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SECURITIES AND EXCHANGE COMMISSION
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In the Matter of ERIK W. CHAN
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OPINION OF THE COMMISSION
CEASE-AND-DESIST PROCEEDING
Grounds for Remedial Action
Causing Fraud in Offer and Sale of Securities
Officer of corporation was a cause of corporation's violations of securities laws by making false and misleading statements of material facts in private placement offer to investors. Held, it is in the public interest to order officer to cease and desist from violating or committing or causing any violation or future violation of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5.
APPEARANCES:
Erik W. Chan, pro se.
David M. Rosen, for the Division of Enforcement.
Appeal filed: October 5, 2000
Last brief received: January 4, 2001
I.
Eric W. Chan appeals from the decision of an administrative law judge. The law judge found that Empower Telecommunications Corporation ("Empower") violated the antifraud provisions of the securities statutes by engaging in a scheme and course of business that operated as a fraud on investors who were offered securities using false and misleading material information. The law judge concluded that Chan knew that Empower acted to defraud investors and that Chan was a cause of Empower's antifraud violations under Section 17(a) of the Securities Act of 1933,1 Section 10(b) of the Securities Exchange Act of 1934,2 and Exchange Act Rule 10b-5. 3
The law judge ordered Chan to cease and desist from committing or causing any violations or any future violations of Securities Act Section 17(a), Exchange Act Section 10(b), and Exchange Act Rule 10b-5. We base our findings on an independent review of the record, except with respect to those findings not challenged on appeal.
II.
A. Background
Chan's alleged violations concern Empower's activities during 1993 and 1994. Chan served as Empower's corporate secretary during this period, and his violations are based on his involvement in certain statements made by Empower that the law judge determined to be fraudulent.
In December 1992, W.H.B. Chan & Co. ("Chan & Co.") entered into memoranda of understanding ("MOUs") with two Indonesiancorporations to build and operate two telephone exchanges.4 On January 11, 1993, William H.B. Chan ("W. Chan"), the father of Erik Chan, incorporated Empower as a Delaware corporation.5 W. Chan then caused Chan & Co., a company that he controlled, to assign the MOUs to Empower.6 In consideration for the assignment, Empower issued 19.6 million preferred shares and a $1 million promissory note to Chan & Co.7 Additionally, Chan & Co. granted to Empower a license to use Telephone Exchange Management Information Systems ("TEMIS") technology.8
B. The Private Placements
When Empower was incorporated, its only assets were the MOUs and the license of TEMIS technology.9 Empower engaged in four private placements in order to raise the funds required to build and manage the two Indonesian telephone exchanges.10 Ultimately, Empower raised approximately $7.6 million from the sale of its common and preferred shares, with shares sold to about 350 investors.
In conjunction with the private placements, Empower's then-president, chief executive officer, and a director, Osvaldo Lorenzetti, wrote a private placement memorandum that Empower furnished to potential investors.11 Lorenzetti circulated it in draft form to all of Empower's officers and directors, including Chan, and solicited their comments for incorporation into the final draft.12
C. PPM Misrepresentations and Omissions
The PPM contained numerous material misrepresentations. These included statements about Empower's business relationships and its intended use of proceeds raised from the private placement of its securities. The PPM also failed to disclose material facts. The PPM did not disclose that Empower was obligated to reimburse PT Propelat ("Propelat"), an Indonesian corporation named as a party in one of the MOUs, for claimed project-related expenses. The PPM likewise failed to disclose that, if Empower's reimbursement was not timely paid, the MOU would automatically terminate. The PPM also failed to disclose that Empower never received the TEMIS technology and that W. Chan had filed for bankruptcy relief shortly before the issuance of the PPM.13 We address these misrepresentations and omissions below.
1. Business Relationships
The Original PPM stated:
[Empower] has orally agreed to accept Bell Atlantic Asia, Inc. ("Bell Atlantic") as a minority (25%) partner in this venture as allowed under the MOU, in exchange for Bell Atlantic's providing 50% of the financing required and the operating management support; [Empower], in conjunction with Partner "B", is jointly the majority holder of this concession. [Empower] is the project manager and the manager of the joint-venture, and Bell Atlantic is planned to be the operating manager of the exchange.
