UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 36669 / January 3, 1996 ACCOUNTING AND AUDITING ENFORCEMENT Release No. 744 / January 3, 1996 ADMINISTRATIVE PROCEEDING File No. 3-8910 -------------------------- : : In the Matter of : ORDER INSTITUTING PROCEEDINGS : PURSUANT TO SECTION 21C OF THE : SECURITIES EXCHANGE ACT Florio Fiorini, : OF 1934, AND FINDINGS AND : CEASE AND DESIST ORDER Respondent. : : : --------------------------: I. The Commission deems it appropriate and in the public interest that public administrative proceedings be instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") to determine whether Florio Fiorini ("Fiorini") committed or caused violations of Sections 10(b) of the Exchange Act and Rules 10b-5 and 13b2-2, thereunder, by: (1) causing Path Communications Corporation ("Pathe") to improperly recognize revenue from a sale and leaseback agreement with an entity that Pathe owned and/or controlled; and, (2) making false and misleading statements about various sources of funds used by Pathe to consummate its acquisition of Metro-Goldwyn-Mayer, Inc. ("MGM"). II. In anticipation of the institution of these administrative proceedings, Fiorini has submitted an Offer of Settlement ("Offer"), which 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, Fiorini consents to the issuance of this Order and the entry of the findings contained herein. III. Accordingly, IT IS HEREBY ORDERED that proceedings pursuant to Section 21C of the Exchange Act be, and they hereby are instituted. IV. On the basis of this Order and Respondent's Offer of -------------------- BEGINNING OF PAGE #2 ------------------- Settlement, the Commission finds-[1]- the following: A. Facts 1. Path Communications Corporation Pathe, during the relevant period, was a motion picture company with common stock registered pursuant to Section 12(b) of the Exchange Act. Pathe filed with the Commission periodic and other reports including quarterly reports on Form 10-Q, Annual Reports on Form 10-K and Current Reports on Form 8-K. Pathe's common stock was traded on the New York Stock Exchange ("NYSE") until August 1992, when it was delisted. 2. Metro-Goldwyn-Mayer, Inc. ("MGM") MGM, during the relevant period, became a subsidiary of Pathe as the result of a merger. MGM was and is engaged in the production, distribution and exhibition of motion pictures. Until the end of 1993, MGM had a class of subordinated debentures registered with the Commission pursuant to Section 12(b) of the Exchange Act and traded on the NYSE. Presently, all outstanding MGM stock is owned by Credit Lyonnais Bank Nederland. 3. Credit Lyonnais Bank Nederland ("CLBN") CLBN is the Dutch subsidiary of Credit Lyonnais, S.A. which is a French bank. CLBN was the primary banker for Pathe. 4. Respondent: Florio Fiorini Fiorini, a resident of Switzerland, was the chairman of Pathe's board of directors from April 1988 through April 1991. In June, 1995 Fiorini was convicted of fraud in Switzerland and was sentenced to six years in prison. 5. The Sham Sale and Leaseback Transaction with Cinema 5 On December 29, 1989, Fiorini and other officers of Pathe caused the company to enter into an agreement by which it purported to sell and lease back a number of movie theaters and other real estate in the United Kingdom ("U.K.") and the Netherlands to a third party, Cinema 5 Europe N.V. ("Cinema 5"). Cinema 5 was to pay $231 million for the properties, $184 million in cash and $47 million in the form of a six-month demand note. As a result of reporting revenue from the Cinema 5 transaction, Pathe improperly recognized gains of $56 million at 1989 year- end and $47 million in the first quarter of 1990. Fiorini falsely represented to Pathe's independent accountant, and to others, that Cinema 5 was owned and/or controlled by a prominent Italian media magnate. Instead, as Fiorini knew, Cinema 5 was not an independent third party, but was controlled entirely by Pathe. Pathe itself provided the funds to establish Cinema 5. Several days before the --------- FOOTNOTES --------- -[1]- The facts, findings, and conclusions herein and the entry of this Order are solely for the purposes of this proceeding and shall not be binding on any other person or entity named in any other proceeding. 