SECURITIES AND EXCHANGE COMMISSION Washington, D.C. Litigation Release No. 15508 / September 25, 1997 Accounting and Auditing Enforcement Release No. 966 / September 25, 1997 SEC v. Ferrofluidics Corporation, Ronald Moskowitz, Jan R. Kirk, Stephen P. Morin, Jerome Allen, Bruce S. Moody, and The 1991 RPM Irrevocable Trust, Civ. No. 97-Civ-7174 (S.D.N.Y.) (September 25, 1997) On September 25, 1997 the Securities and Exchange Commission filed a civil fraud action in the United States District Court for the Southern District of New York against Ferrofluidics Corporation ("Ferrofluidics"), Ronald Moskowitz, Jan R. Kirk, Stephen P. Morin, Jerome Allen, Bruce S. Moody, and The 1991 RPM Irrevocable Trust (the "RPM Trust"). The Commission's complaint alleges that from as early as July 1991 through April 1993, Ferrofluidics, a NASDAQ-listed company, materially inflated its revenues and earnings in financial statements filed with the Commission and in other disclosures made to the investing public. The complaint alleges that Ronald Moskowitz, Ferrofluidics' former chief executive officer, chairman of the board of directors and largest shareholder, was the architect of the fraudulent scheme, and that Jan Kirk, Stephen Morin and Jerome Allen participated in the scheme and concealed the fraud from Ferrofluidics' auditors. The complaint also alleges that defendant Bruce Moody, the trustee of defendant RPM Trust, helped Moskowitz conceal his beneficial interest in the Ferrofluidics shares held by the RPM Trust, and facilitated Moskowitz's sale of Ferrofluidics stock valued at approximately $13 million during the time of the fraudulent conduct. The complaint alleges that defendants prepared and disseminated a series of materially false and misleading statements concerning, among other things, a 1992 sham private placement of stock by the company, sales of the company's products, and equity investments made by the company. Defendants also allegedly disseminated favorable projections concerning Ferrofluidics' future business prospects and profitability, without having any reasonable basis for such projections. The complaint alleges that, as a result of defendants' activities, potential and actual investors in Ferrofluidics were led to believe that Ferrofluidics was a prosperous company with marketable and attractive products, and tremendous opportunities for rapid growth and earnings. In fact, Ferrofluidics was then experiencing significant losses and encountering problems developing and manufacturing its products. The complaint alleges that during the relevant period Moskowitz (directly and through trusts that he controlled) and Allen sold Ferrofluidics stock worth millions of dollars, in a series of private placements and open market transactions, while in the possession of material, nonpublic information about the company. ======END OF PAGE 1====== The complaint alleges that the defendants (except Moody) violated the antifraud provisions of the federal securities laws. Ferrofluidics, Moskowitz, Kirk and Morin also violated certain reporting, internal controls and record-keeping provisions of the federal securities laws. The complaint also alleges that Allen violated Section 17(b) of the Securities Act of 1933 by publishing and circulating The International Investor, a newsletter that ran numerous articles recommending the securities of Ferrofluidics, without disclosing that he had been compensated by the company. The complaint also alleges that Moskowitz and the RPM Trust violated Section 13(d) of the Securities Exchange Act of 1934 and Rule 13d- 2 thereunder by failing to make the disclosures and filings required of persons who directly or indirectly acquire a beneficial interest of 5% or more of any class of a registered equity security. For the same reasons, Kirk and Morin allegedly violated Section 13(d) of the Exchange Act and Rule 13d-1 thereunder. The complaint alleges that Moody aided and abetted Moskowitz's and the RPM Trust's violations of the antifraud provisions by helping Moskowitz conceal his beneficial interest in the Ferrofluidics shares held by the Trust, and by permitting Moskowitz's sales of Ferrofluidics shares while Moskowitz possessed material nonpublic information about the company. Moody allegedly aided and abetted the RPM Trust's violation of Section 13(d) of the Exchange Act and Rule 13d-2 thereunder by failing to make the required disclosure concerning the Ferrofluidics shares beneficially owned by Moskowitz in the Trust's Schedules 13D filed with the Commission. The Commission is seeking injunctive relief, disgorgement of