SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 16975 / April 26, 2001
Accounting and Auditing Enforcement Release No. 1385 / April 26, 2001
Securities and Exchange Commission v. Alexandra Elizabeth Montgomery, William Kenneth Nestor and Harriet Gluck, Civil Action No. CV 97-4219 (E.D.N.Y.)
FINAL JUDGMENTS ENTERED AGAINST DEFENDANTS IN SETTLED CASE INVOLVING FALSIFICATION OF GOLD REFINERY'S INVENTORY AND INSIDER TRADING
The Honorable Eugene H. Nickerson, United States District Court Judge for the Eastern District of New York, recently entered final judgments against Alexandra Elizabeth Montgomery, the former executive vice president, chief financial officer and a director of International Nesmont Industrial Corporation, William Kenneth Nestor, the former president, chief executive officer and chairman of the board of Nesmont, and Montgomery's mother, Harriet Gluck, pursuant to their settlement of civil charges brought by the Securities and Exchange Commission. This brings to a close the Commission's civil action, filed on July 24, 1997, which stemmed from a deliberate scheme to falsify the financial statements of Nesmont, a Canadian processor of precious metals, by, among other things, falsifying Nesmont's gold inventory.
The Commission alleged in its complaint that Montgomery, Nestor and Frederick Burgess, the former head assayer and a director of Nesmont, deliberately sought to overstate the company's income and inflate its reported assets by, for example, including brass bars in gold inventory. The fraudulent scheme involved creating phony documents falsely representing the volume of gold in inventory, falsifying assets and earnings on the company's books and records, and making false representations in press releases and materials filed with the Commission. As a result, Nesmont reported net earnings of $219,923 (Cdn) in its audited financial statements for the year ended December 31, 1992, when it should have reported a net loss of $1,656,836 (Cdn). In its unaudited financial report for the year ended December 31, 1993, Nesmont reported net earnings of $751,592 (Cdn), when it should have reported a net loss of $4,047,726 (Cdn).
The complaint alleged that Montgomery, Nestor and Burgess violated the antifraud and books and records provisions of the federal securities laws, and knowingly circumvented Nesmont's system of internal accounting controls and, in the case of Montgomery and Burgess, knowingly falsified or caused to be falsified Nesmont's books, records and accounts. The complaint further alleged that Montgomery and Burgess made materially false and misleading statements to Nesmont's independent auditors and, in the case of Montgomery, lied to Nesmont's controller, thereby causing him to generate false financial statements. The complaint also alleged that Montgomery, Nestor and Burgess aided and abetted Nesmont's reporting violations by making material misstatements and omissions in annual and periodic reports filed with the Commission.
The Commission's complaint further alleged that Montgomery and her mother, Gluck, violated the antifraud provisions of the federal securities laws by engaging in insider trading in Nesmont securities during June 1994, when both women knew about the inventory fraud, which had not been disclosed to the public. The Nesmont shares were sold through brokerage accounts held in Gluck's name, netting total proceeds of approximately $297,200 (U.S.). After Nesmont's new management publicly disclosed the inventory fraud, and the stock was delisted from the Nasdaq in August 1994, Nesmont stock became virtually worthless. By trading while in possession of material nonpublic information, Gluck and Montgomery avoided losses of approximately $282,400 (U.S.).
Montgomery, Nestor and Gluck, without admitting or denying the allegations of the complaint, agreed to the entry of final judgments that enjoin them from violating the Section 10(b) antifraud provisions of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The judgments against Montgomery and Nestor further enjoin them from violating Exchange Act Section 13(b)(5) and from aiding and abetting violations of Exchange Act Section 13(a) and Rules 13a-1 and 13a-16 thereunder. Montgomery is further enjoined from violating Exchange Act Rules 13b2-1 and 13b2-2. The final judgments bar Montgomery and Nestor from serving as an officer or director of any publicly traded company.
The judgments against Montgomery and Gluck further provide that each is jointly and severally liable for disgorgement of $282,400 in illicit profits, each is liable for payment of an insider trading penalty, and the judgment against Montgomery provides that she is liable for a separate civil penalty stemming from her involvement in the financial fraud. The judgments waive payment of disgorgement and prejudgment interest and do not impose insider trading or civil penalties based on Montgomery's and Gluck's demonstrated inability to pay. The final judgment entered against Nestor requires him to pay a $35,000 civil penalty.
The final judgments against Montgomery and Gluck were entered on January 11, 2001, and the final judgment against Nestor was entered on April 9, 2001. The action against Frederick Burgess, who was named as a defendant in the original action, was dismissed following his death in 1999.
For further information see Litigation Release No. 15419.