Re: 2/27/01 - [AZNT] SEC v. Amazon Natural Treasures Complaint (CV-S-01-0229-RLH-RJJ) - Part 1 of 2
Julie K. Lutz
(Colo. Attorney Reg. No. 77246)
Meredith A. Munro
(Colo. Attorney Reg. No. 25880)
Securities and Exchange Commission
1801 California Street, #4800
Denver, Colorado 80202
Telephone No.: (303) 844-1000
Facsimile: (303) 844-1010
Attorneys for Plaintiff
Blaine T. Welsh
(Nev. Attorney Reg. No. 4790)
United States Attorney's Office
333 Las Vegas Boulevard, Suite 5000
Las Vegas, Nevada 89101
Telephone No.: (702) 388-6336
Facsimile: (702) 388-6787
Associate Resident Counsel
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEVADA
Securities and Exchange Commission, Plaintiff,
V.
Amazon Natural Treasures, Inc.,
Michael A. Sylver, and
Domingos Loricchio, Jr.
Defendants.
COMPLAINT
CV-S-01-0229-RLH-RJJ
Plaintiff Securities and Exchange Commission ("Commission"), for its Complaint alleges as follows:
I.
SUMMARY
1. This Complaint concerns accounting fraud, false statements, securities registration violations and other securities law violations by Amazon Natural Treasures, Inc. ("Amazon") and its president, Michael A. Sylver ("Sylver'), and former vice president, Domingos Loricchio Jr. ("Loricchio Jr.").
2. Amazon primarily sells dietary supplements derived from plants grown in the Amazon rain forest in Brazil. From at least 1997 through March 2000, Amazon made numerous materially false and misleading statements and omissions in public filings with the Commission, press releases, its Interactive web site [www.amazon-treasures.com], and other documents disseminated to the public. Sylver drafted or approved each of these false statements, and Loricchio Jr. signed and approved some of the company's filings containing false statements. The statements and omissions broadly fall into four categories: (1) overstatement of sales revenue for the year ended December 31, 1998; (2) undisclosed cash and stock given to Sylver by Amazon; (3) baseless and unreasonable revenue projections and financial information; and (4) false and misleading claims about the benefits and safety of Amazon's products. Additionally, Amazon failed to develop and maintain adequate books and records and internal accounting controls. Amazon also failed to file with the Commission its Form 10-KSB for the year ended December 31, 1999 and its last three Form I 0-QSBs for fiscal years 1999 and 2000, and most of its previous filings were filed late. Finally, from at least 1997 through 1999, Amazon sold millions of shares of unregistered, non-exempt stock.
3. The Commission brings this action pursuant to the following authorities conferred upon it: one, Section 20(d) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. § 77t] and Section 21 (d)(3) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. § 78u(d)] for civil money penalties; two, Section 20(b) of the Exchange Act [15 U.S.C. § 77t] and Section 21 (d)(1) of the Exchange Act [15 U.S.C § 78u(d)] for an order permanently restraining and enjoining Defendants and granting other equitable relief', and three, Section 20(e) of the Securities Act [15 U.S.C. § 77q and Section 21(d)(2) of the Exchange Act [15 U.S.C. § 78u(d)] for an officer and director bar.
4. Against Amazon, the Commission seeks a permanent injunction for violations of Sections 5(a), 5(c) and 17(a) of the Securities Act [15 U.S.C. §§ 77e(a), 77e(c) and 77q(a)], Sections 10(b), 13(a), 13(b)(2)(A) and (B) of the Exchange Act [15 U.S.C. §§ 78j(b), 78re(a), 77m(b)(2)(A) and 77m(b)(2)(B)], and Rules 10b-5, 12b-20, 12b-25, 13a-l, 13a-13, and 1362-1 thereunder [17 C.F.R. 240.10b-5, 240.12b-20, 240.12b-25, 240.13a-1, 240.13a-13, and 240.1362-1].
