SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20509
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act
March 16, 1998
Date of Report
(Date of Earliest Event Reported)
INTERNATIONAL HERITAGE, INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
Nevada 002-97690-D 87-0421191
(State or other juris- (Commission File No.) (IRS Employer
diction of incorporation) I.D. No.)
Carolina Place
2626 Glenwood Avenue, Suite 200
Raleigh, North Carolina 27608
(Address of Principal Executive Offices)
(919)571-4646
Registrant's Telephone Number
Item 1. Changes in Control of Registrant.
None; not applicable.
Item 2. Acquisition or Disposition of Assets.
None; not applicable.
Item 3. Bankruptcy or Receivership.
On March 16, 1998, the Securities and Exchange Commission (the
"Commission") filed a Complaint for Injunctive and Other Relief against
International Heritage, Inc., Stanley H. Van Etten, Claude W. Savage, Larry
G. Smith and International Heritage, Incorporated, a Nevada corporation
("Defendants"), civil action no. 1 98-CV-0803-RWS, in the United States
District Court for the Northern District of Georgia, Atlanta Division, a
copy of which is attached hereto as Exhibit 99.1. The Commission alleged
violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of
1933, as well as Sections 10(b) and 15(d) of the Securities Exchange Act
of 1934 and Rules 10(b)-5 and 15d-11, promulgated thereunder. The
Commission alleges that the Defendants engaged in the sale of securities
without filing a registration statement with the Commission; made
misrepresentations and material omissions in connection with the sale of
securities; and, knowingly misrepresented International Heritage's ("IHI")
financial condition and concealed the fact that 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 and that
Defendants made incomplete and misleading disclosure regarding its
financial condition in connection with a offering of convertible notes
between July 17 and October 31, 1997. Based on the allegations contained
in the Complaint, the Court entered, ex parte, an Order to Show Cause,
Temporary Restraining Order, Order Freezing Assets, Order Prohibiting
Destruction of Documents and Order Expediting Discovery, which is attached
hereto as Exhibit 99.2, as well as an Order Appointing a Receiver for
Defendant International Heritage, Inc., which is attached hereto as Exhibit
99.3. Pursuant to the terms of that Order, the Court appointed Lloyd T.
Whittaker as Receiver for the estate of IHI.
Upon oral motion of the Defendants, a hearing on March 17,
1998, and a telephone conference with counsel for IHI, the Commission, the
Receiver and his counsel, the Court, on March 19, 1998, modified the terms
of the Order to Show Cause, Temporary Restraining Order, Order Freezing
Assets, Order Prohibiting Destruction of Documents and Order Expediting
Discovery and Order Appointing a Receiver for Defendant International
Heritage, Inc. and ordered the Receiver to permit the Registrant to: accept
new product sales orders (other than orders in connection with obtaining
new Independent Retail Sales Representatives ["new IRSRs"] or new Retail
Business Centers ["new RBCs"]), for the Company-branded line of nutritional
and skin care products and long distance telephone services, from IRSRs who
were authorized to sell IHI products as of March 16, 1998 ("Existing
IRSRs"); to sponsor training meetings to advise and educate Existing IRSRs
regarding the new commission/compensation plan put in place by IHI at its
annual convention held in New Orleans, Louisiana, March 14-15, 1998; to
communicate with its Existing IRSRs; and to conduct its business pursuant
to the sole direction of the Receiver. A copy of the Order is attached
hereto as Exhibit 99.4.
While there can be no assurance of a positive outcome, IHI
intends to vigorously defend this action. The Defendants' position is more
specifically set forth in its Memorandum in Opposition to Plaintiff's
Motion for a Preliminary Injunction and Other Equitable Relief attached
hereto as Exhibit 99.5.
On March 24-27, 1998, the Court conducted a hearing on the
Commission's Motion for Preliminary Injunction. The Commission presented
its evidence in support of its Motion, after which the Defendants moved to
dismiss the Commission's Motion. The Honorable Richard W. Story made a
preliminary oral ruling where he indicated that the system which was
previously in operation by the Defendants did involve an "investment
contract" and that system was violative of the Securities laws; that based
on that prior conduct, the Court would enter a preliminary injunction
affecting the future conduct of IHI and its officers, directors and agents.
