==========================================START OF PAGE 1====== UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 38358 / March 4, 1997 ADMINISTRATIVE PROCEEDING File No. 3-9264 ------------------------------- : ORDER INSTITUTING CEASE-AND- In the Matter of : DESIST PROCEEDINGS : PURSUANT TO SECTION 21C OF JOHN THOMAS ROYALL, : THE SECURITIES EXCHANGE ACT : OF 1934 AND FINDINGS AND Respondent. : ORDER OF THE COMMISSION : ------------------------------- I. The Commission deems it appropriate and in the public interest to institute public administrative proceedings pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") to determine whether John Thomas Royall ("Respondent") violated Exchange Act Section 10(b) and Exchange Act Rules 10b-5 and 13b2-2. II. In anticipation of the institution of these administrative proceedings, Respondent has submitted an Offer of Settlement which the Commission has determined to accept. Solely for purposes of these proceedings and any other proceedings brought by or on behalf of the Commission or to which the Commission is a party, Respondent, without admitting or denying the matters set forth herein, consents to the issuance of this Order Instituting Cease- and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934 and Findings and Order of the Commission ("the Order"), and to the entry of the findings, and the imposition of the remedial sanctions, set forth below.-[1]- III. The Commission finds the following: A. FACTS 1. Respondent Respondent resides in Virginia and, during the relevant period, was Chairman of the Board and Chief Executive Officer of Octagon, Inc. ("Octagon"), a public company described below. Respondent owns 1,125,750 shares of Octagon common stock, which represent approximately 17% of the outstanding shares. 2. Octagon Octagon is a Delaware corporation that, during the relevant period, was headquartered in Reston, Virginia,-[2]- and described itself as an international environmental and telecommunications firm and a full-service provider of contract manpower in the electric power utility industry. Octagon's common stock and Class A Warrants are registered with the Commission pursuant to Section 12(g) of the Exchange Act. After Octagon's initial public offering in February 1994, its common stock and warrants traded initially on the Nasdaq SmallCap Market and subsequently on the Nasdaq National Market System until they were delisted by Nasdaq in April 1995. Since its public offering, Octagon has had 6,450,000 shares of its common stock outstanding, including 3,000,000 restricted shares issued to insiders and others prior to the public offering. On May 22, 1995, pursuant to Exchange Act Rule 12h- ---------FOOTNOTES---------- -[1]- Simultaneously with the entry of this Order, the Commission filed a civil action pursuant to Section 21(d)(3) of the Exchange Act seeking a civil penalty against the Respondent based on the violations described herein. Without admitting or denying the allegations of the Commission's complaint in the civil action, Royall has consented to entry of a final judgment requiring him to pay a $35,000 penalty. -[2]- In January 1996, in connection with a management reorganization and operational restructuring, Octagon moved its corporate headquarters to Altamonte Springs, Florida. ==========================================START OF PAGE 2====== 3(b)(1)(i), Octagon filed a Form 15 with the Commission suspending its duty to file periodic reports on the grounds that it has fewer than 300 shareholders of record. On September 30, 1996, in a related proceeding, the Commission issued an Order, pursuant to Section 21C of the Exchange Act, finding that Octagon violated Exchange Act Sections 10(b) and 13(a) and Rules 10b-5, 12b-20, and 13a-13 thereunder and requiring Octagon to cease and desist from committing or causing any violation or future violation of those provisions. In the Matter of Octagon, Inc., Rel. No. 34-37762. 3. Failure to Disclose Material Related-Party Transactions On or about February 21, 1994, less than a week after Octagon's initial public offering, Octagon's then outside securities counsel formed a Delaware corporation called PRK Group, Inc. ("PRK"), which purported to be an investment banking firm. Simultaneous with the formation of PRK, Respondent signed an agreement on behalf of Octagon pursuant to which Octagon engaged PRK as its "exclusive representative and advisor for the purpose of representing and advising [Octagon] in its prospective mergers, acquisitions and other business combinations campaign." The agreement obligated Octagon to pay PRK a percentage of the total consideration or value of any of Octagon's prospective mergers, acquisitions, or other business combinations. On March 11, 1994, the attorney who formed PRK issued 1,000 shares of PRK stock each to himself, to Respondent's wife, and to the wife of Octagon's president and chief operating officer, giving each a one-third equity interest in PRK. The same day, Octagon entered into an agreement to acquire ABB Power Systems Energy Services, Inc. ("PSESI") for approximately $2.3 million. On March 31, 1994, in connection with its acquisition of PSESI, Octagon paid PRK $219,220 in fees and disbursements for alleged "investment banking" services that in fact were not rendered by PRK. On May 2, 1994, PRK distributed substantially all of this payment by issuing checks for $71,666.67 to each of its three shareholders, including Respondent's wife.