UNITED STATES OF AMERICA
|In the Matter of
SAF T LOK, INC.
|ORDER INSTITUTING PROCEEDINGS PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS AND IMPOSING CEASE-AND-DESIST ORDER|
The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative proceedings be, and they hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Saf T Lok, Inc. ("Saf T Lok" or the "Respondent") to determine whether Saf T Lok violated Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 12b-20, 13a-11, and 13a-13 thereunder.
In anticipation of the institution of these administrative proceedings, the Respondent has submitted an Offer 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 Respondent, without admitting or denying the findings set forth herein, except that it admits to the jurisdiction of the Commission over it and over the subject matter of these proceedings, consents to the entry of the findings and to the issuance of this Order Instituting Proceedings Pursuant to 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 Respondent's Offer of Settlement, the Commission finds the following1:
Saf T Lok, a Florida corporation headquartered in West Palm Beach, manufactures and markets patented gun locks that are designed to prevent the unauthorized or accidental discharge of weapons on which they are installed. Saf T Lok has marketed its products as tools to prevent the unauthorized use of firearms, especially by children. Saf T Lok common stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act and traded on the Nasdaq SmallCap Market.
1. Background: Saf T Lok Enters Into a Private Stock
Offering to Raise Capital and Avoid Delisting From Nasdaq
In June of 1997, Nasdaq officials notified Saf T Lok management that the company faced delisting from the Nasdaq SmallCap Market because its total assets had fallen below $2 million. Desperate to raise capital, Saf T Lok began negotiating with an individual named Sholam Weiss ("Weiss"),2 who claimed to represent various offshore entities that were interested in investing in the company through an offering of restricted stock pursuant to Regulation S of the Securities Act of 1933. Discussions between Saf T Lok and Weiss contemplated pricing the Regulation S stock at $1.50 per share, a discount of approximately 60 percent from the market price of approximately $3.60 per share. However, Nasdaq's Listing Qualifications Panel concluded in a letter dated October 14, 1997, that such a discount was "excessive" and that the proposed offering would be "harmful to the investing public." Nasdaq informed Saf T Lok that closing the offering at the proposed terms would result in the immediate delisting of the company's securities. Thereafter, Weiss agreed to increase the offering price from $1.50 to $2 per share.
Saf T Lok eventually issued $3 million worth of common stock (and additional stock purchase warrants), to the three alleged offshore investors represented by Weiss, and avoided delisting. As a result of the various fees, expenses and other third-party payments ordered by Weiss, however, Saf T Lok netted a total of only $1,910,000 in exchange for issuing the $3 million of common stock.
2. Saf T Lok Makes False or Misleading Disclosures
Concerning a Purported Business Consultancy Contract
As one condition to closing Saf T Lok's 1997 Regulation S offering at the higher price required by Nasdaq, Weiss demanded that Saf T Lok enter into a contract with an entity called A.B. & Associates ("AB") and pay $250,000 for supposed business consulting services. AB was a shell entity created by a longtime acquaintance of Weiss. It listed a commercial mail box facility in Monsey, New York for an address, had no clients, and had never conducted any business. In short, AB had no capacity to provide such services.
Nevertheless, at Weiss's insistence, Saf T Lok entered into a contract with AB to provide certain consulting services. Specifically, the contract provided that AB might, among other things, review, analyze and report on proposed investment opportunities and short-term and long-term investment policies, and render advice with respect to public and private financings. Saf T Lok did not attempt to negotiate any of the provisions of the purported agreement, but simply accepted all the terms of a contract proposed by Weiss.
Saf T Lok disclosed this purported "financial and management consulting services agreement" with AB in its Form 8-K filed on November 14, 1997, but failed to disclose any of the material facts concerning AB, or that Saf T Lok would receive no services or anything else of value from AB in exchange for its $250,000 payment.