This information was false, and several witnesses, including Chan, testified that, when Bell Atlantic learned of the existence of this statement, it threatened a lawsuit unless this information was removed immediately from the PPM. Empower promptly deleted all references to Bell Atlantic and distributed the otherwise substantially identical Revised PPM.14 This was the only information in the PPM or subsequent statements issued by Empower that was ever corrected.15
2. Use of Proceeds
While the PPM stated that proceeds would be used by Empower to pay specified categories of start-up and operating expenses and to repay the $1 million promissory note to Chan & Co., a significant amount was used instead to reimburse W. Chan, Chan & Co., and affiliated entities for expenses unrelated to Empower's operations. Within a week following the distribution of the Revised PPM, Empower began payment of its $1 million promissory note to Chan & Co. By April 27, 1993, the entire note had been paid. Empower, however, continued to make payments to W. Chan and Chan & Co., ultimately more than $1.2 million in excess of the repayments on the note. These payments were not for services rendered to Empower, but rather for the benefit of W. Chan and companies owned or controlled by him.16
In May 1993, when Empower had already provided to W. Chan and Chan & Co. approximately $650,000 in excess of the repaid promissory note, Chan & Co., at Lorenzetti's urging, executed a $750,000 promissory note made payable to Empower.17 Although the note recited that it was in consideration of a "loan" from Empower to Chan & Co., that characterization concealed the fact that the purpose of the note was to account for the improper payments that Empower had made to Chan & Co. The only disclosure to Empower investors about Chan & Co.'s promissory note appeared in the July 28, 1993 "Second Supplement" to the PPM, which falsely represented that Empower "agreed to a loan facility in an amount not to exceed $750,000 to assist [Chan & Co.] in securing its acquisition of [three additional] MOUs" for the benefit of Empower. Chan & Co. never repaid any portion of the note, even though Empower made multiple demands for its repayment.
Chan, as a signatory on Empower's checks, knew that Empower was making payments to W. Chan and his companies for expenses that were not related to Empower's operations. Chan signed at least three of these reimbursement checks after Lorenzetti specifically instructed Chan not to do so. When questioned about this, Chan told Lorenzetti that he had ignored Lorenzetti's instructions because "he had to do it" for his father.
3. Reimbursement Liability
The PPM omitted disclosure concerning Empower's debt to Propelat for certain expenses. Propelat, an Indonesian corporation, was a party to one of the MOUs. Propelat claimed that it was entitled to reimbursement for project-related expenses incurred prior to the execution of the MOU.18 The PPM also failed to disclose that, if this reimbursement was not timely paid, the MOU would automatically terminate.
Empower had acknowledged its reimbursement liability to Propelat prior to the issuance of the PPM. Empower negotiatedthe amount of reimbursement in a February 27, 1993 meeting with Propelat and others, which Chan attended as one of Empower's representatives. At that time, Empower agreed to pay $280,000 to entities designated by Propelat.19 In return, Propelat agreed to a new payment schedule extending beyond the original termination date of the MOU.20
Empower's corporate counsel, in a series of March 1993 memoranda sent to various Empower officers, suggested that the liability to Propelat and the termination of the MOU absent payment of this liability were material. He repeatedly recommended that Empower disclose this information to investors. Nonetheless, Empower disclosed neither its agreement to reimburse Propelat nor that the MOU would terminate absent this reimbursement.
4. The TEMIS Technology
The PPM disclosed that Empower held an exclusive ten-year license to use the TEMIS technology "for the on-line real-time management, supervision and control of telecommunication systems in Indonesia..." and that TEMIS was "an integral part of [Empower's] marketing effort." Although the PPM disclosed that Chan & Co. had licensed this technology from an individual serving as an Empower officer and director, and then "re-licensed" TEMIS to Empower, the PPM failed to disclose that Chan & Co. never received the software program.21 The PPM also failed to disclose that the TEMIS technology had to be converted to Indonesian standards, but that the conversion was never performed and thus Empower never had the use of the TEMIS technology.
5. W. Chan's Bankruptcy
The PPM extolled the business acumen of W. Chan, presenting a lengthy curriculum vitae chronicling his accomplishments. Investors were not told, however, that W. Chan had filed a Chapter 7 bankruptcy petition on August 16, 1991, wherein he listed more than $13 million in liabilities but less than $9,000 in assets.
D. Empower Sought Additional Funds and Paid Commissions
By late 1993, Empower had expended virtually all of the proceeds it had raised in its initial private placement. Because additional funds were required in order to fulfill its MOU obligations, Empower was compelled to seek more investor funds. It offered common stock to its current investors starting in December 1993.
