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UNITED STATES DISTRICT COURT
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Securities and Exchange Commission, Plaintiff, v. CHANCELLOR CORPORATION, BRIAN ADLEY, Defendants. |
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CIVIL ACTION TRIAL BY JURY DEMANDED |
Plaintiff Securities and Exchange Commission (the "Commission") alleges that:
1. This matter involves a multi-faceted financial fraud directed by Brian Adley ("Adley"), the Chief Executive Officer ("CEO"), Chairman of the Board, and controlling shareholder of Chancellor Corporation ("Chancellor" or the "Company"), a public equipment-leasing company. By orchestrating the creation of false corporate documents and fictitious accounting entries, Adley caused Chancellor materially to overstate its revenue, income and assets in periodic filings in 1999 and 2000.
2. Specifically, Adley fraudulently caused Chancellor's 1998 revenue to be overstated by approximately 177% by improperly consolidating $19 million in revenue from a subsidiary over which Chancellor did not acquire actual control until 1999. After Chancellor's initial independent auditors advised Adley that the premature consolidation did not conform with generally accepted accounting principles ("GAAP"), he fired them and hired new auditors, who signed off on the consolidation.
3. In addition, in connection with Chancellor's acquisition of this subsidiary, Adley caused Chancellor improperly to record fees totaling several million dollars to entities he controlled. The payment obligations were purportedly for acquisition consulting services; however, few, if any, services were rendered to support these obligations. Because the fees were not genuinely earned, the fees should not have been recorded on Chancellor's books at all. Further, even if the fees had been genuine, GAAP would have required the Company to report the fees as expenses. Rather than accounting for these fees as expenses, however, Adley directed the bogus fees to be capitalized as an asset, causing Chancellor to report an inflated profit for 1998. Capitalizing the fees rather than expensing them allowed Chancellor to report net income of $850,000 for 1998, rather than a net loss of $2.45 million, and to overstate its assets by $3.3 million. During 1999, Chancellor continued improperly to account for its acquisition, causing its assets and income to be overstated each quarter by 32% to 173%.
4. In 2000, as a result of review by the Commission's Division of Corporation Finance, Chancellor restated its financial results for 1998 and 1999. In its restated financials, Chancellor falsely represented that one of Adley's entities had earned the fees it received and was entitled to receive additional fees. In addition, these filings failed to disclose what amounted to an improper $3.71 million interest-free loan to Adley.
5. To accomplish the fraud, Adley directed the wholesale fabrication of corporate documents, instructed that these fabricated documents be given to the company's auditors, and oversaw the filing of false financial results with the Commission. Franklyn Churchill ("Churchill"), Chancellor's President, signed misleading filings and fabricated documents in connection with this scheme. Chancellor's Acting Chief Financial Officer ("CFO"), David Volpe ("Volpe"), assisted in the document falsification and the Company's controller, Jonathan Ezrin ("Ezrin"), signed financial statements, which he knew or believed to be inaccurate. For his part, Rudolph Peselman ("Peselman"), an outside director, recklessly signed a number of financial statements that were materially misleading and took no care to ensure their accuracy.
6. The firm BKR Metcalf Davis ("Metcalf Davis"), which became Chancellor's auditor after the initial audit firm was fired, failed to conduct its audits of Chancellor's financial statements in accordance with generally accepted auditing standards ("GAAS") and took no steps to report the document fabrication its auditors believed might have occurred. Engagement partner Gregory Davis ("Davis") was responsible for the firm's deficient audits.
7. By engaging in the transactions and practices alleged in this Complaint,
a. Chancellor, Adley, Churchill, Volpe, Ezrin, Peselman, Davis and Metcalf Davis violated Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder [15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5];
b. Chancellor violated, and Adley, Churchill, Volpe, Ezrin, Peselman, Davis and Metcalf Davis aided and abetted Chancellor's violations of, Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Rules 12b-20 and 13a-1thereunder [17 C.F.R. §§ 240.12b-20 and 240.13a-1];
c. Chancellor violated, and Adley, Churchill, Volpe, Ezrin, Davis and Metcalf Davis aided and abetted Chancellor's violations of, Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Rules 12b-20 and 13a-13 thereunder [17 C.F.R. §§ 240.12b-20 and 240.13a-13];
d. Chancellor violated, and Adley, Churchill and Volpe aided and abetted Chancellor's violations of, Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Rules 12b-20 and 13a-11 thereunder [17 C.F.R. §§ 240.12b-20 and 240.13a-11];
e. Chancellor violated, and Adley, Churchill, Volpe, Ezrin and Peselman aided and abetted Chancellor's violations of, Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act [15 U.S.C. §§ 78m(b)(2)(A) and 78m(b)(2)(B)];
f. Adley, Churchill, Volpe and Ezrin violated Section 13(b)(5) of the Exchange Act [15 U.S.C. § 78m(b)(5)] and Exchange Act Rule 13b2-1 [17 C.F.R. § 240.13b2-1];
g. Adley, Churchill, Volpe and Ezrin violated Exchange Act Rule 13b2-2 [17 C.F.R. § 240.13b2-2]; and
h. Davis and Metcalf Davis violated Section 10A of the Exchange Act [15 U.S.C. § 78j-1].
8. Unless enjoined, the Defendants are likely to commit such violations in the future. Accordingly, the Commission seeks entry of a permanent injunction against each Defendant prohibiting further violations of the federal securities laws. The Commission also seeks from Adley, Churchill, Davis and Metcalf Davis, disgorgement of all ill-gotten gains received as a result of the conduct alleged in this Complaint (including with respect to Adley and Churchill, funds received from Chancellor and with respect to Davis and Metcalf Davis, fees received for their audits of Chancellor), plus prejudgment interest; civil monetary penalties against Chancellor, Adley, Churchill, Volpe, Ezrin, Peselman, Davis and Metcalf Davis; and a permanent bar prohibiting each of Adley, Churchill and Peselman from serving as an officer or director of a public company.
9. This Court has jurisdiction over this action pursuant to Section 22(a) of the Securities Act [15 U.S.C. § 77v(a)] and Sections 21 and 27 of the Exchange Act [15 U.S.C. §§ 78u and 78aa]. Additionally, venue is proper here because the acts and practices alleged herein occurred primarily within the District of Massachusetts.
10. The Commission brings this action pursuant to the authority conferred upon it by Sections 20(b) and (e) of the Securities Act [15 U.S.C. § 77t(b) and (e)] and Sections 21(d) and (e) of the Exchange Act [15 U.S.C. §§ 78u(d) and (e)].
11. In connection with the conduct alleged herein, Defendants, directly and indirectly, made use of the means or instrumentalities of interstate commerce, of the mails, the facilities of national securities exchanges, and/or of the means and instruments of transportation or communication in interstate commerce.
