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2: EX-99.1 Miscellaneous Exhibit 9± 36K
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4: EX-99.3 Miscellaneous Exhibit 5± 18K
5: EX-99.4 Miscellaneous Exhibit 4± 18K
6: EX-99.5 Miscellaneous Exhibit 16± 79K
7: EX-99.6 Miscellaneous Exhibit 10 52K
8: EX-99.7 Miscellaneous Exhibit 2± 12K
EX-99.6 — Miscellaneous Exhibit
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UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION
SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff CIVIL ACTION
NO. 1:98-CV-803-RWS
INTERNATIONAL HERITAGE, INC.,
STANLEY H. VAN ETTEN, CLAUDE W.
SAVAGE, LARRY G. SMITH
INTERNATIONAL HERITAGE
INCCRPORATED, a Nevada corporation,
Defentants.
Pursuant to Sections 20 (b) and 20 (d) of the Securities Act and Sections
21 (d) and 21 (c) ofthe Exchange Act, the Securities and Exchange Commission
brought this aciion for injunctive and other equitable relief, alleging
various violations of the securities laws. This case is before the Court on
the Commission's Motion for Preliminary Injunction. After conducting a hearing
and reviewing the entire record, this Court enters the following Order.
I. FINDINGS OF FACT
On March 16, 1998, the Commission sought and obtained a temporary
restraining order against Defendants. The Commission has alleged Defendants
engaged in the sale of securities without filing a registration statement with
the Commission, Defendants made misreprestations and material omissions
connection with the sale of securities, and Defendants knowingly
misrepresented International Heritage's financial condition and concealed the
fact that International Heritage [hereinafter referred to as "IHI"] was
operating a pyramid scheme. The Commission also alleged the Form 8-K filed
with the Commission by IHI contained misrepresentations concerning the nature
of IHI's business and concealed the fact that IHI was operating a pyramid
scheme. The Commission requests that the Court enter a prelirnmary injunction
enjoining all Defendants, their officers, agents, and employees from violating
Sections 5 (a), 5 (c) and 17 (a) of the Securities Act and Section 10 (b) of
the Exchange Act and Rule lOb-5. The Commission also requests that the Court
enjoin IHI and Defendant Van Etten from violating Sections 10 (b) and 15 (d)
of the Exchange Act and Rules lOb-5 ant 15d-11.
IHI contends it is a multi-level marketing firm engaged in the sale of
products such as jewelry, recreational equipment and collectible items. IHI
was founded by Claude W. Savage, Larry G. Smith and Stanley H. Van Etten in
April of 1995. Defendant Van Etten is Chairman of the Board of Directors,
President and Chief Executive Officer of IHI.(1) Defendants Claude Savage and
Larry G. Smith are directors of IHI.(2) Defendants Savage and Smith were
previously associated with Gold Unlimited, a multi-level marketing firm which
had gone out of business.
Defendant Van Etten presently owns Mayflower Capital, a broker dealer
licensed by the National Association of Securities Dealers and the Securities
Exchange Commission. Defendant Van Etten is also a shareholder and manager of
Mayflower Venture Capital Fund, a one million dollar venture capital fund used
to invest in start-up companies.
----------------------------
(1) On March 6, 1998, IHI entered into a reverse merger with Kara
International Inc., and on March 9, 1998, Defendant Van Etten became Chairman
of the Board, President and Chief Executive Officer of International Heritage
Incorporated, formerly Kara International Inc.
(2) Both Defentants Savage and Smith are also presently directors of
Heritage Incorporated.
----------------------------
Between July 17, 1997 and October 31, 1997, IHI notes were sold in a non-
public offering. In connection with the sale of these notes, IHI disclosed to
investors that it had suffered increased losses between May l, 1997 and August
20, 1997.
IHI starlet with a small number of independent retail sales
representatives. The initial independent sales representatives earned
commissions by selling products through their own retail sales
organizations.(3) Prior to March 18, 1998, an individual could join IHI and
sell products at retail puce for a profit, purchase products for personal use
or earn out products by applying commissions earned from sales toward the
purchase of a product.(4) The earn-out option required execution of a Retail
Business Agreement, or "RBA." An RBA was always initially filled out as
an earn-out. Regardless of the option chosen, all sales representatives were
required to purchase a Retail Business Career kit for $100. Under the earn-out
option, a participant executed a RBA and paid $250 toward the purchase of a
product.(5) As stated in the IHI manual, the RBA had a cash value of $250.
