Itex Corporation, Terry L. Neal, Michael T. Baer, Graham H. Norris, Cynthia Pfaltzgraff and Joseph M. Morris

SECURITIES AND EXCHANGE COMMISSION

LITIGATION RELEASE NO. 16305 / SEPTEMBER 28, 1999

ACCOUNTING AND AUDITING ENFORCEMENT
RELEASE NO. 1175

SEC V. ITEX CORPORATION, TERRY L. NEAL, MICHAEL T. BAER, GRAHAM H. NORRIS, CYNTHIA PFALTZGRAFF AND JOSEPH M. MORRIS, CIV. NO. 99-1361 (HA) (D. Ore. September 27, 1999)

SEC FILES FRAUD CASE AGAINST ITEX CORPORATION

On September 27, 1999, the Securities and Exchange Commission filed a civil fraud action in the United States District Court for the District of Oregon against Itex Corporation ("Itex"), Terry L. Neal, Michael T. Baer, Graham H. Norris, Cynthia Pfaltzgraff and Joseph M. Morris (Civil Action 99-1361-HA). The Commission's complaint alleges 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 alleges that Terry Neal, Itex's founder and control person orchestrated and implemented a broad-ranging fraudulent scheme by making materially false and misleading disclosures about the company's business and by failing to disclose numerous suspect and in many cases sham barter deals between Itex and various mysterious offshore entities related to and/or controlled by Neal. Neal was assisted in the fraud scheme by various people who, at the time, were members of Itex management, specifically, Michael Baer, Graham Norris, Joseph Morris and Cynthia Pfaltzgraff.

The Complaint alleges 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 alleges 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 alleges 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 alleges that to cash-in on their fraud, Neal and Baer both sold Itex stock to the market throughout this period, realizing profits of approximately $6.3 million and $1.4 million, respectively. Morris exercised stock options during this period and realized profits of approximately $45,000.

The Complaint also alleges 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). Neal, however, quickly sold the stock back into the U.S. market, and used the approximately $10.7 million in gross proceeds to, among other things, fund Itex and to enrich himself and his family members. During the same period, Neal received an additional half million shares and/or options from Itex in exchange for services and for certain barter transactions.

The Complaint alleges that the defendants violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, as well as certain reporting, internal controls and record-keeping provisions of the federal securities laws. The Complaint alleges that Itex and Neal violated the securities registration provisions of Section 5 of the Securities Act and that Neal violated Sections 13(d) and 16(a) of the Exchange Act of 1934, and Baer violated Section 13(d), by failing to make filings disclosing their beneficial interest and changes in their interest in the securities of Itex.

The Commission is seeking injunctive relief, civil penalties, disgorgement of Neal, Baer and Morris' ill-gotten gains, and officer and director bars against Neal, Baer and Morris.