Current Report — Form 8-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 8-K Current Report 9± 46K
2: EX-99.1 Miscellaneous Exhibit 9± 36K
3: EX-99.2 Miscellaneous Exhibit 4± 18K
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-99.1 — Miscellaneous Exhibit
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF GEORGIA
SECURITIES AND EXCHANGE COMMISSION CIVIL ACTION NO.
Plaintiff, 198-cv-0803
v.
INTERNATIONAL HERITAGE, INC.,
STANLEY H. VAN ETTEN,
CLAUDE W. SAVAGE,
LARRY G. SMITH and
INTERNATIONAL HERITAGE, INCORPORATED,
a Nevada corporation,
Defendants.
COMPLAINT FOR INJUNCTIVE AND OTHER RELIEF
It appears to Plaintiff, Securities and Exchange Commission
("Commission"), and it alleges that:
1. The Plaintiff brings this action to enjoin violations of the
federal securities laws by International Heritage, Inc., ("IHI"), Stanley H.
Van Etten ("Van Etten"), Claude W. Savage ("Savage"), Larry G. Smith ("Smith")
and International Heritage, Incorporated, a Nevada corporation ("Heritage
Incorporated").
This case involves a massive ongoing pyramid scheme which, to date, has
raised at least $150 million from over 150,000 investors nationwide. The
interests in the pyramid scheme are securities. No registration statement has
been filed with the Commission in connection with the sales. The defendants
have been selling the securities by means of misrepresentations and omissions
of material fact necessary to make statements made not misleading.
In addition to selling interests in the pyramid scheme, between July 17,
1997 and November 1, 1997, the defendants sold $5 million in notes convertible
into shares of IHI common stock. The defendants knowingly misrepresented IHIs
financial condition to investors and concealed the fact that IHI was operating
a pyramid scheme.
Finally, on March 6, 1998, IHI entered into a reverse merger with a
publicly traded shell company, Kara International, Inc. ("Kara"). IHI became
a majority owned subsidiary of Kara, and Kara's name was changed to
International Heritage, Incorporated. The Form 8-K filed with the Commission
by Heritage Incorporated made misrepresentations concerning the nature of
IHI s business and concealing the fact that IHI was operating a pyramid
scheme.
2. Defendants IHI, Van Etten, Savage and Smith, by virtue of their
conduct, directly and indirectly, have engaged, and unless enjoined will
engage, in transactions, acts, practices, and courses of business that have
constituted and will constitute violations of Sections (9a), 5(c) and 17(a) of
the Securities Act of 1933 ("Securities Act") [15 U.S.C. 77e(a), 77e(c) and
77q(a)}, and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange
Act") [15 U.S.C. 78j(b)] and Rule 10b-5 [17 C.F.R. 240.10b-5] promulgated
thereunder. Heritage Incorporated, by virtue of its conduct, aided and
abetted by Van Etten, has violated Sections 10-(b) and 15(d) (15 U.S.C. 78j(b)
and 78o(d)] of the Exchange Act and Rules 10b-5 and 15d-11[17 C.F.R. 240.10b-5
and 240.15d-11].
3. Pursuant to authority granted by Section 10(b), 15(d) and 23(a) of
the Exchange Act [15 U.S.C. 78j(b) and 78w(a)], the Commission has promulgated
Rules 10b-5 and 15d-11[17 C.F.R. 240.10b-5 and 240.15d-11], which rules were
in effect at all times relevant herein and are now in effect.
JURISDICTION AND VENUE
4. The Commission brings this action pursuant to Sections 20(b) and
20(d) of the Securities Act [15 U.S.C. 77t(b) and 77t(d)], and Sections 21(d)
and 21(e) of the Exchange Act [15 U.S.C. 78u(d) and 78u(c)], to enjoin the
defendants from engaging in the transactions, acts, practices and courses of
business alleged in this complaint, and transactions, acts, practices and
courses of business of similar purport and object, for appointment of a
receiver, for disgorgement of illegally obtained funds and other equitable
relief, and for civil money penalties.
5. This Court has jurisdiction over this action pursuant to Sections
20(b), 20(d), 22(a) of the Securities Act [15 U.S.C. 77t(b), 77t(d) and
77v(a)] and Sections 21(d), 21(e) and 27 of the Exchange Act [15 U.S.C.
78u(d), 78u(e) and 78a].
6. The defendants, directly and indirectly, made use of the mails,
the means and instruments of transportation and communication in interstate
commerce, and the means and instrumentality s of interstate commerce in
connection with the transactions, acts, practices and courses of business
alleged in this complaint.
