Re: 2/27/01 - [AZNT] SEC v. Amazon Natural Treasures Complaint (CV-S-01-0229-RLH-RJJ) - Part 2 of 2
5. Scienter
32. Sylver acted with scienter. He either drafted or reviewed and approved all of the documents containing the four categories of false and misleading statements and omissions discussed above. He published or permitted others to publish the documents despite being warned by a former securities counsel, a former chief financial officer and several accountants and auditors that certain of the statements were false or misleading. Indeed, he knew that the revenue recorded by Amazon in its 1998 Form 10-KSB was false and he gave fictitious invoices to Amazon's auditors. He also knew that he was receiving undisclosed salary and stock. Finally, he also knew that the fantastic statements about Amazon's projected sales revenues and the benefits of its products were either false or lacked any reasonable basis.
33. Loricchio Jr. acted with scienter. He signed the 1997 and 1998 Form 10-KSBs, as well as all of the Form 10-QSBs discussed above. At a minimum, he acted recklessly by signing the filings without reviewing and correcting them. As the officer who managed Amazon's production and operations, including ordering raw materials from Brazil and filling customer's product orders, he knew or should have known that the 1998 sales revenues were overstated and that the projections were unreasonable or unrealistic. Likewise, as the officer in charge of product quality control and heavily involved in research, he knew or should have known that Amazon's product claims contained in its Commission filings were false and misleading. For example, he knew or should have known about Amazon's statements hawking the non-existent AIDS prevention cream contained in three of the Form 10-QSBs that he signed. As production manager, he knew or had reason to know that no such product existed.
B. Failure to Maintain Books and Records and Provide Adequate Internal Controls
34. Amazon does not maintain the books and records required under the federal securities laws. Amazon's books and records are so deficient that Amazon's independent auditors for the year ended December 31, 1998 disclaimed an opinion on its financials. In Amazon's 1998 Form 10-KSB, the auditors explained that they did not observe the physical inventory as stated in the financial statements. And, because inventory "enter[ed] significantly into the determination of financial position, results of operations, and cash flows, and since the Company does not maintain certain customary accounting records or documents, or an adequate system of internal control... the scope of our work was not sufficient to enable us to express an opinion." According to the auditors, Amazon's books and records contained, at a minimum, the following inadequacies: missing invoices or documents evidencing revenue and cost of sales; no bank reconciliations; no separate perpetual inventory records; no backup for receivables; no support far prepaid expenses; no depreciation schedules for fixed assets; and missing subscription agreements and no documentation to support sales of stock for services.
35. The auditors also documented in their audit workpapers that Amazon lacked a functioning internal control system. The auditors specifically identified the following areas as lacking internal controls: cash; accounts receivable; inventory; property and equipment; accounts payable and accrued liabilities; payroll; notes payable; equity; expenses; and revenue and income.
C. Amazon's Delinquent and Deficient Filings
36. Since its inception as a public company in 1996, Amazon has failed to file timely all three of its annual reports with the Commission and has still not filed its annual report for the year ended December 31, 1999. Moreover, as described above, the independent auditors for Amazon's annual report for the year ended December 31, 1998 could not express an opinion on Amazon's financial statements. Amazon also filed nine of its quarterly reports late [reports for the quarterly periods beginning March 31, 1996 and ending June 30, 1999] and has not yet filed its first three quarterly reports for the year 2000 [reports for the quarterly periods beginning March 3l, 2000]. Finally, on February 10, 2000, Amazon filed a late Form 8-K disclosing that the "auditor/client relationship with [its auditors for the year ended December 31, 1998] had ceased." Both the late and an amended Form 8-K failed to disclose information required in Item 304 of Regulation S-B, including the disagreements between Amazon and its former auditors, and the fact that the auditors had informed the company that it lacked adequate internal controls, among other things.
D. Amazon's Sale of Unregistered Stock
37. From 1997 through at least 1999, Amazon sold approximately 6.3 million shares of its stock, raising approximately $3.8 million dollars. Amazon never registered the stock with the Commission, despite not qualifying for any exemptions from registration. Amazon used three methods to sell its stock: (1) a private placement; (2) sales through a “finder”; and (3) sales by Sylver, several friends, and consultants.
1. Private Placement
38. According to its private placement offering memorandum, Amazon offered 5 million shares of restricted common stock for $1.00 per share on a "best efforts" basis, beginning on November 1, 1997 and closing December 31, 1998. The offering memorandum stated that the stock was exempt from registration pursuant to Section 4(2) of the Securities Act and/or Rule 506 of Regulation D. Neither exemption, however, was available to Amazon. Amazon sold approximately 200,000 shares to Sylver's friends and family, raising $200,000.
2. "Finder" Sales
39. During 1997 and 1998, Amazon sold stock through two now-defunct entities acting as "finders." The finders telephoned potential Amazon investors from investor lists; potential investors then contacted Amazon directly. At least 174 of the offerees contacted through the finders, many of whom were not accredited investors, purchased Amazon stock. Ultimately, Amazon sold 1,731,842 shares of its stock, for $1,627,814, to investors located by the finders.
