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U.S. Securities and Exchange Commission

before the

Release No. 44633 / August 1, 2001

Release No. 1430 / August 1, 2001

File No. 3-10543

In the Matter of

MAX Internet Communications, Inc.,





The Securities and Exchange Commission deems it appropriate that public cease-and-desist proceedings against Respondent MAX Internet Communications, Inc. ("MAX") be initiated pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act").

In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement 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, and without admitting or denying the findings contained herein, except that Respondent admits the Commission's jurisdiction over it and over the subject matter of these proceedings, Respondent has consented to the entry of this Order Instituting Proceedings, Making Findings and Imposing a Cease-and-Desist Order and to the entry of the cease-and-desist order set forth below.


On the basis of this Order and the Offer submitted by Respondent, the Commission finds that:

A. Summary

In this financial fraud case, MAX overstated sales for the first two quarters of fiscal year 2000 by 98%.1 These inflated sales figures prompted a 600% spike in MAX's stock price in only three months (from $4.44 to more than $28), and allowed MAX to jump from the National Association of Securities Dealers OTC Bulletin Board to the NASDAQ. MAX's former chief executive officer, president and chief financial officer each knew these sales were illegitimate under generally accepted accounting principles ("GAAP"), but nevertheless recorded them to protect MAX's stock price and to avoid "condemnation" from and loss of "credibility" in the investment community. They compounded this by misleading MAX's auditors during quarterly reviews, and by issuing a false press release responding to a March 2000 Wall Street Journal article questioning MAX's rapid sales growth.

Eventually, MAX's outside directors - who were misled by senior management - grew suspicious of the lack of cash flow despite the apparent sales growth and, following an investigation, MAX restated the fraudulent quarterly financial statements, which ultimately led to its delisting from the NASDAQ, the collapse of its stock price and a dozen private securities fraud class actions.

B. MAX's Background

MAX is a Nevada corporation based in Dallas, Texas whose stock is registered with the Commission under Section 12(g) of the Exchange Act. During the relevant period, MAX common stock traded first on the OTC Bulletin Board and then on the NASDAQ. NASDAQ subsequently delisted MAX common stock.

MAX originally was named Voxcom, a holding company that, through its subsidiaries, conducted seminars marketing business packages supposedly permitting people to sell calendars, customized trading cards and other paper products from home. Voxcom discontinued its home-based business companies in mid-1998, after resolving litigation with the Federal Trade Commission. Voxcom then concentrated on a new computer card providing seamless audio and video conferencing over the Internet. Voxcom then changed its name to MAX, to highlight its change in business focus. On June 30, 1999, however, MAX was still a developmental stage company, with very little in sales (approximately $300,000 for the entire FY 1999).

On September 14, 1999, MAX formed and funded a Brazilian subsidiary, MAX Internet Communications do Brasil Ltda. ("MAX Brazil"), supposedly to handle South American sales opportunities. At no point did MAX Brazil become self-sufficient.

C. MAX Overstates First Quarter Sales

MAX began inflating its sales during the first quarter of fiscal year 2000 (the three months ending September 30, 1999). MAX's 10-Q for this quarter (filed November 12, 1999) reported total sales of approximately $2.6 million. On November 15, 1999, MAX issued a press release touting the "successful launch" of MAX's product, a 1,300% increase in comparable period sales, "very strong revenues" and the company's "belief that [it] will be profitable on strong sales growth in the second quarter." This alleged success, however, was entirely illusory since none of the three transactions making up nearly all of MAX's first quarter revenue was recognizable as a sale in that quarter.

1. Improper Recognition of a Large South American Sale

The largest of the three first quarter transactions was a purported $1.5 million sale through MAX Brazil to a Brazilian reseller. This order came in after MAX Brazil was formed and shipped just before quarter end, on September 29, 1999. However, the product only shipped to MAX Brazil, not to the ultimate customer. GAAP generally precludes recognizing revenue from a sale of goods until, among other things, delivery to the ultimate customer has occurred. See, e.g., SFAC No. 5, ¶ 84(a); SOP 97-2; SAB 101. MAX Brazil did not ship any product to the ultimate customer until October 28, 1999, as announced in an email to MAX's senior executives. Therefore, when MAX filed its first quarter 10-Q and issued the accompanying press release, it knew that no part of this sale had shipped to the ultimate customer during the first quarter and, thus, that its representations about MAX's first quarter sales were false.

On November 17, 1999, only two days after the glowing press release about MAX's first quarter results, the Brazilian customer cancelled the entire transaction and returned what units it had. MAX did not disclose this fact to the public until May 2000, when it restated the first quarter financial statements.

2. Improper Recognition of "Sales" to Domestic Distributors

The other improper first quarter sales were two $500,000 transactions with United States computer products distributors, which shipped in August 1999. To secure these distributors, however, MAX had to grant substantial rights of return, with no obligation to pay MAX until the goods were sold through to ultimate customers. Moreover, MAX guaranteed one distributor customers for up to 50% of its inventory.

MAX's recognition of these transactions as sales in its first quarter 10-Q was improper under GAAP. Under SFAS No. 48, "Revenue Recognition When Right of Return Exists," a sale with a right of return cannot be recognized if, among other things, (i) the buyer has not paid the seller and has no obligation to pay until the product is resold, or (ii) the seller has "significant obligations for future performance to directly bring about resale of the product by the buyer." SFAS No. 48, ¶ 6(b, e). The distributors never paid MAX for the sales and had no obligation to do so until they either chose to keep the products or sold them. Moreover, MAX guaranteed to one of the distributors purchasers for up to 50% of the order. These terms precluded recognizing this transaction as a sale under GAAP.

