UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 39919 / April 27, 1998 ACCOUNTING AND AUDITING ENFORCEMENT Release No. 1028 / April 27, 1998 ADMINISTRATIVE PROCEEDING File No. 3-9588 _______________________ : : In the Matter of:ORDER INSTITUTING CEASE-AND-DESIST :PROCEEDINGS PURSUANT TO SECTION 21C JOSEPH SANFELLIPO,:OF THE SECURITIES EXCHANGE ACT OF 1934, :MAKING FINDINGS AND IMPOSING SANCTIONS Respondent.: : ________________________: I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that cease-and-desist proceedings pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") be, and hereby are, instituted against Joseph Sanfellipo ("Sanfellipo"). II. In anticipation of the institution of these proceedings, Sanfellipo has submitted an offer of settlement ("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 in which the Commission is a party, Sanfellipo, without admitting or denying the findings herein, except admitting the jurisdiction of the Commission over him and over the subject matter of these proceedings, consents to the entry of this Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings and Imposing Sanctions ("Order").[1] III. FINDINGS On the basis of the Order and the Offer, the Commission finds that:[2] A.Sanfellipo, age 49, of Del Mar, California, was the president of Packaging Plus Services, Inc. ("Packaging Plus") during July and early August of 1991. During the relevant period, Sanfellipo was also president of FranchiseWorks, a franchise development company incorporated in California. B.Packaging Plus, a Nevada corporation with principal offices located in Plainview, New York, was, during the relevant period, engaged in the business of selling franchises for the operation of stores specializing in parcel packaging and shipping. Packaging Plus's common stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act and was traded in the over-the-counter market. C.Violative Conduct On August 8, 1991, Packaging Plus filed an amendment ("Form 10-K Amendment") to its Annual Report on Form 10-K for its fiscal year-ended December 31, 1990 ("Form 10-K"). The Form 10-K Amendment contained Packaging Plus's financial statements for the year-ended December 31, 1990 ("1990 Financial Statements"). The Form 10-K Amendment and the 1990 Financial Statements were materially false and misleading because they overstated Packaging Plus's franchise receivables at December 31, 1990 by $728,412.33 (or 57.2%), overstated Packaging Plus's franchise fee revenue for the year-ended December 31, 1990 by $216,570.00 (or 13.5%), and understated the net loss reported for the year-ended December 31, 1990 by $735,912.33. In June, July and August of 1991, Sanfellipo participated in a fraudulent scheme to overstate the assets, revenue and income of Packaging Plus on its books and records and in the 1990 Financial Statements and the Form 10-K Amendment, by executing backdated and otherwise fraudulent documents relating to franchise agreements, and by signing the Form 10-K Amendment which he knew, or was reckless in not knowing, was materially false and misleading. Sanfellipo also provided a materially false and misleading audit confirmation to Packaging Plus's accountant, in connection with the accountant's audit of the 1990 Financial Statements. The audit confirmation was materially false and misleading because it confirmed that FranchiseWorks owed $305,000 to Packaging Plus at December 31, 1990, when, in fact, FranchiseWorks did not owe any money to Packaging Plus at December 31, 1990. D.Legal Analysis Section 10(b) of the Exchange Act and Rule 10b-5 Section 10(b) of the Exchange Act and Rule 10b-5 proscribe, among other things, misstatements of material fact made in connection with the purchase or sale of securities. Information is material if there is a substantial likelihood that its disclosure would be viewed by a reasonable investor as having significantly altered the total mix of information available. Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988). Information concerning the financial condition of a company is presumptively material. SEC v. Murphy, 626 F.2d 633, 653 (9th Cir. 1980); SEC v. Blavin, 557 F. Supp. 1304, 1313 (E.D. Mich. 1983), aff'd, 760 F.2d. 706 (6th Cir. 1985) (materiality of information relating to financial condition, solvency and profitability not subject to serious challenge). Violations of Section 10(b) of the Exchange Act and Rule 10b-5 require a showing of scienter. Aaron v. SEC, 446 U.S. 680, 696 (1980). The Supreme Court has defined scienter as the "intent to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976). Reckless conduct also satisfies the scienter requirement of Section 10(b) of the Exchange Act and Rule 10b-5. IIT v. Cornfeld, 619 F.2d 909, 923 (2d Cir. 1980); Rolf v. Blyth Eastman Dillon & Co., 570 F.2d 38, 46 (2d Cir.), cert. denied, 439 U.S. 1039 (1978). False and misleading information in annual reports filed with the Commission satisfies the "in connection with" requirement of Section 10(b) of the Exchange Act and Rule 10b-5. See In re Ames Dept. Stores Inc. Stock Litigation, 991 F.2d 953, 962 (2d Cir. 1993); In re Leslie Fay Companies, Inc. Securities Litigation, 871 F. Supp. 686, 699 (S.D.N.Y. 1995). Accord McGann v. Ernst & Young, 102 F.3d 390 (9th Cir. 1996), cert. denied, __ U.S. __, 117 S. Ct. 1460 (April 14, 1997). The Commission has determined that Sanfellipo violated Section 10(b) of the Exchange Act and Rule 10b-5 by knowingly or recklessly engaging in the foregoing fraudulent scheme to overstate the assets, revenue and income of Packaging Plus on its books and records and in the 1990 Financial Statements, and by signing the Form 10-K Amendment which he knew, or was reckless in not knowing, was materially false and misleading. **FOOTNOTES** [1]:Sanfellipo, pursuant to Rule 240(a) of the Commission's Rules of Practice and conditioned upon the agreement of the Commission to dismiss with prejudice its complaint against him in SEC v. Jerald Beagelman, 96 Civ. 3899 (DRH)(E.D.N.Y.), submitted the Offer in anticipation of the institution of these cease-and-desist proceedings. [2]:The findings herein are made pursuant to Sanfellipo's Offer and are not binding on any other person or entity in this or any other proceeding. Exchange Act Rule 13b2-2 Exchange Act Rule 13b2-2 prohibits officers and directors of an issuer from making materially false or misleading statements to an accountant in connection with any audit or examination of the financial statements of the issuer or the preparation or filing of any document or report required to be made or filed with the Commission pursuant to Section 13(a) of the Exchange Act. The Commission has determined that Sanfellipo violated Exchange Act Rule 13b2-2 by providing a materially false and misleading audit confirmation to Packaging Plus's accountant in connection with the accountant's audit of the 1990 Financial Statements. E.Finding By reason of the foregoing, the Commission finds that Sanfellipo violated Section 10(b) of the Exchange Act and Rules 10b-5 and 13b2-2. IV. ORDER IMPOSING SANCTIONS Based on the foregoing, the Commission deems it appropriate and in the public interest to accept Sanfellipo's Offer of Settlement. Accordingly, IT IS HEREBY ORDERED, that Sanfellipo, pursuant to Section 21C of the Exchange Act, cease and desist from committing or causing any violation and any future violation of Section 10(b) of the Exchange Act and Rules 10b-5 and 13b2-2. By the Commission. Jonathan G. Katz Secretary SERVICE LIST Rule 141 of the Commission's Rules of Practice provides that the Secretary, or another duly authorized officer of the Commission, shall serve a copy of an order instituting proceedings on each person named in the order as a party and their legal agent. The attached Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings and Imposing Sanctions has been sent to the following parties and other persons entitled to notice: Hon. Brenda P. Murray Chief Administrative Law Judge Securities and Exchange Commission 450 5th Street, N.W. Mail Stop 11-6 Washington, D.C. 20549 Jill Peterson, Esq. Division of Enforcement Securities and Exchange Commission 450 5th Street, N.W. Mail Stop 8-9 Washington, D.C. 20549 Ghillaine A. Reid, Esq. Division of Enforcement Northeast Regional Office Securities and Exchange Commission 7 World Trade Center, 13th Floor New York, NY 10048 Mr. Joseph Sanfellipo 1155 Camino Del Mar Suite 509 Del Mar, CA 92014