UNITED STATES OF AMERICA
SECURITIES EXCHANGE ACT OF 1934
ACCOUNTING AND AUDITING ENFORCEMENT
The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative proceedings be instituted against Respondents Axel E. Friedberg ("Friedberg") and Rudolf J. Weissenberger ("Weissenberger") pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act").
In anticipation of the institution of these administrative proceedings, Friedberg and Weissenberger have each submitted an Offer of Settlement ("Offers") 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 them and over the subject matter of these proceedings, which Friedberg and Weissenberger admit, Friedberg and Weissenberger consent to the entry of this Order Instituting Public Administrative Proceedings Pursuant to 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 21C of the Exchange Act be, and hereby are, instituted.
The Commission makes the following findings:1
A. Respondents, the Issuer and a Related Individual
Axel E. Friedberg, 55, served as a director of The Cronos Group ("Cronos" or "company") from January 1997 through March 1999. He is an Austrian attorney and has provided business legal advice to Stefan M. Palatin ("Palatin"), the former Chairman and Chief Executive Officer ("CEO") of the company. Friedberg is a citizen of Austria and resides in Vienna, Austria.
Rudolf J. Weissenberger, 65, served as a director of Cronos from February 1997 through March 1999. Weissenberger served as the acting, and then official, Chairman and CEO of Cronos from May 1998 through December 1998 after the former CEO was removed from office by the board of directors. Weissenberger is a citizen of Austria and resides in Malta. He was associated with Palatin in several business ventures between 1980 and 1991.
2. The Issuer
The Cronos Group2 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 National Market System.3 Cronos made its initial public offering ("IPO") in December 1995. Cronos both owns and manages marine cargo containers.
3. Related Individual
Stefan M. Palatin is the former Chairman and Chief Executive Officer, and majority shareholder, of Cronos. In May 1998, Palatin was removed as CEO and, in July 1998, he resigned from the Board of Directors ("board") of Cronos.
This proceeding involves Friedberg's and Weissenberger's conduct as directors of Cronos. Prior to joining the board, Friedberg had learned about several transactions involving Palatin when he provided legal and other services to him. After Friedberg joined the board, he authorized filings with the Commission that he knew or was reckless in not knowing were materially false and misleading with respect to those transactions. Similarly, Weissenberger authorized filings which failed to disclose the potential effect on the company of a transaction he had with Palatin. That disclosure was necessary in order to make the statements in Cronos' filing not misleading.
Palatin controlled the company's disclosures and was the beneficiary of the matters that the company misrepresented in its filings. Friedberg, by authorizing the filings, was a cause of Cronos' antifraud and reporting violations. Weissenberger was also a cause of the company's reporting violations.
Palatin acquired sole control of Cronos' predecessor and other assets from Weissenberger in 1991. Cronos first sold shares publicly in December, 1995 ("the IPO") after the Commission declared its registration statement effective. Palatin dominated and controlled the company from 1991 through the IPO and until his ouster by the board in 1998. Throughout this period Palatin, among other things, caused and attempted to cause the company to disburse funds to him and to mischaracterize those disbursements in Cronos' filings with the Commission and reports to shareholders. Similarly, Palatin and the company made material misstatements and failed to disclose material facts concerning collateral he pledged to secure his promise to repay certain loans to the company.4
Before and after the IPO, Palatin caused Cronos to disburse several payments totaling more than $7.5 million to an entity he controlled. Cronos, at Palatin's direction, represented in its offering materials and subsequent annual and other filings with the Commission that the payments were a loan to a third party, Barton Holdings Ltd. ("Barton").5 The filings did not disclose the fact that Palatin controlled Barton. The funds purportedly loaned to Barton were paid to Palatin or otherwise applied to discharge obligations he owed to third parties. Cronos' filings with the Commission, including its 1996 annual report on Form 20-F, misrepresented the company's transactions with Palatin and Barton and Barton's relationship with Palatin.