Ultimately, the distributors could not sell MAX's product and returned their entire allotments of product in December 1999 and January 2000, respectively.

3. Despite the Return of Nearly All First Quarter Sales, MAX
Intentionally Perpetuates the Illusion of Strong Sales Growth

Despite the fact that nearly all first quarter sales had been returned by the end of January 2000, MAX actively sought to sustain the illusion of robust sales growth by providing inaccurate information for and authorizing public dissemination of misleading analyst reports. MAX authorized two separate analysts to disseminate misleading reports asserting that first quarter sales totaled over $2.6 million - even though MAX knew at the time that 95% of those alleged sales had already been returned.

D. MAX Overstates Second Quarter Sales

For the quarter ended December 31, 1999, MAX reported total sales of approximately $8.1 million, nearly all through MAX Brazil. These purported sales consisted primarily of an alleged sale to the Brazilian government (approximately 60% of reported sales) and a supposed sale to a Chilean entity (approximately 40% of reported sales). By recognizing these sales, MAX reported a profit for the first time in its history.

MAX filed its 10-Q reporting these alleged financial results on February 22, 2000. The same day, MAX issued a press release touting its "strong revenue growth" and alleged profitability, which it characterized as a "clear indication" that the company's product was "rapidly gaining acceptance." According to the press release, MAX felt that "[t]o be profitable at this stage of our growth is a promising indicator of the company's future." This alleged sales growth was wholly illusory, however, since neither the Brazilian government sale nor the Chilean sale was recognizable under GAAP.

1. The Brazilian Government Transaction

On October 26, 1999, MAX received a supposed order from the Brazilian government, to be delivered in five lots. The first two lots shipped to MAX Brazil on December 1, 1999 and December 20, 1999, respectively. However, MAX Brazil did not deliver, nor have authority from the Brazilian government to deliver, either of these lots before December 31, 1999. Instead, both lots were still in customs in early January 2000. Under GAAP, the lack of delivery to the ultimate customer precluded recognizing this transaction as a sale. See, e.g., SFAC No. 5, ¶ 84(a); SOP 97-2; SAB 101. Even so, MAX's second quarter 10-Q misrepresented that the Brazilian government sale was complete.

2. The False Chilean Transaction

On December 28, 1999, MAX received a supposed order from a Chilean company. The goods for this order never left Dallas. On December 29, 1999, a shipment to fill the order was prepared and picked up by MAX's Dallas-based shipping agent. However, MAX directed the shipping agent to hold the goods until payment was received. MAX never received payment and the goods remained at the shipping agent's Dallas warehouse until many months later, when MAX finally retook possession.

As noted, GAAP generally precludes recognizing revenue from a sale of goods until delivery to the ultimate customer has occurred. Delivery of this order had not occurred by December 31, 1999; indeed, MAX always retained title to and constructive possession of the goods. Nevertheless, MAX's second quarter 10-Q and accompanying press release misrepresented that the Chilean sale was complete.

E. The Critical Wall Street Journal Article and MAX's Misleading Response

On March 22, 2000, an article in the Wall Street Journal's "Texas Journal" questioned MAX's sales growth. The article noted that MAX's accounts receivable had grown by the same magnitude as its sales for the first two quarters of fiscal year 2000, which indicated that all of MAX's sales were on credit. The article suggested that MAX was simply stuffing the channels to create the illusion of sales growth, specifically highlighting the South American sales and the apparent lack of payment for those sales.

The next day, MAX issued a press release defending the legitimacy of its sales, particularly in Brazil. MAX's chief executive officer stated that he had just returned from investigating the situation in Brazil, and then attributed the "slow" receivables to "delays as may be expected in the normal course of business" and expressed "confidence" in MAX Brazil's management and the soundness of the alleged sales and related receivables. These statements were either misleading or outright falsehoods, since, in fact, the CEO had learned from his trip to Brazil that, for example, MAX Brazil's management had forged certain sales-related documents, had resigned and likely had stolen substantial sums from the company. None of this was mentioned in the press release, and certainly could not be considered "delays as may be expected in normal course of business." Moreover, since no goods had ever been delivered to an ultimate customer, there was no basis to believe in the soundness of MAX Brazil's sales or receivables.

F. MAX Restates its First and Second Quarter Financials

Following an investigation by outside counsel, MAX restated its first and second quarter financial statements. The restatement wiped out nearly all reported first and second quarter sales. Upon restatement, MAX's first quarter sales went from $2.637 million to $137,000, a 95% decrease. Second quarter sales fell 99%, from $8.133 million to $119,000. Overall, of the $13.27 million in gross sales MAX recognized in the first and second quarters, all but $256,000 - or more than 98% - was eliminated upon restatement.

G. Conclusion

As a result of the foregoing, MAX violated Sections 10(b), 13(a), 13(b)(2) and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-13 and 13b2-1 thereunder.


In view of the foregoing the Commission deems it appropriate to impose the sanctions agreed to in the Offer.

Accordingly, IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act, that Respondent, MAX, cease and desist from committing or causing any violation and any future violation of Sections 10(b), 13(a), 13(b)(2) and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-13 and 13b2-1 thereunder.

By the Commission

Jonathan G. Katz


1 MAX has a June 30 fiscal year end.


Modified: 08/07/2001