SECURITIES ACT OF 1933
Rel. No. 8078 / April 4, 2002

SECURITIES EXCHANGE ACT OF 1934
Rel. No. 45693 / April 4, 2002

Admin. Proc. File No. 3-9697

In the Matter of

ERIK W. CHAN
1940 Westwood Boulevard, No. 273
Los Angeles, California 90025

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ORDER IMPOSING REMEDIAL SANCTIONS

On the basis of the Commission's opinion issued this day, it is,

ORDERED, that Erik W. Chan cease and desist from committing or causing any violation of or future violation of Sections 17(a) and 17(b) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5.

By the Commission.

Jonathan G. Katz
Secretary

Footnotes

1 15 U.S.C. § 77q(a).
2 15 U.S.C. § 78j(b).
3 17 C.F.R. § 240.10b-5.
4 The record reflects that an MOU is treated in Indonesia as a binding contract.
5 W. Chan served as Empower's promoter, chairman, and a director.
6 The assignment was actually to Empower Telecommunication (Indonesia), Ltd. ("Empower Indo"), a British Virgin Islands corporation that Empower represented in private placement memoranda circulated to investors to be its wholly owned subsidiary.
7 Empower disclosed that W. Chan was its majority shareholder as a result of W. Chan's ownership, "through Chan & Co.," of these shares.
8 The TEMIS technology was software developed to allow an analog telephone system (the type then used in Indonesia) to track telephone calls and produce detailed billing statements comparable to statements generated by a more technologically advanced digital telephone system.
9 Empower disclosed that its assets consisted of cash (less than $5,000) and 100% ownership of Empower Indo. In practice, Empower treated Empower Indo's assets as its own, informing potential investors that "all discussions of the business and operations of [Empower] as well as its financial statements are presented on a consolidated basis with Empower Indo...."
10 The four private placements occurred as follows: (1) from January 1993 to August 1993, Empower sold 800,000 preferred shares, raising $5 million; (2) from December 1993 to March 1994, Empower sold 293,450 common shares, raising approximately $900,000; (3) from June 1994 to October 1994, Empower raised another $1.3 million from the sale of preferred shares; and (4) from July 1995 through November 1995, Empower raised another $400,000 from the sale of common shares.
11 The private placement memorandum was originally dated January 22, 1993 (the "Original PPM"), and revised and re-dated February 18, 1993 (the "Revised PPM") (collectively the "PPM"). The record refers to a PPM "First Supplement" dated April 12, 1993 and contains a "Second Supplement" dated July 28, 1993.
12 Lorenzetti testified that he incorporated comments from W. Chan, a draft financial statement from Empower's treasurer and director, Donald E. Whorl, and "boilerplate" language that was contained in an office computer.
13 On September 26, 1996, the Division filed a complaint in federal district court against Empower, Lorenzetti, Whorl, W. Chan, and Chan & Co. The complaint alleged violations of the antifraud provisions of the securities laws based on use of the PPM and sought, among other things, a permanent injunction against each defendant from violating various provisions including Securities Act Section 17(a), Exchange Act Section 10(b), and Exchange Act Rule 10b-5. Empower, Lorenzetti, and W. Chan each consented to an injunction. A default judgment was entered against Chan & Co.

The Commission accepted an offer of settlement from Whorl consenting to entry of a cease and desist order against him. See Donald E. Whorl, Securities Act Rel. No. 7574 (Sept. 9, 1998), 67 SEC Docket 2810.