One of IHI's slogan's was, "Open...Create...Certify....Duplicate." With
the execution of an RBA, the representative earned 200 points, or what the
company referred to as "Retail Sale Business Volume." Executing a RBA would
effectively open a "Retail Business Center." A business center was a position
in IHI's computer tracking system for the recording of Retail Sales
----------------------------
(3) All representatives were required to submit an application.
(4) Although IHI constantly updates its marketing materials, the Retail
Business Career Kit received by the Commission in September of 1997 contained
materials with the latest revision date of October, 1996.
(5) However, it was possible for an IHI participant to enroll and make
no payment other than $100 for the Career kit.
----------------------------
Business Volume or RSBV.(6) Through March 8, 1998, approximately 90% of the
business centers were certified through an RBA. A business center also served
as a necessary component in the creation of a business organization; a
business organization consisted of a group of sales representatives.
Participants had the option of opening one, three or seven business
centers.(7) The incentive for multiple centers was to sponsor more business
organizations. A participant could not earn more than $2200 per week with a
single business center. Therefore, if a participant wanted more money, he had
to open more business centers.
IHI conducted regular regional training events for sales representatives.
To attract new representatives, present representatives would conduct weekly
opportunity meetings outlining the program. Representatives would explain
IHI's bilateral system as requiring sales represantatives to develop a
business organization on the left and right in order to earn money. This
process was referred to as "duplication." Under IHI's old program, the only
way to become a sales representative was by sponsorship through another sales
representative. No more than two sales representatives could be sponsored
directly under one business center.
The establishment of business centers and the accumulation of RSBV were
also mechanisms for calculaing override commission. Override commissions were
commissons on sales made by other sales representatives within a business
organization. In order to earn override
-------------------------------
(6) With the buyout option, the representativre had 60 days to pay IHI
the balance of the cost of the product ordered with the execution of the
Retail Business Agreement. With the cash out option the representative had 60
days to recover his $250 deposit back. However, the cash out option was not
available if the representative had earned 1200 Retail Sales Business Volume.
(7) The cash-out option was not available to representatives who had
purchased three or seven business centers. The cost of seven centers was
$1850; this payment could be made with a credit card.
--------------------------------
commissions, a sales representative was required to ceritfy his retail
business center by accumulating a minimum of 200 RSBV. Under the earn-out
option, initial certification was accomplished by payment of $250 toward the
purchase of a product order. With the $250 payment and product order, 200 RSBV
was credited to the business center and to each business center above it in
the retail sales organization, regardless of whether the product was ever
actually purchased or "earned out." If the product was earned in its entirety,
the product was delivered to the representative. Representatives did not have
the option of receiving a commission check in lieu of the product ordered upon
execution of the RBA.
Commissions were earned according to preset RSBU achievement levels. Once
a sale representative had accmulated a total of at least 1,200 RSBV on each
side of his sales organization, the representative would receive a $500
product or commision. This process resulted in Level One certification. For
Level Two certification, a reprecentative had to accumulate 2400 RSBV on each
side; for Level Three, 3600 RSBV on each side. Each additional level of
certification entitled the representative to an additional $500 product or
commission. After Level Three certification was accomplished, a
representative's RSBV total was cleared. However, that representative would
receive a "free" business center which could be used to replace a business
center in the representative's business organization. This free business was
referred to as a Development Certificate. Also, after Level Three
certification, a representative could earn a $700 commission bonus if two
representatives, one on each side of his organization earned 3600 RSBV within
two commission periods. A sales representative could not earn override
commissions unless RSBV was migrating upward. To facilitate migration of RSBV,
also required representatives who had achieved the first level of earnings to
recertify their business centers every 13 weeks. Recertification was
accomplished by purchasing products or executing more RBA's.(8) If a
representative sponsored a new representative who certified a business center,
each business center above the new representative would receive 200 RSBV.