2 -------------------- BEGINNING OF PAGE #3 ------------------- sale/leaseback, Pathe changed the name of a dormant subsidiary, Cannon Japan B.V., to Cinema 5. On December 29, Pathe purportedly sold Cinema 5 to Fininvest International Ltd., a Seychelles Island company. The consideration paid by Fininvest to Pathe, $2.5 million, was loaned to Fininvest by Pathe through a line of credit provided by CLBN. The Managing Directors of Cinema 5 after its purchase by Fininvest were friends and business associates of Giancarlo Parretti, Pathe's Chief Executive Officer. Fernando Cappuccio, a director of Pathe who had formerly been Pathe's chief financial officer, was Cinema 5's sole representative in arranging for the sale and leaseback transaction with Pathe. He delegated the selection of the United Kingdom theaters to be acquired by Cinema 5 to a Pathe official. Cappuccio's only direction to the Pathe official was to identify properties with a total value of $130 million, the amount of a delinquent loan Pathe's United Kingdom subsidiary owed to CLBN. No other criteria, such as location or anticipated revenue, were used. At that time, Cappuccio told the Pathe official that Cinema 5 was "an in-house transaction and as such, there was no third party principal" and that the Italian media magnate was "the face" that Pathe was putting on the Cinema 5 transaction. The $184 million cash portion of the "payment" by Cinema 5 to Pathe was financed entirely by CLBN. CLBN did not advance new credit, but in effect substituted Cinema 5 for Pathe as the debtor on $184 million in preexisting loans. Finally, additional evidence that Cinema 5 was controlled by Pathe is as follows: No one representing Cinema 5 looked at the real estate or performed any other due diligence. A U.K. law firm subsequently hired by Cappuccio stated in a letter that the terms of the agreement were "quite abnormal and highly prejudicial" to Cinema 5 and that it was "extraordinary" that so many matters were apparently taken on trust, without legal safeguards and that the entire amount of the purchase money was paid up front. After the sale and leaseback transaction, Pathe continued to treat the properties as its own when, in attempting to finance Pathe's 1990 acquisition of MGM, it granted Credit Lyonnais, S.A. the right to sell some of the properties it had purportedly sold to Cinema 5. In the course of the 1990 audit of Pathe's financial statements, Pathe's auditors requested confirmation of the ownership of Cinema 5. In response, Fiorini delivered a forged letter purporting to bear the signature of an executive employed by the Italian media magnate. That letter falsely asserted that the executive owned 100 percent of Cinema 5, and that neither Parretti nor Fiorini had any ownership interest in Cinema 5. 6. The Acquisition of MGM 3 -------------------- BEGINNING OF PAGE #4 ------------------- In March 1990, Pathe entered into an agreement with MGM's predecessor to commence a tender offer to acquire all outstanding shares of MGM common and preferred stock for $20 per share, or $1.22 billion. The agreement obligated Pathe to make four $50 million nonrefundable deposits. The tender offer commenced on March 14 and, by its terms, was set to expire April 30. The deal collapsed after four extensions when another entity, which was to provide $650 million to Pathe for the tender offer, pulled out. On June 21, 1990, Pathe announced a new merger agreement with MGM. The new agreement increased the buyout price to $21.50 per share, or $1.36 billion, and extended the closing date to October 23, 1990. The agreement provided that the merger would be financed with funds provided in part by leveraging assets of MGM and Pathe, and by an additional equity contribution from several companies owned or controlled by Fiorini and/or Parretti. The merger agreement required that Pathe obtain an opinion from an investment banking firm that the merged entity would be solvent as of the completion of the transaction. As set forth below, at least $305 million of Pathe's current liabilities and at least $113 million of Pathe's contingent liabilities were not recorded in Pathe's books and records when the investment firm rendered its opinion. One of the $50 million nonrefundable deposits paid in connection with the proposed merger was provided by SASEA Holding S.A., an entity controlled by Fiorini, in July 1990. SASEA borrowed substantially all of the funds for that payment from CLBN, pursuant to an agreement under which the funds would be repaid in October, 1990. Parretti and Fiorini committed Pathe to repay the monies loaned to SASEA. However, that commitment was not recorded in Pathe's books and records, or disclosed to the investment firm that rendered the solvency opinion. As of late October, Pathe had failed to raise all of the equity financing required to complete the merger with MGM. To complete the financing, Parretti and