Specifically, the Court: enjoined further use of the Retail Business
Agreement, certification and recertification of Retail Business Centers and
any payment or investment required for participation in the IHI sales
program other than the purchase of the sales kit; required that any
transaction where products or services are to be provided, that they be
provided upon payment, provided that it will relieve the Receiver upon
selection of a Monitor who will monitor the activities of IHI to assure its
compliance with the terms of the Order and to approve the new compensation
plan; will require the Company to post a $5 million bond to satisfy any
judgement that may be rendered as a result of the proceeding; will not
permit any of the named Defendants to leave their positions with the
Company without leave of Court; and accepted Mr. Van Etten's agreement to
reduce his compensation to one half of the amount set forth in his original
Employment Agreement with the Company. The Court also ruled that upon
relief of the Receiver, the officers are to be restored to their positions
and authority in the Company.
On April 3, 1998, the Court entered a Memorandum Opinion and
Order setting forth as follows: Defendant IHI its officers, agents,
servants, employees, attorneys and persons in active concert or
participation with them be restrained from making use of any means or
instruments of transportation or communication in interstate commerce or
of the mails to sell, carry or offer any securities unless registered; to
offer any securities by employing any device, scheme or artifice to
defraud; engaging in any act, practice or course of business which operates
or would operate as fraud or deceit upon any person; obtaining money or
property through 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; 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;
filing any reports with the Commission which are false and misleading or
fail to disclose material facts necessary to make the statements made not
misleading; destroying, transferring or rendering illegible all books,
records, ledgers, accounts, statements and other documents used in the
defendant's business; that Lloyd Whittaker is appointed Monitor for IHI to
periodically review the activities of IHI and assure IHI's compliance with
the terms of the Order and the federal securities laws; requiring that IHI
post a bond in the amount of $5 million until further order of the Court;
requiring that Defendants Stanley H. Van Etten, Claude W. Savage and Larry
G. Smith not leave their positions with IHI without prior leave of Court;
that IHI will not transfer its sales operation or representative networks
to any other entity without prior leave of Court; that Defendant Van
Etten's monetary compensation as set out in the Employment Agreement
between Van Etten and IHI will be reduced by fifty percent (50%) until
further order of the Court; IHI shall develop and submit to the Monitor a
new compensation and marketing plan consistent with the terms of the Order;
that IHI shall not permit any further use of the Retail Business Agreement,
shall not require new or current sales representatives to certify or
recertify, through payment by the sales representative to IHI, in order to
receive override commission; 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; that IHI will give notice of the terms of the
Order to all representatives within thirty (30) days of entry; that the
Receiver shall be relieved of his duties and the Receivership dissolved
upon the posting of the bond; that upon posting of the bond, IHI, the
officers and directors of IHI will have the authority to resume and may
resume their responsibilities as officers and directors of IHI; that the
prior Orders entered by the Court shall be vacated and modified to conform
with this Order; and that the Court's Order does not constitute a
securities or investment 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 Order
restrict, limit, prohibit or disqualify the defendants, or any affiliate
of the defendants, in any manner, from 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 Advisors
Act of 1940, or the Commodity Exchange Act, and/or any rules or regulations
promulgated thereunder. The Order is attached hereto as Exhibit 99.6. The
Notice of Posting of Cash Bond and Order Approving Cash Bond is attached
hereto as Exhibit 99.7.
On April 9, 1998 the $5 million cash bond was posted by Mr. Van
Etten on behalf of IHI, with the Clerk of the Court, United States District
Court, Northern District of Georgia, Altanta Division, pursuant to the
terms of the Notice of Posting of Cash Bond and Order Approving Cash Bond,
and by operation of the Memorandum Opinion and Order, the Receiver has been
relieved of his responsibilities and 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 the Order.
Exhibit
Description of Exhibit* Number
Complaint for Injunctive and Other Relief, dated
March 16, 1998 99.1
Order to Show Cause, Temporary Restraining Order, Order Freezing Assets,
Order Prohibiting Destruction of Documents and Order Expediting Discovery,
dated March 16, 1998 99.2
Order Appointing a Receiver for International
Heritage, Inc., dated March 16, 1998 99.3
Order [dated March 19, 1998 modifying the previously entered Order to Show
Cause, Temporary Restraining Order, Order Freezing Assets, Order
Prohibiting Destruction of Documents and Order Expediting
Discovery] 99.4
Defendants' Memorandum in Opposition to Plaintiff's Motion for a
Preliminary Injunction and Other Equitable Relief, dated March 24, 1998
99.5
Memorandum Opinion and Order, dated April 3, 1998 99.6
Notice of Posting of Cash Bond and Order Approving Cash Bond, dated April
3, 1998 99.7
*Copies of all original exhibits are on file with the Clerk of the United
States District Court, Northern District of Georgia, Atlanta Division,
Civil Action No. 1:98-CV-803-RWS.
Item 4. Changes in Registrant's Certifying Accountant.
None; not applicable.
Item 5. Other Events.