Although IHI contends that it is a product driven company, the facts
demonstrate that across the board, selling products was not IHI's primary
operation. As of April, 1997, there were 192 IHI representatives in the Macon,
Georgia area. All 192 representatives were on IHI's product ship list for that
area. However, only three individuals listed on the shipping list were not
listed as IHI representatives. Testimony from the receiver's accountant
indicated that approximately 90% of the total sales revenue of IHI comes from
establishing or recertifying business centers. Participants testified that at
IHI meetings there was little discussion of products and prospective
participants were told they coule earn money faster through recruitment. They
understood that in order to make money in IHI they only had to recruit two
people. The witnesses understood that their sales organization would grow
through duplication. The fortunes of IHI investors were inextricably tied to
the success of the efforts of IHI promoters. Furthermore, of the 569,440
total product orders since IHI's inception, 288,418 orders have not
been filled.
As to the old plan, IHI's regulatory history is not unblemished. In the
spring of 1997, North Carolina's Attorney General's office began an
investigation of IHI operations. On June 3, 1991, Defendants entered into an
agreement with the State of North Carolina requiring 70% of all North Carolina
sales revenue to be retail sales to persons not connected to IHI or its
participants.
----------------------------------
(8) A representative could have a maximum of three outstanding RBA's per
business center.
----------------------------------
In March of 1997, Georgia's Attorney General's office began an investigation
of IHI operations. On February 4, 1998, the Georgia Fulton County Superior
Court entered an order of assurance of voluntary compliance. In this order,
Defendants agreed to a requirement of 50% non-partcipant sales prior to
payment of any commissions or dividends. IH1 is presently in compliance with
both agreements.
While Defendants contend the new plan does not involve the sale of
securities, the new plan contains some of the same aspects of the old plan.
Under the new plan, a retail business center is "qualified" rather than
"certified;" although the cost and RSBV requirements are not the same, the
process is the same. Requalification is still required every 13 weeks, and
requalification is necessary to earn override commissions. However, a
representative must also select additional bonus products to be earned out to
requalify a business center. To broaden IHI,s program, another compensation
plan was developed, the Flex-Level Compensation Plan. This plan uses PV or
personal volume rather than RSBV to calculate earnings and assign value to
products. Although the alternative compensation plan entitles a representative
to "Personal Volume Rebate Commission[s]," this term is not defined in the
manual. Retail Sales Organization RSO's still exist and sponsorship is still
the only method of developing RSO's. In both plans, representatives can
earn development bonuses and development certificates by similar methods
described above.
The new plan does not include the RBA or a $250 deposit.
II. CONCLUSION OF LAW
The issue before the Court is whether Defendants have violated federal
securities laws warranting an exercise of this Court's equitable jurisdiction.
Before the Court may issue a preliminary injunction, the Commission must
demonstrate by a preponderance of the evidence that there is reasonable
likelihood that Defendants are engaged or about to engage in practices that
violate federal securities laws. S.E.C. v First Financial Group of
Texas. 645 F.2d 429 (5th Cir. Unit A May 1981).(9) The Commission may make
such a showing by submitting proof of past substantive violations that
indicate a reasonable likelihood of future substantive violations. Id, In
determining whether to issue an injunction, the Court must consider the
egregiousness of the defendant's actions, the isolated or recurrent nature of
the infraction, the degree of scienter involved, the sincerity of the
defendant's assurances against future violations, the defendant's recognition
of the wrongful nature of his conduct, and the likelihood that the defendant's
occupation will present opportnities for future violations. S.E.C. v Carriba
Air, Inc, 681 F.2d 1318, 1322 (11th Cir. 1982). With such an inquiry, the
Court is required to view all evidence in a light most favorable to the
Commission, and the Commission is entitled to all reasonable inferences.
S.E.C. v. Blatt, 583 F.2d 1325 (5th Cir. 1978).
Before proceeding on the merits of the Commission's requests for relief,
the Court must first determine whether Defendants have engaged in the offer
and sale of "securities" under the terms of the Securities Act and the
exchange Act. The Commission argues the "security" involved in the case at bar
can be characterized as an "investment contract."(10) As stated by the
---------------------------------
(9) S.E.C. v. Carriba Air, Inc., 681 F.2d 1318, 1324 n.7 (Eleventh
Circuit bound by Fifth Circuit decisions handed down prior to close of
business on September 30, 1981 unless and until the Eleventh Circuit speaks en
banc to the issue presented).