For its December 1993 offering of common stock, Empower did not circulate a new PPM.22 Rather, it relied upon the existing PPM and circulated only a securities purchase agreement and a two-page "newsletter." The securities purchase agreement represented that no sales commissions would be paid in connection with the sale of Empower stock. In fact, Empower paid more than $100,000 in commissions for the sale of its stock during this offering.23 Although Chan testified that he understood in December 1993 that the securities purchase agreement prohibited Empower from paying sales commissions, Chan signed all of the commission checks paid to salespersons.
III.
Securities Act Section 8A24 and Exchange Act Section 21C25 authorize the Commission to impose a cease and desist order against any person that is violating, has violated, or is about to violate any provision of these Acts, or rule or regulation thereunder. Additionally, the Commission may issue an order against any "person that is, was, or would be a cause of the violation, due to an act or omission the person knew or should have known would contribute to such violation...."26
A. Empower Violated the Antifraud
Provisions of the Securities Laws
We must first determine whether Empower violated the securities laws before deciding whether Chan caused Empower to commit any such violations. As discussed above, Empower offered for sale and sold securities to investors using a PPM and securities purchase agreement that contained false and misleading statements. Many of the misrepresentations in and omissions from these documents concerned issues fundamental to Empower's business, including Empower's business relationships, its assets, and its intended use of the proceeds from the securities offerings. As such, the misrepresentations and omissions were material.27 We conclude for purposes of this opinion that Empower violated the antifraud provisions of the securities laws.
B. Chan was a Cause of Empower's Violations
Having determined that Empower violated the securities laws, we must next determine whether Chan was a cause of these violations. Chan admits that "certain disclosures should have been made," and concedes that Empower made misrepresentations andomitted to disclose facts to investors. Nonetheless, Chan disputes that he "caused" Empower to violate the antifraud provisions of the securities laws.
As discussed below, Chan participated in, or was aware of, every event that Empower misrepresented in, or omitted from, the PPM and the securities purchase agreement. Lorenzetti gave Chan the PPM prior to its distribution in order for Chan to review it substantively and provide comments, but Chan took no action to correct misrepresentations or to add to it omitted material facts. Chan also knew that the securities purchase agreement stated that no sales commissions would be paid, but that Empower intended to, and did in fact, pay commissions.28 As with the PPM, Chan did not make any corrections to the securities purchase agreement.
Chan, an officer of Empower, was specifically asked to review Empower's offering materials and provide comments, knowing that these documents would be used to solicit investors. Chan knew that these materials contained misrepresentations, but did nothing to correct them.29 Accordingly, we conclude that Chan was a cause of Empower's violations.
C. Chan Knew or Should Have Known That He Was
Contributing to Empower's Violations
We next determine whether Chan knew or should have known that his actions would contribute to Empower's securities law violations. In this case, Chan knew that the PPM and securities purchase agreement contained material misrepresentations and failed to disclose material facts. For example, Chan knew that, but for one meeting in November 1992 between Lorenzetti and a Bell Atlantic representative, no discussions between Empower and Bell Atlantic had taken place. He also knew when he reviewed the Original PPM that Empower had not entered into any written agreement with Bell Atlantic and made no attempt to verify thedisclosure that an oral agreement existed between Empower and Bell Atlantic. Chan asserts that he did not attempt to correct the information about Empower and Bell Atlantic because he relied on Lorenzetti and Empower's legal counsel to make any necessary correction. Chan, however, was aware of all the background information regarding Bell Atlantic, and his failure to ensure that the statements in the PPM were truthful was therefore knowing.