12. Chancellor, a Massachusetts corporation headquartered in Boston, Massachusetts, was principally engaged in the business of buying, selling, and leasing new and used transportation equipment, such as tractors, trailers and trucks. From 1983 to 2001, Chancellor's common stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act. Its common stock has traded publicly on the over-the-counter bulletin board since 1994, when it was delisted from NASDAQ for failure to meet financial requirements.
13. Brian M. Adley, age 40, a resident of Lexington, Massachusetts, was Chairman of the Board and CEO of Chancellor from December 1996 through October 2001. Adley also owns and is the Chairman of the Board and CEO of Vestex Capital Corporation ("Vestex"), a private investment firm, which is Chancellor's majority stockholder.
14. Franklyn E. Churchill, age 67, a resident of Swampscott, Massachusetts, was the President of Chancellor from July 1998 through October 2001. He also served as the Chief Operating Officer of Chancellor from July 1998 to April 2000.
15. David C. Volpe, age 47, a licensed certified public accountant ("CPA") until 1991 and a resident of Stoughton, Massachusetts, is a financial and business development consultant and was the Acting CFO of Chancellor from February 1997 to April 1999.
16. Jonathan Ezrin, age 48, a resident of Plymouth, Massachusetts, was the Principal Accounting Officer of Chancellor from 1997 to December 1999 and the Corporate Treasurer from December 1999 to October 2000. Ezrin was also the Corporate Controller from 1997 to 1999 and maintained Chancellor's general ledger during the period from 1998 to 2000.
17. Rudolph Peselman, age 57, a resident of Newton, Massachusetts, was a director of Chancellor from 1996 to 2001 and a member of the Board's audit committee from June 1999 to October 2001.
18. Metcalf Davis (formerly Metcalf, Rice, Fricke and Davis), a firm of CPAs headquartered in Atlanta, Georgia, was Chancellor's independent auditor from February 1999 to October 2001.
19. Gregory Davis, age 51, a CPA and a resident of Lilburn, Georgia, served as the engagement partner on the firm's audits of Chancellor's 1998 and 1999 financial statements, as well as of the restatements made in 2000 with respect to its previously filed 1998 and 1999 financial reports. Davis was also the partner responsible for monitoring Metcalf Davis's quality control system.
20. MRB, Inc. ("MRB"), a Georgia corporation headquartered in Conley, Georgia, was a closely held company acquired by Chancellor on January 29, 1999. Prior to its acquisition, the company was engaged in the retailing and wholesaling of used transportation equipment, primarily tractors and trailers.
21. Vestex Capital Corporation ("Vestex"), a private Massachusetts venture capital corporation, is wholly owned by Adley. During 1996 through 2000, Vestex was the majority shareholder of Chancellor, holding approximately 53% of the company's outstanding common stock.
22. On August 10, 1998, Chancellor entered into a letter of intent to acquire MRB. The acquisition closed on January 29, 1999. At Adley's direction, Chancellor materially overstated its revenue and income for the year ended December 31, 1998 by improperly accounting for the MRB acquisition as of August 1998 rather than as of the January 1999 date of the closing. By prematurely consolidating the two companies' financial results, Chancellor increased its 1998 revenues from $11 million to $30 million.
23. In the beginning of February 1999, Chancellor's outside auditors, Reznick Fedder, & Silverman ("Reznick Fedder") were preparing to audit the Company's 1998 results and informed individuals at Chancellor, including Adley, Churchill and Volpe that it did not believe that Chancellor's consolidation of MRB's financial results with Chancellor's as of August 1998 was appropriate. Under GAAP, such consolidation would have been proper if there had been a written agreement giving Chancellor effective control over MRB as of that date.
24. In February 1999, Adley and Volpe gave Reznick Fedder a management agreement (the "Management Agreement"), which they claimed gave Chancellor control over MRB's affairs as of August 1, 1998. However, Adley, Churchill and Volpe had participated in the creation of the Management Agreement between October and December 1998 and had falsely backdated it to August 1998 in order to justify the consolidation of results to the auditors.
25. Reznick Fedder found the terms of the Management Agreement insufficient to support the conclusion that Chancellor controlled MRB as of August 1998, and continued to maintain that consolidation of MRB's 1998 financial results with Chancellor's did not conform with GAAP. The auditors reaffirmed their position in a February 8, 1999 memorandum sent to Chancellor's audit committee, which at the time consisted of Adley and an outside director, and again at a board meeting on February 12, 1999 attended by Adley, Churchill and Peselman. To support its position, Reznick Fedder gave Adley and Volpe accounting literature that outlined the criteria that had to be satisfied in order for Chancellor to consolidate properly MRB's 1998 financial results with its own.
26. Upon receiving this accounting literature, Adley directed Volpe to create another document, a "First Amendment" to Chancellor's Management Agreement with MRB (the "First Amendment"), which was falsely dated August 17, 1998. With input from Adley and Churchill, Volpe drafted the First Amendment in an effort to address the deficiencies in the Management Agreement cited by Reznick Fedder and to meet the criteria set forth in the GAAP literature that Reznick Fedder had provided. The fictitious First Amendment provided in substance that Chancellor would assume control of MRB's daily operations in August 1998 and that, from then on, MRB would be required to submit significant decisions to Chancellor for approval.
27. The two controlling shareholders of MRB, however, never approved the First Amendment. Indeed, the terms of the First Amendment were completely inconsistent with their understanding that control of MRB would not pass to Chancellor until after the closing, which took place in January 1999. Further, the terms of the document did not comport with the actual relations between the two companies before the January 1999 acquisition.
28. On or about February 17, 1999, Churchill provided the First Amendment to Reznick Fedder, but that document did not cause Reznick Fedder to change its position. The auditors were skeptical about the document's authenticity and continued to insist that Chancellor account for the MRB acquisition as of January 1999. On February 25, 1999, due in part to Reznick Fedder's refusal to approve the premature consolidation of MRB's results, Adley and Churchill fired Reznick Fedder.
29. Peselman was aware of the disagreement over the consolidation date and approved the dismissal of Reznick Fedder, but took no steps to determine whether Chancellor's position on that issue was incorrect.
30. After dismissing Reznick Fedder, Chancellor engaged Metcalf Davis to conduct the independent audit of its 1998 financial statements. At Adley's direction, Volpe provided the fabricated Management Agreement and the First Amendment to Metcalf Davis. In March 1999, Adley also directed Volpe to prepare for Davis, the Metcalf Davis engagement partner, a chronology of Chancellor activities (the "Chronology") designed to show falsely that Chancellor effectively controlled MRB as of August 1, 1998.
