UNITED STATES OF AMERICA
In the Matter of
|ORDER INSTITUTING PUBLIC PROCEEDINGS PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS, AND ORDERING RESPONDENT TO CEASE AND DESIST|
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 Timothy Tuttle ("Tuttle").
In anticipation of the institution of these administrative proceedings, the Respondent has submitted an offer of settlement (the "Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceeding brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings contained herein, except that Respondent admits that the Commission has jurisdiction over him and the subject matter of these proceedings, the Respondent by his Offer, consents to the entry of the findings and the imposition of the cease-and-desist order set forth below.
The Commission makes the following findings:1
a. This case involves a financial reporting fraud perpetrated by the senior officers of I. & J. Bagel, Inc. ("I&J"), a California-based entity and wholly-owned subsidiary of Manhattan Bagel Inc. ("Manhattan Bagel" or the "Company"), which, during the relevant period, manufactured and distributed bagel dough and cream cheese products to a network of 220 franchised, licensed and Company-owned bagel bakery stores operating in 15 states and Canada.
b. In 1995 and 1996, I&J's Chairman of the Board, Allan Boren ("Boren"), and its president, Eric Cano ("Cano"), orchestrated a scheme to inflate the Company's net income by, among other things, recording fictitious sales on I&J's books. The effect of these particular misrepresentations was to overstate Manhattan Bagel's consolidated net income before taxes by $206,000 in the year ended December 31, 1995. Boren's brother, Philip Borini ("Borini"), implemented the fraud by (i) procuring false confirmations for the Company's auditors with respect to the fictitious sales, and (ii) making payments against the fictitious bagel sales using money provided by Boren.
c. Respondent Tuttle contributed to Borini's efforts by signing false audit confirmations and orally making false representations to the Company's auditors concerning bagels supposedly purchased by one of two fictitious accounts. Tuttle also made a sham payment on one of the fictitious accounts using money supplied by Boren.
d. As a result of his conduct, Tuttle caused violations of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder and violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder.
a. Tuttle, age 42, is Borini's brother-in-law. He is, and was at all relevant times, the owner of Peerless Building Maintenance Company ("Peerless"), a firm providing office cleaning services. Peerless purportedly was a large customer of I&J. Tuttle resides in North Ridge, California.
3. Other Relevant Entities and Individuals
a. Manhattan Bagel was incorporated in the State of New Jersey with its principal executive offices in Eatontown, New Jersey. On November 19, 1997, Manhattan Bagel filed a voluntary petition for reorganization under Chapter 11 of the federal Bankruptcy Act. On July 28, 1998, New World Coffee & Bagels, Inc. ("NWC") entered into an acquisition agreement with Manhattan Bagel whereby NWC would acquire 100% of Manhattan Bagel. NWC's acquisition of Manhattan Bagel was closed and approved by the United States Bankruptcy Court for the District of New Jersey in November 1998. Prior to becoming a wholly-owned subsidiary of NWC, Manhattan Bagel's common stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act and quoted on the National Association of Securities Dealers Automated Quotations System ("NASDAQ") under the symbol BGLS.
b. I&J was acquired by Manhattan Bagel on June 29, 1995 as a wholly-owned subsidiary of the Company. At the time of the acquisition, I&J owned and licensed approximately 17 bagel bakery stores in the Los Angeles area.
c. Boren, age 36, was employed by Manhattan Bagel as the Chairman of the Board of I&J from June 1995 to December 1995, when he resigned. Boren and his wife were the largest shareholders of Manhattan Bagel from June 1995 to March 1996.
d. Cano was employed by Manhattan Bagel as the President of I&J from June 1995 to April 1996, when he resigned. He was a consultant to the Company from April 1996 to June 1996.
e. Borini, age 46, is Boren's brother and Tuttle's brother-in-law.
(1) Beginning in the second quarter of 1995, just prior to the acquisition, Boren and Cano implemented a scheme to inflate I&J's operating results, by, among other things, creating fictitious bagel sales for two purported wholesale customers, including, Peerless, a small building maintenance company.
(2) After the markets closed on June 20, 1996, Manhattan Bagel announced that following the installation of new management at I&J, Manhattan Bagel "ha[d] uncovered certain improper bookkeeping entries and accounting practices," and further stated that Manhattan Bagel's independent auditors had advised that, based on the findings to date, Manhattan Bagel would be required to restate its first quarter 1996 financial results.
(3) On June 21, 1996, the price of Manhattan Bagel common stock fell approximately 35%, declining from $21.25 to $13.75 on record volume.
