UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES ACT OF l933 Release No. 7669 / April 21, 1999 SECURITIES EXCHANGE ACT OF l934 Release No. 41316 / April 21, 1999 ACCOUNTING AND AUDITING ENFORCEMENT Release No. 1128 / April 21, 1999 ADMINISTRATIVE PROCEEDING File No. 3-9879 : In the Matter of : ORDER INSTITUTING PUBLIC : PROCEEDINGS PURSUANT : TO SECTION 8A OF THE : SECURITIES ACT OF 1933 JEFF BERGMAN, : AND SECTION 21C OF THE : SECURITIES EXCHANGE ACT : OF 1934, MAKING FINDINGS : AND IMPOSING A CEASE- : AND-DESIST ORDER Respondent. : : I. The Securities and Exchange Commission ("Commission") deems it appropriate to institute public administrative proceedings against Jeff Bergman ("Bergman" or "Respondent") pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act".) In anticipation of the institution of these administrative proceedings, Bergman has submitted an Offer of Settlement ("Offer") to the Commission, which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the findings, except as to the Commission's finding of jurisdiction over him and the subject matter of this proceeding, which are admitted, Bergman has consented to the issuance of this Order Instituting Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Making Findings and Imposing a Cease- and-Desist Order ("Order".) Accordingly, IT IS ORDERED that proceedings pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act be, and hereby are, instituted. II. FACTS The Commission finds: . SUMMARY From June 1993, to at least mid-1995, certain executives at Northstar Health Services, Inc. ("Northstar" or "the Company"), including its former chief executive officer, engaged in a fraudulent scheme to inflate the revenues of Northstar. Bergman participated in the fraud involving the falsification of Northstar’s financial statements for its fiscal year ended December 31, 1994 ("fiscal 1994") by providing Northstar with false checks and a false audit confirmation to support Northstar’s recording of fictitious consulting fees earned by a Northstar subsidiary from Breaux Corporation ("Breaux".) In turn, these false documents were provided to Northstar auditors. Contrary to Bergman’s representations, however, Northstar never rendered any consulting services to Breaux, and Breaux never owed the amounts to the Company. In fact, Breaux was actually a corporation Bergman used to direct investments. Bergman’s fraudulent conduct enabled Northstar to overstate its revenue by $167,750 for fiscal 1994. As a result, Northstar’s financial statements for fiscal 1994 were materially misstated. These material misstatements were included in Northstar’s Form 10-KSB filed with the Commission for fiscal 1994, and in Northstar’s Registration Statement on Form SB-2 that went effective on May 18, 1995. . RESPONDENT Jeff Bergman ("Bergman"), age 44, is a resident of Wexford, Pennsylvania. From 1991 through at least 1995, Bergman served as chairman of the board, chief executive officer and president of a publicly-held company whose securities were registered with the Commission pursuant to Section 12(g) of the Exchange Act and traded on NASDAQ. Bergman is also the friend of the former chief executive officer, president and chairman of the board of Northstar. C. OTHER RELEVANT ENTITY Northstar Health Services, Inc. ("Northstar") is a Delaware corporation with its principal place of business located in Indiana, Pennsylvania. Northstar provides rehabilitation therapy and related services at outpatient clinics and patient care facilities in Pennsylvania, Ohio and West Virginia. As of May 5, 1998, Northstar had 5,975,424 shares of common stock issued and outstanding. Northstar’s common stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act and is traded on the OTC Bulletin Board. D. BERGMAN PROVIDED A FALSE AUDIT CONFIRMATION LETTER AND TWO FICTITIOUS CHECKS FOR REVIEW BY NORTHSTAR’S AUDITORS For fiscal 1994, Northstar reported total net revenue of $13,362,000 and income before taxes of $1,297,000. Of the income before taxes, $167,750 (12.9 percent) resulted from fictitious consulting revenue that Bergman, along with the former chief executive officer of Northstar, falsely claimed was owed by Bergman’s company, Breaux, to Northstar, thereby resulting in Northstar’s false reporting of revenue on three separate occasions. The first fictitious transaction involved a $47,500 obligation owed by Breaux for professional services rendered by Northstar in connection with the "[o]rganization, development and staffing of Moon Clinic." The consulting revenue was evidenced by an undated invoice addressed to Bergman’s residential address. On two subsequent