SECURITIES AND EXCHANGE COMMISSION Washington, D.C. LITIGATION RELEASE NO. 15617 / January 14, 1998 SECURITIES AND EXCHANGE COMMISSION v. SHELDON KRAFT, Civil Action No. 98- CV-00095 (GK)(D.D.C.) UNITED STATES v. SHELDON KRAFT, Cr. 98-18-A (E.D. VA.) The Securities and Exchange Commission ("Commission") today filed a Complaint against Sheldon Kraft ( Kraft ), 46, a New York City stock broker, in the United States District Court for the District of Columbia. This case is another in a line of significant Commission enforcement actions and/or criminal prosecutions arising from this wide-ranging investigation of microcap fraud involving Systems of Excellence, Inc. ( SOE ) and other issuers. The Complaint alleges that Kraft acted as the principal facilitator for Charles O. Huttoe ( Huttoe ), formerly the Chairman and CEO of SOE, in manipulating the market for the securities of that company. Simultaneously with the filing of the Complaint, Kraft consented, without admitting or denying the Commission s allegations, to an order enjoining him from violations of the securities registration and antifraud provisions of the federal securities laws, and requiring him to disgorge his illegal gains of $3,193,337 from the manipulation of SOE securities, together with prejudgment interest. In satisfaction of the disgorgement judgment, Kraft will disgorge all of his assets except his residence and household items. The disgorged assets include $1,107,000 in cash, plus certain real estate and claims that he has against his former employer. Any remainder of the disgorgement amount will be waived in light of Kraft s demonstrated inability to pay based on his sworn representations in his statement of financial condition. Kraft also agreed to a Commission order barring him from the securities industry and from participating in an offering of penny stock. The Commission s Complaint alleges the following: Kraft met Huttoe in early 1995, and thereafter guided Huttoe throughout the manipulation of SOE. When SOE s original software business collapsed, Kraft found a high-tech video teleconferencing business to put into the SOE shell so as to make it attractive to investors. Thereafter, Kraft introduced Huttoe to his total world -- Kraft s network of brokers, market makers, and stock touters -- who Huttoe then bribed with SOE stock to manipulate the price of SOE. As a result of Kraft s introductions, Huttoe entered into such arrangements with five stock promoters who were to push sales of SOE stock to retail brokerage customers, three stock touters who would disseminate recommendations to purchase SOE via mass media and other means, and two traders at market making broker-dealer firms who agreed to support the price of SOE. As a result of these and other manipulative activities, SOE s stock price rose from pennies to $4 9/16 per share in just a few months. In addition, Kraft directed Huttoe in establishing nominee accounts through which Kraft secretly sold more than 6.3 million shares of SOE stock for Huttoe into the inflated market, on which Huttoe realized proceeds of approximately $9.62 million of his more than $12.5 million of illegal profits derived from the SOE manipulation. For his part in the SOE fraud, Kraft demanded compensation in the form ======END OF PAGE 1====== of direct cash payments from Huttoe and free trading shares of SOE stock that he had Huttoe issue in the names of his nominees. Kraft also obtained kickbacks from the persons he introduced to Huttoe in the form of cash or a portion of the SOE stock Huttoe supplied them in exchange for carrying out their roles in the manipulation. Kraft then sold his free SOE stock -- a total of approximately 1.66 million shares -- into the inflated market through nominee accounts in the United States and Canada. In addition, in exchange for directing the illegal sales of SOE stock in Huttoe s nominee accounts, Kraft received his ordinary commissions, and a percentage of the proceeds from the sale of stock through Huttoe s nominee accounts. In total, Kraft made illegal profits of $3,193,337 from his role in the SOE scheme. The Commission's Complaint alleges that as a result of that conduct Kraft violated Sections 5 and 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The court order to which Kraft consented enjoins him from future violations of those provisions. Kraft also consented to the entry of a Commission order pursuant to Sections 15(b) and 19(h) of the Exchange Act barring him from association with any broker, dealer, municipal securities dealer, investment adviser or investment company, or participation in any offering of penny stock, based on the entry of the above injunction. Also today in the United States District Court for the Eastern District of Virginia, Kraft pleaded guilty to a two-count criminal information charging him with one count of conspiracy to commit securities fraud and money laundering and one count of failure to file tax returns. Kraft's plea was in connection with, among other things, the fraud involving SOE. Background The Commission Prosecutions The cases against Kraft are the latest in a series of actions that the Commission and criminal authorities have filed against a number of individuals and entities related to the manipulation of the securities of SOE and two other microcap companies. On November 7, 1996, the Commission filed a Complaint and obtained emergency relief against Huttoe and twelve other defendants, including