UNITED STATES OF AMERICA
|In the Matter of||:|
|: ORDER MAKING|
|PAUL Y. OKUDA,||: FINDINGS, IMPOSING|
|STEPHEN A. THORPE, and||: REMEDIAL SANCTIONS|
|DAVID J. CHESTER||: AND CEASE-AND-DESIST|
|: ORDER AS TO DAVID J.|
David J. Chester has submitted an Offer of Settlement ("Offer") for the purpose of disposing of the issues raised by this proceeding. 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, and prior to hearing and without admitting or denying the findings set forth herein, except as to the Commission's finding of jurisdiction over him and the subject matter of this proceeding, Chester consents to the entry of this Order Making Findings, Imposing Remedial Sanctions and Cease-and-Desist Order as to David J. Chester ("Order"). The Commission has determined that it is appropriate and in the public interest to accept the Offer of Settlement from Chester, and accordingly is issuing this Order.1
Based on the foregoing, the Commission finds that:2
David J. Chester, age 49, is a principal of Wheaten Partners, a broker-dealer registered with the Commission. Chester owns Chester Financial, Inc., a public relations firm located in New York City. Chester conducted certain transactions relating to a private placement of shares of Ferrofluidics Corporation ("Ferrofluidics"). Ferrofluidics, a publicly traded Massachusetts corporation, is headquartered in Nashua, New Hampshire.
B. The April 1992 Private Placement
In early 1992, Ronald Moskowitz, Ferrofluidics' former Chief Executive Officer and Chairman of the Board of Directors, made plans for a private placement of 720,000 newly issued, unregistered Ferrofluidics shares. Moskowitz was unable to find legitimate buyers for most of those shares. Instead, Moskowitz and Jan R. Kirk, Ferrofluidics' former Chief Financial Officer, parked 620,000 shares with Chester Financial, Inc. and three other individuals (the "Purchasers") until the shares could be registered and sold to bona fide investors. Moskowitz told Chester, in substance, that Ferrofluidics would lend Chester Financial, Inc. the money to purchase 200,000 shares of Ferrofluidics and that Chester Financial, Inc. would receive any profits from the stock if the stock price moved higher. Chester understood that Chester Financial, Inc. would have no risk of loss if the price dropped.
The Purchasers, including Chester, each signed a subscription agreement, a promissory note, and a pledge agreement. However, none of the Purchasers, including Chester, paid for the subscribed Ferrofluidics stock, nor did they have the financial ability to pay for the shares.
Ferrofluidics publicly announced, in a press release dated April 23, 1992, that it had "$12,000,000 of added capital" as a result of the private placement. The condensed balance sheet issued as part of the press release showed an $11.2 million increase in working capital and total assets. These statements were false. In fact, the transaction added only $1.6 million in equity, from a single legitimate purchaser.
The Purchasers, including Chester, never made any payments on their notes, nor did the company expect them to. Ferrofluidics nonetheless booked interest on the notes as a receivable and thereby increased Ferrofluidics' net income by approximately $580,000, or 17%, during fiscal 1992 and $212,000, or 22%, during the first quarter of fiscal 1993.
During the fiscal years ended June 30, 1991 and 1992, Ferrofluidics recorded $735,000 of expenses in a suspense account, treating them as having been incurred in connection with a proposed private placement of shares by Ferrofluidics. In fact, most of these expenses were incurred in connection with Moskowitz's efforts to sell stock beneficially owned by him (through his family trusts), Moskowitz's payments to investor relations consultants, and Moskowitz's personal travel and expenses. When the sham private placement was completed in April 1992, Ferrofluidics improperly charged these costs against capital. Because the costs were not incurred in connection with a legitimate private placement of shares by Ferrofluidics, they should have been expensed. As a result of this improper accounting treatment, Ferrofluidics' net income was materially overstated during the relevant period. In addition, Ferrofluidic's auditors were provided with a false confirmation during the fiscal 1992 audit, reflecting that Chester Financial, Inc. owed Ferrofluidics the amount payable under its note.
C. Stock Sales by Chester
From September to December 1992, Chester, for commissions of $0.375 to $0.75 per share, assisted in selling 365,000 shares of Ferrofluidics' stock. Among other things, Chester solicited investors, arranged and attended sales presentations, and provided written materials about Ferrofluidics to prospective investors. During the relevant time, Chester was not registered with the Commission as a broker or dealer.
A. Antifraud Violations -- Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5
Section 17(a) of the Securities Act, Section 10 (b) of the Exchange Act, and Rule 10b-5 thereunder prohibit fraud in connection with the offer, purchase, or sale of securities. A person violates these provisions by making false and misleading statements if the individual speaks with knowledge and awareness that the statements were to be communicated to, and reasonably could be expected to be relied upon by, purchasers and sellers of a security. Through the scheme described above, the false and misleading press releases relating to it, and the misrepresentations in its financial statements, Ferrofluidics violated these provisions. Based on the conduct described above, Chester willfully aided and abetted and caused Ferrofluidics' violations.
B. Acting as Unregistered Broker-Dealer -- Section 15(a) of the Exchange Act
Section 15(a) of the Exchange Act provides that it is unlawful for any broker or dealer to "effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security ... unless such broker or dealer is registered in accordance with subsection (b) of this section." Chester violated Section 15(a) of the Exchange Act by acting as a broker and receiving commissions in connection with the sale of Ferrofluidics stock without registering with the Commission.
Based on the above, the Commission finds that Chester willfully violated Section 15(a) of the Exchange Act; and willfully aided and abetted and caused violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder.
Accordingly, IT IS HEREBY ORDERED that Chester,
1. cease and desist from committing or causing any violations of, and committing or causing any future violations of, Section 17(a) of the Securities Act and Sections 10(b) and 15(a) of the Exchange Act, and Rule 10b-5 thereunder;
2. be, and hereby is, suspended from association with any broker or dealer for six (6) months; and
3. pay disgorgement of $50,000 within thirty (30) days of the entry of the Order. Payment is to be made by U.S. Postal money order, certified check, bank cashier's check, or bank money order, made payable to the Securities and Exchange Commission and shall be hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312, under cover of a letter that identifies the respondent and the name and file number of this proceeding. A copy of the cover letter and of the form of payment shall be simultaneously transmitted to Laura B. Josephs, Esq., Securities and Exchange Commission, Division of Enforcement, 450 Fifth Street, N.W., Washington, D.C. 20549-0703.
By the Commission.
Jonathan G. Katz
-- This matter was instituted as to Chester on July 1, 1997 pursuant to Section 8A of the Securities Act of 1933 and Sections 15(b)(6) and 21C of the Securities Exchange Act of 1934. -- The findings herein are made pursuant to Chester's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.
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