In 1996, following the IPO, Palatin became indebted to Cronos in the amount of several million dollars.6 To secure this obligation he pledged as collateral slightly more than one million shares of Cronos stock which he claimed to own outright. In fact, however, these shares were already encumbered. They were owned by a Panamanian bearer share company whose shares were held in trust to secure Palatin's obligation to pay Weissenberger for Palatin's purchase of Cronos' predecessor, among other assets. Moreover, Palatin had failed to make payments when they came due, that is, he had defaulted on his obligation to pay Weissenberger.7 Cronos' filings with the Commission, including the 1996 Form 20-F, filed after Friedberg and Weissenberger joined the board, failed accurately to describe the circumstances giving rise to Palatin's indebtedness to Cronos and the problems concerning his pledge of shares to secure this loan. The company's filings failed to disclose that the collateral was encumbered by reason of the earlier trust agreement and that Palatin had defaulted on the obligation collateralized by the trust agreement.
2. Friedberg's Conduct
Friedberg's relationship with Palatin dates back to the 1980's. Among other things, Friedberg helped organize and incorporate Barton, acted as its agent, opened a Swiss bank account for it and oversaw the receipt of funds into and the disbursement of funds from the account. As a consequence, he knew that Cronos paid funds to Barton and he directed the disbursement of those funds, at Palatin's direction, to or for the benefit of Palatin. In short, he knew or was reckless in not knowing that Palatin controlled Barton.
In 1997, after he joined Cronos' board, he authorized the issuance of financial statements and textual disclosure, in the company's annual report on Form 20-F, which materially misrepresented the relationships between Cronos, Palatin and Barton. Among other things, the filing failed to disclose Palatin's control of Barton and receipt of funds purportedly loaned to Barton, facts Friedberg knew intimately.
Friedberg also acted as the trustee pursuant to the agreement between Palatin and Weissenberger for Palatin's purchase of Weissenberger's interest in Cronos' predecessor, among other assets. As trustee, he knew that the shares that Palatin had pledged to Cronos were, in fact, encumbered by the prior pledge to Weissenberger. Friedberg also knew that Palatin had defaulted on his obligation under this agreement, entitling Weissenberger to claim a majority of the shares. Nevertheless, Friedberg assured others that there was no defect with the pledge to the company. He also authorized the 1996 Form 20-F filing which described the shares as collateral for Palatin's obligation to Cronos and did not disclose the earlier pledge to Weissenberger or the default on the underlying agreement.
3. Weissenberger's Conduct
Weissenberger became a director in winter 1997, after Friedberg but before the filing of the 1996 Form 20-F. He knew that the 1996 Form 20-F would not disclose the fact that the collateral Palatin had pledged to Cronos was pledged to him and that Palatin had defaulted on the obligation to him. Palatin had acknowledged being in default but asked him to forebear declaring a default or disclosing the prior pledge. Palatin assured Weissenberger that he would cure the default and would pay off his obligations to Cronos and to Weissenberger by selling shares. Weissenberger relied on Palatin's assurances. Because he honored Palatin's request, Weissenberger did not disclose these facts to others at Cronos, the auditors or company counsel. Weissenberger authorized the filing of the 1996 Form 20-F and other filings even though they failed to disclose the double pledge of the collateral and Palatin's default.
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. Violations of the antifraud provisions require proof of scienter. See Aaron v. SEC, 446 U.S. 680 (1980). Cronos failed accurately to disclose transactions with Palatin and facts concerning the impairment of collateral it held to secure Palatin's repayment of funds he owed the company. Under Generally Accepted Accounting Principles, Cronos' transactions with Palatin were material related party transactions that should have been reported.8 These false and misleading disclosures appeared, among other places, in the 1996 annual report on Form 20-F and Forms 6-K filed with the Commission in 1997. The false and misleading disclosures were material because an investor would consider the related party transactions and the value of collateral for a multi-million dollar related party loan important to making an investment decision. The loan constituted a material asset on the company's balance sheet.