(10) According to 15 U.S.C. Section 78c (a) (10) of the Exchange Act,
the term "security" means "any note, stock, treasury stock, bond, debenture,
certificate of interest or partcipation in any profit-sharing agreement..., or
any ...transferable share, investment contract...; or any certificate of
interest or paricipation in, temporary or interim certificate for, receipt
for, or warrant or right to subscribe to or purchase any of the foregoing[.]"
The Securities Act contains a similar definition found at 15 U.S.C. Section
77b (l). The Supreme Court has held that the two definitions are virtually
identical. Tchereonin v Knight. 389 U.S. 332, 335-36, 88 S.Ct. 548, 552-53, 10
L.E.2d 564(1967). See also United American Bank of Nashville v. Gunter et
al., 620 F.2d 1108, 1114 (5th Cir. July 1980).
---------------------------------
Supreme Court in S.E.C. v. W. J. Howey 328 U.S. 293, 299, 66 S.Ct. 1100, 1103,
90 L.Ed. 1244 (1946). "An investment contract for purposes of the Securities
Act means a contract, transaction or scheme whereby a person invests his money
in a common enterprise and is led to expect profits solely from the efforts of
the promoter or a third party." See also Tcherepin et al. v. Knight et al.,
389 U.S. 332, 338, 88 S.Ct. 548, 554, 19 L.E.2d 564 (1967) (the test for an
investment contract under the Exchange Act is whether the scheme involves an
investment of money in a common enterprise with profits to come solely from
the efforts of others) and United Housing Foundation, Inc. v. Forman, 421 U.S.
837, 95 S.Ct. 2051, 44 L.E.2d 621 (1975).
The Commission contends Defendants, offer and sale of business center
interests are investment contracts and thus securities. While it is clear
participants in IHI's old program made an investment of money in a common
enterprise,(11) Defendants argue the third prong of the Howey test has not
been met. In S.E.C. v. Koscot Interplanetary Inc,. the Eleventh Circuit Court
of Appeals expressly adopted the view of the Ninth Circuit and held an
investment contract exists when "the efforts made by those other than the
investor are the undeniably significant ones, those essential managerial
efforts which affect the failure or success of the enterprise." 497 F.2d 473,
418 - 479 (5th Cir. 1974). See also Eberhardt v. Waters. 901 F.2d 1578 (11th
Cir. 1990)(where
------------------------------
(11) In S.E.C. v Koscot Interplanetary Inc. 497 F.2d 473 (5th Cir.
1974), the Court of appeals held "the requisite commonality [of an enterprise]
is evidenced by the fact that the fortunes of all investors are inextricably
tied to the efficacy of the [business organization's] meetings and guidelines
on recruiting prospects and consummating a sale while the fact the an
investor's return is independent of that of other investors in the operation
is not decisive." The Court of Appeals' analysis of the second prong focused
on the uniformity of impact of the promoter's efforts.
------------------------------
third prong of Howey was satisfied even where profits were not derived
"solely" from the efforts of others but were also derived from insubstantial
efforts of the investor). In the case at bar, upper-level management of IHI
implemented widespread promotional programs which included live conferences,
telephone conferences, meetings, and training events. The Retail Sales Career
Kit purchased by each representative included brochures, video presentations,
audio cassettes, and flip chart presentations which explained IHI's marketing
program and were used to advertise IHI's program to prospective participants.
An IHI representative only had to find a listening ear, while IHI promoters
retained immediate control over the managerial conduct of the enterprise.
Representatives only had to find two recruits. Representatives testified that
they understood their sales organization would group simply by duplication.
After finding two recruits, investors would profit by the geometric
progression of the process of recruitment, and the success of a
representative's investment was inextrcably tied to the efforts of IHI
promoters. Therefore, this Court concludes the IHI program involved the offer
and sale of securities.