Fiorini arranged for certain "bridge loans" from CLBN to Pathe totalling $255 million. Parretti represented that the bridge loans would be repaid from additional equity contributions to be received after the merger closed. In fact, Fiorini knew at the time that he and Parretti obtained the "bridge loans" that the purported funding sources were either non-existent, or highly contingent. The "bridge loans" were not recorded in Pathe's books and records, and were not disclosed to the investment firm that rendered the solvency opinion. Finally, Fiorini failed to disclose to the investment firm the existence of a $113 million contingent liability that Pathe had incurred in connection with a license agreement with Reteitalia S.p.A. ("Reteitalia"), an Italian media company. On October 20, 1990, Fiorini signed an agreement for the merged entity to license television and pay-per-view rights in Spain and Italy for certain films to Reteitalia for $168 million to be paid over five years. CLBN and another company related to Reteitalia factored the agreement to provide Pathe cash that could be used to finance the merger. However, on the same day the license agreement was executed, Fiorini executed a side letter agreement on behalf of Pathe that 4 -------------------- BEGINNING OF PAGE #5 ------------------- obligated it to repurchase the license rights for $113 million plus interest at Reteitalia's request within 12 months of the execution of the agreement. Fiorini did not disclose the side letter agreement to the investment firm, and it was not recorded as a contingent liability in Pathe's books and records. During the audit of Pathe's 1990 financial statements, Fiorini furnished Pathe's auditors with a forged document that purported to confirm the existence of the license agreement with Reteitalia, but that failed to disclose the repurchase agreement. Reteitalia later exercised its rights under the side letter agreement. B. Legal Discussion 1. Violations of Section 10(b) of the Exchange Act and Rules 10b-5 --------- FOOTNOTES --------- Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder prohibit the use of any means or instrumentality of interstate commerce or the mails to employ devices, schemes or artifices to defraud, to make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or to engage in any act, practice or course of business which operates or would operate as a fraud upon any person in connection with the purchase or sale of a security. As described above, Fiorini caused Pathe to enter into the sham transaction with Cinema 5. He also arranged the "bridge loans" to finance the MGM merger, and executed the side letter with Reteitalia that obligated Pathe to repurchase the license rights. Fiorini failed to disclose the material facts concerning those transactions either to investors in Pathe, or to the investment banking firm that rendered the solvency opinion concerning the MGM transaction. As a result, he violated Section 10(b) and Rule 10b-5 of the Exchange Act. 2. Misrepresentations to Accountants in Connection with the Preparation of Required Reports Rule 13b2-2 of the Exchange Act prohibits any officer or director of an issuer to make materially false or misleading statements or "omit to state, or cause another person to omit to state, any material fact necessary in order to make statements made, in light of the circumstances under which such statements were made, not misleading" to an accountant in connection with an audit or the preparation of any document or report required to be filed with the Commission. Fiorini violated Rule 13b2-2 when he provided the independent accountant with a forged letter that purported to evidence that Cinema 5 was not affiliated with Pathe. Fiorini again violated Rule 13b2-2 in April 1991, when he provided the independent accountant with a forged confirmation concerning the Reteitalia transaction that did not disclose the repurchase agreement. V. FINDINGS Based on the above, the Commission finds that Fiorini 5 -------------------- BEGINNING OF PAGE #6 ------------------- violated Section 10(b) of the Exchange Act and Rules 10b-5 and 13b2-2, thereunder. VI. ORDER In view of the foregoing, the Commission deems it appropriate and in the public interest to accept Fiorini's Offer of Settlement. Accordingly, IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act, that Fiorini cease and desist from committing or causing any violation, and committing or causing any future violation, of Section 10(b) of the Exchange Act and Rules 10b-5 and 13b2-2 thereunder. By the Commission. Jonathan G. Katz Secretary 6