5. Against Sylver, the Commission seeks an order of permanent injunction, disgorgement (including prejudgment interest), civil money penalties, and an officer and director bar for violations of Sections 5(a), 5(c) and 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rules 10b-5, 1362-2 and 1362-1 thereunder, and for aiding and abetting Amazon's violations of Section 13(a) and 13(b)(2)(A) and (B) of the Exchange Act and Rules 12b-20, 12b-25, 13a-1 and 13a-13 thereunder.
6. Against Loricchio Jr., the Commission seeks a permanent injunction and civil penalties for violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and for aiding and abetting Amazon's violations of Section 13(a) of the Exchange Act and Rules 12b-20, 12b-25, 13a-1 and 13a-13 thereunder.
II.
JURISDICTION AND VENUE
7. This Court has jurisdiction over this action pursuant to Section 22(a) of the Securities Act [15 U.S.C. § 77v(a)] and Section 27 of the Exchange Act [15 U.S.C. § 78aa]. In connection with the transactions, acts, practices, and courses of business described in this Complaint, each of the Defendants, directly and indirectly, has made use of the means or instrumentalities of interstate commerce, of the mails, and/or of the means and instruments of transportation or communication in interstate commerce.
8. Venue lies in this Court pursuant to Section 22(a) of the Securities Act and Section 27 of the Exchange Act because certain of the transactions, acts, practices and courses of business constituting the violations of law alleged herein occurred within this judicial district, in addition, Amazon has its principal place of business, and Sylver resides, in this judicial district.
III.
PENDING BANKRUPCTY ACTION
9. On July 20, 2000, Sylver petitioned for bankruptcy under Chapter 13 of the Bankruptcy Code. In re Michael A. Sy1ver and Ilana Svlver, Civ. No. 00-15363 (BCD Nev.). The Commission's Complaint against Sylver is exempt, however, from the automatic stay of litigation generally afforded petitioners in bankruptcy. Section 362(b)(4) of the Bankruptcy Code provides that the filing of a petition under Chapter 13 "does not operate as a stay ... of the commencement or continuation of an action or proceeding by a governmental unit." 11 U.S.C. § 362(b)(4).
IV.
THE DEFENDANTS
10. Amazon Natural Treasures, Inc. is a Nevada corporation that primarily sells dietary supplements derived from plants grown in the Amazon rain forest in Brazil. Its principal place of business is in Las Vegas, Nevada.
11. Michael A. Sylver, of Las Vegas, Nevada, is the president, chief executive officer, treasurer, and a director of Amazon. Sylver tightly controls Amazon, including its staff, officers and board of directors. According to Amazon's 1998 Form 10-KSB filed with the Commission on September 1, 1999 ("1998 Form 10-KSB"), Sylver and his family collectively owned approximately 37 percent of Amazon's preferred voting-only stock.
12. Domingos Loricchio Jr., was the vice president, secretary and a director of Amazon from March 28, 1996 until he resigned his positions on July 21, 2000. While employed at Amazon, he was in charge of Amazon's production and operations, including ordering raw materials from Brazil and filling customer's product orders. According to Amazon's 1998 Form 10-KSB, Loricchio Jr. and his family collectively owned approximately 30 percent of the preferred voting only stock of Amazon. He is a citizen of Brazil who maintained a residence in Las Vegas, Nevada during his tenure at Amazon.
V.
SECURITIES LAW VIOLATIONS
A. False and Misleading Statements and Omissions
13. From at least 1997 through March 2000, Amazon made numerous materially false and misleading statements and omissions in public filings with the Commission, press releases, its Interactive web site, and other corporate documents disseminated to the public.
1. Overstatement of Revenue for 1998
14. In the spring of 1999, during its financial audit for the year 1998, Sylver told Amazon's auditors that Amazon earned approximately $580,900 in sales revenue for 1998. As proof of earnings, Sylver gave the auditors a sampling of invoices allegedly representing these sales. Amazon reported the total sales revenue claimed by Sylver in its Form 10-KSB and accompanying financial statements filed with the Commission on September 1, 1999.
