Litigation Release No. 16437 / February 15, 2000

Accounting and Auditing Enforcement Release No. 1229 / February 15, 2000

SEC v. Itex Corporation, Terry L. Neal, Michael T. Baer, Graham H. Norris, Cynthia Pfaltzgraff and Joseph M. Morris, CV 99-1361 BR (D. Ore. September 27, 1999)


On February 4, 2000, the United States District Court for the District of Oregon entered a final judgment permanently enjoining Itex Corporation ("Itex) from violating the anti-fraud provisions of the federal securities laws, as well as certain securities registration, internal controls and record-keeping provisions. The Commission's complaint, filed September 27, 1999, alleged that from at least December 1993 through February 1998, Itex, a company engaged in the barter exchange business and formerly listed on the NASDAQ Small Cap Market, materially inflated its revenues and earnings in financial statements filed with the Commission and in other disclosures made to the investing public. The Complaint alleged that Itex made materially false and misleading disclosures about the company's business and failed to disclose numerous suspect and in many cases sham barter deals between Itex and various mysterious offshore entities related to and/or controlled by Terry Neal, Itex's founder and control person.

The Complaint alleged that Itex reported substantial revenue from sham barter transactions as a principal in its own name or through its Swiss-based subsidiary, Associated Reciprocal Traders ("ART"). In fiscal years 1994 through 1997, approximately 56%, 56%, 43% and 60%, respectively, of Itex's reported revenues derived from such barter transactions. Almost all of the Itex barter transactions were suspect inside deals involving Neal himself. The barter deals involved difficult-to-value assets, such as artwork, pre-paid advertising due bills, and worthless stocks in public companies. Some Itex deals involved purely bogus assets such as leases on vacant property, a non-existent stamp collection, and highly-questionable unpatented and undeveloped mineral claims.

The Complaint alleged that without the fabricated barter earnings from Neal's transactions, Itex would have reported losses rather than profits for fiscal years 1994 through 1997. Itex's materially overstated financial condition and results of operation were reported in its financial reports for this period and touted in numerous press releases. Riding this wave of financial misinformation, Itex's stock price rose from $2.25 to $12.50 per share from January 1994 through February 1996.

The Complaint alleged that the defendants defrauded Itex investors by bartering assets of little or no value and by designating the value of many of Itex's assets and transactions in "trade dollars" rather than their far lower U.S.-dollar fair market values on its financial statements. On the Itex Exchange, members trade goods and services. In lieu of trading (or bartering) such goods and services directly, Exchange members use Itex trade dollars, issued to them by the Itex Exchange. Itex corruptly took advantage of the process, however, by orchestrating numerous bogus barter deals, in which the goods and services exchanged were grossly overvalued, and then reported in Itex public filings as income and/or assets, thus facilitating the fraud.

The Complaint also alleged that while Itex managed to inflate its income statement from barter transactions conducted and reported in trade dollars, it needed cash to pay its operating expenses. Since the company had in reality been losing money from fiscal 1995 through the present, it made up the operating shortfall with $11.7 million in proceeds from the sale of its common and preferred stock. To facilitate the fraud, the bulk of the shares, approximately 1.2 million, were initially sold at substantial discounts to offshore entities secretly controlled by Neal, under cover of Regulation S (which allows offshore sales to foreign investors who have no present intention to sell them back into the U.S. market). The stock, however, was quickly sold back into the U.S. market, and the approximately $10.7 million in gross proceeds was, among other things, used to fund Itex .

Itex consented, without admitting or denying the Commission's allegations, to the entry of a final judgment permanently enjoining it from violating Sections 5 and 17(a) of the Securities Act of 1933, and Sections 10(b), 13(a), 13(B)(2)(A) and 13(B)(2)(B) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-13, thereunder. The final judgment also orders Itex to restate its financial statements and file an amended Form 10-K for its fiscal year ended July 31, 1997 and to file complete and accurate Forms 10-K for its 1998 and 1999 fiscal years.

Joseph M. Morris, Itex's former chief financial officer, previously consented to the entry of a final judgment of permanent injunction and other relief (Lit.Rel. No. 16430, February 10, 2000) and a Commission order barring him from practicing as an accountant before the Commission with a right to reapply after five years (In the Matter of Joseph Morris, Admin. Proc. No. 3-10144, February 10, 2000). The Commission is continuing its litigation against defendants Terry Neal, Michael T. Baer, Graham H. Norris and Cynthia Pfaltzgraff.