Pork Three...
40. In selling their SOE stock, Melcher and Terry, knowingly or
recklessly, failed to disclose material facts:
a. Terry, and, on information and belief, Melcher, were selling their SOE stock while they were making their strong buy recommendations to the investing public;
b. Melcher and Terry's promotional materials hyping the stock were materially false and misleading.
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HUTTOE TRIES TO PREVENT DISCOVERY OF HIS ILLEGAL SCHEME
HUTTOE LIES TO SOE'S INDEPENDENT AUDITORS,
PRESENTING THEM WITH FALSE AND MISLEADING DOCUMENTS
41. On July 2, 1996, SOE engaged the accounting firm of Weinberg, Pershes & Co. (WPC) to conduct an audit of SOE's financial statements for its fiscal year ended February 28, 1996.
42. During the audit, Huttoe, knowingly or recklessly, provided the auditors with materially false and misleading documents and information, including false S-8 registration statements, and withheld requested material information.
a. The S-8 registration statements falsely represented that the stock recipients were consultants of SOE, and had performed services for the company, when in fact, they were not consultants, and had provided no services sufficient to qualify the registration as an S-8.
b. The S-8 registration statements falsely represent that they had been filed with the Commission, when in fact they had not.
c. SOE and Huttoe failed to respond to the auditors' letters requesting further information regarding SOE's apparent violations of laws in connection with the distribution of SOE stock.
HUTTOE PREPARES FORGED AND FRAUDULENT DOCUMENTS
AND FILES THEM WITH THE COMMISSION
43. On or about September 20, 1996, SOE's independent auditors, WPC, began questioning SOE and Huttoe, pursuant to Section 10A of the Exchange Act [15 U.S.C. Section 78j-1], about SOE's possibly illegal activities in connection with the massive
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distribution of the shares purportedly registered on Forms S-8.
44. In response, Huttoe expanded his cover-up scheme to create the impression that the previously issued stock was properly registered on Forms S-8.
45. Over the weekend of September 21 and 22, 1996, Huttoe, along with the Corporate Secretary working under his direction, fabricated a series of "consulting agreements" for filing as exhibits to a new series of Forms S-8
to be filed with the Commission.
46. The "consulting agreements" described fictitious services purportedly provided to SOE by Huttoe's nominees and SOE investors and bore fictitious agreement dates. In fact, no such services were provided.
47. Some of these "consulting agreements" contained fictitious "lock up" terms, pursuant to which the recipients agreed not to sell the securities purportedly granted pursuant to the agreement until a fixed period of time had elapsed. In certain cases, the securities purportedly subject to the "lock up" had already been disposed of by the time the agreement was created.
48. Huttoe procured forged signatures for the purported
consultants on the "consulting agreements."
49. Huttoe directed that the bogus agreements, bearing the forged signatures, be made exhibits to 16 Registration Statements on Form S-8, knowing that they were to be filed with the United States Securities and Exchange Commission, as they were, on or about September 24, 1996.
50. Those Registration Statements purported to register a total of approximately 39.6 million shares, which purported to be issued to 93 different consultants in exchange for services that SOE valued at $54.5 million.
HUTTOE PROCURES A MATERIALLY FALSE
AND MISLEADING ACCOUNTANT'S REPORT
51. On or about September 21, 1996, Huttoe hired Merle S. Finkel, who held himself out as affiliated with M.S. Finkel, to provide an unqualified audit opinion for SOE's fiscal year 1996, which ended February 29, 1996.
52. That same day, September 21, 1996, Finkel signed an
unqualified Auditor's Opinion for inclusion in the Company's Form 10KSB filed with the Commission.
53. As was known or recklessly disregarded by Huttoe and SOE, the Auditor's Opinion was materially false and misleading in its entirety.
54. In fact, Finkel had made no attempt to contact anyone from SOE's real auditors, WPC, or to obtain that firm's workpapers.
55. Finkel never discussed the company or its books, records and accounts with the SOE personnel responsible for managing the SOE's bank accounts and keeping SOE's records.
HUTTOE ALTERS SOE'S BOOKS
56. Prior to September 21, 1996, an entry in the company's books, records and accounts contained an entry for a liability described as "note payable shareholders." This entry related to the shares issued to SOE investors pursuant to the so-called "private placement," but which were now purportedly registered under Forms S-8.
57. Under Huttoe's direction, SOE knowingly or recklessly
falsified the books to convert that liability into a note payable to Huttoe. In fact, no such note existed.
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58. This alteration deliberately concealed the fact that the "note payable" was connected to the "private placement," which also involved the distribution of unregistered SOE shares to investors.
59. Huttoe knowingly or recklessly caused the falsification of the contract in which SOE purported to hire Merle S. Finkel, so as to give the false impression that Finkel had been hired on September 13, 1996, rather than the same day his unqualified audit opinion was rendered.
HUTTOE CONCEALS HIS TRADES BY
FAILING TO FILE REQUIRED DISCLOSURE REPORTS
60. Huttoe failed to file Forms 3, 4, and/or 5, although required to do so, to publicly disclose his trading in SOE stock, and the massive changes in his beneficial ownership of SOE stock.