Friedberg, as a result of acting as attorney for Barton, and as trustee in connection with the Palatin/Weissenberger agreement, knew material facts concerning these matters. Although he obtained some of the information while acting as an attorney, his obligation to maintain client confidences did not supersede his obligation in this instance to assure that filings with the Commission that he approved were complete and accurate. Nevertheless, Friedberg authorized the filing of the 1996 Form 20-F and Forms 6-K which he knew or was reckless in not knowing contained materially false and misleading statements and omitted material facts concerning Palatin's relationship with Barton and the collateral Palatin had pledged to Cronos. By authorizing the filings, he was a cause of Cronos' violations of Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5. He also thereby was a cause of Cronos' violations of Section 13(a) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1 and 13a-16.
The disclosures and financial statements in Cronos' 1996 Form 20-F and Forms 6-K filed in 1997 did not disclose material facts giving rise to the uncertainty associated with the collateral pledged by Palatin. Weissenberger, as a director of Cronos, authorized these filings. At the time he knew that the collateral had previously been pledged to him and that Palatin was in default on their 1991 stock purchase agreement. Instead of correcting the filings or bringing the facts to the attention of others, Weissenberger relied on Palatin's assurances that he would cure the default and pay off both the company and him, thereby rendering the non-disclosure harmless. See In the Matter of W. R. Grace & Co., Release No. 39157 (Sept. 30, 1997). He allowed his loyalty to a friend to override his obligations to ensure that the company's disclosures were accurate and complete. By authorizing filings that Weissenberger knew or should have known were inaccurate, he was a cause of Cronos' violations of Section 13(a) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1 and 13a-16.
Based on the foregoing, the Commission finds that Friedberg caused violations of Sections 10(b) and 13(a) of the Exchange Act, and Exchange Act Rules 10b-5, 12b-20, 13a-1, and13a-16. Further, the Commission finds that Weissenberger caused violations of Section 13(a) of the Exchange Act, and Exchange Act Rules 12b-20, 13a-1 and 13a-16.
Based on the foregoing, the Commission deems it appropriate to accept the Offers submitted by the Respondents and accordingly,
IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act, that:
A. Friedberg cease and desist from committing or causing any violation, or any future violation, of Sections 10(b) and 13(a) of the Exchange Act, and Exchange Act Rules 10b-5, 12b-20, 13a-1, and 13a-16; and
B. Weissenberger cease and desist from causing any violation, or any future violation, of Section 13(a) of the Exchange Act, and Exchange Act Rules12b-20, 13a-1, and 13a-16.
By the Commission.
Jonathan G. Katz
1 The findings herein are made pursuant to the Offers that Friedberg and Weissenberger submitted and are not binding on any other person or entity in this or any other proceeding.
2 The Commission issued a cease-and-desist order against Cronos on November 15, 1999, based, in part, on the improper acts described herein. See In the Matter of The Cronos Group, Admin. Proc. No. 3-10096 (Nov. 15, 1999).
3 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.
4 For a more complete description of Cronos' violations see In the Matter of The Cronos Group, Admin. Proc. No. 3-10096 (Nov. 15, 1999).
5 Barton sold shares in the IPO. The registration statement did not disclose that Palatin controlled Barton and consequently, was a selling shareholder in the IPO.
6 Following the IPO, and under pressure from auditors and outside counsel, Palatin guaranteed the unpaid balance purportedly owed by Barton. Subsequently, Barton defaulted and Palatin, in effect, assumed the obligation to pay the balance owed.
7 Palatin was obligated to make two payments per year to Weissenberger. By mid-1997, Palatin had failed to make at least two consecutive payments and was in default of his obligation pursuant to the agreement. In 1997, prior to the filing of Cronos' 1996 Form 20-F, at Palatin's request, Weissenberger agreed not to invoke the default clause of the agreement.
8 See Statement of Financial Accounting Standards No. 57; Regulation S-X, Section 210.4-08(k); Regulation S-K, Item 404(a).