On March 13, 1998, the Commission suspended trading in the
securities of International Heritage, Incorporated ("IHIN") for the period
from 1:00 PM, EST, March 13, 1998 through 11:59 AM, EST, on March 26, 1998,
because of questions regarding the accuracy of statements concerning, among
other things, the return investors could expect to make on their investment,
the regulatory background of the company and of its president. The Commission
was of the opinion that the public interest and the protection of investors
required a suspension of trading.
On March 24, 1998, a class action complaint was filed in the United
States District Court for the Eastern District of North Carolina,
styled: Sharon A Meckenstock, Dan H. Meckenstock, Custodian FBO Jean Carlo
Meckenstock and Wilbur E. Meckenstock, on their own behalf and on behalf
of a class of all persons similarly situated v. International Heritage,
Inc., Stanley H. Van Etten, Claude W. Savage, Larry G. Smith, International
Heritage, Incorporated, civil action no. 5:98-CV-237-BR-2. In their action
the Plaintiffs, allege upon information and belief, based upon documentary
evidence, including publicly available news articles and releases, the
investigation of their attorneys and the Complaint filed by the Commission,
that the Defendants defrauded investors of $155 million in the form of
notes, common stock and other securities and that Defendants used
misrepresentations and omissions of material facts in an unlawful and
fraudulent scheme to offer and sell securities of IHI through recruiting
people to buy interests in business centers. Plaintiffs allege the
Defendants were engaged in a "massive ongoing Ponzi scheme". The Plaintiff
sets forth, as the facts underlying the Complaint, the same factual
circumstances as set forth in the Commission's Complaint dated March 16,
1998. The Plaintiff's allege, inter alia: violations of Section 10(b) of
the Exchange Act and Rule 10b-5 promulgated thereunder and violations of
Section 20(a) of the Exchange Act. The Plaintiffs request relief as
follows: to certify the action as a class action; to award Plaintiffs and
the Class their damages, including the purchase price of all securities
purchased by them together with prejudgment interest or rescission of the
purchase price of such securities; reasonable attorney's fees and costs and
other relief as the court deems just and proper. The Defendants intend to
vigorously defend this action.
On March 27, 1998, a class action complaint was filed in the
District Court of Dallas County, Texas, 101st Judicial District, by
Denise March, Felix Glen Ortega, Lupe Ortega, individually and on behalf
of all others similarly situated v. International Heritage, Inc., Stanley
L. Van Etten, Claude Savage and Larry Smith, case no. 98-2332-E.
Plaintiffs intend to add as Defendants all members of the Board of
Directors. Plaintiffs are filing individually and on behalf of all persons
who purchased one or more business centers from IHI from April 1, 1995
until present throughout the United States. Plaintiffs set forth as the
facts underlying the proceedings that: Defendants failed to disclose that
90% of the $50 million in gross revenue earned by December 31, 1996 was
attributable to the sale of "business centers" as opposed to sales of
products; that IHI was a scheme devised by the individual Defendants to go
public at the earliest opportunity, which did not occur until March, 1988;
that IHI produced marketing materials containing testimonials of top
producers and language indicating that IHI was legally and regulatorily
sound throughout the United States and in each of the states in which it
operated; that the background on Defendant Van Etten failed to disclose his
personal bankruptcy filed in 1990; that Representatives were discouraged
from personally contacting state regulators regarding the business of IHI;
that the costs of promotional materials for representatives to succeed in
the business were exorbitant; that Plaintiff's purchased business centers
believing IHI's business to be legal but on March 20, 1998 Plaintiff's
learned the SEC had shut down the offices of IHI, frozen the assets of IHI
and had declared the conduct of IHI illegal. Plaintiffs allege, inter
alia: fraud, fraud in stock transactions, securities fraud and exemplary
damages. Plaintiffs request relief as follows: actual damages on behalf
of the class in the amount of $150 million; exemplary damages on behalf of
the class in the amount of $300 million; costs; interest and attorney's
fees. The Defendants intend to vigorously defend this action.
On March 18, 1998, a class action complaint was filed in the
District Court of Dallas County, Texas, F-116th Judicial District, by
Craig T. Liebendorfer, individually and on behalf of others similarly
situated v. International Heritage, Inc., case no. DV98-2241. Plaintiff
is brining this action on behalf of himself and a class of similarly
situated purchasers of rights of participation in the "multi-level
marketing or pyramid scheme" conducted by International Heritage, Inc.