Section 5 of the Securities Act prohibits the sale of securities by the
use of instrumentalities of interstate commerce without the filing of a
registration statement.(12) To establish a violation of this provision of the
Act, the Commission must make a prima facie showing that no registration
statement was in effect as to the securities, that Defendants sold or
-------------------------------
(12) 15 U.S.C Section 77e (a) provides, "Unless a registration
statement is in effect as to a security, it shall be unlawful for any person,
directly or indirectly to make use of any means or instruments of
transportation or comnunication in interstate commerce or of the mails to sell
such security through the use or medium of any prospectus or otherwise; or to
carry or cause to be carried through the mails or in interstate commerce, by
any means or instruments of transportation, any such security for the purpose
of sale or for delivery after sale." 15 U.S.C. Section 17e (c) is
the provision that requires filing of a registration statement when securities
are offered and sold.
-------------------------------
offered to sell the securities, and that interstate transportation or
communication and mails were used. S.E.C. v. Continental Tobacco Co. of South
Carolina 463 F.2d 137 (5th Cir. 1972).
The Commission contends Defendants have been selling securities, since
1995 by using the mails, traveling, and other media including telephone
conference calls without filing a registration statement. The Commission
submitted undisputed evidence that defendants used the mails to send
promotional sales materials to investors and used instrumentalities of
interstate commerce such as telephones and travel to give sales meetings. The
Commission also demonstrated that the use of instrumentalities of interstate
commerce was for the purpose of the sale and offer of securities. The sale of
business centers by the use of the RBA constitutes the sale of securities and
Defendants failed to file a registration statement as to these securities.
Therefore, Defendants violated Sections 5 (a) and (c) of the Securities Act.
Several provisions of the Securities Act and the Exchange Act prohibit
the use of any manipulative device in the sale of securities.(13) To prove
violations under Sections 10 (b), Rule
--------------------------------
(13) 15 U.S.C. Section 78j CD) provides,
It shall be unlawful for any person, directly or indirectly, by the use
of any means or instrumentality of interstate commerce or of the mails, or of
any facility of any national securities exchange [t]o use or employ, in
connection with the purchase or sale of any security registered on a national
securities exchange or any security not so registered, any manipulative or
deceptive device or contrivance in contravention of such rules and regulations
as the Commission may prescribe as necessary or appropriate in the public
interest or far the protection of investors.
Rule 10b-5 is found at 17 C.F.R Section 240.10b-5. This regulation provides,
It shall be unlawful for any person, directly or indirectly, by the use of any
means or instrumentality of interstate commerce, or of the mails or of any
facility of any national securities exchange, (a) To employ any device,
scheme, or artifice to defraud, (b) To make any untrue statement of material
fact or to omit to state a material fact necessary in order to make the
statements made, in the light of the circumstances under which they were made,
not misleading, or (c) To engage in any act, practice, or course of business
which operates or would operate as a fraud or deceit upon any person, in
connection with the purchase or sale of any security.
-----------------------------------
10b-5 and 17(a)(1), the commission must establish that Defentants acted with
seienter. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193-94 n.12 (1976); Aaron
v. S.E.C., 446 U S. 680, 100 S.Ct. 1945, 64 L.E.2d 611 (1980). The Commission
may demonstrate the existence of scienter by showing that Defendants engaged
in knowing or intentional misconduct. Aaron, 446 U.S. at 695, 100 S.Ct. at
1955. In the Eleventh Circuit, scienter may also be established by showing
that the defendant's conduct exhibited severe recklessness. Carriba Air. 681
F.2d at 1324.
Defendants' old compensation plan which included the use of the RBA is
comparable to the program found in Webster v. Omnitrition International, Inc.,
79F. 3d 776 (9th Cir. 1996). Defendants exhibited at least severe recklessness
in marketing and implementing the old program. Therefore, this Court
concludes that Defendants violated Section 10 (b) of the Exchange Act, Rule
10b-5, and Section 17 (a)(1) of the Securities Act.
--------------------------------
17 C.F.R. Section 240.10b-5.
Section 17 (a) ofthc Securities Act is found at 15 U.S C. Section 77q
(a) (1), which provides, "It shall be unlawful for any person in the offer or
sale of any securities by the use of any means or instruments of
transportation or communication in interstate commerce or by the use of the
mails, directly or indirectly to employ any device, scheme, or artifice to
defraud."