31. The Chronology, prepared by Volpe with input from Adley and Churchill, falsely reflected that the Management Agreement and the First Amendment both had been created and signed in August 1998. In addition, the Chronology listed correspondence ostensibly written by Churchill on various dates from July 1998 through December 1998. In these communications, Churchill purportedly instructed MRB's controlling shareholders to act on various business matters. However, Churchill did not actually create these letters and memoranda until March 1999, at which time he did so at Adley's instruction and in order to make the Chronology appear legitimate.
32. Once Volpe and Churchill had completed the Chronology and the supporting correspondence, Volpe provided the documents to Davis. Based upon interactions with Volpe, Davis had reason to suspect that the Chronology and the documents reflected in it were not legitimate.
33. In connection with its acquisition of MRB, Adley also caused Chancellor improperly to record $3.3 million in consulting fees payable to Vestex, Adley's venture capital firm. The fees were supposedly earned for work done by Vestex in finding, introducing and negotiating the MRB acquisition and securing financing for it. However, Vestex provided few, if any, of these services to justify these fees.
34. To substantiate these fees, Adley directed Chancellor personnel to alter or completely fabricate numerous documents. For example, in December 1998, at Adley's direction, Volpe altered Chancellor's records and increased the total recorded fees payable to Vestex in connection with the MRB acquisition from $150,000 to approximately $3.3 million, a sum which included about $2.8 million in consulting fees. However, there was no documentation to support these increased fees.
35. Ezrin, Chancellor's controller, allowed the $3.3 million in fees to Vestex to be recorded on Chancellor's books in December 1998, even though he did not know of any documents supporting the fees and did not believe they were justified.
36. During March and April 1999, Adley directed Chancellor's Corporate Clerk (the "Clerk") to fabricate and backdate documents to be given to Metcalf Davis to support the $3.3 million Vestex fee entry. Over the course of several days, if not weeks, Adley told the Clerk each document he wanted the Clerk to create, conveyed the substance he wanted the Clerk to include in each document, and edited and reviewed the documents before finally directing that they be given to Davis.
37. Among the documents that Adley directed the Clerk to fabricate were several board resolutions and minutes. One such resolution, backdated to September 11, 1998, directed Chancellor to pay to Vestex $3.25 million for services supposedly rendered in connection with the MRB acquisition. Adley also directed the Clerk to create a promissory note backdated to December 22, 1998, from the Company to Vestex in the amount of $3,475,000, supposedly in payment for services rendered by Vestex, and a purported consulting agreement between Chancellor and Vestex to support the issuance of the fabricated promissory note to Vestex. At Adley's direction, these fabricated documents were then given to Davis, just days before Chancellor's Form 10-KSB was to be filed.
38. Adley also directed that Chancellor's financial records be altered to be consistent with the fabricated documents created in March and April 1999. At Adley's direction, Volpe prepared a journal entry reflecting Chancellor's purported note payable to Vestex for MRB acquisition fees, and Ezrin made the entry in the Company's accounting system. Volpe and Ezrin did as they were directed even though they questioned the validity of the debt on the ground that there were no documents reflecting the services for which the debt had supposedly been incurred.
39. Because the fees were not genuinely earned, the fees should not have been recorded on Chancellor's books at all. Further, even if the fees had been genuine, GAAP would have required the Company to report the fees as expenses. Rather than accounting for these fees as expenses, however, Adley directed the bogus fees to be capitalized as an asset, causing Chancellor to report an inflated profit for 1998. Capitalizing the fees rather than expensing them allowed Chancellor to report net income of $850,000 for 1998, rather than a net loss of $2.45 million, and to overstate its assets by $3.3 million.
40. During February and March 1999, Chancellor filed three misleading Forms 8-K regarding accounting treatment for the MRB acquisition. All three were drafted by Volpe and signed by Churchill at Adley's direction.
41. On February 10, 1999, Chancellor filed a Form 8-K to report its acquisition of MRB. In this Form 8-K, Chancellor, at Adley's direction, designated August 1, 1998 as the acquisition date for accounting purposes and failed to disclose that its auditors, Reznick Fedder, disagreed with the August 1998 consolidation date.
42. On March 4, 1999, Chancellor filed a Form 8-K to report its dismissal of Reznick Fedder as its independent auditor. Although Adley, Churchill and Volpe all knew that Reznick Fedder's position regarding the effective consolidation date for MRB differed from Chancellor's, Chancellor falsely represented in the Form 8-K that there were no disagreements with Reznick Fedder on any matters of accounting principles or practices.
43. On March 15, 1999, Reznick Fedder filed a letter with the Commission reporting the firm's disagreement with Chancellor's accounting treatment of the MRB acquisition. In the letter, Reznick Fedder stated that it had advised Chancellor, in connection with the Form 8-K filed on February 10, 1999, that the Company's accounting for the purchase of MRB as of August 1, 1998, rather than as of January 29, 1999, did not comply with GAAP. In response, on March 22, 1999, Chancellor filed a Form 8-K/A which falsely stated that Reznick Fedder's rejection of the August 1998 consolidation date had been only preliminary, and that Reznick Fedder had failed to examine the First Amendment. The Form 8-K/A also falsely stated that Reznick requested additional information pertinent to the consolidation date only after it was dismissed.
44. On April 16, 1999, Chancellor filed a Form 10-KSB for the year ended December 31, 1998. Adley, Churchill, Ezrin and Peselman signed it. Volpe, the Acting CFO, did not sign the Form 10-KSB, but assisted in compiling information included in it. Adley was involved in the preparation of the financial statements and text, and also furnished the information in the related party footnote, which described the consulting services that Vestex supposedly provided to Chancellor and the fees that Vestex accrued.
45. Just before filing the 10-KSB, Chancellor provided Metcalf Davis with a management representation letter signed by Adley, Volpe and Ezrin. The letter represented that all related party transactions were "complete, valid, authorized and approved," that there was "no fraud involving management employees," and that Chancellor's financial statements were in conformity with GAAP.
46. In the financial statements included in its Form 10-KSB, Chancellor improperly accounted for its acquisition of MRB as of August 1, 1998, and as of that date, consolidated its financial results with those of MRB. As a result, Chancellor reported annual revenues of $29,639,000 (177% higher than the $10,708,000 revenue figure for Chancellor without the MRB consolidation); annual net income of $850,000 (62% higher than the $524,000 figure without the consolidation); and assets of $29,569,000 (261% higher than the $8,186,000 figure without the consolidation). This accounting treatment did not comply with GAAP because during 1998 Chancellor did not have the effective control of MRB needed to justify accounting for MRB's acquisition as of August 1998.
