UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 40169 / July 6, 1998 ADMINISTRATIVE PROCEEDING File No. 3-9641 _____________________________ : In the Matter of :ORDER INSTITUTING PROCEEDINGS :PURSUANT TO SECTION 21C OF THE Erick A. Gray, :SECURITIES EXCHANGE ACT OF 1934, :MAKING FINDINGS AND ORDERING Respondent. :RESPONDENT TO CEASE AND DESIST : _____________________________: I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that proceedings be, and they hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") to determine whether Erick A. Gray ("Gray") caused violations by Novatek International, Inc. ("Novatek") of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. II. In anticipation of the institution of these administrative proceedings, Gray has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Under the terms of the Offer, Gray, solely for the purpose of these proceedings and any other proceeding brought by or on behalf of the Commission or in which the Commission is a party, prior to a hearing pursuant to the Commission's Rules of Practice and without admitting or denying the matters set forth herein, consents to the issuance of the Order Instituting Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings and Ordering Respondent to Cease and Desist (the "Order"). III. The Commission makes the following findings:[1] RESPONDENT Erick A. Gray, age 46, is an optometrist and a resident of Columbia, Maryland. Vincent Celentano hired Gray as the president and CEO of Universal HealthWatch, Inc. at the recommendation of William Trainor. Gray served in these capacities from May 1995 to December 1996. Gray was appointed by Frank Cooney to Novatek's board of directors at the recommendation of William Trainor. Gray served in this capacity from May 1986 until he resigned in October 1996. OTHER RELEVANT ENTITIES Novatek International, Inc. is a Colorado corporation whose principal office was located in Columbia, Maryland. Novatek purportedly markets and distributes rapid medical diagnostic test kits in South and Latin America and the Bahamas. Novatek's common stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act and was traded on the NASDAQ SmallCap Market System until October 14, 1996, when the NASD suspended trading in the stock. This trading suspension remains in effect. On October 28, 1996, Novatek filed a voluntary petition for protection pursuant to Chapter 11 of the Federal Bankruptcy Code.[2] William Trainor and Vincent Celentano controlled Novatek and their role was never disclosed to Novatek's public shareholders. Universal HealthWatch, Inc. ("Universal") is a private company with its principal office located in Columbia, Maryland. Universal purportedly manufactures rapid medical diagnostic test kits for the detection of infectious diseases such as HIV and cholera. William Trainor and Vincent Celentano controlled Universal and their role in Universal was never disclosed to Novatek's public shareholders. SUMMARY From April through September 1996, Novatek issued a series of press releases falsely stating that it had entered into contracts worth a total of $400 million with entities in various South American countries. Gray read one or more of these press releases after Novatek issued them. Gray also participated in negotiations with one or more of these South American entities and knew or should have known that these negotiations had not resulted in the contracts described in the press releases. Gray did not take sufficient steps to ensure that Novatek corrected the false press release of which he was aware, to examine other press releases to confirm the accuracy of statements made therein or take sufficient steps to ensure that Novatek's subsequent press releases were accurate. FACTS Novatek's Commission filings and publicly disseminated press releases identified Universal as the manufacturer of the medical diagnostic test kits that Novatek purportedly distributed. As a result of holding positions with both Novatek and Universal, and being intimately involved in Universal's business, Gray was or should have been aware of the fact that Trainor and Celentano controlled Universal and had involvement and influence in the management of Novatek. In August 1996, Gray and others traveled to Brazil and participated in the negotiations with the Oswaldo Cruz Foundation ("Fiocruz") that resulted in a purported "joint venture agreement" between Novatek and Fiocruz. Following the discussions with Fiocruz officials, Trainor was involved in drafting an agreement entitled "Memorandum of Understanding" ("MOU") that was subsequently executed by Gray on behalf of Universal, by Novatek's president and by a Fiocruz official. By its terms, the MOU was merely a preliminary step towards a final agreement. It stated, in relevant part, that the representatives of Novatek, Universal and Fiocruz "will negotiate an agreement for the purpose of establishing a joint venture between the parties." The MOU did not set forth such important details as dates on which manufacturing and distribution were to begin or whether importation of component parts for assembly in Brazil had been authorized. The MOU also contained certain material contingencies, such as the requirement that test results of the devices be satisfactory to Fiocruz and that any final agreement receive approval from the government of Brazil. On August 16, 1996, Novatek issued a press release stating that Novatek and Universal had entered into a joint venture with Fiocruz, a division of the federal government of Brazil, "wherein the technology for diagnostic kits produced by Universal Healthwatch will be transferred to the Novatek Joint Venture project." The term of the agreement was stated as ten years with "projected revenues exceeding $35 million dollars in the first year and expanding thereafter." The press release did not describe the material contingencies outlined in the MOU. The press release stated, however, that Novatek held the "exclusive license to market and distribute, throughout South America and Central America, 12 rapid medical testing devices manufactured by Universal HealthWatch, Inc." Gray became aware of this press release after it was issued. Having participated in the Fiocruz discussions and having signed the MOU, Gray recognized that the press release issued by Novatek did not accurately reflect the agreement that he believed had been reached among the parties. Upon reading the press release, Gray sent a memorandum to Novatek's president, Gaston Oxman, requesting details about the "contract that was just signed with Brazil. I understood it to be a letter of understanding - an agreement." Gray also spoke with Oxman and told Oxman that he should find out what happened and make a correction, but no correction was ever made. Gray did nothing further, such as contacting Trainor, to correct the apparent misstatement in the press release. As a Novatek director, and in light of the circumstances described above, Gray knew or should have known that his failure to take corrective action would cause Novatek's shareholders and the investing public to continue to receive false and misleading information regarding this purported contract. Gray, therefore, caused Novatek's violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.[3] IV. In view of the foregoing, the Commission deems it appropriate and in the public interest to accept Respondent's Offer of Settlement. Accordingly, IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act that Gray permanently cease and desist from committing or causing violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. By the Commission Jonathan G. Katz Secretary **FOOTNOTES** [1]:The findings herein are made pursuant to Respondent's Offer and are not binding on any other person or entity in this or any or any other proceeding. [2]:On June 18, 1998, the Commission filed a civil action against Novatek, William Trainor and Vincent Celentano alleging violations of the antifraud, periodic reporting and other provisions of the Exchange Act. See SEC Litigation Release No. 15786 (June 18, 1998). [3]:Section 10(b) of the Exchange Act and Rule 10b-5 thereunder proscribe a variety of fraudulent practices, including the employment of any device, scheme or artifice to defraud, in connection with the purchase or sale of securities. A person may violate these provisions when, acting with the requisite scienter, he or she misrepresents a material fact or omits to state a fact necessary to make the facts stated not misleading.