7. Certain of the transactions, acts, practices and courses of
business constituting violations of the Securities Act and the Exchange Act
have occurred in the Northern District of Georgia. Specifically, investors
have been solicited to purchase the investments in the Northern District of
Georgia.
8. The defendants, unless restrained and enjoined by this Court, will
continue to engage in the transactions, acts, practices and courses of
business alleged in this complaint, and in transactions, acts, practices and
courses of business of similar purport and object.
DEFENDANTS
9. International Heritage, Inc., is a North Carolina corporation
incorporated on April 28, 1995. IHI's principal offices are in Raleigh, North
Carolina. On March 6, 1998, IHI entered into a reverse merger with Kara
International Inc. ("Kara"), a publicly traded shell company. Kara changed
its name to International Heritage, Incorporated. IHI became a majority owned
subsidiary of Heritage Incorporated. (formerly Kara).
10. Stanley H. Van Etten, 35 years of age, is the founder, chairman of
the board of directors, president and chief executive officer of IHI. As of
March 6, 1998, Van Etten is the chairman and CEO of Heritage Incorporated
(formerly Kara), which now owns IHI.
11. Claude W. Savage, 58 years of age, is a founder and director of
IHI. As of March 6, 1998, Savage is a director of Heritage Incorporated.
12. Larry G. Smith, 51 years of age, is a founder and director of IHI.
As of March 6, 1998, Smith is a director of Heritage Incorporated.
13. International Heritage, Incorporated, a Nevada corp., was known as
Kara International Inc. ("Kara") until the March 6, 1998 reverse merger.
Prior to the merger, Kara was a shell company with no active business.
Heritage Incorporated files reports with the Commission pursuant to Section
15(d) of the Exchange Act. Heritage Incorporated common stock is traded in
the over-the-counter market.
THE IHI PYRAMID SCHEME
14. Beginning in April 1995, IHI, through Van Etten, Savage, Smith and
others, has been soliciting individuals throughout the United States to invest
in a pyramid scheme. To date, more than 154,500 investors have purchased
interests in the program, which are described by IHI as business centers.
15. IHI, through Van Etten, Savage, Smith and others, provides written
promotional materials, promotional meetings, video tapes, internet web pages
and national conference calls which are used to solicit new investors.
16. New investors are recruited by an investor who is already
involved. The prospective investor is typically convinced to attend a
promotional meeting where a presentation is made in a revival atmosphere.
17. The IHI pyramid scheme investment is presented to prospective
investors as a network marketing system. One slogan used is "All the
Strengths of Corporate America with the Benefits of Network Marketing."
18. Each IHI investor purchases one, three or seven interests, which
are denoted "business centers."
19. The investors are required to generate $250 from each center
before that center is "certified." The $250 is generally generated by the
investor signing a retail business agreement which includes the investor
purchasing a product from IHI for $500, with the $250 serving as a down
payment. The investor is also required to purchase an IHI sales kit for $100.
The retail business agreement provides for payment by credit card, enabling
the investor to leave the presentation with up to seven centers certified.
20. IHI describes its program as an opportunity. Specifically,
investors are told that they can earn up to $2,200 per week per business
center. Although investors can nominally earn income by selling products, the
sales pitch clearly implies that the significant income will come from
enrolling new members, who will in turn enroll new members, in a typical
pyramid arrangement. The vast majority of revenues to IHI, and the
significant compensation to investors, comes from signing up new members.
21. The IHI sales kit contains a book written by Van Etten and his
father which explicitly discourages recruiting persons with experience in
retail sales, because such persons might actually try to sell the products,
and neglect their more important function, to bring in new members. One
passage reads:
Now a second reason why traditional salespersons are a risky lot
for you to deal with also becomes crystal clear. If you sponsor
an individual with years of experience in direct sales, his
natural inclination will be to sell, sell, sell the company's
product, but odds are that he will do that at the expense of
neglecting to build a sales organization beneath himself. As a
result, his productivity for you will be of the flash-in-the-pan
variety because as soon as he tires of selling the 'same old
product' he will move on to what he sees as more interesting, if
not greener, 'pastures.' Meanwhile, you will be left with a hole
in your downline.... (emphasis in original)
22. The IHI pyramid structure is bi-lateral in nature, in that each
business center can have only two business centers directly below it in the
pyramid. The IHI compensation structure provides commissions to a center based
on the revenue produced by the lesser producing center directly below the
center being compensated.