47. Chancellor's Form 10-KSB also falsely represented that Adley's Vestex entity had handled the acquisition of MRB and provided consulting, financing and other services in connection with the acquisition. It also falsely stated that as part of those services, Vestex had obtained $3.5 million in financing for Chancellor. In the filing, Chancellor referred to the fabricated Vestex consulting agreement and promissory note, which purported to support the $3.3 million fee payable, and attached the promissory note as an exhibit. The bogus fees should not have been included in Chancellor's financial results. Further, even if they had been genuine, they should have been recorded as expenses under GAAP. In its 10-KSB, however, Chancellor capitalized the bogus fees, thereby allowing Chancellor to report net income of $850,000 rather than a net loss of $2.45 million.
48. Peselman signed Chancellor's Form 10-KSB for 1998 without taking any steps to ensure that it did not contain materially misleading statements. For example, Peselman made no inquiry into the reasons underlying Metcalf Davis's approval of the 1998 consolidation, even though that approval was completely contrary to Reznick Fedder's position on the issue. In addition, he knew that Chancellor had written off $1.14 million in related party payments in 1997. However, despite that knowledge, he signed off on 1998 financial statements reflecting millions of dollars in amounts owed to Adley's entities without checking whether there was adequate support for the amounts and whether the related party arrangements were adequately disclosed.
49. Chancellor reported its quarterly financial results for the first three quarters of 1999 in Forms 10-QSB filed on May 13, 1999, August 16, 1999, and November 15, 1999. Each of these forms, which were signed by Churchill, was materially misleading. Each overstated Chancellor's assets by, among other things, including the $3.3 million in fees to Vestex as a capitalized asset. Primarily as a result of the improper capitalization of these fees, Chancellor overstated its total assets by 32% for the first quarter of 1999; 35% for the second quarter; and 42% for the third quarter.
50. In addition, the improper consolidation of MRB's results with Chancellor's before January 1, 1999, rather than at the end of January 1999, when the acquisition closed, caused Chancellor's 1999 revenue to be overstated by 33% for the first quarter of 1999. Chancellor also changed its description of the Vestex fees, but failed to record as expenses the $1.1 million in fees it now claimed that it supposedly paid to Vestex during 1999 in connection with the MRB acquisition closing. Capitalizing rather than expensing the purported fees caused Chancellor's net income to be overstated by 37% for the first quarter, 173% for the second quarter, and 95% for the third quarter of 1999.
51. Adley, Davis and Churchill provided false information to the Commission when staff in the Commission's Division of Corporation Finance began a review of Chancellor's filings. In late spring 1999, the Commission informed Chancellor that the August 1, 1998 consolidation date appeared improper and requested an explanation of the accounting principles followed by the Company and Metcalf Davis.
52. In its written responses to the Commission, dictated by Adley with input from Davis and signed by Churchill, Chancellor falsely represented that the First Amendment was drafted and signed in August 1998 and that it reflected Chancellor's full control of MRB from that time on. The letters also falsely represented that Reznick Fedder had approved the August 1998 consolidation date after reviewing the First Amendment. Nevertheless, in December 1999, the Commission informed Chancellor that the Company must restate its financials to reflect the MRB acquisition date as of the first quarter of 1999. The Commission also informed Chancellor that when restating its financials, it would have to expense rather than capitalize the $3.3 million in consulting fees purportedly earned by Vestex.
53. In January 2000, Chancellor filed a Form 10-KSB-A, signed by Adley, Churchill, Ezrin and Peselman, restating its 1998 year-end financial results to reflect the MRB acquisition as of January 29, 1999. Chancellor reported in its income statement total 1998 revenues of $10,708,000 rather than $29,639,000 (a 64% reduction from the figure it had previously reported) and net income of $524,000 rather than $850,000 (a 38% reduction). On its balance sheet, Chancellor's total assets decreased from $29,569,000 to $8,186,000 (a 72% reduction), and total liabilities decreased from $22,562,000 to $5,824,000 (a 74% reduction). Further, Chancellor's total equity, as restated, decreased from $7,007,000 to $2,362,000 (a 66% reduction).
54. When restating its financials, Chancellor expensed only $1.1 million of the $3.3 million in Vestex consulting fees that had been capitalized on its balance sheet and it reversed the remaining $2.2 million altogether. Although Chancellor had previously taken the position that the fees had become due in 1998, it now recorded the $1.1 million expense in the first quarter of 1999, claiming that it had been a "success fee" payable only upon closing. The treatment of these fees was inconsistent with Chancellor's representation in its original 1998 10-K that the entire $3.3 million was a fixed obligation, represented by a December 1998 promissory note from Chancellor to Vestex for the entire amount of the fees. In the Form 10-KSB-A, Chancellor did not disclose the discrepancy between its previous and current descriptions of the fee. In the amended Form 10-KSB, Chancellor also continued to state falsely that among the services Vestex had provided, Vestex had obtained $3.5 million in financing for Chancellor. The Company also did not make any public announcement of the restatement, nor did the Form 10-KSB-A identify the financials as restated or explain the reason for the restatement.
55. After reviewing Chancellor's amended Form 10-KSB, the Commission questioned why Chancellor had reversed $2.2 million of the $3.3 million Vestex fee. In response, Adley and Davis claimed that the $2.2 million represented "contingent fees," payable based on a percentage of future profits of MRB. Because the fees were contingent, they claimed, Chancellor did not have to include them in its restated 1998 or 1999 financials. This explanation was inconsistent with Chancellor's earlier representations to the Commission that the fees owed to Vestex were for services performed before the MRB acquisition and with its initial 1998 Form 10-KSB, which stated that the fees had already been incurred.
56. In addition to its questions about the reversal of $2.2 million from expenses, the Commission determined that Chancellor had not disclosed that its Form 10-KSB-A represented a restatement of its financial results. As a result, the Commission required Chancellor to file a second, corrected Form 10-KSB-A.
57. In June 2000, Chancellor filed a second amended Form 10-KSB, which was signed by Adley, Churchill, Ezrin and Peselman. Chancellor's restated financial results remained unchanged in this filing. However, pursuant to the Commission's direction, Chancellor disclosed that it had restated its results. Likewise, Metcalf Davis revised its auditor's report to include a statement that Chancellor had restated its consolidated financial statements to reflect a change in the effective MRB acquisition date.
58. Chancellor's related party disclosure, however, remained materially misleading in the second amended Form 10-KSB. Chancellor falsely stated that Vestex could earn up to $3.25 million for its MRB consulting services, that Vestex had already earned $1.1 million in fees, and that the remaining fees were contingent fees dependent on the profitability of the merged company. It failed to disclose that Chancellor had previously described the entire amount of the fees as fixed, that the purported documents relating to the fees reflected no contingency, and that there was no basis for the fees. Chancellor also continued to state falsely that Vestex had obtained $3.5 million in financing for the Company.
