==========================================START OF PAGE 1====== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. Litigation Release No. 15129 \ October 21, 1996 Accounting and Auditing Enforcement Release No. 845 / October 21, 1996 Securities and Exchange Commission v. Don Haywood Pace (Civ. No. 96-2416) (USDC/DC) On October 21, 1996, the Securities and Exchange Commission filed a civil lawsuit against Don Haywood Pace in the United States District Court for the District of Columbia alleging violations of the antifraud, proxy, books and records and beneficial ownership provisions of the federal securities laws. The Commission is seeking an injunction from future violations, a bar from serving as an officer or director of a publicly-held company, disgorgement of ill-gotten gains and civil penalties. Don Pace is former chief executive officer and director of Pace American Group, Inc., a holding company that wrote surety bonds and insurance products through wholly-owned subsidiaries. Don Pace co-founded Pace American in 1988 and helped to take it public in 1992 through an offering of common stock which raised over $18 million. The Commission s complaint alleges that Don Pace committed antifraud violations by failing to disclose in Pace American s annual reports, proxy materials and registration statements filed with the Commission that he received over $480,000 in related party transactions. The transactions allegedly involved his undisclosed receipt between 1990 and 1994 of over $450,000 in commission payments made by Pace American to Commercial Surety Bond Agency, a Pace American surety bond agency owned by Ralph Eidem, and of a portion of payments which Pace American surety bond holders made to shell corporations which he helped to establish and had an undisclosed interest. The Commission s complaint also asserts that Don Pace committed financial fraud by causing Pace American to issue consolidated financial statements which failed to disclose that he caused Pace American to convert an equity interest made by certain investors into a debt which Don Pace obligated Pace American to repay. Don Pace also caused Pace American to understate the company's loss reserves on surety bonds outstanding at year-end 1992. The Commission also alleges that Don Pace misled Pace American's auditor in connection with its audit of and issuance of reports on the company s financial statements for its fiscal years ended December 31, 1989 through 1992, by providing to the auditor financial statements which falsely recorded a total of ==========================================START OF PAGE 2====== 2 $443,375 of interest expenses on the debt to certain investors as reinsurance expenses and failed to include a significant liability for the conversion of equity to debt. The complaint alleges that Don Pace also misled the auditor by providing to it a management representation letter in connection with the 1992 audit which stated that unpaid losses on the company's insurance portfolio were adequate when he had serious concerns at the time whether the company's loss reserves on surety bonds written in 1992 should have been significantly increased. The Commission also alleges that Don Pace caused Pace American to maintain false books and records because he failed to have the company s books and records reflect the existence of Pace American brokerage accounts he exercised control over in Mexico as well as his misappropriation from those accounts of $42,589 in corporate assets stemming from bond proceeds. The complaint further asserts that after his dismissal from Pace American, Don Pace filed with the SEC a Schedule 13D concerning his beneficial ownership of common stock which fraudulently disclosed that he had no plans or proposals to have the company effect a change in management or an extraordinary corporate transaction. The complaint alleges that before and after Don Pace filed the Schedule 13D he had plans and proposals to replace the company s board of directors and have the company consider merging a Mexican company which wrote surety bonds into Pace American. As a result of the foregoing, the Commission alleges in its Complaint filed today that Don Pace violated Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(b)(5), 13(d) and 14(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13b2-1, 13b2-2, 13d-1, 13d-2 and 14a-9 thereunder.