3. Sales By Sylver and Others
40. Finally, beginning in 1997 and continuing at least through 1999, Sylver and two or three of his friends and consultants sold Amazon stock to individuals, sometimes friends of friends. Some of the stock was purportedly "free-trading stock” that had been previously issued to Titan. In these cases, the investors wrote checks out to Titan, but the investors were not told that Sylver controlled Titan and that Titan was, in effect, Amazon. In addition, as discussed above, Sylver sold Amazon stock into the public market through the two brokerage accounts he held in the name of Titan. Sylver sold approximately 4 million shares of Amazon stock (approximately 2 million of which was nominally held in the name of Titan), raising approximately $1.3 million (approximately $516,000 from the Titan sales).
V.
FIRST CLAIM
(VIOLATIONS BY DEFENDANTS AMAZON, SYLVER AND LORICCIO JR. OF SECTION 17(A) OF THE SECURITIES ACT AND SECTION 10(b) OF THE EXCHANGE ACT AND RULE 10b-5 THEREUNDER)
41. Paragraphs 1 through 40 are hereby realleged and incorporated by reference.
42. Defendants directly and indirectly, with scienter, in the offer or sale and in connection with the purchase or sale of Amazon securities, by use of the means or instrumentalities of interstate commerce or by use of the mails, have employed devices, schemes, or artifices to defraud; have made untrue statements of material fact or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or have engaged in acts, practices, or courses of business which have been and are operating as a fraud or deceit upon the purchasers or sellers of such securities.
43. By reason of the foregoing; Defendants violated and unless restrained and enjoined will continue to violate Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
SECOND CLAIM
(VIOLATIONS BY DEFENDANTS AMAZON AND SYLVER OF 13(b)(2)(A) AND (B) OF THE EXCHANGE ACT)
44. Paragraphs 1 through 40 are hereby realleged and incorporated by reference.
45. Amazon violated Sections 130(b)(2)(A) and (B) of the Exchange Act by failing to develop and maintain accounting records that accurately and fairly reflect its transactions and the dispositions of its assets.
46. Amazon also violated Section 13(b)(2)(B) by failing to devise and maintain a system of internal accounting controls sufficient to permit preparation of financial statements in conformity with generally accepted accounting principles.
47. Sylver aided and abetted Amazon's violations of 13(b)(2)(A) and (B). He knowingly and substantially assisted in Amazon's violations by causing or failing to correct the deficiencies in Amazon's accounting records and purposefully falsifying certain records, including invoices.
48. By reason of the foregoing, Amazon and Sylver violated and unless restrained and enjoined will continue to violate 13(b)(2)(A) and (B) of the Exchange Act.
THIRD CLAIM
(VIOLATIONS BY DEFENDANTS AMAZON, SYLVER AND LORICCIO JR. OF SECTION 13(a) OF THE EXCHANGE ACT AND
RULES 12b-25, 13a-1 AND 13a-13 THEREUNDER)
49. Paragraphs 1 through 40 are hereby realleged and incorporated by reference.
50. Amazon violated Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder by filing annual reports that contained materially false and misleading information and omissions. As set forth above, Amazon's material misrepresentations and omissions contained in its reports included statements about Amazon's revenue during 1998, salary and stock issued to Sylver, revenue and earnings projections, and the "proven" safety and efficacy of Amazon's products.
51. In addition, Amazon violated Section 13(a) of the Exchange Act and Rules 13a-I and 13a- 13 thereunder by failing to file timely its annual reports for the years 1996, 1997 and 1998, its nine quarterly reports listed above, and its Form 8-K disclosing the termination of its 1998 auditor-client relationship. Further, its annual report for 1998 did not contain an auditor's opinion, in violation of Rule 2-02(b) of Regulation S-X [17 C.F.R. 210.2-02(b)]. Moreover, Amazon has not filed its annual report for 1999 and first three quarterly reports for 2000.
52. By failing to file timely reports and by filing reports containing materially false and misleading statements and omissions, Amazon violated Section 13(a) of the Exchange Act and Rules 12b-25, 13a-1 and 13a-13 thereunder.
53. Sylver knowingly and substantially assisted Amazon's violations by drafting and/or reviewing and approving Amazon's filings. Sylver thus aided and abetted Amazon's violations of Section 13(a) of the Exchange Act and Rules 12b-25, 13a-1 and 13a-13 thereunder.
54. As an officer and director of the company with a duty to approve and sign Amazon's filings, Loricchio Jr. also aided and abetted Amazon's violations of Section 13(a) of the Exchange Act and Rules 12b-25, 13a-1 and 13a-13 thereunder.
55. By reason of the foregoing, Amazon violated, and Sylver and Loricchio aided and abetted violations of, and unless restrained and enjoined defendants will continue to violate and aid and abet, Section 13(a) of the Exchange Act and Rules 12b-25, 13a-1 and 13a-13 thereunder.