Chan also was aware of, and participated in, the use of Empower's funds to reimburse W. Chan, Chan & Co., and others affiliated with W. Chan. The record is replete with copies of checks to Chan & Co. and related entities, all drawn on Empower's account and bearing Chan's signature. Lorenzetti testified that he discussed this issue with Chan on multiple occasions and specifically asked Chan to enlist the aid of his mother and "try to use [her] influence to tell his father not to [misappropriate funds]."30 Lorenzetti further testified that he instructed Chan to stop writing checks to W. Chan and Chan & Co., but that Chan defied his instructions.31 While Chan denies that he disobeyed Lorenzetti's instructions, he does not deny that he wrote checks to Chan & Co.32
Chan admits that he worked with Charles Lesser to prepare Empower's books and records for calendar year 1993.33 In anticipation of an eventual audit, Lesser, with the aid of Chan on an almost daily basis in October and November 1993, reviewed every check written by Empower in order to establish where money had been expended, for what purpose, and to obtain background documentation.34
Lesser and Chan determined that, of the $5 million that Empower had raised by the end of 1993, less than $620,000 was expended on Empower projects in Indonesia but more than $2.2 million went to W. Chan and his companies. They concluded that W. Chan and his companies (including Chan & Co.) had received from Empower at least $1,210,591.23 in payments unrelated to Empower's business (the other $1 million was credited against Empower's promissory note).
Chan concedes that some payments by Empower to Chan & Co. were correctly categorized by Lesser and Chan as payments for expenses of Chan & Co., not Empower.35 Accordingly, we find that Chan knew that the disclosure in the PPM about Empower's "use of proceeds" was false, and that Chan's argument that he was not aware that Empower was paying expenses unrelated to Empower's business is unpersuasive.
In addition to Chan's knowledge of Empower's misrepresenta-tions in the PPM, Chan also knew that the PPM failed to disclose material information. In particular, Chan knew that Propelat had requested $1.5 million in reimbursements, and that Empower ultimately had agreed to reimburse Propelat for a portion of that amount. Chan admitted that he attended the February 27, 1993 meeting in Indonesia with Propelat, during which Empower agreedto reimburse Propelat $280,000 for expenses.36 Chan further acknowledges that Empower's counsel advised the company in writing that this liability should be disclosed to investors. Chan argues, however, that it is "not reasonable to conclude" that Chan knew of this advice. Chan claims that this issue was "directly handled between [counsel] and senior management."
Nonetheless, Chan admitted at the hearing that the require-ment in the MOU to reimburse Propelat was "a topic within the office, you know, among Empower's executives" and that Empower's counsel "had raised it." Even if Chan did not know specifically that Empower's counsel had advised the company three times to disclose the Propelat liability, clearly a liability of this magnitude was material and needed to be included in the PPM. Chan knew that this disclosure had not been made.
Chan knew that the MOU with Propelat was central to Empower's business. Chan also knew that, if Empower failed to reimburse Propelat, the MOU would automatically terminate. This information was material. Although the termination provision was subsequently deleted from the MOU, Propelat did not agree to delete it until months after Empower distributed the PPM and had already raised hundreds of thousands of dollars from investors.37
Chan also knew that the PPM failed to disclose that the TEMIS technology, which Chan admitted was important to the marketing of Empower's securities to investors, was unavailable to Empower. Although Chan claims that he believed "at the time of the PPM" that the TEMIS technology was available to Empower, this claim is contradicted by Lorenzetti's testimony that the unavailability of this technology was discussed with Chan andothers on numerous occasions. Lorenzetti testified that it was "common knowledge" that Empower had not received TEMIS. This "situation was discussed internally" and Chan was privy to discussions about Chan & Co.'s failure to make payments under the licensing agreement. Chan admitted at the hearing that Empower did not receive TEMIS, that investors were never informed of this material fact, and that Chan at no time suggested that Empower inform investors of this fact. Further, even if TEMIS had been available, Chan knew that the person who originally had been designated to convert the technology to Indonesian standards was not available to do so. We find that Chan knew that the TEMIS technology was not available to Empower and that the disclosure in the PPM about TEMIS was misleading.
Chan also knew that the PPM touted W. Chan's business acumen but failed to disclose W. Chan's bankruptcy filing.38 In this regard, the selling agent employed for the initial private placement required all the directors to complete a questionnaire, which required that they each disclose any bankruptcy filing.39 As an Empower officer, Chan also completed a questionnaire and knew that the selling agent considered disclosure of this information material. Nonetheless, Chan did not disclose to the selling agent W. Chan's bankruptcy40 and neither corrected the PPM nor disclosed to investors that the PPM omitted this information.41
In connection with Empower's December 1993 stock offering, the securities purchase agreement was sent to the same persons who had invested in the initial offering. Lesser testified that W. Chan caused Empower to hire four salespersons for the purpose of selling to existing shareholders additional Empower securities. Lesser testified that the securities purchase agreement specifically recited that no sales commissions would be paid because Empower's management, including Chan, knew that it was illegal to pay commissions to a person not registered with the Commission as a broker-dealer.42 Lesser testified thatEmpower had discussions with its counsel and "numerous internal discussions" among management, including Chan, about engaging in the stock offering and paying commissions to salespersons, even though management knew Empower was not supposed to pay commissions.43 Moreover, Lesser acknowledged that Empower's management considered trying "to conceal its true intent, namely to pay commissions," by attempting to categorize the sales agents as "60-day employees" of Empower rather than commissioned salespersons. However, management abandoned this strategy.