---------------------------------
However, this Court declines to conclude that Defentants IHI and Stanley
Van Etten violated Section 15 (d) of the Exchange Act or Rule 15d-11. At this
point, there is an insuffient basis in the evidence to support a violation of
either provision.
Defendants contend IHI's program no longer includes the use of the Retail
Business Agreement and prospective injunctive relief is not required. However,
the new plan retains elements from the old plan (e.g., certification and
recertification) which cause the Court concern about future violations. The
nature of Defendants' past violations demonstrate the reasonable likelihood of
future violations; therefore, preliminary injunctive relief is warranted. See
Continental Tobacco, 463 F2d. at 162. See also S.E.C. v. Radio Hill Mines Co.,
Ltd., 479 F2d 4 (2nd Cir. 1973) (where court designed additional reporting
requirements to insure compliance with a preliminary injunction against
violations of the securities laws).
For the aforementioned reasons, the Commission's Motion for Preliminary
Injunction is GRANTED.
PRELIMINARY INJUCTION
The Commission having demonstrated a reasonable likelihood of future
violations by the defendants, it is herby ORDERED that:
1.
Until further order of this Court, defendant International Heritage,
Inc. ("IHI"), its officers (as officers and in their individual capacities),
agents, servants, employees, attorneys, and those persons in active concert or
participation with them be, and they hereby are restrained from directly or
indirectly:
A. making use of any means or instruments of transportation or
communication in interstate commerce or of the mails to sell any securities
through the use of any prospectus or otherwise, unless and until a
registration statement is in effect with the Commission as to such securities;
B. carrying securities or causing them to be carried through the
mails or in interstate commerce, by means or instruments of transportation,
for the purpose of sale or delivery after sale, unless and until a
registration statement is in effect with the Commission as to such securities;
C. making use of any means or instruments of transportation or
communication in interstate commerce or of the mails to offer to sell or offer
to buy, through the use or medium of any prospectus or otherwise, any interest
in securities, unless and until a registration statement is filed with the
Commission as to such security is the subject of a refusal order or stop order
or (prior to the effective date of the registration statement) any public
proceeding or examination under Section 8 of the Securities Act, 15 U.S.C.
77h, in violation of Sections (a) and 5 (c) of the Securities Act, 15 U.S.C.
77e(a) and 77e(c). Provided, however, that nothing in the foregoing portion
of the preliminary injunction shall apply to any security or transaction which
is exempt from the provisions of Section 5 of the Securities Act, 15 U.S.C.
77e.
2.
Until further order of this Court, defendant IHI, its officers (as
officers and in their individual capacities), agents, servants, employees,
attorneys and those persons, in active concert or participation with them, in
connection with the purchase or sale or in the offer or sale of securities,
by use of any means or instrumentality's of interstate commerce or any means
or instruments of transportadon or communication in interstate commerce, or by
the mails or any facility of any national securities exchange, be, and they
hereby are restrained from directly or indirectly:
(1)employing any device, scheme or artifice to defraud;
(2)engaging in any act, practice or course of business which operates or
would operate as a fraud or deceit upon any person;
(3)obtaining money or property by means of any untrue statement of a
material fact, or omitting to state a material fact necessary in
order to make the statements made, in the light of the circumstances
under which they were made, not misleading; or
(4)making any untrue statement of a material fact or omitting to State a
material fact necessary in order to make the statements made, in
light of the circumstances under which they were made, not
misleading, in violation of Section 17(a) of the Securities Act, 15
U.S.C. 77q(a), Section 1O(b) of the Exchange Act, 15 U.S.C. 78j(b),
and Rule lOb-5, 17 C.F.R. 240.10b-5, thereunder.
3.
Until further order of this Court, defentant International Heritage
Incorporation, a Nevada corporation, its officers (as officers and in their
individual capacities), agents, servants, employees, attorneys and those
persons in active concert or participation with them, be and hereby are
restained from directly or indirectly filing reports with the Commission, on
Form 8-K or otherwise, which are false and misleading or fail to disclose
material facts necessary to make the statements made not mislesding, in
violation of Section 15(d) of the Exchange Act, 15 U.S.C. 780(d), end Rule
15d-11, 17 C.F.R 240.15d-11.