FOURTH CLAIM
(VIOLATIONS BY DEFENDANTS AMAZON AND SYLVER OF RULES 1362-1 and 1362-2 OF THE EXCHANGE ACT)
56. Paragraphs 1 through 40 are hereby realleged and incorporated by reference.
57. Sylver violated Rule 1362-1 of the Exchange Act by falsifying or causing to be falsified, any book, record or account subject to Section 13(b)(2)(A) of the Exchange Act. Sylver also violated Rule 1362-2 by making false statements to an accountant in connection with an audit and the preparation of a filing with the Commission. Specifically, Sylver violated both rules by providing Amazon's 1998 auditors with fictitious invoices and other documents that overstated Amazon's revenue for the year ended December 31, 1998, and by orally confirming Amazon's nonexistent sales. Unless restrained and enjoined, Sylver will continue to violate Rules 1362-1 and 1362-2.
58. Amazon is liable for Sylver's conduct with respect to falsifying Amazon's financial records. Amazon thus violated, and unless restrained and enjoined will continue to violate, Rule 1362-1.
FIFTH CLAIM
(VIOLATIONS BY DEFENDANTS AMAZON AND SYLVER
OF SECTIONS 5(a) AND 5(e) OF THE SECURITIES ACT)
59. Paragraphs 1 through 40 are hereby realleged and incorporated by reference.
60. From at least 1997 through 1999, Amazon, directly and indirectly, made use of the means or instruments of transportation and communication in interstate commerce and of the mails to offer to sell or offer to buy through the use or medium of any prospectus or otherwise Amazon securities, without a registration statement having been filed with the Commission as to such security in violation of Sections 5(a) and 5(c) of the Securities Act.
61. No registration statements have been filed with the Commission or are otherwise in effect with respect to the Amazon stock offered by Amazon and Sylver.
62. By reason of the foregoing, Amazon and Sylver have violated and unless restrained and enjoined will continue to violate Sections 5(a) and 5(c) of the Securities Act.
VI.
PRAYER FOR RELIEF
WHEREFORE, the Commission respectfully requests that the Court:
A. AS TO AMAZON NATURAL TREASURES, INC.
1. Find that Defendant Amazon committed the violations alleged herein.
2. Enter an injunction, in a form consistent with Rule 65(d) of the Federal Rules of Civil Procedure restraining and enjoining Amazon and persons in active concert or participation with it, from violating, directly or indirectly, Sections 5(a), 5(c) and 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A) and (B) of the Exchange Act and Rules 10b-5, 12b-20, 12b-25, 13a-l, 13a-13, and 1362-1 thereunder.
3. Order such further relief, equitable and legal, as the Court may deem just and proper.
B. AS TO DEFENDANT MICHAEL A. SYLVER
1. Find that Defendant Sylver committed the violations alleged herein.
2. Enter an injunction, in a form consistent with Rule 65(d) of the Federal Rules of Civil Procedure restraining and enjoining Sylver and persons in active concert or participation with him from violating, directly or indirectly, Sections 5(a), 5(c) and 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 12b-25, 13a-l, 1362-1, and 1362-2 thereunder.
3. Order Sylver to account for, but delay order enforcing disgorgement of, all ill-gotten gains, together with prejudgment and post-judgment interest as provided by law. The Commission will seek an order to enforce such disgorgement when and if such an order becomes appropriate upon the conclusion of Sylver's bankruptcy petition.
4. Determine, but delay order enforcing payment of, the proper amount of civil penalties pursuant to Section 20(d) of the Securities Act that Sylver shall pay. The Commission will seek an order to enforce such award when and if such an order becomes appropriate upon the conclusion of Sylver's bankruptcy petition.
5. Enter an order barring Sylver from serving as an officer or director of any publicly held company pursuant to Section 21 (d)(2) of the Exchange Act and Section 20(e) of the Securities Act and pursuant to the Court's equitable power.
6. Order such further relief, equitable and legal, as the Court may deem just and proper.
C. AS TO DEFENDANT DOMINGOS LORICCHIO JR.
1. Find that Defendant Loricchio Jr. committed the violations alleged herein.
2. Enter an injunction, in a form consistent with Rule 65(d) of the Federal Rules of Civil Procedure restraining and enjoining Loricchio Jr. and persons in active concert or participation with him from violating, directly or indirectly, 17(a) of the Securities Act and Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 12b-25, 13a-1 and 13a-13 thereunder.
3. Order Loricchio Jr. to pay a civil penalty pursuant to Section 20(d) of the Securities Act in an amount to be determined by the Court.
4. Order such further relief, equitable and legal, as the Court may deem just and proper.
Dated: February 27, 2001
Respectfully submitted,
Julie K. Lutz
Meredith A. Munro
Attorneys for Plaintiff
Securities and Exchange Commission
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Note: Scanned from court documents; not responsible for errors and omissions |
