign private issuer" as defined by Exchange Act Rule 3b-4. In its 1999 fiscal year, Cronos began reporting as a United States issuer.
3 In May 1998, Palatin was arrested by Austrian governmental authorities as a result of allegations of financial fraud and he is presently awaiting a criminal trial in the matter.
4 Palatin lost control of some of the Contrin entities when they were placed in receivership as a result of their deteriorating financial condition.
5 Cronos acted at Palatin's instructions with respect to all material matters relating to the $500,000 payment. With respect to the original payment, he told others at Cronos that Contrin owed him the funds and had authorized the company to pay him directly.
6 Contrin has asserted several claims against Cronos, including ones created by the payments to Palatin in 1994. At this time, Contrin's claims against Cronos have not been resolved.
7 The preferred shares earned dividends of $900,000 annually.
8 Barton was formed by Palatin's attorney who, in turn, was appointed as Barton's agent. The attorney and a sub-agent he employed opened a bank account in Switzerland in Barton's name. The majority of deposits to that account, including the dividends on the preferred shares originally issued to TOEMT and subsequently transferred to Barton, were paid out on the instructions of the attorney to discharge obligations owed by Palatin. All payments from Cronos to Barton went either through the Swiss account or directly to Palatin. No one at Cronos other than Palatin was permitted to communicate or engage in dealings with Barton. When Contrin's financial condition deteriorated to the point where it became a potential liability for Palatin, he transferred Contrin to Barton. These and other facts compel the conclusion that Palatin formed and controlled Barton and used it to conceal his role in certain transactions and his ownership of certain assets, including, but not limited to, those discussed in this Order.
9 Palatin told others at Cronos that Barton was in the process of changing banks and could not receive direct transfers of funds from the company. He contended that he was advancing funds to Barton from his personal accounts and he directed the company to reimburse him by transferring funds directly to his accounts.
10 In fact, the IPO shares sold at a price significantly below that which Palatin and Cronos had initially anticipated. Originally, they anticipated that the proceeds to Barton from the sale of its shares in the IPO would be sufficient to retire the debt. Because the actual offering price was lower than anticipated, after Barton's share of the proceeds were paid to Cronos, a substantial loan balance remained.
11 Palatin had represented to the auditors that Barton was the debtor and that he had no interest, direct or indirect in Barton. The auditors accepted his representations.
12 At the time of the pledge, Palatin had rights to 463,636 of the 1,030,303 shares of Cronos that he had pledged. The value of these shares was less than the loan balance.
13 Cronos first attempted to disburse the funds to Palatin's attorney. Palatin had instructed the attorney, upon receipt of the funds, to forward the money to him. When attempts to wire the funds to the attorney failed, Cronos disbursed the funds directly to an account controlled by Palatin.
14 Palatin used proceeds from the loan to repay the $1.5 million to Cronos.
15 Section 10A of the Exchange Act provides auditors with procedures to follow, including notification of the company's management and under certain circumstances the Commission, when in the course of an audit they detect or become aware of information indicating that an illegal act has or may have occurred. Here, the auditors resigned after providing a report to the board that concluded that an illegal act may have occurred that had a material effect on the financial statements, that senior management and the board had not taken appropriate remedial action and the failure of management and the board to take remedial action was reasonably expected to warrant a restatement or the auditors resignation from the engagement. The auditors resigned from the engagement shortly thereafter. The last remaining independent director resigned on the same day the auditors resigned and then at Palatin's direction his former partner was appointed to the board.
16 The outstanding balance reflects an offset for the value of the collateral which Palatin pledged to secure his loans and which was sold following his default.
17 See Qualitative Characteristics of Accounting Information, Statement of Financial Accounting Concepts No. 2 (Fin. Accounting Standards Bd. 1980).
18 As a foreign private issuer during the relevant period, Cronos needed only to provide information in its annual filing to the extent that it had disclosed to its security holders or otherwise made public the information specified in Item 404. See Regulation S-K, Instructions to Item 404. Cronos voluntarily disclosed certain information during the relevant period, therefore it was obligated to provide the information in its Forms 20-F for 1996 through 1998.
19 Accounting for Contingencies, Statement of Financial Accounting Standards No. 5, § 10 (Fin. Accounting Standards Bd. 1975), requires disclosure of a contingency when there is at least a reasonable possibility that a loss or an additional loss may have been incurred.
20 Item 507 of Regulation S-K requires a registrant to identify selling shareholders on Form F-1.
21 Item 9 of Form 20-F requires a registrant to describe, among other things, internal and external sources of liquidity and events and uncertainties that may result in material changes in the registrant's liquidity. Palatin's technical default of the sales agreement associated with the pledged collateral raised an uncertainty regarding recoverability of the loan to Palatin.
22 See Exchange Act Rule 13a-16.