23. As a result of the compensation structure, if a retail sales
oriented person occupies
one of the centers, the compensation to the center above that person on the
pyramid tends to be limited to what the retail sales person can personally
sell. In such a situation, the power of geometric growth, which IHI preaches,
will be lost. This structure provides an overwhelming incentive to recruit
investors whose focus will be on perpetuating the pyramid.
MISREPRESENTATIONS IN CONNECTION WITH THE PYRAMID SCHEME
24. As in all pyramid schemes, the defendants do not disclose that at
some point, the market becomes saturated, the supply of new members runs out,
and the newest investors are unable to generate returns. Van Etten, Savage and
Smith, and through them IHI, have been aware of this inevitable result
throughout the scheme.
25. IHI represents in its sales presentations that it is a model of
corporate compliance, and is "regulatory right." In fact, in June 1997, IHI
entered into an agreement to resolve investigation by the State of North
Carolina in which the state had concluded that IHI was violating the North
Carolina Pyramid Schemes Act. The agreement only restricted IHI's activities
in North Carolina. In October 1996, IHI voluntarily restricted its activities
in the State of Florida after state inquiries. In February 1998, IHI entered
into an agreement with the state of Georgia limiting IHI's activities.
26. IHI's true regulatory history is not disclosed to business center
investors. Van Etten, Savage and Smith were aware of the regulatory actions
when they occurred.
27. The IHI materials describe Van Etten's career, including 13+ years
as an "investment banker." The materials fail to disclose a past IRS lien on
Van Etten's residence and his personal bankruptcy in 1990. The IHI materials
also fail to disclose that Savage and Smith were involved in a prior failed
multilevel marketing scheme.
IHI'S SALE OF NOTES
28. Between August 5, 1997 and October 31, 1997, IHI, through Van Etten,
Savage, Smith and others, raised $5 million by selling IHI notes convertible
into IHI common stock, to approximately 95 persons in fourteen states.
29. The notes offering was conducted by WIN Capital Corp., registered
broker dealer.
30. IHI, Van Etten, Savage and Smith authorized the use of the
disclosure document used in connection with the notes offering. The disclosure
document was denoted a "term sheet" and was dated July 17, 1997.
31. The term sheet disclosed that IHI had losses of approximately $1.9
million during the first four months of 1997. The term sheet did not disclose
that by the time of the offering, IHI's losses for the year had increased to
$7.6 million, and that IHI was facing a severe shortage of operating funds.
32. Van Etten, Savage and Smith were each aware of IHI's increased
losses and shortage of operating funds at lease as early as August 20, 1997.
They nevertheless failed to update the term sheet, which was provided to
prospective investors through October 1997.
33. The term sheet represents that IHI pays commissions and bonuses
"derived solely from sales as opposed to headhunting or any similar
activities." In fact, IHI's compensation scheme is premised primarily on
headhunting for new members. Van Etten, Savage and Smith were aware of the
workings of IHI's compensation scheme at all times during the note offering.
34. The term sheet states that representatives "who sponsor other
representatives must fulfill supervisory activities, including ongoing
communication and managerial supervision with the IRSRs [representatives]
within their Retail Sales organization in order to qualify for ongoing
commissions and bonuses." This statement is misleading because IHI has no
procedure to gather and electronically monitor such activities and this
purported requirement is not enforced.
35. The term sheet represents that IHI has "a prohibition from
presenting hypothetical earnings projections" in sales presentations. In fact,
IHI's presentation relies heavily on an example using assumed earnings of
$2,200 per week per center. All of the defendant were aware of this practice
when they prepared the term sheet.
The Heritage Incorporated Form 8-K
36. On or about March 10, 1998, Heritage Incorporated (formerly Kara)
filed a form 8-K with the Commission announcing the reverse merger and
describing the business of IHI, now a majority owned subsidiary.
37. The Form 8-K was signed by Van Etten and contains misrepresentations
and omissions designed to conceal the fact that IHI, the only significant
asset of Heritage Incorporated (formerly Kara) is operating a pyramid scheme.
The Form 8-K states that IHI's marketing program has been "structured to fit
within the Amway safeguards applicable to direct selling companies" as
anti-pyramiding safeguards.
38. The Form 8-K includes, as one of those purported safeguards, a
representation that "commissions and bonuses are derived solely from sales as
opposed to headhunting, sponsoring or any similar activities." This statement
is a mischaracterization since IHI's structure compensates investors primarily
based on recruitment of new investors. The overall representation that IHI is
not operating a pyramid scheme is also false.
39. In addition, the Form 8-K discloses the Commission's "informal
investigation" and represents that "IHI has provided the SEC with all
information requested to date." Although most of the Commission's requests for
information have been honored, on December 17, 1997, the Commission requested
certain additional information and in January 1998 requested information as to
the number of persons who had entered the IHI matrix via the "retail business
agreement." All of the requested information has not been provided.