SOE FILES MATERIALLY FALSE AND MISLEADING
PUBLIC DISCLOSURE AND REGISTRATION REPORTS
SOE FILES A MATERIALLY FALSE AND MISLEADING FORM 10-KSB
61. On or about September 23, 1996, SOE, under the direction of Huttoe, filed its annual report on Form 10-KSB with the Commission. The statement was materially false and misleading.
a. The statement's financials incorporate the fictitious "note payable" to Huttoe;
b. The statement incorporates the materially false and misleading Auditor's Opinion;
c. The discussion of liquidity and capital resources in the Managements' Discussion and Analysis section stated that SOE's "primary sources of cash are from royalty income, development fees and services and support revenues and the sales of video teleconferencing product," when in fact they were not SOE's primary source of cash for 1996. Those sources in the aggregate
generated less than $200,000 of revenue in 1996, an amount dwarfed by SOE's selling, general and administrative expenses, which exceeded $900,000.
d. The statement includes a false projection
specifically ordered included by Huttoe, that "sales are projected to
substantially increase over the next twelve months," and that "[p]rojections of $41 million in gross revenues appear to be within the Company's grasp," when there was no reasonable basis for these projections; and
e. The statement fails to disclose that shares
purportedly registered on Forms S-8 were issued to Huttoe's nominees, that those nominees had not provided services to SOE, that Huttoe was selling company stock through those nominees, and that Huttoe was selling stock for his own profit.
62. Huttoe and SOE knew or recklessly disregarded the fact that the report was materially false and misleading.
SOE FILES A MATERIALLY FALSE AND MISLEADING FORM 10-QSB
63. On or about September 23, 1996, SOE, under Huttoe's direction, filed its quarterly report on Form 10-QSB with the Commission.
64. This report was materially false and misleading in failing to disclose that shares purportedly registered on Forms S-8 were issued to Huttoe's nominees, that those
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nominees had not provided services to SOE, that Huttoe was selling company stock through those nominees, and that Huttoe was selling stock for his own profit.
65. Huttoe and SOE knew or recklessly disregarded the fact that the report was materially false and misleading.
SOE FILES THE SECOND SET OF MATERIALLY FALSE
AND MISLEADING FORM S-8 REGISTRATION STATEMENTS
66. On or about September 24, 1996, SOE, under Huttoe's direction, filed materially false and misleading Registration Statements on Form S-8, with the Commission.
a. The forged "consulting agreements" were annexed to the Registration Statements;
b. The Registration Statements falsely described services provided to the company by the stock recipients even though in fact no such services were provided.
c. The Registration Statements were the instruments of a fraud, as their belated filing created the deception that the shares described therein were properly registered with the Commission.
67. Huttoe and SOE knew or recklessly disregarded the fact that the Registration Statements were materially false and misleading and fraudulent.
SOE FILES A MATERIALLY FALSE AND
MISLEADING CURRENT REPORT ON FORM 8K
68. On or about October 1, 1996, SOE filed with the Commission a materially false and misleading current report on Form 8-K, to explain the resignation of its auditors, WPC.
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69. The report falsely states that "there have been no
disagreements with Weinberg, Pershes on any matter of accounting principals or practices, financial statement disclosure or auditing scope or procedure or any reportable events".
70. In fact, there were material disagreements in these areas.
71. Huttoe and SOE knew or recklessly disregarded the fact that the report was materially false and misleading.
CLAIM ONE
(SALE OF UNREGISTERED SECURITIES)
VIOLATIONS OF SECTIONS 5(A), 5(C)
OF THE SECURITIES ACT [15 U.S.C. Section 77E(A), AND 77E(C)]
72. Paragraphs 1 through 71 are hereby realleged and incorporated by reference.
73. By reason of the foregoing, all defendants, and each of them, have violated, are violating, and unless restrained will violate Sections 5(a) and 5(c) of the Securities Act [15 U.S.C. Sections 77e(a) and 77e(c)].
CLAIM TWO
(FRAUDULENT OFFER AND SALE,
INSIDER TRADING)
VIOLATIONS OF SECTION 17(A) OF THE
SECURITIES ACT [15 U.S.C. Section 77Q(A)], SECTION 10(B)
OF THE EXCHANGE ACT, AND RULE 10B-5
THEREUNDER [17 C.F.R. Section 240.10B-5]
74. Paragraphs 1 through 71 are hereby realleged and incorporated by reference.
75. By reason of the foregoing, defendants Huttoe, Huttoe & Assoc., National Trading Services, Word Corp., SGA Goldstar, Melcher, Terry, Alpha Securities, Dunbar Holdings, and SOE, and each of them, directly or indirectly, have violated, are
violating, and unless restrained will violate Section 17(a) of the Securities Act [15 U.S.C. Section 77q(a)], Section 10(b) of the Exchange Act [15 U.S.C. Section 78j(b)], and Rule 10b-5 thereunder [17 C.F.R. Section 240.10b-5].
CLAIM THREE
(UNDISCLOSED COMPENSATION FOR STOCK PROMOTION)
VIOLATIONS OF SECTION 17(B) OF
THE SECURITIES ACT [15 U.S.C. Section 77Q(B)]
76. Paragraphs 1 through 71 are hereby realleged and incorporated by reference.
77. By reason of the foregoing, defendants SGA Goldstar, Melcher, Terry, Alpha Securities, and Dunbar Holdings, and each of them, directly or indirectly, have violated, are violating, and unless restrained will violate, Section 17(b) of the Securities Act [15 U.S.C. Section 77q(b)].
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