59. Peselman signed the two restatements of Chancellor's 1998 financial results, even though they contained misstatements about the $3.3 million related party fees which were completely contrary to representations made in Chancellor's original Form 10-KSB, which Peselman had also signed. Peselman ignored these red flags and never questioned whether there was any basis for the change and whether it was appropriate.
60. Indeed, Peselman had completely neglected to fulfill his duties as a director and as an audit committee member. He failed to oversee Chancellor's financial reporting, exercising no care to ensure that the company had appropriate accounting procedures and internal controls and that its financial records were accurate. In fact, he acquiesced in Adley's complete control of accounting decisions, including those relating to payments to Adley's own company, Vestex.
61. On March 30, 2000, Chancellor filed its Form 10-KSB for 1999, which was signed by Adley, Churchill and Ezrin. The financial results and disclosure it contained were consistent with Chancellor's misleading first amended 1998 Form 10-KSB filed in January 2000. Also, in August 2000, Chancellor filed an amended Form 10-KSB for 1999, signed by Adley and Churchill. This filing contained revised financial results and disclosures consistent with the Company's misleading June 2000 amended Form 10-KSB for 1998. Both of Chancellor's 1999 Forms 10-KSB were materially misleading because they falsely reflected the $1.1 million in fees that Vestex was supposed to have earned, and stated that Vestex could earn up to $2 million more for its consulting services, contingent on the profitability of Chancellor after the merger. Further, Chancellor continued to represent falsely that Vestex had obtained $3.5 million in financing for Chancellor.
62. In 2000, Merrill Lynch Business Financial Services, Inc. ("Merrill Lynch") extended a $3.75 million line of credit to Chancellor. To secure the line of credit, Adley personally pledged $3.25 million in cash and securities that were placed in a separate collateral account at Merrill Lynch in Adley's name. The loan agreement required Chancellor to use the line of credit proceeds only for working capital and expressly prohibited use for personal purposes.
63. In violation of the restriction, Adley repeatedly transferred proceeds from the Chancellor line of credit account to his own personal Merrill Lynch account, which was separate from the required collateral account. In an apparent effort to conceal what he was doing, Adley transferred the funds from Chancellor through bank accounts of Vestex and another Adley entity, VMI, before placing them in his personal brokerage account. Between January 2000 and June 2000, Adley obtained over $3.71 million from Chancellor in this manner for his personal benefit.
64. Ezrin recorded the transfer of Merrill Lynch loan proceeds to Vestex and VMI as payments for guarantees supposedly provided by Vestex, even though he had doubts as to whether there was any basis for the payments and made little, if any, effort to determine their propriety.
65. In both his personal account and the required collateral account, Adley actively traded large amounts of common stock and sustained substantial losses. In May 2001, Adley's collateral account fell below the minimum required by the loan terms and Merrill Lynch called the Chancellor loan. Because Chancellor lacked the necessary funds, Merrill Lynch required Adley to repay the loan proceeds. In effect, Adley caused Chancellor to lend him $3.71 million interest-free for his personal use over the course of a year. The forced loan deprived Chancellor of working capital it needed and eventually caused the Company to default on its obligation to Merrill Lynch.
66. Chancellor did not disclose Adley's improper diversion of the Company's funds in the Forms 10-QSB that it filed with the Commission for the first three quarters of 2000. Adley and Churchill signed these Forms 10-QSB. In a footnote in its Form 10-QSB for the quarter ended March 31, 2000, Chancellor stated inaccurately that "[d]uring the period ended March 31, 2000, the Company advanced $1,500,000 to the majority shareholder as collateral for its guarantee of the $3 million line of credit." Further, the footnote failed to disclose that the "advance" to Adley, through VMI and Vestex, violated the terms of the loan agreement. Chancellor made similarly misleading statements about the Merrill Lynch loan in its Forms 10-QSB for the second and third quarters of 2000.
67. Metcalf Davis conducted an audit of Chancellor's 1998 financial results, which was not in accordance with GAAS, and issued an audit opinion, which falsely stated that Chancellor's financial statements were presented in conformity with GAAP.
68. In connection with Metcalf Davis's audit of Chancellor's 1998 financial statements, Davis, the engagement partner, with input from a senior manager who reported to him (the "Senior Manager"), concluded that it was proper under GAAP to record the MRB acquisition as of August 1, 1998 because Chancellor had the necessary control of MRB as of that date. Davis arrived at this conclusion even though he knew that Reznick Fedder had previously determined that accounting for the acquisition as of August 1, 1998 did not comply with GAAP.
69. Further, in reaching this conclusion, Davis relied on the Management Agreement and the First Amendment as the evidence of Chancellor's control even though he knew that there were issues raised as to the authenticity of the First Amendment. For example, Davis was aware that the Senior Manager had raised concerns about the authenticity of the First Amendment, which was not referenced in the papers that Metcalf Davis had received from Reznick Fedder on the issue and which conveniently seemed to address all of Reznick Fedder's objections to the 1998 control date. In addition, as a result of his interactions with Volpe, Davis had additional reasons to suspect the authenticity of the First Amendment.
70. Notwithstanding the concerns about the authenticity of the First Amendment, neither Davis nor any other Metcalf Davis auditor questioned Adley or any other Chancellor representative about the document's authenticity. Nor did Davis or any other Metcalf Davis auditor confirm the existence, date or terms of the First Amendment with the MRB shareholders. Indeed, for his part, Davis took no steps whatsoever to confirm the authenticity of the documents on which the 1998 consolidation date depended.
71. Davis, the concurring partner on the audit (the "Concurring Partner"), and the Senior Manager were all aware of the possibility that Chancellor's management had fabricated the First Amendment, if not other documents as well, yet they never attempted to communicate that fact to Chancellor's audit committee, its board of directors, or the Securities and Exchange Commission. Metcalf Davis's report to Chancellor's audit committee on the propriety of the August 1, 1998 consolidation date, which was signed by Davis and reviewed by the Senior Manager and the Concurring Partner, did not refer to the issue in any way.
72. Davis also personally performed the audit fieldwork for Chancellor's 1998 related party transactions, such as those with Vestex, because he deemed this to be a high-risk audit area. Davis knew that Chancellor had written off $1.14 million in related party payments in 1997. During his examination of the 1998 transaction, Davis questioned Adley about the basis for the $3.3 million in fees payable to Vestex for services received in connection with MRB's acquisition. On the last day of his fieldwork at Chancellor, Davis received just three documents (all of which had been fabricated) to support the fees: a copy of a board resolution authorizing Chancellor to pay Vestex fees of $3,250,000 for services relating to MRB's pending acquisition; a copy of a $3,475,000 note payable to Vestex that included $3.3 million owed for services supposedly received in connection with the MRB acquisition; and a purported agreement between Chancellor and Vestex relating to consulting services.