40. Van Etten, who signed the Form 8-K (electronically) was aware of the
true nature of IHI's business and was aware that the disclosures referenced
above were misleading.
41. The business center interests, the notes offered and
sold by IHI, and shares of Heritage Incorporated common stock, are securities,
as that term is defined in the Securities Act and the Exchange Act. No
registration statement has ever been filed with the Commission in connection
with the sale of business center interests .
COUNT I
FRAUD
Violations of Section 17(a)(1) of the Securities Act
(15 U.S.C. 77g(a)(1))
42. Paragraphs 1 through 41 are hereby realleged and are incorporated
herein by reference.
43. From in or about April 1995 through the present, defendants IHI,
Van Etten, Savage and Smith, singly and in concert, in the offer and sale of
securities, by the use of means and instruments of transportation and
communication in interstate
commerce and by use of the mails, directly and indirectly, employed devices,
schemes and artifacts to defraud purchasers of such securities, all as more
particularly described above.
44. The defendants knowingly, intentionally, and/or recklessly engaged in
the aforementioned devices, schemes and artifices to defraud.
45. By reason of the foregoing, defendants IHI, Van Etten, Savage and
Smith have violated, and, unless restrained and enjoined, will continue to
violate Section 17(a)(l) of the Securities Act [15 U.S.C. 77q(a)(1)].
COUNT II
FRAUD
Violations of Sections 17(a)(2) and 17(a)(3) of the Securities
Act [15 U.S.C. 77g(a)(2) and 77g(a)(3)]
46. Paragraphs 1 through 41 are hereby realleged and are incorporated
herein by reference.
47. From in or about April 1995 through the present, defendants IHI, Van
Etten, Savage and Smith, in the offer and sale of securities, by use of means
and instruments of transportation and communication in interstate commerce and
by use of the mails, directly and indirectly;
(a) obtained money and property by means or untrue statements of
material facts and omissions 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; and
(b) engaged in transactions, practices and courses of business
which operated and would operate as a fraud and deceit upon
the purchasers of such securities,
all as more particularly described above.
48. By reason of the foregoing, defendants IHI, Van Etten, Savage and
Smith have violated, and, unless restrained and enjoined, will continue to
violate Sections 17(a)(2) and (3) of the securities Act [15 U.S.C. 77q(a)(2)
and (3)].
COUNT III
FRAUD
Violation of Section 10(b) of the Exchange Act
[15 U.S.C. 78j(b)] and Rule 10b-5 Thereunder
[17 C.F.R. 240.10b-5]
49. Paragraphs 1 through 41 are hereby realleged and are incorporated
herein by reference.
50. From in or about April 1995 through the present, defendants IHI, Van
Etten, Savage and Smith, and from at least March 6, 1998 through the present
Heritage Incorporated, in connection with the purchase and sale of securities,
by the use of means and instrumentality's of interstate commerce and by use of
the mails, directly and indirectly;
(a) employed devices. schemes, and artifices to defraud,
(b) made untrue statements of material facts and 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; and
(c) engaged in acts, practices, and courses or business which
operated as a fraud and deceit upon persons,
all as more particularly described above.
51. Said defendants knowingly, intentionally and/or recklessly engaged in
the above-described conduct.
52. By reason of the foregoing, defendants IHI, Van Etten, Savage, Smith
and Heritage Incorporated have violated, and, unless restrained and enjoined
will continue to violate Section 10(b) of the Exchange Act [15 U.S.C. 78j(b)]
and Rule 10b-5 thereunder [17 C.F.R. 240.10b-5].
COUNT IV
UNREGISTERED OFFERING OF SECURITIES
Violations of Sections 5(a) and
5(c) of the Securities Act [15 U.S.C. 77e(a) and 77e(c)]
53. Paragraphs 1 through 41 are hereby realleged and are incorporated
herein by reference.
54. No registration statement has been filed or is in effect with the
Commission pursuant to the Securities Act and no exemption from registration
exists with respect to the business center interests and transaction in such
interests described herein.
55. From a date unknown, but since at lease in or about April 1995
continue through the present, defendants IHI, Van Etten, Savage and Smith,
singly and in concert, have and, unless enjoined, will continue to:
a. make use of the means or instruments of transportation or
communication in interstate commerce or of the mails to sell
securities, described herein ac business centers interests,
through the use or medium of a prospectus or otherwise;
b. carry securities or cause such securities, described
herein as business center interests, to be carried
through the mails or in interstate commerce, by any
means or instruments of transportation, for the purpose
of sale or for delivery after sale;
c. make use or the 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, the securities
described herein as business center interests, without a
registration statement having been filed with the
Commission as to such securities.