15. At least $266,600, or 68 percent, of the alleged total Sales revenue, as reported in Amazon's 1998 Form 10-KSB, and most or all of the invoices were fictitious. Although Amazon did receive proceeds on or about the dates represented by Sylver, the proceeds were from stock sales (equity) rather than product sales (revenue). Customers listed on the fictitious invoices purchased stock from Amazon, not product.
2. Undisclosed Cash and Stock Compensation
16. Amazon's Form 10-KSBs for the years ended December 31, 1996 and 1997 ("1996 Form 10-KSB" and "1997 Form 10-KSB” respectively) falsely stated that Sylver did not earn any compensation, deferred or otherwise, for his services on behalf of Amazon. In addition, Amazon's 1998 Form 10-KSB falsely stated that, although Amazon had authorized the payment of compensation to Sylver in 1998, it had not paid Sylver and would not do so until it had positive cash flows.
17. Contrary to Amazon's representations, Sylver received a salary. Between November 1997 and September 1998, Sylver received approximately $38,000 in checks, many of which were identified as payroll either on the face of the check or on the attached description. In addition, from 1997 through 1999, Sylver withdrew over $425,000 in cash from Amazon's bank accounts. Upon information and belief, Sylver used these funds for personal purposes, rather than legitimate business purposes of Amazon.
18. In addition, Amazon's 1996, 1997 and 1998 Form 10-KSBs failed to disclose stock given to Sylver by Amazon. The three Form 10-KSBs gave only a partial listing of Sylver's stock ownership and declared that Amazon had not granted Sylver any options or stock appreciation rights.
19. In fact, Amazon issued stock to an entity controlled by Sylver, named Titan Investments ("Titan'). In July 1995, Sylver and his parents, then the sole officers of a private predecessor entity to Amazon, authorized Amazon to issue Titan two million shares of Amazon common stock once Amazon went public. Later, from January 1997 through May 1998, Sylver caused Amazon to issue all or most of the two million shares to Titan. Sylver deposited about half of these shares into two brokerage accounts held in the name of Titan but secretly controlled by him. Sylver sold a portion of the 2 million shares into the open market; the rest Sylver sold -- often at very reduced prices -- to his family members, friends, and Amazon's consultants. Sylver deposited the stock sale proceeds, approximately $514,000, into a Titan bank account he also secretly controlled. Sylver personally withdrew $316,000 written in checks out to cash. Upon information and belief, Sylver used these funds for personal purposes, rather than legitimate business purposes of Amazon.
3. Baseless and Unreasonable Financial Projections
20. Throughout its existence, Amazon has made grandiose claims of future sales revenues and profits that were false, misleading or lacked a reasonable basis.
21. For example, in its 1996 Form 10-KSB, Amazon stated that it "anticipate[d] achieving" $1,490,788 in product sales for the calendar year ended December 1, 1997. In a press release dated November 21, 1997, Amazon stated that "estimated sales [for its sweetener] for the first year alone [1998] will be over $50 million" and that its "nutritional supplement division... projected first quarter sales [1998] of $2.7 million from a direct mail campaign." Similarly, in a press release dated December 2, 1997, Amazon projected that its revenue for 1998 would be $75 million and earnings would be $50 million, its revenue for 1999 would be $125 million and earnings would be $75 million, and that its revenue for 2000 would be $250 million and earnings would be $175 million.
22. Similarly, on numerous occasions Amazon made misleading announcements concerning future revenue from recent inventory gains. For example, in a February 2, 1998 press release, Amazon stated that its nutritional sweetener division is "now fully stocked… with over 100 tons... [and that] gross revenue for [Amazon] for this retail transaction will be approximately $4,000,000." In its Form 10-QSBs for September 30, 1998, March 31, 1999 and June 30, 1999, Amazon made the following and other similar statements: "It's the company's goal to solicit 1,000 stores by September 1998 [sic]... based on each store selling 100 bottles per month [of five specific supplements], the estimated gross revenue per year initially is estimated at $18,000,000."