73. Davis was aware that the Senior Manager had raised issues about the Vestex fees, noting that the work papers contained no documentation to support the nature or value of the supposed services for which the fees were being charged.
74. Davis questioned Adley and Churchill about the fees, which totaled approximately 70% of the stock transaction, and asked Adley and Ezrin for invoices or other documents showing that services had, in fact, been rendered. However, he never received any such documents. Instead, Davis relied entirely on oral representations from Adley and Churchill that Vestex had performed the services.
75. Davis reviewed Chancellor's draft Form 10-KSB, including the footnote referring to related party transactions. This footnote did not meet GAAP standards because it did not adequately disclose information necessary to understand the fees for the MRB transaction, including the services purportedly justifying these charges or how the charges were determined. Davis, however, did not ensure that these items were added to the text.
76. Davis also approved Chancellor's improper capitalization of the purported $3.3 million MRB fees to Vestex as "incremental costs" payable to an outside consultant in a business combination. This treatment was inconsistent with GAAP, which provide that fees payable to employees or entities controlled or owned by employees, such as Adley's entity Vestex, are internal costs that must be expensed. Davis approved this treatment even though he knew that the capitalized $3.3 million in fees represented approximately 10% of Chancellor's total reported assets and that capitalizing rather than expensing the fees would cause Chancellor to report a profit rather than a loss for 1998.
77. On April 14, 1999, Davis signed and authorized issuance of the Metcalf Davis auditors' report for Chancellor's 1998 year-end financial results. The report stated that Chancellor's financial statements were fairly presented in conformity with GAAP and that Metcalf Davis's audit had been performed in accordance with GAAS.
78. Davis also signed Metcalf Davis's audit reports for both of Chancellor's restatements of its 1998 financial results. After the Commission raised questions about the nature of the $3.3 million in Vestex fees and required that they be expensed, Davis, in effect, acknowledged that Chancellor had improperly capitalized and recorded the Vestex fees and related note payable. Davis then took the position that $2.2 million of the fees was actually a contingent liability which did not need to be recorded when the acquisition was consummated because its repayment was based on the future profitability of MRB. Davis took this position even though he still had not examined any documents evidencing the nature of the Vestex fees or the services rendered. Rather, he based his new position solely on Adley's oral representations. Adley's new explanation of the fees was completely inconsistent with the representations in the original Form 10-KSB and the fabricated supporting Vestex documents that Davis had reviewed; nonetheless, Davis still took no steps to confirm that the fees were legitimate.
79. Without evidence to support Chancellor's representations concerning the Vestex fees, and also without a review conducted by the Concurring Partner, Davis signed a Metcalf Davis audit report containing an unqualified opinion, which was included in Chancellor's 10-KSB-A filed in January 2000 for the year ended December 31, 1998. The amended Form 10-KSB which Davis approved remained materially misleading with respect to the fees, which were improperly disclosed because there was no evidence of Vestex providing the services to justify them.
80. Davis continued to fail to substantiate the propriety of Chancellor's related party disclosures in the financial statements included in the second amended Form 10-KSB-A, filed in June 2000 for the year ended December 31, 1998. When that filing was being prepared, Adley gave Davis a draft memo that listed the supposed components of the $3.3 million Vestex fees; however, Davis did not take any steps to verify its accuracy. Davis nevertheless signed the Metcalf Davis audit report, which expressed an unqualified opinion as to Chancellor's revised restated financial statements.
81. In addition, Davis signed the Metcalf Davis audit reports for the misleading Forms 10-KSB filed by Chancellor for the year ended December 31, 1999, which continued to falsely reflect the nature and validity of the fees that Vestex was supposed to have earned and the fees that it still had the potential to earn.
82. Further, Davis reviewed and approved Chancellor's Forms 10-QSB for the fiscal quarters ended March 31, 1999, June 30, 1999, September 30, 1999, March 31, 2000, June 30, 2000, and September 30, 2000, which, as described above, were materially misleading in their description and treatment of the Vestex fees. Davis also reviewed and approved language in Chancellor's Forms 10-QSB for the first three quarters of 2000 which failed meaningfully to disclose Adley's misuse of Chancellor loan proceeds from Merrill Lynch, without taking any steps to determine the nature of the transaction to which the 10-QSB referred.
83. Plaintiff Commission repeats and realleges paragraphs 1 through 82 above.
84. At various points during the period from October 1998 through August 2000, Chancellor, Adley, Churchill, Volpe, Ezrin, Peselman, Davis and Metcalf Davis engaged in fraudulent activities resulting in material overstatements of revenue, income, and assets in Chancellor's public announcements and in its filings with the Commission.
85. By reason of the foregoing, Chancellor, Adley, Churchill, Volpe, Ezrin, Peselman, Davis and Metcalf Davis, singly or in concert with others, directly or indirectly, in connection with the purchase or sale of securities, by the use of any means and instrumentalities of interstate commerce, or of the mails, or any facility of any national securities exchange: (a) employed devices, schemes, or artifices to defraud; (b) made untrue statements of material fact or omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or (c) engaged in acts, practices or courses of business which operated or would operate as a fraud or deceit upon any persons, including purchasers or sellers of Chancellor's securities in violation of Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder.
86. The conduct of Chancellor, Adley, Churchill, Volpe, Ezrin, Peselman, Davis and Metcalf Davis conduct involved fraud, deceit, or deliberate or reckless disregard of regulatory requirements, and resulted in substantial loss, or significant risk of substantial loss, to other persons, within the meaning of Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)].
87. Plaintiff Commission repeats and realleges paragraphs 1 through 82 above.
88. Chancellor reported materially false and misleading information in its Forms 10-KSB and 10-KSB-A for the fiscal years ended December 31, 1998 and December 31, 1999, and the Forms 10-QSB for the fiscal quarters ended March 31, 1999, June 30, 1999, September 30, 1999, March 31, 2000, June 30, 2000, and September 30, 2000. Each of those filings contained financial statements that materially misstated Chancellor's revenue, income, assets, and other relevant financial information.
89. Chancellor also filed materially false and misleading Forms 8-K during February and March 1999 containing incomplete and inaccurate information relating to its acquisition of MRB and its dismissal of its auditors.
90. By reason of the foregoing, Chancellor violated Sections 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13 [17 C.F.R. §§ 240.12b-20, 240.13a-1, 240.13a-11, and 240.13a-13].
