SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
LITIGATION RELEASE NO. 15906 / September 24, 1998
SECURITIES AND EXCHANGE COMMISSION v. CHARLES O. HUTTOE, ET AL.,
Civil Action No. 96-02543 (GK)(D.D.C.)
SEC WINS SUMMARY JUDGMENT AGAINST INTERNET MICROCAP STOCK TOUT
The Securities and Exchange Commission ("Commission")
announced that on September 14, 1998, the United States District
Court for the District of Columbia granted the Commission's
motion for summary judgment against Shannon B. Terry ("Terry")
and Dunbar Holdings, Ltd., ("Dunbar"), two defendants in the case
arising out of the manipulation of the market for the securities
of Systems of Excellence, Inc. ("SOE"). The Court found that
Terry and Dunbar, Terry's wholly owned Bahamian shell company,
violated the antitouting and antifraud provisions of the
securities laws by touting and scalping the securities of SOE and
seventeen other microcap issuers. The Court ordered Terry and
Dunbar to disgorge trading profits of $828,448 and certain other
compensation, together with prejudgment interest on that amount,
and permanently enjoined them future violations of Section 17(a)
of the Securities Act of 1933, Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 thereunder.
In particular, the Court found the following:
From August 1993 until November 1996 Terry was employed by SGA
Goldstar Research, Inc., publisher of the SGA Goldstar Whisper
Stocks newsletter. That newsletter profiled and made
recommendations promoting largely unknown and untested penny
stock or small capitalization companies, and was distributed
over the internet and otherwise.
Terry's duties included writing articles and commentaries
about some of the companies, selling newsletter subscriptions
and assisting in production and distribution of the
newsletter.
Companies paid SGA with stock in exchange for articles
promoting their stock in the Whisper newsletter. Terry got
stock from SGA for companies he promoted in the articles he
wrote.
Continuously over a two year period, Terry sold stocks after
the Whisper newsletter recommended that its subscribers
purchase those stocks. Terry sold both stock that he received
as compensation for touting the issuer and stock that he
purchased in the market shortly before promotional articles
appeared in the Whisper newsletter.
Terry's failure to disclose that he had been given shares in
exchange for promoting the companies in the newsletter
violated the antitouting and the antifraud provisions of the
securities laws. The Court rejected a "disclaimer" that
"personnel associated with SGA may own shares in the companies
mentioned herein or may act as consultants thereto for
compensation" as inadequate disclosure of those facts, and
held that "t is inherently misleading to present articles
as objective reporting when they are in fact promotions paid
for by the company featured."
Terry's failure to disclose that he intended to sell his
personal holdings of stock despite the recommendations to buy
made in the Whisper newsletter -- a practice known as
"scalping" -- separately violated the antifraud provisions of
the securities laws.
Terry's undisclosed touting and scalping separately defrauded
subscribers to the newsletters. The Court ordered Terry and
Dunbar to disgorge the commissions he earned for selling
subscriptions to the Whisper newsletter.
The Court also rejected Terry's and Dunbar's claims that
Section 17(b) of the Exchange Act -- requiring disclosure of
compensation received from an issuer, underwriter or dealer in
exchange for publishing a description of a security -- violated
the First and Fifth amendments of the Constitution as applied to
them.
In the same decision, the Court denied the Commission's
motion for summary judgment against J.S. Holdings, a relief
defendant in the case. It also granted J.S. Holdings' motion to
lift the preliminary injunctive relief previously imposed.
In other developments in recent months, the Commission has
entered into settlements with, or dismissed from the litigation,
seven additional relief defendants. On August 6, 1998, the Court
ordered, pursuant to a consent in which she neither admitted nor
denied the Commission's allegations, Nancy Ellis, aka Nancy Ellis
Davis, aka Nancy Davis ("Ellis") to pay disgorgement of
$3,579,770, which is the amount of illegal proceeds that she
received from the SOE fraud. The settlement provided that upon
the transfer by Ellis to the Court-appointed Receiver of
$2,805,047 in bank accounts that were previously frozen in this
case, collection of the remaining disgorgement would be waived in
light of her demonstrated inability to pay based on the
representations in Ellis's sworn financial statements. On August
17, 1998, those funds were transferred to the Receiver in full
compliance with the Court's order. As part of the settlement
with Ellis, the Commission agreed to dismiss without prejudice
Ellis's son and daughter-in-law, relief defendants William K. Daw
and Sonya Daw, from the litigation.
In addition, relief defendants Jack Weinstein, Nancy
Weinstein, and Adobe Galleries Inc. ("Weinstein relief
defendants") consented, without admitting or denying the
Commission's allegations, to the entry of a final judgment in
which the Court declared that they have no right, interest, or
claim to three checks that they received from Ellis totaling
$2,600,000 and ordered them to surrender these instruments.
These three checks, drawn on accounts containing fraud proceeds,
were the basis for the Commission's claims against the Weinstein
relief defendants. The Court entered this final judgment on July
15, 1998. Finally, the Commission dismissed without prejudice
relief defendant Lynda Lou Kane-Kraft from the ongoing litigation
on April 10, 1998. Kane-Kraft's husband, Sheldon Kraft, settled
on January 14, 1998 a related Commission action filed against him
pursuant to which he paid to the Receiver $1,107,000 in cash,
surrendered a vacation house, and assigned claims against his
former employer. The Commission's settlement with Kraft, which
virtually eliminated the combined assets of Kraft and Kane-Kraft,
encompassed the relief that potentially could be obtained from
Kane-Kraft.
The Commission previously has made several announcements
concerning these matters. See Lit. Rel. 15888 (September 18,
1998); Lit. Rel. 15677 (March 19, 1998); Lit. Rel. 15617 (January
14, 1998); Lit. Rel. 15600 (December 22, 1997); Lit. Rel. 15571
(November 25, 1997); Lit. Rel. 15490 (September 12, 1997); Lit.
Rel. 15286 (March 12, 1997); Lit. Rel. 15490 (January 31, 1997);
Lit. Rel. 15185 (December 12, 1996); Lit. Rel. 15153 (November 7,
1996); Securities Exchange Act Rel. No. 33791 (October 7, 1996).
The Commission's investigation in this matter is continuing.
This enforcement action is part of the Commission's four-
pronged approach to minimizing Microcap fraud: enforcement,
inspections, investor education and regulation. For more
information about the SEC's response to Microcap fraud, visit the
SEC's Microcap Fraud Information Center at:
sec.gov.
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