(4) Manhattan Bagel's June 20 Announcement addressed only some of the misrepresentations then contained on its books as a result of the fraudulent scheme. Manhattan Bagel had not, at the time of the announcement, uncovered a number of other significant misrepresentations, including the fictitious sales, because Boren, Cano and Borini were then actively engaged in efforts to conceal the true facts from the Company's auditors - an effort that continued through August 1996. Tuttle knew or was reckless in not knowing that his conduct contributed to these efforts.
(5) The above-referenced conduct caused Manhattan Bagel to make material misrepresentations in its financial statements for the six months ended June 30, 1995, the nine months ended September 30, 1995, and the year ended December 31, 1995. These materially inaccurate financial statements were included in periodic reports filed with the Commission, including among others the Form 10-QSB filed on August 15, 1995, Form 10-QSB filed on November 15, 1995, Form 10-KSB filed on March 19, 1996, the Form 10-QSB filed on May 15, 1996 and the Form 10-QSB filed on August 19, 1996.
b. Fictitious Sales
(1) At the year ended December 31, 1995, I&J's books showed sales to Peerless of $85,356.50. According to I&J's records, in 1996, Peerless purportedly made two payments on the Peerless account, including one $50,000.00 payment by Peerless check, dated August 12, 1996, signed by Tuttle. The sales recorded to the Peerless account were fictitious. Moreover, the $50,000 payment was a sham.
(2) In connection with the 1995 year-end audit of Manhattan Bagel's financial statements, the Company's auditors prepared written requests to Peerless, in October 1995 and again in February 1996, asking that it confirm the respective amounts owed to I&J at September 30, 1995 (the October requests) and December 31, 1995 (the February requests).
(3) The auditors faxed their October 1995 request to Tuttle, seeking confirmation that Peerless owed I&J $53,597 as of September 30, 1995. Tuttle knew that Peerless had never purchased products from I&J. He called Borini to learn what the confirmation concerned. Borini assured Tuttle that Borini would take care of it.
(4) In February 1996, the auditors again made a request to Peerless, asking that it confirm a balance due I&J of $70,737 at December 31, 1995. Tuttle again called Borini, who again told Tuttle that he would take care of the confirmation.
(5) On August 12, 1996, at Boren's instruction, Tuttle attended a meeting with Cano and an audit partner concerning sales of bagels to I&J. The meeting was held at the offices of Cano's attorney. The engagement partner attended by conference call.
(6) In advance of the meeting with the auditors, Boren met with Tuttle and told Tuttle to confirm orally to the auditors that Peerless owed I&J money for bagel purchases. Tuttle knew that Peerless had never purchased bagels from I&J.
(7) In the meeting with the auditors, Tuttle carried out Boren's instruction, falsely telling the auditors that Peerless had purchased bagels and related products from I&J during 1995 and had owed the amounts previously confirmed. Tuttle knew that these statements were false. When the auditors asked what Peerless did with all of the bagels, Tuttle falsely replied that Peerless gave bagels to customers. Tuttle knew that this statement was false.
(8) The auditors then asked Tuttle to sign a confirmation. Tuttle excused himself from the meeting and went to an adjoining room where, unbeknownst to the auditors, Boren and Cano were waiting. Tuttle expressed concern to them about signing a false confirmation. Boren told him to sign it, knowing the confirmation would be false. Tuttle then called Borini, who likewise told Tuttle to sign the false confirmation. Borini also knew that the confirmation would be false. Tuttle returned to the meeting room and, in the auditor's presence, signed the false account receivable confirmation for the balance that purportedly remained outstanding as of June 30, 1996. Tuttle knew that the confirmation was false.
(9) During the same meeting, Tuttle handed the auditors a check for $50,000, which represented most of the balance purportedly due on Peerless' account. Tuttle told the auditors that these funds belonged to Peerless. This representation was also false, and Tuttle knew it was false. Shortly before the meeting, Borini conveyed to Tuttle Boren's instruction that Tuttle write a check to Manhattan Bagel for $50,000. Borini assured Tuttle that $50,000 would be deposited to Peerless' bank account the next day. The next day, August 13, 1996, Cano delivered a paper bag to Borini's home containing $50,000 in cash. Cano and Borini's assistant counted the cash in Borini's dining room. Borini's assistant then delivered the cash to Borini's attorney, who drew a $50,000 check against his attorney trust account payable to Peerless. The attorney gave the check to Borini's assistant. The check was then deposited to Peerless' account.
