Kenneth Schwartz and Joel Steinberg
SECURITIES EXCHANGE ACT OF 1934
Release No. 41933 / September 28, 1999
ACCOUNTING AND AUDITING ENFORCEMENT
Release No. 1182 / September 28, 1999
ADMINISTRATIVE PROCEEDING
File No. 3-10044
| ______________________________ | |
| : | |
| : | |
| In the Matter of | : ORDER INSTITUTING A PUBLIC |
| : PROCEEDING PURSUANT TO SECTION | |
| : 21C OF THE SECURITIES EXCHANGE | |
| KENNETH SCHWARTZ and | : ACT OF 1934, MAKING |
| : FINDINGS AND | |
| JOEL STEINBERG | : IMPOSING A CEASE-AND- |
| : DESIST ORDER | |
| Respondents. | : |
| ______________________________ | : |
I.
The Commission deems it appropriate that public administrative proceedings be, and they hereby are, instituted against Kenneth Schwartz ("Schwartz") and Joel Steinberg ("Steinberg") pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act").
II.
In anticipation of the institution of this proceeding, Schwartz and Steinberg have submitted Offers of Settlement for the purpose of disposing of the issues raised by this proceeding. Solely for the purposes of this proceeding and any other proceeding brought by or on behalf of the Commission or to which the Commission is a party, Schwartz and Steinberg, without admitting or denying the findings set forth herein, except that they admit to the jurisdiction of the Commission over them and over the matters set forth in this Order Instituting a Public Proceeding Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings and Imposing a Cease-and-Desist Order ("the "Order"), consent to the entry of this Order.
III.
On the basis of this Order and Schwartz's and Steinberg's Offers of Settlement, the Commission finds1 that:
A. Respondents
1. Schwartz, 49, is a partner in Cosmetics Plus, a retail fragrance shop which did business with Model Imperial, Inc. during the relevant period.
2. Steinberg, 49, is Schwartz's partner in Cosmetics Plus.
B. The Issuer
Model Imperial, Inc ("Model Imperial") is a Florida corporation headquartered in Boca Raton, Florida. Its common stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act and was traded on the National Association of Securities Dealers Automated Quotation System until April 10, 1996, when it was delisted. On July 18, 1996, Model Imperial filed for protection under Chapter 11 of the Bankruptcy Code. In September 1997, a reorganization plan was approved by the Bankruptcy Court whereby a privately-held company contributed funds pursuant to an agreement with Model Imperial's secured and unsecured creditors in exchange for 90 percent of Model Imperial's stock.
C. Facts
Model Imperial, a wholesale distributor of fragrances and cosmetics, engaged in a variety of fraudulent accounting and reporting practices during 1994 and 1995 that resulted in false and misleading periodic filings with the Commission.2 Among these was the company's failure to disclose its practice of obtaining certain products for distribution through illicit payments, and the falsification of the company's books and records to conceal this practice.
To ensure a continuing supply of products from a vendor, Model Imperial made payments to an officer of the vendor, either directly or through a middleman. Certain of these payments were made in cash.
Model Imperial's chief executive officer, Harold Ickovics ("Ickovics"), obtained the cash for these payments by staging fraudulent purchases of perfume through a cooperating New York City perfume vendor, Cosmetics Plus. On at least three occasions, Ickovics delivered a Model Imperial check to the principals of Cosmetics Plus, Schwartz and Steinberg, and received cash in exchange, minus a three percent fee retained by Schwartz and Steinberg. Specifically, in September 1993, Ickovics received $150,000 in cash from Schwartz and Steinberg in exchange for a $154,500 Model Imperial check. In February 1994, he received $140,000 in exchange for a $144,200 Model Imperial check and, in June 1994, he received $200,000 in cash in exchange for a $206,000 Model Imperial check. The fees Schwartz and Steinberg received from their role in these transactions was in the total amount of at least $14,500.
