==========================================START OF PAGE 1====== UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 37762 / September 30, 1996 ADMINISTRATIVE PROCEEDING File No. 3-9132 ------------------------------ : ORDER INSTITUTING CEASE-AND- In the Matter of : DESIST PROCEEDINGS : PURSUANT TO SECTION 21C OF OCTAGON, INC., : THE SECURITIES EXCHANGE ACT : OF 1934 AND FINDINGS AND Respondent. : ORDER OF THE COMMISSION : ------------------------------- I. The Commission deems it appropriate and in the public interest to institute public administrative proceedings pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") to determine whether Octagon, Inc. (the "Respondent") violated Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 12b-20, and 13a-13 promulgated thereunder. II. In anticipation of the institution of these administrative proceedings, the Respondent has submitted an Offer of Settlement which the Commission has determined to accept. Solely for purposes of these proceedings and any other proceedings brought by or on behalf of the Commission or to which the Commission is a party, the Respondent, without admitting or denying the matters set forth herein, consents to the issuance of this Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934 and Findings and Order of the Commission ("the Order"), and to the entry of the findings, and the imposition of the remedial sanctions, set forth below. III. The Commission finds the following: A. FACTS 1. The Respondent The Respondent is a Delaware corporation that, during the relevant period, was headquartered in Reston, Virginia,-[1]- and described itself as an international environmental and telecommunications firm and a full-service provider of contract manpower in the electric power utility industry. The Respondent's common stock and Class A Warrants are registered with the Commission pursuant to Section 12(g) of the Exchange Act. After the Respondent's initial public offering in February 1994, its common stock and warrants traded initially on the Nasdaq SmallCap Market and subsequently on the Nasdaq National Market System until they were delisted by Nasdaq in April 1995. Since its public offering, the Respondent has had 6,450,000 shares of its common stock outstanding, including 3,000,000 restricted shares issued to insiders and others prior to the public offering. On May 22, 1995, pursuant to Exchange Act Rule 12h-3(b)(1)(i), the Respondent filed a Form 15 with the Commission suspending its duty to file periodic reports on the grounds that it has fewer than 300 shareholders of record. 2. The Respondent's Failure to Disclose Material Related-Party Transactions On April 13, 1994, the Respondent filed with the Commission its annual report on Form 10-K for the year ended December 31, 1993. On May 26, 1994, the Respondent filed with the Commission its quarterly report on Form 10-Q for the quarter ended March 31, 1994. Both filings prominently discussed the Respondent's acquisition of Power Systems Energy Services, Inc. ("PSESI") in March 1994,-[2]- but they omitted to state material facts ---------FOOTNOTES---------- -[1]- In January 1996, in connection with a management reorganization and operational restructuring, Octagon moved its corporate headquarters to Altamonte Springs, Florida. -[2]- The acquisition of PSESI was also the subject of press releases issued by the Respondent on March (continued...) ==========================================START OF PAGE 2====== necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. Specifically, these public filings omitted to state that, prior to the Respondent's agreement to acquire PSESI, the Respondent had retained PRK Group, Inc. ("PRK"), a newly-formed related party owned one-third each by: (i) the wife of the Respondent's Chairman of the Board and Chief Executive Officer; (ii) the wife of the Respondent's President, Chief Operating Officer, and Director; and (iii) the company's outside securities counsel.-[3]- These public filings also omitted to state that, in connection with its acquisition of PSESI, the Respondent paid PRK $219,220 in fees and disbursements for alleged "investment banking" services that in fact were not rendered by PRK. 3. The Respondent's False and Misleading Disclosures About a Material Contract On July 12, 1994, the Respondent issued a press release announcing that it had entered into an agreement with James Mackenzie International Trading PLC ("JMIT") to sell "state-of- the-art portable satellite telecommunications equipment and spare parts to [JMIT] during a two-year term for an aggregate purchase price of $72.6 million subject to certain reasonable performance criteria." The press release further stated that "[a]dditional terms of payment will be provided under an irrevocable letter of credit to be drawn and confirmed by a major international commercial bank," and that the agreement with JMIT "substantially increases [the Respondent's] presence in the European Union." This press release was false and misleading with respect to the magnitude and terms of the contract with JMIT. Contrary to the description in the press release, the Respondent had entered into two agreements with JMIT. The initial agreement, dated July 11, 1994, was for only $36.3 million of equipment and spare parts. The Respondent and JMIT had also entered into a supplemental agreement, dated July 12, 1994, for an additional $36.3 million of equipment and spare parts expressly conditioned upon the Respondent "satisfactorily perform[ing]" its obligations to JMIT during the initial 90 days of the primary contract. The press release was also false and misleading in its assertion that the agreement with JMIT "substantially increases Octagon's ---------FOOTNOTES---------- -[2]-(...continued) 14, 1994 and March 23, 1994, as well as a Form 8-K filed with the Commission on April 6, 1994. -[3]- The officers associated with PRK are no longer employed by the Respondent, and the Respondent terminated its retention of the above-referenced securities counsel in December 1994. ==========================================START OF PAGE 3====== presence in the European Union." Although JMIT maintained an address in London, JMIT was acting as an