91. Plaintiff Commission repeats and realleges paragraphs 1 through 82 above.
92. Chancellor reported materially false and misleading information in its Forms 10-KSB and 10-KSB-A for the fiscal years ended December 31, 1998 and December 31, 1999. Each of those filings contained financial statements that materially misstated Chancellor's revenue, income, assets, and other relevant financial information.
93. Each of Adley, Churchill, Volpe, Ezrin, Peselman, Davis and Metcalf Davis knew, or was reckless in not knowing, that Chancellor's conduct was improper, and each knowingly and substantially assisted Chancellor to report materially false and misleading information in its Forms 10-KSB and 10-KSB-A for the fiscal years ended December 31, 1998 and, except as to Volpe and Peselman, December 31, 1999.
94. By reason of the foregoing, each of Adley, Churchill, Volpe, Ezrin, Peselman, Davis and Metcalf Davis aided and abetted Chancellor's violation of Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Rules 12b-20, and 13a-1 thereunder [17 C.F.R. §§ 240.12b-20, and 240.13a-1], and therefore is liable pursuant to Section 20(e) of the Exchange Act [15 U.S.C. § 78t(e)].
95. Plaintiff Commission repeats and realleges paragraphs 1 through 82 above.
96. Chancellor reported materially false and misleading information in its Forms 10-QSB for the fiscal quarters ended March 31, 1999, June 30, 1999, September 30, 1999, March 31, 2000, June 30, 2000, and September 30, 2000. Each of those filings contained financial statements that materially misstated Chancellor's revenue, income, assets, and other relevant financial information.
97. Each of Adley, Churchill, Volpe, Ezrin, Davis and Metcalf Davis knew, or was reckless in not knowing, that Chancellor's conduct was improper, and each knowingly and substantially assisted Chancellor to report materially false and misleading information in its Forms 10-QSB for the fiscal quarter ended March 31, 1999, and except as to Volpe, for the fiscal quarters ended June 30, 1999, September 30, 1999, March 31, 2000, June 30, 2000, and September 30, 2000.
98. By reason of the foregoing, each of Adley, Churchill, Volpe, Ezrin, Davis and Metcalf Davis aided and abetted Chancellor's violation of Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Rules 12b-20, and 13a-13 thereunder [17 C.F.R. §§ 240.12b-20 and 240.13a-13], and therefore is liable pursuant to Section 20(e) of the Exchange Act [15 U.S.C. § 78t(e)].
99. Plaintiff Commission repeats and realleges paragraphs 1 through 82 above.
100. Chancellor filed materially false and misleading Forms 8-K during February and March 1999 containing incomplete and inaccurate information relating to its acquisition of MRB and its dismissal of its auditors.
101. Each of Adley, Churchill and Volpe knew, or was reckless in not knowing, that Chancellor's conduct was improper, and each knowingly and substantially assisted Chancellor to report materially false and misleading information in the Forms 8-K it filed during February and March 1999.
102. By reason of the foregoing, each of Adley, Churchill and Volpe aided and abetted Chancellor's violation of Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Rules 12b-20, and 13a-11 thereunder [17 C.F.R. §§ 240.12b-20 and 240.13a-11], and therefore is liable pursuant to Section 20(e) of the Exchange Act [15 U.S.C. § 78t(e)].
103. Plaintiff Commission repeats and realleges paragraphs 1 through 82 above.
104. Chancellor maintained false and misleading books and records, which, among other things, materially overstated the company's revenue, income, assets, and other relevant financial information for the fiscal years ended December 31, 1998 and December 31, 1999, and for the fiscal quarters ended March 31, 1999, June 30, 1999, September 30, 1999, March 31, 2000, June 30, 2000, and September 30, 2000.
105. By reason of the foregoing, Chancellor violated Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. § 78m(b)(2)(A)].
106. Plaintiff Commission repeats and realleges paragraphs 1 through 82 above.
107. Chancellor maintained false and misleading books and records, which, among other things, materially overstated the company's revenue, income, assets, and other relevant financial information for the fiscal years ended December 31, 1998 and December 31, 1999, and for the fiscal quarters ended March 31, 1999, June 30, 1999, September 30, 1999, March 31, 2000, June 30, 2000, and September 30, 2000.
108. Each of Adley, Churchill, Volpe, Ezrin and Peselman knew, or was reckless in not knowing, that Chancellor's conduct was improper, and each knowingly and substantially assisted Chancellor to keep and maintain false and misleading books and records for the fiscal years ended December 31, 1998 and December 31, 1999, and for the fiscal quarters ended March 31, 1999, June 30, 1999, September 30, 1999, March 31, 2000, June 30, 2000, and September 30, 2000.
109. By reason of the foregoing, each of Adley, Churchill, Volpe, Ezrin and Peselman aided and abetted Chancellor's violations of Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. § 78m(b)(2)(A)], and therefore is liable pursuant to Section 20(e) of the Exchange Act [15 U.S.C. § 78t(e)].
110. Plaintiff Commission repeats and realleges paragraphs 1 through 82 above.
111. Chancellor failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that the company's transactions were recorded as necessary to permit preparation of financial statements in conformity with GAAP during the fiscal years ended December 31, 1998 and December 31, 1999, and during the fiscal quarters ended March 31, 1999, June 30, 1999, September 30, 1999, March 31, 2000, June 30, 2000, and September 30, 2000.
112. By reason of the foregoing, Chancellor violated Section 13(b)(2)(B) of the Exchange Act [15 U.S.C. § 78m(b)(2)(B)], and therefore is liable pursuant to Section 20(e) of the Exchange Act [15 U.S.C. § 78t(e)].
113. Plaintiff Commission repeats and realleges paragraphs 1 through 82 above.
114. Chancellor failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that the company's transactions were recorded as necessary to permit preparation of financial statements in conformity with GAAP during the fiscal years ended December 31, 1998 and December 31, 1999, and during the fiscal quarters ended March 31, 1999, June 30, 1999, September 30, 1999, March 31, 2000, June 30, 2000, and September 30, 2000.
115. Each of Adley, Churchill, Volpe, Ezrin and Peselman, or was reckless in not knowing, that Chancellor's conduct was improper, and each knowingly and substantially assisted Chancellor's failure to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that the company's transactions were recorded as necessary to permit preparation of financial statements in conformity with GAAP during the fiscal years ended December 31, 1998 and December 31, 1999, and during the fiscal quarter ended March 31, 1999; and except as to Volpe, during the fiscal quarters ended June 30, 1999, September 30, 1999, March 31, 2000, June 30, 2000, and September 30, 2000.