Chan not only admits that sales commissions were paid from the sale of Empower's common stock, but also admits that he signed and issued the commission checks to the salespersons. He further admits that at times he signed blank checks so that they could be issued to the salespersons while Chan was away on business. Although Chan denies knowing "at the time" that the payments he issued to salespersons were "commissions,"44 he concedes that he knew that the payment of commissions was inconsistent with the representations in the securities purchase agreement.
D. Chan's Claims of Inexperience and
Limited Responsibility are No Defense
Denying that he "caused" Empower's securities law violations, Chan argues that he lacked the requisite experience, and requisite authority, to know that his actions or omissions would contribute to any securities law violations. Chan asserts that his employment at Empower constituted his "first working experience after graduating from college" and that he therefore was "in no position to make financial or accounting decisions." He repeatedly stresses that he was only an "administrative assistant" and, because of his inexperience, he was unable to discern whether Empower made misrepresentations and/or omissions of material fact in its solicitation of investors. We are not persuaded.
Chan insists that he was asked only to proofread the PPM for "grammatical errors" and had neither the knowledge nor the aptitude to suggest substantive modifications. This argument is specious. Lorenzetti testified that all officers and directors, including Chan, were provided with drafts of the PPM in order to review it for content and provide substantive comments. Moreover, Chan's professed ignorance about Empower's misrepresentations and omissions is not consistent with the record. Chan had personal knowledge of facts contradicting the statements in the PPM and securities purchase agreement. He also knew of material information that was omitted from these documents. While Chan may claim he lacked work experience prior to serving as Empower's secretary, a lengthy resume is not required in order to know that one should not cause others to commit fraud.
We likewise find unpersuasive Chan's claim that he did not cause Empower's violations because others bore responsibility for ensuring that disclosures were made.45 As a corporate officer, Chan was responsible for ensuring that Empower's offering documents disclosed material facts of which he had knowledge.46 Whether others also had an obligation to ensure the accuracy of Empower's discloses does not relieve Chan of his obligation to do so. Thus, the mere fact that others also may have caused Empower to violate the securities laws does not insulate Chan from liability for his own acts and omissions.
* * * *
Based upon the foregoing, we conclude that Chan "knew or should have known," within the meaning of the securities laws, that his failure to disclose the misrepresentations in the PPM and the securities purchase agreement would contribute toEmpower's violations of the antifraud provisions, and we find that Chan was a cause of Empower's violations of the antifraud provisions of the securities laws.47
IV.
The law judge ordered Chan to cease and desist from committing or causing any violations or future violations of the antifraud provisions of the securities laws. In determining sanctions, including whether to issue a cease-and-desist order, we consider the following factors:
The egregiousness of the defendant's actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of the defendant's assurances against future violations, the defendant's recognition of the wrongful nature of his conduct, and the likelihood that the defendant's occupation will present opportunities for future violations.48
In this case, Chan knew that the PPM and securities purchase agreement contained material misrepresentations and omitted to disclose material facts. Given Chan's direct involvement in many of the underlying matters that were either misrepresented or not disclosed to investors, Chan's actions were egregious. Chan's involvement in contributing to Empower's fraudulent activities occurred over an extended period of time. Chan does not accept responsibility for his actions, but rather blames others and asserts that he was too inexperienced to know better. Because we find there is a risk that Chan will repeat his behavior, we therefore will order Chan to cease and desist from committing or causing any violations or future violations of the antifraud provisions of the securities laws.
An appropriate order will issue.49
By the Commission (Chairman PITT and Commissioners HUNT and GLASSMAN).
Jonathan G. Katz
Secretary
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 45693 / April 4, 2002
Admin. Proc. File No. 3-9697
In the Matter of ERIK W. CHAN
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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
| 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. |
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Modified: 04/08/2002