In all three instances, Schwartz and Steinberg provided Ickovics with Cosmetic Plus invoices, purportedly billing Model Imperial for merchandise in the amounts of the Model Imperial checks. In fact, in none of these instances was any merchandise purchased from Cosmetics Plus by Model Imperial. In each case, Ickovics then had the fraudulent purchases recorded on Model Imperial's books to conceal the true nature of transactions. Moreover, Model Imperial failed to disclose that it engaged in commercial bribery in its annual report on Form 10-K for 1994 and its quarterly reports on Form 10-Q for the second and third quarters of 1994 and the first, second and third quarters of 1995.
IV.
Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder require issuers whose securities are registered with the Commission, pursuant to Section 12 of the Exchange Act, to file annual and quarterly reports. Rule 12b-20 requires that the reports contain such information as is necessary to insure that the statements made in those reports are not, under the circumstances, misleading. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit, among other things, materially false and misleading statements in connection with the purchase or sale of a security. An issuer and its management and others may violate Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by, intentionally or with reckless disregard for the truth, making material misstatements or omissions in Commission filings, which investors rely upon in deciding whether to purchase the issuer's securities. SEC v. Great American Industries, 407 F.2d 453 (2d Cir. 1968); SEC v. Geotek, 426 F. Supp. 718 (N.D. Cal. 1976), affirmed, 590 F.2d 785 (9th Cir. 1979).
Model Imperial violated Sections 10(b) and Rule 10b-5 thereunder, as well as the reporting provisions, by filing, with the knowledge of its management, annual and quarterly reports that failed to disclose the company's practice of making illicit payments to obtain products for distribution. Schwartz and Steinberg were "a cause" of Model Imperial's violations, for purposes of Section 21C of the Exchange Act, because they facilitated the company's disclosure failures by providing Ickovics with bogus invoices which they knew or should have known would be used to conceal the illegal conduct.
Rule 13b2-1 promulgated under Section 13(b)(2) of the Exchange Act, provides that no person shall, directly or indirectly, falsify or cause to be falsified any book, record, or account subject to Section 13(b)(2). Schwartz and Steinberg each violated Rule 13b2-1 by providing Ickovics with the bogus invoices for fictitious merchandise, thereby causing false entries to be made in Model Imperial's books and records.
V.
Based on the foregoing, the Commission finds that Schwartz and Steinberg caused, for purposes of Section 21C of the Exchange Act, Model Imperial's violations of Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 13a-1 and 13a-13 thereunder, and directly violated Rule 13b2-1.
VI.
In view of the foregoing, the Commission finds that it is appropriate to impose the following relief as agreed to in the Offers of Settlement.
Accordingly, IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act, that:
A. Schwartz and Steinberg cease and desist from committing or causing any violations and any future violations of Sections 10(b) and 13(a) of the Exchange Act and Exchange Act Rules 10b-5, 13a-1, 13a-13 and 13b2-1 thereunder;
B. Schwartz and Steinberg pay disgorgement in the amount of $14,500, together with prejudgment interest in the amount of $6,995.47; and
C. The payments required by paragraph VI. B of this Order shall be made within thirty (30) days of the entry of this Order to the United States Treasury. Such payment shall be: (A) made by United States postal money order, certified check, bank cashier's check or bank money order; (B) made payable to the Securities and Exchange Commission; (C) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under cover letter that identifies Schwartz and Steinberg as the Respondents in these proceedings, the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Richard C. Sauer, Assistant Director, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-0803.
By the Commission.
Jonathan G. Katz
Secretary
FOOTNOTES
-[1]- The findings herein regarding Schwartz and Steinberg are made pursuant to their Offers of Settlement and are not binding on any other person or entity in this or in any other proceeding. -[2]- On September 28, 1999, the Commission filed a complaint in the United States District Court for the District of Columbia charging two former officers of Model Imperial with falsifying Model Imperial's financial statements and fraudulently inflating the company's sales and net income. In a separate action, the Commission charged an officer of a company that supplied perfume and other products to Model Imperial with making inaccurate statements to Model Imperial's auditors. These statements were of assistance to Model Imperial's president in misleading the company's auditors concerning certain of Model Imperial's business practices and the nature of certain of its expenses.