23. Finally, beginning in 1998 through 2000, Amazon announced in press releases and on its Internet web site that it was entering into a "profitability phase." For example, from at least June 1999 to March 2000, Amazon's web site stated, "on Thursday, July 15, 1999, we entered into an exciting new phase - THE PHASE OF PROFITABILITY PHASE."
24. Amazon never met the foregoing projections. In fact, Amazon's projected revenues dwarfed its prior sales revenues: sales revenues were only $34,975 for 1996, $44,849 for 1997, and $392,061 for 1998 (which revenue was overstated by at least 68 percent, as discussed above).
25. Nor did Amazon have any reasonable basis to believe that it could meet the foregoing projections. Amazon's projections allegedly were based on the success of a marketing plan that consisted of advertisements and a rock concert in the Amazon rain forest. However, Amazon never implemented the marketing plan and never had the $5 million it needed to implement the marketing plan. Further, Amazon could not even have satisfied the demand that theoretically would be generated by the marketing plan. Amazon lacked the market demand, raw supply and production capability to meet the projections.
26. Further, Amazon's statements announcing the receipt of inventory and future revenue misrepresented Amazon's inventory. In 1998 Amazon had approximately two tons of sweetener, not the 100 tons the company claimed. Further, Amazon had no more than 150 stores selling its product as of May 1999, seriously undermining Amazon's sales projections or $18 million based on future sales at 1,000 stores.
27. Finally, contrary to Amazon's claims, Amazon never made a profit. Indeed, Amazon suffered net losses of $7,715,709 in 1996, $1,096,465 in 1997, and $4,815,331 in 1998.
4. False and Misleading Product Claims
28. Since it became a publicly traded company, Amazon has made innumerable false and misleading statements regarding the "proven” beneficial and safe effects of its products in Commission filings, press releases, its Interactive web site and other public documents.
29. In a January 28, 1997 press release, Amazon announced that one of its directors had "developed a cream protection against AIDS." Amazon listed its "aids preventive cream" as a product for sale in four Form 10-QSBs, beginning in September 30, 1997 and ending September 30, 1998. Although the director allegedly started to develop an AIDS prevention cream, he stopped research and development before completion. Needless to say, Amazon never made its alleged product available for purchase, and there is no evidence that the common natural supplements purportedly comprising the alleged AIDS prevention cream have any effect on the AIDS virus.
30. Amazon also made repeated claims that its products treat and cure certain other diseases. Most notably, since at least late 1999 and continuing today, Amazon claims in its Internet web site that hydrastis (a/k/a goldenseal), an ingredient in a product called puama, "fights cancer of the breast, uterus, stomach, nose and larynx" Amazon also currently claims in its web site that another product, pan d'arco, "has proved to inhibit the growth of ulcers and tumors" and is a "recommended product" for cancer. These claims, and others like them, are false. There is no evidence that hydrastis prevents cancer. Likewise, although the ingredients found in pau d'arco may have "anticancer properties," clinical research has demonstrated that the effective dosage would be toxic.
31. Finally, Amazon has made numerous claims that its research proves its products cause no side effects. For example, from at least June 1999 through 2000, Amazon's Interactive web site stated that "[d]ue to our research… we have proved that Phytogenic supplements which have absolutely no side effects whatsoever .... Our Phytogenic supplements… will never do any harm to any other organ of the body unlike allopathic medicines." Despite these claims, Sylver never saw evidence of testing, and Amazon had no documents to establish such claims of testing. Amazon's own Form 10-KSBs admit, in a buried disclaimer, that there is "no scientific evidence to establish that [its] products are safe or beneficial for human consumption." In fact, many of Amazon's products do have side effects, some serious. For example, three products offered by Amazon (ipe roxo a/k/a lapochal, pau d'arco and guarana), can cause several forms of cancer and are toxic in some dosages.
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