SGA Goldstar Research, Inc., which disseminated a tout sheet over the internet, and its principals, Theodore R. Melcher, Jr. and Shannon B. Terry. See SEC v. Huttoe, Et Al., 96-CV-02543 (GK)(D.D.C.). Kraft was responsible for introducing Huttoe to SGA Goldstar. The Complaint alleged a massive ongoing market manipulation orchestrated by Huttoe in which he executed an unregistered distribution of tens of millions of SOE shares. The Complaint further alleged that Huttoe artificially inflated the price for those shares by issuing materially false press releases about nonexistent multimillion dollar sales of SOE products, filing false periodic reports with the Commission, and bribing with SOE stock persons to tout SOE stock, including Melcher and Terry. As a final part of the scheme, Huttoe, Melcher, and Terry then took advantage of the inflated market by dumping shares on unwitting investors. On January 29, 1997, the Commission amended the Complaint to allege that in addition to touting SOE stock, SGA Goldstar, Melcher, and Terry engaged in ======END OF PAGE 2====== a systematic practice of publishing promotional coverage for other issuers in exchange for compensation. On November 25, 1997, Huttoe settled the Commission s action by consenting to an order permanently enjoining him from violations of certain provisions of the federal securities laws, barring him from acting as an officer or director of a public company, and requiring him to disgorge over $12.5 million, the amount he derived from the SOE manipulation, provided that except for surrendering certain assets, payment of the full disgorgement amount was waived in light of his demonstrated inability to pay. Huttoe also consented to a Commission order barring him from the securities industry. The actions against SGA Goldstar, Melcher, and Terry are pending. In a separate action filed on December 22, 1997, the Commission sued Barclay Davis, a Las Vegas, Nevada based penny stock promoter that Kraft introduced to Huttoe. See SEC v. Davis, Et Al., 97-CV-03056 (GK)(D.D.C.). The Complaint against Davis alleges that Davis entered the ongoing scheme to manipulate the market for SOE, and that Huttoe gave Davis unregistered shares of SOE stock to facilitate the use of a registered broker-dealer to push SOE stock on the public. The Complaint against Davis further alleges that he engineered the falsification by SOE of Commission filings, and that he arranged for his team, which included CPA Merle S. Finkel, to accomplish this. The Complaint against Davis also alleges that he used two other microcap companies that he controlled, Bio-Tech Industries, Inc. ( Bio-Tech ) (formerly Twenty First Century Health, Inc.) and Combined Companies International Corp. ( CCIC ), as vehicles for market manipulations. The action against Davis is pending. In another action, the Commission sued CPA Finkel, the former auditor of SOE, Bio-Tech, and CCIC alleging that on at least 13 occasions, Finkel issued materially false or inaccurate audit reports on the financial statements of these companies. See SEC v. Finkel, 97-CV-00505 (EGS)(D.D.C.). Finkel settled that action by consenting to a permanent injunction against future violations of certain provisions of the federal securities laws, and also consented to a Commission order denying him the privilege of appearing or practicing before the Commission as an accountant. The Criminal Prosecutions In terms of criminal actions, Kraft is the fifth individual to plead guilty to felony charges stemming from these matters. On January 31, 1997, Huttoe, who presently is incarcerated, was sentenced to a federal prison term of 46 months, followed by two years supervised release, and a $10,000 fine, pursuant to a criminal information charging him with one count of securities fraud and one count of money laundering. On March 12, 1997, Finkel pleaded guilty to a criminal information charging him with one count of conspiracy to commit securities fraud and bank fraud, and is awaiting sentencing. On September 12, 1997, Melcher, who presently is incarcerated, was sentenced to a prison term of 12 months, followed by two years supervised release, and a $20,000 fine, pursuant to a criminal information charging him with conspiracy to commit securities fraud. On December 22, 1997, Davis, who is awaiting sentencing, pleaded guilty to one count of conspiracy to commit securities fraud and bank fraud, and one count of money laundering. * * * The Commission previously has issued a number of releases concerning ======END OF PAGE 3====== these and other related matters. See Lit. Rel. 15600 (December 22, 1997); Lit. Rel. 15571 (November 25, 1997); Lit. Rel. 15490 (September 12, 1997); Securities Exchange Act Rel. No. 38691 (May 29, 1997); Securities Exchange Act Rel. No. 38653 (May 19, 1997); Lit. Rel. 15286 (March 12, 1997); Securities Exchange Act Rel. No. 38345 (February 27, 1997); Securities Exchange Act Rel. No. 38260 (February 10, 1997); Lit. Rel. 15490 (January 31, 1997); Lit. Rel. 15185 (December 12, 1996); Lit. Rel. 15153 (November 7, 1996); Securities Exchange Act Rel. No. 33791 (October 7, 1996). The Commission is cooperating with separate investigations in this matter carried on by the United States Attorney's Offices for the District of Nevada and the Eastern District of Virginia, and the Criminal Investigation Division of the Internal Revenue Service. The Commission's investigation in this matter is continuing. ======END OF PAGE 4======