14 It is unclear from the record who received the Original PPM, but several investors stated in affidavits that they purchased Empower stock following Empower's disclosure of its purported agreement with Bell Atlantic.
15 Empower distributed the PPM to prospective investors only in conjunction with its first private placement. For the three subsequent private placements, Empower "deemed" investors to "have already received the original memorandum" because Empower solicited additional investment only from existing shareholders. In its 1996 complaint, the Division alleged that the misstatements and omissions in the PPM that were not corrected in the three subsequent private placements continued to mislead investors.
16 Although Chan claims that many of these payments were for expenses properly attributable to Empower, even Chan concedes that certain payments, categorized in Empower's books as expenses of Chan & Co., were incurred by Chan & Co. in the pursuit of its own business goals and were not incurred by Empower or for its benefit.
17 As noted, ultimately Empower made payments to Chan & Co. of more than $1.2 million that were for services not rendered to Empower -- an amount nearly $500,000 higher than Chan & Co.'s May 1993 promissory note. Lorenzetti confirmed that Empower's books and records reflected that this additional amount was paid to Chan & Co. after execution of the $750,000 promissory note.
18 Propelat alleged that it was owed $1.5 million; Empower valued the liability at approximately $800,000.
19 Empower paid only $230,000.
20 It was not until May 7, 1993, nearly four months after Empower distributed the PPM, that Propelat agreed in writing to delete from the MOU the automatic termination provision. Propelat's agreement to terminate this provision was based on Empower's assurances in an April 23, 1993 letter that it would pay agreed-to liabilities.
21 The record reflects that Chan & Co. never made any payments under its licensing agreement with the owner of the TEMIS technology.
22 See supra note 15.
23 On September 9, 1998, the Division instituted, in addition to the present proceeding against Chan, a separate proceeding against two Empower sales agents alleging that they sold or offered for sale shares of Empower securities in violation of Securities Act Section 5(a) and 5(c) and that they committed fraud by, among other things, receiving commissions from the sale of Empower stock contrary to written and oral representations. See Gilbert and Pearle G. Mintz, Securities Act Rel. No. 7576 (Sept. 9, 1998), 67 SEC Docket 2816. The Commission accepted offers of settlement from each sales agent.
24 15 U.S.C. § 77h-1(a).
25 15 U.S.C. § 78u-3(a).
26 15 U.S.C. §§ 77h-1(a); 78u-3(a).
27 See, e.g., Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988) (in order to be material, "there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available") (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)).
28 In fact, Chan wrote Empower's checks for payment of sales commissions.
29 Cf. Albert T. Devaul, Securities Act Rel. No. 7192 (July 5, 1995), 59 SEC Docket 2162, 2167 (Settled Cease-and-Desist Order) (Corporate insider "had a duty to ensure that the offering documents included the material facts of which he was aware. His failure to take sufficient steps to ensure that the offering documents were accurate caused [the corporation's] violations of the antifraud provisions.").
30 Lorenzetti testified that, just prior to his departure from Empower, Chan requested Lorenzetti to issue an Empower check for an expense of W. Chan. When Lorenzetti refused to do so, Chan "begged" Lorenzetti to pay this expense, arguing that his father had committed to pay it and, if the expense were not paid, it would hurt W. Chan's business interests.
31 When Lorenzetti questioned Chan concerning the reason he defied Lorenzetti's instructions, Chan indicated that he continued to sign Empower checks payable to his father or W. Chan's companies because his "father had committed to make these payments."
32 Lorenzetti testified that on one occasion he printed post-dated checks payable to Chan & Co. to be cashed on a specific date for services to be provided to Empower. Following Lorenzetti's departure on a business trip, the date on one check was changed and it was immediately cashed. The check bears Chan's initials next to the changed date and Chan signed the check.
33 Empower hired Lesser in July 1993 as a consultant. In September 1993, Lesser assumed the position of chief financial officer (following Lorenzetti's departure) until resigning his position in February 1994.
34 Lesser testified that he worked with Chan to prepare Empower's books because Chan, who signed Empower's checks, "was the only one who really had knowledge of how the money had been expended and why checks had been written and had most of the back-up documentation in his possession."
35 Lesser testified that his review confirmed Lorenzetti's belief that W. Chan and his companies were misappropriating Empower funds.
36 In Chan's written opening hearing statement, Chan denied that he attended this meeting. Chan subsequently admitted during his hearing testimony that he attended the meeting.
37 The materiality of Empower's reimbursement liability and the termination of the MOU absent such reimbursement is further demonstrated by Lesser's testimony that, had he known that Empower had agreed to pay Propelat's expenses, he would have included this liability in the financial statements accompanying Empower's July 1993 PPM Second Supplement. Lesser also testified that the Second Supplement had been circulated to Chan in advance of its publication, but that Chan never informed Lesser that there was a disclosure issue about the Propelat liability.
38 There is no dispute that Chan had personal knowledge of his father's bankruptcy. Chan admitted that he was forced to move out of the family home as a result of the bankruptcy.
39 Although W. Chan disclosed on his questionnaire that one of his companies had sought bankruptcy relief, he omitted any reference to his own bankruptcy in 1991.
40 As to the selling agent, Chan claims that he was "only instructed to pass" the questionnaires to Empower's directors, not to review them. He further claims that it was the responsibility of Empower's attorney to assess the accuracy of the questionnaire responses. These arguments miss the point. Chan knew that the disclosure of this information was material but that the PPM failed to disclose it.
41 The import of this omission and whether the information could be deemed material is demonstrated by the fact that Empower's outside auditor immediately resigned from itsengagement upon learning that W. Chan had filed bankruptcy but failed to disclose this information when the selling agent requested it. Cf., Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988)("[An] omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.") (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)).
42 Although the record does not indicate how Empower's management "knew" that its salespersons could not be paid commissions, we note that Exchange Act Section 3(a)(4) defines a "broker" as "any person engaged in the business of effecting transactions in securities for the account of others." 15 U.S.C. § 78c. Exchange Act Section 15(a)(1) makes it unlawful for a broker "to effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security (other than an exempted security or commercial paper, bankers' acceptances, or commercial bills) unless such broker . . . is registered" with the Commission. 15 U.S.C. § 78o. A person effects transactions if he or she participates in securities transactions "at key points in the chain of distribution," including helping an issuer to identify potential purchasers of securities, soliciting securities transactions, and participating in the order-taking or order-routing process (for example, by taking transaction orders from customers). See Massachusetts Fin. Serv., Inc. v. Securities Investor Protection Corp., 411 F. Supp. 411, 415 (D. Mass.), aff'd, 545 F.2d 754 (1st Cir. 1976). Cf., 17 C.F.R. § 240.3a4-1 (An associated person of an issuer shall not be deemed to be a broker solely by reason of his participation in the sale of securities if, among other things, such person "is not compensated in connection with his participation by the payment ofcommissions or other remuneration based either directly or indirectly on transactions in securities.").
43 Lesser testified that he ultimately resigned his position because his "continually communicated concerns" to Empower's management, including Chan, about the illegality of paying commissions, were ignored.
44 Acknowledging that Empower knew it could not pay commissions, but that the salespersons wanted higher salaries for their solicitation of shareholders, Chan stated at the hearing that "the idea of paying bonuses was established." Chan did not elaborate on the distinction between a bonus and a commission.
45 For example, Chan argues that he was not obligated to disclose his father's bankruptcy to the selling agent, other directors, or to investors, because it was the obligation of Empower's attorney to ensure that this disclosure was made.
46 See authority cited supra note 29.
47 See Sharon M. Graham, 53 S.E.C. 1072, 1085 & n. 35 (1998), aff'd, 222 F.3d 994 (D.C. Cir. 2000).
48 Joseph J. Barbato, 53 S.E.C. 1259, 1281 n.31 (1999) (quoting Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd, 450 U.S. 91 (1981)).
49 We have considered all of the parties' contentions. We have rejected or sustained these contentions to the extent thatthey are inconsistent or in accord with the views expressed in this opinion.