116. By reason of the foregoing, each of Adley, Churchill, Volpe, Ezrin and Peselman aided and abetted Chancellor's violations of Section 13(b)(2)(B) of the Exchange Act [15 U.S.C. § 78m(b)(2)(B)], and therefore is liable pursuant to Section 20(e) of the Exchange Act [15 U.S.C. § 78t(e)].
117. Plaintiff Commission repeats and realleges paragraphs 1 through 82 above.
118. By reason of the foregoing, Adley, Churchill, Volpe and Ezrin knowingly circumvented Chancellor's system of internal accounting controls; and, directly or indirectly, falsified, or caused to be falsified, Chancellor's books, records and accounts in violation of Section 13(b)(5) of the Exchange Act [15 U.S.C. § 78m(b)(5)] and Exchange Act Rule 13b2-1 [17 C.F.R. § 240.13b2-1].
119. Plaintiff Commission repeats and realleges paragraphs 1 through 82 above.
120. By reason of the foregoing, each of Adley, Churchill, Volpe and Ezrin, directly or indirectly, made or caused to be made materially false or misleading statements, or omitted to state or caused another person to omit to state material facts necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading, to an accountant in connection with (1) the audits and auditor reviews of the financial statements of Chancellor and (2) the preparation and filing of documents or reports required to be filed with the Commission in violation of Rule 13b2-2 [17 C.F.R. § 240.13b2-2] promulgated under the Exchange Act.
121. Plaintiff Commission repeats and realleges paragraphs 1 through 82 above.
122. Section 10A of the Exchange Act requires a public accountant conducting an audit of a public company such as Chancellor to include in the audit procedures designed to provide reasonable assurance of detecting illegal acts that would have a direct and material effect on the determination of financial statement amounts. In the course of auditing Chancellor for the fiscal years ended December 31, 1998 and December 31, 1999, Davis and Metcalf Davis failed to meet these statutory requirements.
123. Further, section 10A of the Exchange Act requires a public accountant conducting an audit of a public company such as Chancellor to: (i) determine whether it is likely that an illegal act occurred; and if so, (ii) determine and consider the possible effect of the illegal act on the financial statements of the issuer; and (iii) if the illegal act is not clearly inconsequential, as soon as practicable, inform the appropriate level of management and assure that the audit committee of the client is adequately informed about the illegal act. If neither management nor the audit committee takes timely and appropriate remedial action in response to the auditor's report, the auditor is obliged to take further steps, including reporting the likely illegal act to the Commission.
124. In the course of auditing Chancellor for the fiscal years ended December 31, 1998, and December 31, 1999, Davis and Metcalf Davis was aware, for each year in which they were responsible for the Chancellor audit, that it was likely that Chancellor was preparing and filing quarterly and annual financial statements and other reports which contained material misrepresentations and omissions in violation of the antifraud provisions of the federal securities laws. Davis and Metcalf Davis nevertheless did not report these likely violations to the Chancellor audit committee or take other steps required by the statute when Chancellor management and its board did not correct the violations.
125. By reason of the foregoing, Davis and Metcalf Davis violated Section 10A of the Exchange Act [15 U.S.C. § 78j-1].
WHEREFORE, Plaintiff Commission respectfully requests that this Court issue a Final Judgment:
Permanently enjoining Chancellor from violating, directly or indirectly:
a. Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder;
b. Section 13(a) of the Exchange Act [15 U.S.C. §§ 78m(a)] and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder [17 C.F.R. §§ 240.12b-20, 240.13a-1, 240.13a-11, and 240.13a-13]; and
c. Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act[15 U.S.C. §§ 78m(b)(2)(A) and 78m(b)(2)(B)].
Permanently enjoining each of Adley, Churchill, Volpe and Ezrin from violating, directly or indirectly:
a. Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder;
b. Section 13(b)(5) of the Exchange Act [15 U.S.C. § 78m(b)(5)] and Exchange Act Rules 13b2-1 and 13b2-2 [17 C.F.R. §§ 240.13b2-1, 240.13b2-2];
c. Section 13(a) of the Exchange Act [15 U.S.C. §§ 78m(a)] and Rules 12b-20, 13a-1, and 13a-13 thereunder [17 C.F.R. §§ 240.12b-20, 240.13a-1, and 240.13a-13]; and
d. Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act [15 U.S.C. §§ 78m(b)(2)(A) and 78m(b)(2)(B)].
Permanently enjoining each of Adley, Churchill and Volpe from violating, directly or indirectly Exchange Act Rule 13a-11 [17 C.F.R. § 240.13a-11].
Permanently enjoining Peselman from violating, directly or indirectly:
a. Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder;
b. Section 13(a) of the Exchange Act [15 U.S.C. §§ 78m(a)] and Rules 12b-20 and 13a-1 thereunder [17 C.F.R. §§ 240.12b-20 and 240.13a-1]; and
c. Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act [15 U.S.C. §§ 78m(b)(2)(A) and 78m(b)(2)(B)].
Permanently enjoining each of Davis and Metcalf Davis from violating, directly or indirectly:
a. Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder;
b. Section 10A of the Exchange Act [15 U.S.C. §§ 78j-1]; and
c. Section 13(a) of the Exchange Act [15 U.S.C. §§ 78m(a)] and Rules 12b-20, 13a-1, and 13a-13 thereunder [17 C.F.R. §§ 240.12b-20, 240.13a-1, and 240.13a-13].
Permanently prohibiting each of Adley, Churchill and Peselman from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act [15 U.S.C. § 781] or that is required to file reports pursuant to Section 15(d) of the Exchange Act [15 U.S.C. § 78o(d)].
Requiring Adley, Churchill, Davis and Metcalf Davis to disgorge their ill-gotten gains, including prejudgment interest thereon, with said monies and interest to be disbursed in accordance with a plan of distribution to be ordered by the Court.
Requiring Adley, Churchill, Volpe, Ezrin, Peselman, Davis and Metcalf Davis to pay civil money penalties pursuant to Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)] in an amount to be determined by the Court.
Ordering such other and further relief as this case may require and the Court deems appropriate.
The Commission hereby demands a trial by jury on all claims so triable.
Respectfully submitted,
JUAN MARCEL MARCELINO
District Administrator
By: ________________________
Luke T. Cadigan
Senior Trial Counsel (BBO# 561117)
Celia Moore
Deputy District Administrator (BBO# 542136)
Paul Block
Senior Counsel (BBO# 551158)
ATTORNEYS FOR PLAINTIFF
SECURITIES AND EXCHANGE COMMISSION
73 Tremont Street, Suite 600
Boston, Massachusetts
(617) 424-5900 ext. 203 (Cadigan)
(617) 424-5900 ext. 628 (Block)
(617) 424-5940 (Facsimile)
Dated: April __, 2003
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