defendants' ill-gotten gains, prejudgment interest, the imposition of civil penalties against Moskowitz, Kirk, Allen, Morin and the RPM Trust, and officer and director bars against Moskowitz, Kirk and Morin. Simultaneously with the filing of the complaint, and without admitting or denying the Commission's allegations, Ferrofluidics and Morin agreed to the entry of permanent injunctions. Morin also consented to pay a $25,000 civil penalty, and to the entry of an order barring him for five years from serving as an officer or director of a public company. Morin has also offered to consent to a five-year bar from practicing as an accountant before the Commission pursuant to Commission Rule of Practice 102(e). In a related cease-and-desist proceeding (In the Matter of Kedar Gupta, Alvan Chorney, and Herbert Moskowitz, Admin. Proc. File No. 3-9435), the Commission's Division of Enforcement alleges that Gupta, Chorney and Herbert Moskowitz failed to properly report on Schedules 13D their ownership of Ferrofluidics shares, and that Gupta caused Ferrofluidics' violation of the antifraud provisions of the Exchange Act by obtaining a letter from a customer, containing materially false and misleading information about the status of the customer's order, knowing that the letter would be provided to Ferrofluidics' auditors. The Commission previously instituted four related administrative proceedings: In the Matter of Helen T. Chalut and Saleem Noorani, Admin. Pro. File No. 3-9344 (July 1, 1997); In the Matter of Paul Y. Okuda, Stephen A. Thorpe and David J. Chester, Admin. Pro. File No. 3-9345 (July ======END OF PAGE 2====== 1, 1997); In the Matter of Dickinson & Co. and Marshall T. Swartwood, Admin. Pro. File No. 3-9321 (May 28, 1997) and In the Matter of Sheldon S. Traube and George F. Sweeney, Admin. Pro. File No. 3-9283 (March 27, 1997). In the Matter of Helen T. Chalut and Saleem Noorani, a settled cease- and-desist proceeding, the Commission found that Chalut and Noorani caused violations of the antifraud provisions based, respectively, on Chalut's role in the sham private placement and Noorani's provision, at Ferrofluidics' request, of back-dated letters relating to a commission schedule that never existed, which Ferrofluidics provided to its auditors as support for improper accounting entries. The Commission also found that Noorani violated Section 15(a) of the Exchange Act for assisting Ferrofluidics in selling 1,155,00 of its shares when he was not registered as a broker-dealer. Chalut and Noorani were ordered to pay disgorgement of $21,000 and $65,000, respectively. In the Matter of Paul Y. Okuda, Stephen A. Thorpe and David J. Chester, a contested administrative and cease-and-desist proceeding, the Division alleges that Okuda and Chester violated or caused, and willfully violated, aided, abetted, counseled, commanded, induced or procured; and Thorpe violated or caused violations of the antifraud provisions based on their participation as nominees in the sham private placement. The Order also alleges that Chester, for commissions, assisted Ferrofluidics in selling 365,000 of its shares when he was not registered as a broker- dealer, in violation of Section 15(a) of the Exchange Act. The Division seeks disgorgement and prejudgment interest against all three respondents and civil money penalties and administrative sanctions against Okuda and Chester. In the Matter of Dickinson & Co. and Marshall T. Swartwood, a contested administrative and cease-and-desist proceeding, the Division alleges that Dickinson and Swartwood caused and willfully aided, abetted, counseled, commanded, induced or procured violations of Section 17(b) of the Securities Act in connection with Dickinson's publication of Sheldon Traube's research reports on Ferrofluidics, which failed to disclose that Ferrofluidics had paid for the reports or the amount of payment. The Division seeks administrative sanctions and civil money penalties against both respondents. In the Matter of Sheldon S. Traube and George F. Sweeney, a settled administrative and cease-and-desist proceeding, the Commission found that Traube violated Section 17(b) of the Securities Act for his role in the publication of the Ferrofluidics research reports discussed above. The Commission found that Moskowitz arranged to have Sweeney bill Ferrofluidics for Traube's work on the first report and to pay Traube after Sweeney's bill had been paid. The Commission found that Sweeney caused Traube's violation and ordered Traube and Sweeney to pay disgorgement and prejudgment interest. Traube was also censured. ======END OF PAGE 3======