Aura Systems, Inc., et al.; Gerald S. Papazian

LITIGATION Release No. 17557 / June 11, 2002

ACCOUNTING AND AUDITING Release No. 1575 / June 11, 2002

Securities and Exchange Commission v. Aura Systems, Inc., et al., U.S. District Court for the Central District of California (Civil Action No. 02-4555 NM) (MANx)

Securities and Exchange Commission v. Gerald S. Papazian, U.S. District Court for the Central District of California (Civil Action No. 02-04553 RMT) (AJWx)

SEC NAMES AURA SYSTEMS, NEWCOM, AND FORMER OFFICERS IN ACCOUNTING FRAUD CASE INVOLVING TENS OF MILLIONS IN REVENUE OVERSTATEMENTS AT EACH COMPANY.

AURA SYSTEMS AND FORMER CHAIRMAN KURTZMAN WERE SUBJECT OF PRIOR SEC CEASE-AND-DESIST ORDER.

The U.S. Securities and Exchange Commission today filed a settled civil enforcement action in U.S. District Court in Los Angeles against El Segundo, California based Aura Systems, Inc. ("Aura"), currently a seller of an induction power system and formerly a seller of multi-media products; its majority owned subsidiary NewCom, Inc. (now called Ncom, Inc.); and former officers of both companies. The SEC's complaint alleges that during its 1997 and 1998 fiscal years Aura overstated its revenue by at least $26.5 million by fictitiously inserting itself into the distribution chain for Korea Data Systems Co. Ltd. computer monitors that were sold to a major U.S. personal computer retailer and by recognizing revenue from nonexistent sales of computer monitors to two shell entities.

The SEC also alleges that during its 1998 and 1999 fiscal years, NewCom recorded balance sheet overstatements of at least $43.2 million by booking fictitious sales, prematurely recognizing revenue, overstating receivables, and overstating inventory. The SEC also alleged that, in two quarterly reports filed in its 1997 fiscal year, Aura improperly recognized $2.54 million in contract revenue that it had earned and booked in prior periods. The complaint alleges that these overstatements violated the antifraud provisions of the federal securities laws.

Today's complaint follows an October 2, 1996 SEC Cease-and-Desist Order entered by consent against Aura, its former Chairman and CEO Zvi (Harry) Kurtzman (also a defendant), and others for violations of the antifraud and other provisions of the federal securities laws and reflects the SEC's emphasis on identifying and seeking effective relief against recidivist securities law violators.

The complaint alleges that former Aura Chairman and CEO Kurtzman and former Aura and NewCom CFO Steven C. Veen knew or were reckless in not knowing about the Aura and NewCom overstatements and that Veen knew or was reckless in not knowing about the improper contract revenue recognition. The SEC also alleges that former NewCom Chairman and President Sultan W. Khan and former Executive Vice President Asif M. Khan knew or were reckless in not knowing about the NewCom overstatements.

Without admitting or denying the allegations in the complaint, Aura, NewCom and each of these former officers filed consents agreeing to settle the case on the following terms:

  • Kurtzman consented to: (a) a permanent injunction against violations of Section 17(a) of the Securities Act of 1933 ("Securities Act") and Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 13b2-1 and 13b2-2 thereunder; (b) a $75,000 civil penalty; and (c) a permanent officer and director bar.

  • Veen consented to: (a) a permanent injunction against violations of Section 17(a) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 thereunder; (b) a $50,000 civil penalty; and (c) a five-year officer and director bar. In a separate Commission proceeding, Veen also offered to accept a five-year suspension from appearing or practicing before the Commission under Rule 102(e)(3) of the Commission's Rules of Practice.

  • Sultan Khan and Asif Khan each consented to a permanent injunction against violations of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 thereunder with no penalty imposed based on their sworn statements of financial condition.

  • Aura consented to a permanent injunction against violations of Section 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, 13a-1 and 13a-13 thereunder, with no penalty imposed based on its Statement of Financial Information dated June 3, 2002.

  • NewCom consented to a permanent injunction against violations of Sections 10(b), 13(a), 13(b)(2)(A) and (B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder.

Simultaneous with the filing of the complaint, the SEC also issued a settled cease-and-desist order against former Aura President Gerald S. Papazian, finding that he knew or was reckless in not knowing that Aura's annual reports contained material misstatements resulting from the fictitious monitor sales and the improper contract revenue recognition. The order requires Papazian to cease and desist from committing or causing violations of Section 17(a) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 thereunder. In a companion civil action, Papazian consented to pay a civil penalty of $25,000. Papazian neither admitted nor denied the findings in the SEC's order nor the allegations in its complaint.

The SEC also issued a settled cease-and-desist order against Korea Data Systems USA, Inc. ("KDS"), a U.S. affiliate of Korea Data Systems Co. Ltd., and its officers Lap-Shun (John) Hui and Bun (Ben) Wong for being a cause of Aura's inclusion of the purported computer monitor sales in Aura's annual reports by making circular wire transfers that allowed Aura to record "payments" from the fictitious sales. The order requires KDS, Hui, and Wong to cease and desist from committing or causing violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act. KDS, Hui, and Wong neither admitted nor denied the findings in the SEC's order. KDS also consented to pay a civil penalty of $25,000 in the civil action without admitting or denying the allegations in the complaint.

*  SEC v. Gerald S. Papazian in this matter.
*  SEC v. Aura Systems, Inc., et al. in this matter.