-[3]- Octagon's acquisition of PSESI was the subject of press releases issued by the company on March 14, 1994, and March 23, 1994, and of a Form 8-K filed with the Commission on April 6, 1994. It was also prominently featured as a "subsequent event" in Octagon's annual report on Form 10-K for the year ended ---------FOOTNOTES---------- -[3]- In October 1994, Octagon and PRK agreed to cancel their agreement, and in December 1994, Octagon terminated its retention of the securities lawyer who formed PRK. ==========================================START OF PAGE 3====== December 31, 1993 (which was filed with the Commission on April 13, 1994) and as a current event in Octagon's quarterly report on Form 10-Q for the quarter ended March 31, 1994 (which was filed with the Commission on May 26, 1994). None of these press releases or public filings contained any disclosure about Octagon's relationship with PRK or about the fees Octagon had paid to Respondent's wife and other related parties through PRK in connection with the acquisition of PSESI. Respondent reviewed and approved each of the foregoing press releases and public filings. He also signed the public filings in his capacity as Chairman of the Board and Chief Executive Officer of Octagon. Throughout the relevant period, he knew or was reckless in not knowing that PRK was a related party, that the fees paid by Octagon to PRK were material in both nature and amount, and that Octagon had a duty to disclose these matters to the investing public. He also knew or was reckless in not knowing that Octagon's annual report on Form 10-K for the year ended December 31, 1993 (filed with the Commission on April 13, 1994) and Octagon's quarterly report on Form 10-Q for the quarter ended March 31, 1994 (filed with the Commission on May 26, 1994) omitted to state material facts disclosing the company's related- party transactions with and payments to PRK, which facts were necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. 4. False and Misleading Disclosures About a Contract with James Mackenzie International Trading PLC On July 12, 1994, Octagon issued a press release announcing that it had entered into an agreement with James Mackenzie International Trading PLC ("JMIT") to sell "state-of-the-art portable satellite telecommunications equipment and spare parts to [JMIT] during a two-year term for an aggregate purchase price of $72.6 million subject to certain reasonable performance criteria." The press release further stated that "[a]dditional terms of payment will be provided under an irrevocable letter of credit to be drawn and confirmed by a major international commercial bank," and quoted Respondent as stating that the agreement with JMIT "substantially increases Octagon's presence in the European Union." Respondent reviewed and approved this press release. The press release was false and misleading with respect to the magnitude and terms of the contract with JMIT. Contrary to the description in the press release, Octagon had entered into two agreements with JMIT. The initial agreement, dated July 11, 1994, was for only $36.3 million of equipment and spare parts. Octagon and JMIT had also entered into a supplemental agreement, dated July 12, 1994, for an additional $36.3 million of equipment and spare parts expressly conditioned upon Octagon ==========================================START OF PAGE 4====== "satisfactorily perform[ing]" its obligations to JMIT during the initial 90 days of the primary contract. The press release was also false and misleading with respect to Respondent's quoted statement that the agreement with JMIT "substantially increases Octagon's presence in the European Union." Although JMIT maintained an address in London, JMIT was acting as an intermediary for buyers in Iran. On August 16, 1994, Octagon filed with the Commission its Form 10-Q for the quarter ended June 30, 1994, which disclosed the contract with JMIT as a subsequent event. This Form 10-Q, which was reviewed and signed by Respondent, repeated the false statement that there was a contract "for $72.6 million." In addition, although the Form 10-Q disclosed that this contract was "subject to the issuance of a letter of credit," it failed to disclose that the letter of credit was already nearly a week overdue under the express terms of the contract. This was particularly significant because Octagon had several weeks earlier paid JMIT $1.265 million cash (in lieu of a performance bond), which the contract specified was to be used by JMIT "exclusively for the purpose of obtaining" such a letter of credit. The Form 10-Q also failed to disclose that Octagon and JMIT had already accused each other of breaching the agreement; that Octagon had already hired a private investigator to investigate JMIT; that the private investigator had preliminarily reported facts suggesting that JMIT may have defrauded Octagon; or that Octagon was contemporaneously engaging a London solicitor to act on its behalf "in the prosecution of [its] claims" against JMIT.