3. Saf T Lok Makes False and Misleading Statements
Concerning a Purported $20 Million Distribution Agreement
While negotiating the terms of Saf T Lok's Regulation S offering on behalf of his purported offshore investors, Weiss proposed to Saf T Lok management that he would set up a distribution company that would sell Saf T Lok's products. Weiss had a new company, United Safety Action, Inc. ("USA"), incorporated for the stated purpose of distributing Saf T Lok's gun locks. USA had no assets, offices, or employees. Its business address was the same commercial mail box facility in Monsey, New York used by AB. Weiss proposed to raise $10 million to finance USA's operations, with $7 million to purchase an inventory of Saf T Lok products for resale, and $3 million earmarked for related expenses. During negotiations of the USA agreement, however, Weiss indicated to Saf T Lok management that he would be unable to raise the full $10 million, although he still proposed to raise a much smaller amount, perhaps as little as $2 million to $3 million. USA eventually received total funding of only $150,000.
b. Saf T Lok Enters Into the USA Distribution Agreement
Despite USA's lack of financing and inability to perform, Saf T Lok entered into a distribution agreement with USA on February 12, 1998. The contract granted USA exclusive rights to distribute Saf T Lok's products to retailers, and provided that USA would purchase up to $20 million of gun locks over a three-year period. However, as a practical matter, the agreement only committed USA to purchase $1 million of locks. Specifically, the agreement provided that USA could terminate the contract after fulfilling the "initial order" of $7 million of gun locks. It also provided that any purchase orders Saf T Lok received from "any customer" would count towards satisfying USA's "initial order" obligation. On February 11, 1998, one day before entering into the USA agreement, Saf T Lok had announced its receipt of a $6 million purchase order from a third-party wholesaler ("Wholesaler"), potentially leaving USA with a purchase obligation of only $1 million.
c. Saf T Lok Makes False or Misleading Statements and
Omissions in Describing the USA Distribution Agreement
Saf T Lok published a series of materially false or misleading statements concerning the USA agreement in various press releases and Commission filings in 1998. First, a February 19, 1998 Saf T Lok press release announcing the USA distribution agreement included the false statement that USA "had secured $10 million in working capital" to start its business plan and advertising campaign. Additionally, the release falsely claimed that USA had an "obligation to purchase at least $20 million" of Saf T Lok products, and quoted Saf T Lok's president and chief executive officer as saying that the agreement was "guaranteeing $20 million in sales." The following month, on March 13, 1998, Saf T Lok filed a Form 8-K that discussed the terms of the USA distribution agreement, but failed to disclose that USA was not financially capable of performing its obligations.
Two months later, in May 1998, Saf T Lok made additional false or misleading statements and omissions about the USA distribution agreement. Saf T Lok's Form 10-Q for the first quarter ended March 31, 1998 (filed May 20, 1998) falsely described USA's minimum purchase obligations as "in addition" to the $6 million purchase order received from the Wholesaler. Further, the Form 10-Q added: "Based on the aforementioned, management believes it has adequate capital to fund operations for a reasonable period of time." At that late date, however, three months after the purported USA agreement was entered into, USA still had no capital and had not made a single payment to Saf T Lok under the distribution agreement. Finally, in a May 21, 1998 earnings announcement, Saf T Lok falsely stated that the USA contract would provide a "minimum of $20 million in orders over a 24-month period." The release also attributed to Saf T Lok's president and CEO the baseless claim that, in light of the USA contract, "the Company will be profitable in the next quarter."3
4. Saf T Lok Announces, Then Voids, a Major Development Contract
In May 1998, Saf T Lok entered into a contract with a laser technology company to develop a fingerprint recognition system, mounted on a handgun, that would unlock the weapon only if the user's fingerprints matched the fingerprints pre-set in the system. The laser technology, if effectively applied to Saf T Lok's products, had the potential to revolutionalize the gun locks. However, the technology necessary to implement such a product was unproven, and Saf T Lok lacked the resources to finance its development. Saf T Lok's chairman authorized the expenditure of no more than $20,000 to investigate the possible development and application of the technology. Saf T Lok entered into a contract with the laser technology company in May 1998.
On May 26, 1998, Saf T Lok issued a materially false and misleading press release announcing the contract. The release failed to disclose material uncertainties about the technology or that Saf T Lok lacked the resources to finance the development of the proposed product. On the contrary, the release boasted that the fingerprint recognition system "will be available by the end of the year."
Approximately two weeks later, Saf T Lok voided the contract because it was unwilling to commit the required resources to it. Saf T Lok issued a press release that same day, after the market closed, announcing termination of the agreement.
5. Saf T Lok Pays For and Reviews Drafts of a
False and Misleading Third-Party Research Report
In February 1998, Saf T Lok paid $5,000 to a securities analyst ("Analyst") to prepare a research report for dissemination concerning Saf T Lok and its securities. The Analyst received certain financial information from the company, and spoke to senior management and another employee about Saf T Lok and its products. The Analyst later sent a draft of his research report to Saf T Lok, and had a conference call with its CEO to discuss possible revisions.