These acts include, but are not limited to, the activities as described in
paragraphs 1 through 27 and 41 of this complaint.
56. By reason of the foregoing, defendants IHI, Van Etten, Savage and
Smith, directly and indirectly, singly and in concert, have violated, and
unless enjoined, will continue to violate Sections 5(a) and 5(c) or the
Securities Act [15 U.S.C. S 77e(a)and 77e(c)].
COUNT V
FILING OF FALSE REPORTS
Violations of Sections 15(d) of the
Exchange Act and Rule 15d-11 thereunder
57. Paragraphs 1 through 41 are hereby realleged and are incorporated
herein by reference.
58. Defendants Heritage Incorporated, aided and abetted by Van Etten,
filed a Form 8-K with the Commission on or about March 10, 1998, which was
false and misleading or failed to disclose material facts necessary to make
the statement made not misleading, as described above in paragraphs 36 through
40.
59. By reason of the foregoing, defendant Heritage Incorporated has
violated, and defendant Van Etten has aided and abetted violations, and unless
restrained and enjoined, Heritage Incorporated will continue to violate and
Van Etten will continue to aid and abet violations of, Section 15(d) of the
Exchange Act [15 U.S.C. 78o(d)] and Rule 15d-11 (17 C.F.R. 240.15d-11].
PRAYER FOR RELIEF
WHEREFORE, Plaintiff Securities and Exchange Commission respectfully
prays for:
I.
Findings of Fact And Conclusions of Law pursuant to Rule 52 of the
Federal Rules of Civil Procedure, finding that the defendants committed the
violations alleged herein.
II.
A temporary restraining order, preliminary and permanent injunctions,
restraining and enjoining defendants IHI, Van Etten, Savage and Smith, their
officers, agents, servants, employees, attorneys, and those persons in active
concert or participation with them who receive actual notice of the order of
injunction, and each of them, whether as principals or as aiders and abettors,
from violating Sections 5(a), 5(c) and 17(a) of the Securities Act [15 U.S.C.
77e(a), 77e(c) and 77q(a)], and Section 10(b) of the Exchange Act [15 U.S.C.
78j(b)] and Rule 10b-5 [17 C.F.R. 240.10b-5] promulgated thereunder, and
enjoining Heritage International and Van Etten from violating Sections 10(b)
and 15(d) of the Exchange Act [15 U.S.C. 78j(b) and 78o(d)] and Rules 10b-5
and 15d-11 thereunder [17 C.F.R. 240.10b-5 and 240.15d-11].
III.
An order requiring accountings by defendants IHI, Van Etten, Savage and
Smith of the use of proceeds of the sales of the securities described in this
complaint and the disgorgement of all ill-gotten gains or unjust enrichment
with prejudgment interest, to effect the remedial purposes of the federal
securities laws, and an order freezing the assets of the defendants, to
preserve the status quo.
IV.
An order pursuant to Section 20(d) of the Securities Act [15 U.S.C.
77t(d)] and Section 21(d)(3) of the Exchange Act [15 U.S.C. 78u(d)(3)]
imposing civil penalties against defendants IHI, Van Etten, Savage, Smith and
Heritage Incorporated.
V.
An order appointing a receiver to marshal the assets of IHI and to take
other actions necessary to achieve a just distribution of those assets.
VI.
Such other and further relief as this Court may deem just, equitable,
and appropriate in connection with the enforcement of the federal securities
laws and for the protection of investors.
Dated: 3/16/1998 RESPECTFULLY SUBMITTED,
/S/William P. Hicks
District Trial Counsel
Georgia Bar No. 351649
Telephone (404) 842-7675
/S/James E. Long
District Counsel
Georgia Bar No. 457100
Counsel for Plaintiff
Securities and Exchange Commission
3475 Lenox Road, N.E., Suite 1000
Atlanta, Georgia 30326-1232
Dates Referenced Herein and Documents Incorporated by Reference
| This ‘8-K’ Filing | | Date | | Other Filings |
|---|
| |  |
| Filed on: | | 4/10/98 |
| | 3/10/98 | | 8-K |
| For Period End: | | 3/6/98 | | 8-K |
| | 12/17/97 |
| | 11/1/97 |
| | 10/31/97 |
| | 8/20/97 |
| | 8/5/97 |
| | 7/17/97 |
| | 4/28/95 |
| List all Filings |
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