-[4]- On August 22, 1994, at least 10 days past JMIT's deadline for posting its letter of credit and several days after the publication of a Wall Street Journal article raising doubts about Octagon's contract with JMIT, Octagon issued a press release, which was reviewed and approved by Respondent, announcing that Octagon had found a German supplier for the equipment and spare parts it would be selling to JMIT. The press release also quoted Respondent as stating that Octagon and its supplier were "ready, willing and able" to ship the merchandise "immediately upon the posting of the letter of credit by [JMIT], which we anticipate in the near term." This press release was misleading. First, by August 22 there was no basis for any anticipation that JMIT would ever post its letter of credit, much less "in the near term." Second, the press release failed to disclose that JMIT's principal stated objection to Octagon's performance under the contract was ---------FOOTNOTES---------- -[4]- In early 1996, Octagon announced that it had obtained a $1.3 million judgment against JMIT and its managing director. ==========================================START OF PAGE 5====== precisely that Octagon was seeking to improperly substitute the German supplier's goods -- which Octagon had contracted for in June -- for those of another manufacturer specifically provided for in the contract between Octagon and JMIT. During the seven-week period following Octagon's first announcement of its contract with JMIT on July 12, 1994, the price of Octagon's stock nearly doubled from approximately $8 per share to more than $14 per share. On September 1, 1994, Octagon issued a press release that accused JMIT of engaging in a "worldwide scheme to defraud" and put the market on notice for the first time that the contract with JMIT would not be performed. After this announcement, Octagon's stock immediately fell from $14-1/4 per share to $12-3/4 per share, after which it continued to decline to less than $7 per share by the end of September 1994 and less than $2 per share by mid-December 1994. Respondent knew or was reckless in not knowing that Octagon's July 12 and August 22 press releases, and its quarterly report on Form 10-Q for the quarter ended June 30, 1994 (filed with the Commission on August 16, 1994), contained the foregoing false and misleading statements of material fact, and omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. 5. Misleading Statements and Omissions Made to Octagon Accountants In connection with the preparation and filing of Octagon's annual report on Form 10-K for the year ended December 31, 1993 (filed with the Commission on April 13, 1994), Octagon's quarterly report on Form 10-Q for the quarter ended March 31, 1994 (filed with the Commission on May 26, 1994), and Octagon's quarterly report on Form 10-Q for the quarter ended June 30, 1994 (filed with the Commission on August 16, 1994), Respondent knowingly or recklessly omitted to state to Octagon's internal accounting staff material facts necessary in order to make statements made, in light of the circumstances under which they were made, not misleading, or caused others to do so. In particular, he failed to tell Octagon's accounting staff all material facts about Octagon's above-described contractual relationships with PRK and JMIT. ==========================================START OF PAGE 6====== B. LEGAL DISCUSSION 1. Respondent's Violations of Exchange Act Section 10(b) and Rule 10b-5 Thereunder Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, prohibit the making of materially false or misleading statements or omissions, or the use of any fraudulent practices, in connection with the purchase or sale of any security. 15 U.S.C.  78j(b); 17 C.F.R.  240.10b-5. A person must act with scienter to violate these antifraud provisions. Aaron v. SEC, 446 U.S. 680 (1980). Respondent violated these provisions by directly and actively participating in Octagon's failure to make timely disclosure about its material related-party transactions with PRK and in Octagon's making of materially false, misleading, and incomplete statements in its press releases and in its quarterly report on Form 10-Q for the quarter ended June 30, 1994 about its contract with JMIT. Moreover, because Respondent was directly and personally involved in the transactions, contracts, and negotiations at issue and reviewed all of the relevant filings and press releases, he acted with the requisite degree of scienter to establish a violation of Section 10(b) and Rule 10b-5 thereunder. 2. Respondent's Violations of Exchange Act Rule 13b2-2 Exchange Act Rule 13b2-2 forbids any officer or director of an issuer from making any materially false or misleading statement or omitting 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, inter alia, the preparation or filing of any document or report required to be filed with the Commission. The Respondent violated Rule 13b2-2 by failing to disclose all material facts about PRK to the Octagon accounting personnel responsible for preparing the company's annual report on Form 10-K for the year ended December 31, 1993 and its quarterly report on Form 10-Q for the first quarter of 1994, and by failing to disclose all material facts about JMIT to the Octagon accounting personnel responsible for preparing the company's quarterly report on Form 10-Q for the second quarter of 1994. ==========================================START OF PAGE 7====== IV. FINDINGS Based on the above, the Commission finds that Respondent committed or caused violations of Exchange Act Section 10(b) and Exchange Act Rules 10b-5 and 13b2-2. V. ORDER Accordingly, IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act, that Respondent John Thomas Royall cease and desist from committing or causing any violation and any future violation of Exchange Act Section 10(b) and Exchange Act Rules 10b-5 and 13b2-2. By the Commission. Jonathan G. Katz Secretary ==========================================START OF PAGE 8======