B. LEGAL DISCUSSION
1. Violations of Exchange Act Section 10(b) and Rule 10b-5
a. Section 10(b) of the Exchange Act and Rule 10b-5 prohibit any person, in connection with the purchase or sale of securities, from making any untrue statement of a material fact, or omitting to state a material fact, using any device, scheme or artifice to defraud, or engaging in any transaction, practice, or course of business which operates as a fraud. See Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988).
b. Boren, Cano and Borini each violated Section 10(b) of the Exchange Act and Rule 10b-5 by knowingly or recklessly engaging in conduct resulting in material misstatements and omissions in, among other filings, Manhattan Bagel's Forms 10-QSB for the quarters ended June 30, 1995, September 30, 1995, March 31, 1996 and June 30, 1996 and in its Form 10-KSB for the year ended December 31, 1995.
c. By his conduct outlined above, Tuttle caused these violations of Section 10(b) of the Exchange Act and Rule 10b-5.
2. Violations of Exchange Act Section 13(b)(5) and Rule 13b2-1
a. Section 13(b)(5) of the Exchange Act prohibits any person from, among other things, knowingly falsifying any book, record, or account of an issuer as described in Section 13(b)(2). The knowing falsification of the books, records, or accounts of a subsidiary of an issuer is deemed to be a violation of Section 13(b)(5) of the Exchange Act. See SEC v. Larry E. Leslie, Litigation Release No. 13651 (May 26, 1993).
b. As described above, Boren, Cano and Borini knowingly or recklessly falsified the books, records, and accounts of I&J, a subsidiary of Manhattan Bagel. Thus, they each violated Section 13(b)(5) of the Exchange Act.
c. By his conduct outlined above, Tuttle caused these violations of Section 13(b)(5) of the Exchange Act.
d. Rule 13b2-1 prohibits any person from directly or indirectly falsifying, or causing to be falsified, any book, record, or account subject to Section 13(b)(2)(A) of the Exchange Act. Section 13(b)(2)(A) of the Exchange Act requires that every issuer of securities registered pursuant to Section 12 of the Exchange Act make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect its transactions and disposition of assets.
e. As described above, Boren, Cano and Borini directly and indirectly falsified and caused to be falsified books, records, and accounts of I&J which were subject to the requirement by Section 13(b)(2)(A) of the Exchange Act that such books, records, and accounts be accurate. These individuals thus violated Exchange Act Rule 13b2-1.
f. By his conduct outlined above, Tuttle caused these violations of Exchange Act Rule 13b2-1.
3. Manhattan Bagel's Periodic Reporting Violations
a. Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 require issuers to file annual and quarterly reports with the Commission. An issuer violates these provisions if it files materially false or misleading reports. GAF v. Milstein, 453 F.2d 720 (2d Cir. 1971); SEC v. Koenig, 469 F.2d 198 (2d Cir. 1972); SEC v. Great American Industries, Inc., 407 F.2d 453 (2d Cir.), cert. denied, 395 U.S. 920 (1969). Rule 12b-20 requires that such reports include any additional information that may be necessary in order to make the statements made not misleading.
b. At all relevant times, Manhattan Bagel was a reporting company subject to the provisions of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13. Manhattan Bagel's reports on Form 10-QSB for the quarters ended June 30, 1995, September 30, 1995, March 31, 1996, and June 30, 1996 and on Form 10-KSB for the year ended December 31, 1995 were materially inaccurate and misleading, as were a number of subsequent filings that incorporated the prior filings by reference. Accordingly, Manhattan Bagel violated Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13.
c. Section 13(b)(2)(A) of the Exchange Act requires issuers to make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflect its transactions and dispositions of assets. Manhattan Bagel violated Section 13(b)(2)(A) of the Exchange Act by failing to make and keep books, records, and accounts that accurately, and in reasonable detail, reflected certain revenue and expense transactions by its wholly-owned subsidiary, I&J.
d. By his conduct outlined above, Tuttle caused Manhattan Bagel's violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13.
Based on the foregoing, Tuttle caused violations of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder, and violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder.
In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions agreed to by Tuttle in his Offer.
Accordingly, IT IS ORDERED, that:
Pursuant to Section 21C of the Exchange Act, Tuttle cease and desist from committing or causing any violation and any future violations of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder, and from causing any violations and any future violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder.
By the Commission.
Jonathan G. Katz
|1||The Commission makes the findings herein pursuant to the Respondent's Offer. These findings are not binding on any other person or entity in this or any other proceeding.|
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