occasions, Bergman, along with the former chief executive officer of Northstar, facilitated Northstar’s reporting of an additional $64,000 and $56,250 in fictitious revenue for fiscal year 1994 for consulting services Northstar purportedly provided to Breaux. To support the fictitious revenue, Bergman provided Northstar with false documents, and Northstar, in turn, provided these false documents to its auditors. Specifically, by letter dated March 17, 1995, Northstar sent an audit confirmation letter to Breaux, signed by the former chief executive officer of Northstar, asking Breaux to confirm that as of December 31, 1994, Breaux owed Northstar consulting fees of $167,750, the total due under all three consulting arrangements. In response, Bergman falsely confirmed that as of December 31, 1994, Breaux owed the amount to Northstar and that Northstar had "subsequently received" payment of $130,250 from Breaux. To make it appear that the payments had been made, Bergman provided Northstar with two checks totaling $120,250 written on a Breaux bank account. However, during the period Bergman wrote the checks and confirmed the amounts as owed, Breaux had less than $600 in its bank account. The Breaux checks were never cashed. III. LEGAL DISCUSSION . VIOLATIONS OF THE ANTIFRAUD PROVISIONS -- SECTION 17(a) OF THE SECURITIES ACT AND SECTION 10(b) OF THE EXCHANGE ACT AND RULE 10b-5 THEREUNDER Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit false and misleading statements made "in connection with the purchase or sale of securities." Section 17(a) of the Securities Act prohibits fraudulent conduct "in the offer or sale of securities." Section 17(a)(1) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder require a showing of scienter. Aaron v. SEC, 446 U.S. 680, 695, 697 (1980). The scienter requirement is satisfied by a showing of recklessness. In re Westinghouse Securities Litigation, 90 F.3d 696 (3d Cir. 1996). Sections 17(a)(2) and 17(a)(3) of the Securities Act do not require a showing of scienter. Aaron v. SEC, 446 U.S. at 697. A violation of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder require proof that the misrepresentations or omitted facts were material. An omitted fact is material if there is a substantial likelihood that its disclosure would have been considered significant by a reasonable investor. Basic Inc. v. Levinson, 485 U.S. 224, 231-232 (1988); and TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). Bergman, a friend of the former chief executive officer of Northstar, wrote false checks to make it appear that Breaux had paid Northstar for fabricated consulting services. Bergman signed a false audit confirmation letter to facilitate the recording of $167,750 in fraudulent revenue by Northstar. Bergman knew or was reckless in not knowing that Northstar auditors would use the false documents in auditing Northstar’s 1994 financial statements and that the financial statements would be publicly disseminated to Northstar investors. As the Commission has recognized, "the confirmation procedure is an integral and vital part of the auditing process. Subversion of the process corrupts the integrity of the audit and can injure investors by facilitating the injection of false financial information into the marketplace." In the Matter of Troy Lee Wood, Exchange Act Release No. 37905 (October 31, 1996). Therefore, Bergman committed violations of Section 17(a) of the Securities Act and Sections 10(b) and of the Exchange Act and Rule 10b-5 thereunder. IV. FINDINGS Based on the foregoing, the Commission finds: That Bergman committed or caused violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. V. OFFER OF SETTLEMENT Bergman has submitted an Offer in which, without admitting or denying the findings, except as to the Commission's finding of jurisdiction over him and the subject matter of this proceeding, which are admitted, he consents to the Commission's issuance of this Order which: Makes findings, as set forth above, and orders that he cease and desist from committing or causing any violation, and committing or causing any future violation of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. VI. ORDER Based on the foregoing, the Commission finds it appropriate to accept the Offer submitted by Bergman and to impose the Cease-and-Desist Order consented to therein. Accordingly, IT IS HEREBY ORDERED, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act that: Bergman cease and desist from committing or causing any violation and any future violation of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. By the Commission. Jonathan G. Katz Secretary 1 2