4.
Pending further order of this Court, defendant IHI, its officers (as
officers and in their individual capacities), agents, employees, servants,
attorneys, and all persons in active concert or participation with them, and
each of them are restrained and enjorned from destroying, transferring or
otherwise rendering illegible all books, records, papers, ledgers, accounting
statements and other documents employed in any of such defendants' businesses,
which reflect the business activities of any of the defendants, or which
reflect the transactions described in the Commission's Complaint.
5.
IT IS FURTHER ORDERED that Lloyd Whittaker is hereby appointed Monitor
for IHI. The Monitor will periodically review the activities of IHI to assure
IHI's complianee with this order and the federal securities laws. This review
will be performed within thirty (30) days of this order and not less than
quarterly thereafter. The Monitor will have full access to the offices,
records and officers and employees of IHI except any information protected by
an applicable privilege. IHI wil1 provide quarterly financial information to
the Monitor in the form and as otherwise directed by the Monitor, and will
submit any changes in its compensation plan to the Monitor for approval before
implementing such changes. IHI will provide the Monitor with the names,
addresses and phone numbers of any new representatives who are enrolled by
IHI. IHI will also make available for review by the Monitor order forms for
all products and services sold by IHI, which shall contain the name and
address of the purchaser, the items purchased and the purchase price IHI shall
not accept any orders which do not contain this information. The Monitor will
periodically contact a sampling of such representatives and customers to
determine if the IHI program is being presented in a way which is inconsistent
with this order. The Monitor will report to the Court any conduct
inconsistent with this Order. IHI shall be responsible for, and shall pay,
the reasonable fees and costs incurred by the Monitor, including, but not
limited to, professional fees.
6.
IT IS FURTHER ORDERED that IHI will post a bond in the amount of $5
million unti1 further order of this Court, to ensure that at least that amount
is available to satisfy any amounts that may be ordered paid by IHI in this
proceeding. The specific conditions of such bond shall be set out in a
separate order, which conditions are incorporated herein by reference.
7.
IT IS FURTHER ORDERED that defendants Stanley H. Van Etten, Claude W.
Savage and Larry G. Smith shall not leave their positions with IHI without
prior leave of the Court.
8.
IT IS FURTHER ORDERED that IHI shall not transfer its sales operation
or representative networks to any other entity without prior leave of the
Court.
9.
IT IS FURTHER ORDERED that defendant Van Etten's monetary compensation as
set out in the Employment Agreement between Van Etten and International
Heritage, Inc. wil1 be reduced by fifty percent (50%) until further order of
the Court.
10.
IHI shall develop and submit to the Monitor a new compensation and
marketing plan consistent with the terms of this order. Any future amendments
to the plan shall also be submitted to the Monitor. The Monitor shall submit
the plans to Plaintiff and the Court for review. The Monitor will review any
plans submitted by IHI to assure compliance with this order and shall approve
a plan only after determining that the plan complies with the terms of the
Order and any applicable laws. After approval by the Monitor of a plan or
amendment such plan or amendment can be implemented by IHI. IHI will not be
required to await approval by the Court of such plans. No new sales
representatives shall be approved by IHI until the new composition and
marketing plan is approved by the Monitor. Notwithstanding the foregoing, the
Court may, upon motion of any party or sua sponte issue a show cause order
requiring IHI to appear before the Court and show that the plans are in
compliance with the terms of the Order. In addition to seeking approval of
the Monitor to the new plans, IHI may, before implementation of such
plans, request that the Count review any new or amended plans to assure
compliance with the terms of this Order.
11.
IT IS FURTHER ORDERED that IHI shall not permit any further use of the
Retail Business Agreement, or any similar agreement which permits, as an
aspect or part of the business operations, compensation plan, or marketing
plan of IHI, sales representatives of IHI to make partial payments toward the
purchase of a product or service in order to receive override commissions on
the sale of products or services. However, IHI may continue to require a
prospective sale representative to purchase a sales kit at a cost of $100.00,
which costs shall be consistent with IHI's costs to provide the kit.
12.
IT IS FURTHER ORDERED that IHI shall not requlre new or current
sales represantatives of IHI to certify or recertify, through payment by the
sales representative to IHI, in order to receive override commissions.