The report, issued later under the name of State Street Securities,4 strongly recommended an investment in Saf T Lok, describing the company and its products in glowing terms and projecting dramatic increases in Saf T Lok's sales, earnings and stock price. State Street Securities placed the report on the PR Newswire and on the Business Wire on February 17, 1998.
The research report included false or misleading forecasts about the company's business prospects. For example, the report projected sales of two million units in 1998 and three million units in 1999, with net sales of $60 million in 1998, and $90 million the following year, figures that Saf T Lok's chairman and CEO both later acknowledged were unreasonable. The report further said that the stock price "could rise to $20-$40 per share over the next 12-24 month period."5 Saf T Lok officials reviewed the report - including those figures - before it was published, and knew that those projections were unreasonable and far exceeded the company's own projections. Nevertheless, Saf T Lok did not object to those financial projections at the time the report was prepared or disseminated, issue any corrective disclosure, or take any steps to halt distribution of the report until May 1998, three months after the report was made public.
6. The Market for Saf T Lok Stock
Several of the false or misleading statements discussed herein had a material impact on the daily trading volume and price of Saf T Lok common stock. For example, for the month of January 1998, Saf T Lok stock traded at an average price of approximately $3 per share, at an average daily volume of approximately 330,200 shares. On February 17, 1998, the day State Street Securities released its "strong buy" recommendation, the stock closed at $4 3/16 per share, an increase of approximately 9.8 percent from the previous day's close of $3 13/16 - on trading volume of nearly 2 million shares. For the three-day period of February 17 through February 19, 1998 (the date Saf T Lok announced the USA distribution agreement), the stock's average daily trading volume was nearly 1.4 million shares. Finally, on June 12, 1998, the first full trading day after Saf T Lok announced the termination of the fingerprint development contract, Saf T Lok's stock price fell approximately 23 percent, from $4.25 per share to its closing price of $3.25 per share.6
C. LEGAL ANALYSIS
1. Applicable Law
Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit the use of manipulative and deceptive practices in connection with the purchase or sale of a security. 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. Rules 13a-11 and 13a-13 require issuers to file Forms 8-K (as necessary) and Forms 10-Q (quarterly), respectively. Inherent in Section 13(a)'s reporting requirement is the requirement that all reports be complete and accurate. A violation of Section 13(a) occurs if periodic reports contain materially false or misleading information. Moreover, Rule 12b-20 requires that such reports contain, in addition to all expressly required disclosures, such other information as is necessary to ensure that the statements made in the report are not materially misleading.
2. Liability for False and Misleading Disclosures Concerning
The Purported Consulting, Sales and Development Contracts
a. The AB Business Consulting Agreement
Saf T Lok violated the antifraud provisions, as well as Section 13(a) of the Exchange Act and Rules 13a-11 and 12b-20 thereunder, by falsely describing the AB contract as a bonafide consulting agreement in its Form 8-K filed November 14, 1997, and failing to disclose the true circumstances concerning the formation of the purported agreement. The disclosure was material because it concerned the supposed hiring of a firm to provide advice on raising capital, and involved the disposition of approximately eight percent of the gross proceeds of the Regulation S offering - facts of import to reasonable investors of a company facing possible delisting. Full disclosure of the facts and circumstances concerning the AB agreement was necessary to make Saf T Lok's disclosure not misleading.
b. The USA Distribution Agreement
Saf T Lok violated the antifraud provisions by making false and misleading statements and omissions in two press releases concerning the purported USA distribution agreement. Saf T Lok also violated the antifraud provisions, as well as Section 13(a) of the Exchange Act and Rules 13a-11, 13a-13, and 12b-20 thereunder, by making false or misleading statements and omissions concerning that purported agreement in two Commission filings.7 The disclosures falsely described USA's financial ability to perform its obligations under the contract, and misrepresented the terms of the agreement. The false or misleading statements was material to investors, since Saf T Lok at that time had little sales and no profits. Full disclosure of the circumstances surrounding the USA agreement was necessary to make Saf T Lok's disclosures not misleading.
c. The Laser-Based Fingerprint Development Contract
Saf T Lok also violated the antifraud provisions by issuing the false and misleading press release on May 26, 1998 that announced the fingerprint development contract, which included terms that Saf T Lok was unwilling to accept. The press release was material because it reported a major development - computer-based fingerprint technology - that could have fundamentally changed the nature of Saf T Lok's products.