intermediary for buyers in Iran. On August 16, 1994, the Respondent filed with the Commission its Form 10-Q for the quarter ended June 30, 1994, which disclosed the contract with JMIT as a subsequent event. This Form 10-Q repeated the false statement that there was a contract "for $72.6 million." In addition, although the Form 10-Q disclosed that this contract was "subject to the issuance of a letter of credit," it failed to disclose that the letter of credit was already nearly a week overdue under the express terms of the contract. This was particularly significant because the Respondent had several weeks earlier paid JMIT $1.265 million cash (in lieu of a performance bond), which the contract specified was to be used by JMIT "exclusively for the purpose of obtaining" such a letter of credit. The Form 10-Q also failed to disclose that the Respondent and JMIT had already accused each other of breaching the agreement; that the Respondent had already hired a private investigator to investigate JMIT; that the private investigator had preliminarily reported facts suggesting that JMIT may have defrauded the Respondent; or that the Respondent was contemporaneously engaging a London solicitor to act on its behalf "in the prosecution of [its] claims" against JMIT. On August 22, 1995, at least 10 days past JMIT's deadline for posting its letter of credit and several days after the publication of a Wall Street Journal article raising doubts about the Respondent's contract with JMIT, the Respondent issued a press release announcing that it had found a German supplier for the equipment and spare parts it would be selling to JMIT, and that the Respondent and its supplier were "ready, willing and able" to ship the merchandise "immediately upon the posting of the letter of credit by [JMIT], which we anticipate in the near term." This press release was misleading. First, by August 22 there was no basis for any anticipation that JMIT would ever post its letter of credit, much less "in the near term." Second, the press release failed to disclose that JMIT's principal stated objection to the Respondent's performance under the contract was precisely that the Respondent was seeking to improperly substitute the German supplier's goods -- which the Respondent had contracted for in June -- for those of another manufacture specifically provided for in the contract between the Respondent and JMIT. During the seven-week period following the Respondent's first announcement of its contract with JMIT on July 12, 1994, the price of the Respondent's stock nearly doubled from approximately $8 per share to more than $14 per share. On September 1, 1994, the Respondent issued a press release that put the market on notice for the first time that the contract with ==========================================START OF PAGE 4====== JMIT would not be performed. After this announcement, the Respondent's stock immediately fell from $14-1/4 per share to $12-3/4 per share, after which it continued to decline to less than $7 per share by the end of September 1994 and less than $2 per share by mid-December 1994. Since being delisted by NASDAQ in April 1995, the Respondent's stock has generally traded for less than $1 per share. B. LEGAL DISCUSSION 1. The Respondent's Violations of Exchange Act Section 10(b) and Rule 10b-5 Thereunder Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, prohibit the making of materially false or misleading statements or omissions, or the use of any fraudulent practices, in connection with the purchase or sale of any security. 15 U.S.C.  78j(b); 17 C.F.R.  240.10b-5. A Respondent must act with scienter to violate these antifraud provisions. Aaron v. SEC, 446 U.S. 680 (1980). The Respondent violated these provisions by failing to make timely disclosure about its material related-party transactions with PRK and by making materially false, misleading, and incomplete statements in its press releases and in its quarterly report on Form 10-Q for the quarter ended June 30, 1994 about its contract with JMIT. Moreover, because the Respondent's principal officers directly participated in not only the transactions, contracts, and negotiations at issue but also the preparation and review of the relevant filings and press releases, the Respondent acted with the requisite degree of scienter to establish a violation of Section 10(b) and Rule 10b-5 thereunder. 2. The Respondent's Violations of Exchange Act Section 13 and Rules 12b-20 and 13a-13 Thereunder Section 13(a) of the Exchange Act and Rule 13a-13 thereunder require issuers of registered securities to file quarterly reports with the Commission on Form 10-Q. 15 U.S.C.  78m(a); 17 C.F.R.  240.13a-13. Courts have uniformly held that it is implicit in this requirement that the information reported in such periodic reports be accurate. See, e.g., SEC v. Savoy Indus., 587 F.2d 1149, 1165 (D.C. Cir. 1978), cert. denied, 440 U.S. 913 (1979). Exchange Act Rule 12b-20 requires that an issuer's periodic reports include any additional information "as may be necessary to make the required statements, in the light of the circumstances under which they are made, not misleading." 17 C.F.R.  240.12b-20. The Respondent violated the foregoing provisions by filing a quarterly report on Form 10-Q for the quarter ended March 31, 1994 that failed to disclose its material related-party ==========================================START OF PAGE 5====== transactions with PRK and by filing a quarterly report on Form 10-Q for the quarter ended June 30, 1994 that contained false, misleading, and incomplete statements about its contract with JMIT. IV. FINDINGS Based on the above, the Commission finds that the Respondent violated Exchange Act Sections 10(b) and 13(a) and Rules 10b-5, 12b-20, and 13a-13 thereunder. V. ORDER Accordingly, IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act, that the Respondent, Octagon, Inc., cease and desist from committing or causing any violation of, and committing or causing any future violation of, Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 12b-20, and 13a-13 thereunder. By the Commission. Jonathan G. Katz Secretary ==========================================START OF PAGE 6======