13.
IT IS FURTHER ORDERED that IHI shall not accept payment for products or
services without either delivering the product or services or making
appropriate arrangements with a carrier, manufacturer, or supplier of that
product or service to deliver the product or service to the purchaser of that
product or service.
14.
IT IS FURTHER ORDERED that IHI will give notice of this Order and its
terms to representatives within thirty (3O) days, and will supply proof of
this effort to the Monitor. IHI will provide notice of its Compensation Plan
to all representatives within thirty (30) days of its approval, and will
supply proof of this effort to the Monitor.
15.
The Court finds that the Receiver, Lloyd Whittaker, has performed his
duties in full and complete compliance with the terms of this Court's previous
orders. The Receiver shall be relieved of his responsibilities upon the
posting of the $5 million bond required to be posted by IHI under this Orter.
Upon the posting of said bond, the Receiver's bond which has been filed with
the Clerk of Court shall be discharged. Prior to the discharge of the
Receiver, the Receiver is authorized to transfer the sum of $120,000.00 from
IHI to the Trust Account of Kilpatrick Stockton, LLP, the Receiver's legal
counsel, to be held for payment of the professional fees and expenses incurred
by the Receiver, the Receiver's legal counsel, and the Receiver's financial
consultant, in connection with the Receiver's duties and obligations during
his tenure. However, such professional fees and expenses shall be paid only
upon submission of appropriate applications for fees and expenses to the Court
and upon the Court's approval of same to the extent that the amount of the
Court approved professional fees and expenses are less than the amount
reserved in the Trust Account, then the excess would be returned forthwith to
IHI. To the extent that the amount of the Court approved professional fees
and expenses are more than the amount reserved in the Trust Account, IHI shall
be ordered forthwith to remit the deficiency to the Receiver.
16.
IT IS FURTHER ORDERED that, upon the posting of the $5 million bond by
IHI, the officers and directors of IHI will have the authority to resume, and
may resume, their responsibilities as officers and directors of IHI in
accordance with the terms of this Order.
17.
IT IS FURTHER ORDERED that the orders entered by the Court in this Cause
on March 16, 1998 and as subsequently modified on March 17, 1998, shall be
vacated and modified in their entirety to conform with the terms of this
Order upon the posting of the $5 mlllion bond by IHI.
18.
IT IS FURTHER ORDERED that this Order shall not and does not constitute a
securities or invesment related permanent or temporary injunction for purposes
of any collateral effects or reporting requirements under state securities
laws or self-regulatory organization rules, nor shall the existence of this
Order restrict, limit, prohibit or disqualify the Defendants, or any affiliate
of the Defendants, in any manner from (a) engaging in any lawful activity or
practice pursuant to the Securities Act of 1933, the Securities Exchange Act
of 1934, the Investment Company Act of 1940, the Investment Advisers Act of
1940, or the Commodity Exchange Act, and/or any rules or regulations
promulgated thereunder, and/or any state securities and commodities laws
(including with limitation, participating in offerings or availing themselves
of exemptions including the Uniform Limited Offering Exemption, as and to the
extent now or hereafter adopted), or (b) acting as an affliated person of any
underwriter, broker, dealer, investment adviser, investment company, bank,
insurance company, or other entity or person under any applicable federal or
state insurance, securities, banking or commodities 1aw.
SO ORDERED this 3rd day of April, 1998.
/s/RICHARD W. STORY
United States District Judge
Dates Referenced Herein and Documents Incorporated by Reference
| Referenced-On Page |
|---|
| This ‘8-K’ Filing | | Date | | First | | Last | | | Other Filings |
|---|
| |  |
| Filed on: | | 4/10/98 |
| | 3/18/98 | | 2 |
| | 3/17/98 | | 10 |
| | 3/16/98 | | 1 | | 10 | | | 8-K/A |
| | 3/9/98 | | 1 |
| | 3/8/98 | | 3 |
| For Period End: | | 3/6/98 | | 1 | | | | | 8-K |
| | 2/4/98 | | 5 |
| | 10/31/97 | | 2 |
| | 8/20/97 | | 2 |
| | 7/17/97 | | 2 |
| List all Filings |
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