3. Direct Liability for Inaccurate Projections
In a Research Report Paid for by Saf T Lok
Under Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, Saf T Lok is directly liable for the materially false and misleading projections contained in the analyst report ultimately issued by State Street Securities. Saf T Lok paid $5,000 to an analyst to prepare the State Street Securities report; Saf T Lok senior management provided information (including a copy of the illusory USA contract) to the author, edited a draft of the report, represented that the report was consistent with the company's views, and then released the report to State Street Securities for the purpose of public distribution. By exercising such direct control over the report, Saf T Lok is directly liable for its contents. Saf T Lok management recognized that the report's projections lacked any reasonable basis and they far exceeded internal company projections. For example, the report projected sales of two million units in 1998 and three million units in 1999, with net sales of $60 million in 1998, and $90 million the following year. The report further said Saf T Lok's stock price "could rise to $20-$40 per share over the next 12-24 month period."8
On the basis of this Order and the Offer of Settlement submitted by the Respondent, the Commission finds that Saf T Lok violated Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 12b-20, 13a-11, and 13a-13 thereunder.
In view of the foregoing, the Commission has determined to accept the Respondent's Offer of Settlement.
Accordingly, IT IS ORDERED, pursuant to Section 21C of the Exchange Act, that Saf T Lok cease and desist from committing or causing any violation and any future violation of Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 12b-20, 13a-11, and 13a-13 thereunder.
By the Commission.
Jonathan G. Katz
1 The findings herein are made pursuant to Saf T Lok's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.
2 In an unrelated matter, Weiss, 46, of Monsey, New York, was convicted in November 1999 after a lengthy trial in federal court in Orlando, Florida of 78 counts of racketeering, wire fraud, money laundering, and other crimes in connection with the looting of millions of dollars from a life insurance company. Weiss fled during the start of jury deliberations, and became a fugitive. He was sentenced in absentia to 845 years in prison and ordered to pay a $123 million fine and another $125 million in restitution. He was arrested in Vienna, Austria, on October 24, 2000, and is awaiting extradition proceedings.
3 For the first quarter of fiscal 1998, Saf T Lok announced a net operating loss of approximately $76,000 on gross revenue of approximately $277,000. The USA contract did not make Saf T Lok profitable for any quarter, as neither the Wholesaler nor USA met its obligations under their respective agreements.
4 State Street Securities, now known as Taylor Stuart Financial, is a registered broker-dealer based in New York, and is not related to State Street Bank and Trust Co. State Street Securities was the placement agent in Saf T Lok's $3 million Regulation S offering in 1997. State Street Securities distributed the report at Saf T Lok's invitation, after reviewing its contents with Saf T Lok's senior management.
5 On February 17, 1998, the date the State Street Securities report was released, Saf T Lok stock closed at $4 1/32 per share.
6 Saf T Lok's June 11, 1998 press release announcing the termination of the fingerprint development contract also announced other events adverse to the company.
7 See supra at Section III B(3)(c).
8 An issuer that sufficiently involves itself in the preparation of a third-party research report is liable for any false statements or baseless projections contained in the report under a separate theory of liability, sometimes referred to as the "entanglement theory." Under this theory, the issuer's prepublication involvement is such that the information in the report can be reasonably attributed to the company itself. See e.g., Elkind v. Liggett & Myers, Inc., 635 F.2d 156, 163 (2d Cir. 1980); Schaffer v. The Timberland Co., 924 F. Supp. 1298, 1310 (D.N.H. 1996) ("liability may attach to an analyst's statements where the defendants have expressly or impliedly adopted the statements, placed their imprimatur on the statements, or have otherwise entangled themselves with the analysts to a significant degree"); In re ICN/Viratek Securities Litigation, Fed. Sec. L. Rep. (CCH) ¶99,213 (S.D.N.Y. 1996); In the Matter of Presstek, Inc., Exchange Act Rel. No. 39472 (December 22, 1997). Saf T Lok, however, did more than merely involve itself in the publication of the State Street Securities report. By paying for the report, which, as described above, Saf T Lok knew contained false and misleading information, Saf T Lok is directly liable for the report's contents, just as it would be liable for a false and misleading press release prepared by a third-party public relations firm. SEC v. Green Oasis Environmental, Inc., SEC Lit. Rel. No. 15876 (D.S.C. August 21, 1998) (injunction entered against issuer that paid public relations firm which issued false and misleading press releases as part of fraudulent scheme).
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