Plaintiff sets forth as the facts underlying the proceedings that:
Defendant spent tens of thousands of dollars promoting or marketing a
multi-level marketing or pyramid scheme; that Defendant disseminated false
and misleading promotional material pertaining to: (a) the purported
expected return of its multi-level marketing or pyramid scheme (b)the
legality of its multi-level marketing or pyramid scheme and (c) the
purported financial stability of the company; on March 13, 1998, the
Commission suspended trading of IHI stock alleging that the Defendant had
made materially false statements of fact and material omissions of fact in
its SEC filings. Plaintiff alleges, inter alia: breach of express
warranty. Plaintiff requests relief as follows: all actual, consequential
and exemplary damages, equitable and/or injunctive relief, together with
costs, expenses and attorney's fees. Plaintiff's damages are significantly
less than $25,000, and Plaintiff contends, upon information and belief,
that the damages of all other similarly situated class members shall also
be less than $25,000. The Defendant intends to vigorously defend this
action.
On April 1, 1998, a class action complaint was filed in the Circuit Court
of Barbour County, Alabama, by Randall L. Greene, Andy Clark, Jackson
Wayne Murphy, Donnie Kenneth Broderway, James H. Thomas, Individually and on
behalf of all others similarly situated v. International Heritage,
Incorporated, a foreign corporation; International Heritage, Inc., a foreign
corporation; et. al., case no. CV-98-42. Plaintiffs set forth as the facts
underlying the proceedings that: Defendants conduct an illegal multi-level
marketing scheme or enterprise enlisting as many as 175,000 sales
representatives in the United States and Canada and generating more than $150
million in revenue; this multi-level marketing scheme is designed to generate
revenues for its existing members or agents principally from the subscription
of new members for a fee; IHI discourages the sale of products, but encourages
existing members to generate revenues by signing up new members; IHI does not
manufacture any tangible consumer goods or product, nor does IHI offer for
sale at retail any tangible consumer good or product; IHI encourages new
members to "sign up" members under them as "legs"; IHI promises merchandise,
products and/or cash to representatives who recruit a certain number of new
sales representatives and complete the requisite number and levels of "legs";
IHI misrepresented the value of the merchandise and failed to pay as promised;
and IHI misrepresented the nature of the business, in which they were engaged
and the incentives and payments for recruitment in order to recruit additional
representatives and generate additional revenues. Plaintiffs allege inter
alia: common law fraud; fraudulent concealment; breach of contract; and unjust
enrichment. Plaintiffs seek the following relief: certification of the class
comprised of all adult persons in the United States who purchased the
privileges of membership in the multi-level marketing scheme or enterprise,
International Heritage; certification of the sub-class comprised of Alabama
residents, against the named Defendants for compensatory damages for fraud, a
scheme to defraud, suppression, breach of contract, unjust enrichment,
deceptive trade practices and/or other wrongful conduct in violation of the
statutory law of the State of Alabama; compensatory damages only, plus
interest on said amount; and costs.
On April 3, 1998, the Montana Securities Commissioner issued a
Cease and Desist Order in the Matter of: International Heritage, Inc.,
Stanley H. Van Etten, Claude W. Savage, Larry G. Smith and International
Heritage, Incorporated, a Nevada corporation, and their agents and
representatives, case no. I-04-02-98-04. The Commissioner has concluded:
that he has proper jurisdiction over the matter; that Respondents'
marketing program is a security within the meaning of the Securities Act
of Montana, paragraph 30-10-103(22), MCA; offer or offer to sell includes
"every attempt to offer to dispose of or solicitation of an offer to buy
a security or interest in a security for value" Section 30-10-103(15), MCA;
in connection with the offers of securities to persons in Montana,
Respondents violated paragraph 30-10-201(1), MCA, by transacting business
as broker-dealers or salesmen in Montana without registering as such;
Respondents violated paragraph 30-10-202, MCA, by transacting business in
unregistered securities; Respondents violated paragraph 30-10-301(1)(b),
MCA, by failing to disclose certain material facts, necessary to disclose
in order to make the statements made about the investment, in light of the
circumstances under which they were made not misleading; and that
Respondents violated paragraph 30-10-301(1)(c), MCA, by engaging in an act,
practice, or course of business which operates or would operate as a fraud
or deceit upon any person in that IHI's business center program constituted
a pyramid scheme and IHI directed sales representatives not to contact
state regulators in order to avoid investigations or inquiries into the IHI
business center program. The Order requires the Respondents to cease and
desist from issuing, offering and selling securities to persons in
violation of the Securities Act of Montana and that the violations are
grounds for the imposition of an administrative fine not to exceed $5,000
per violation upon any person found to have engaged in any act or practice
constituting a violation of any provision of the Securities Act of Montana.
Respondents are provided an opportunity to be heard on this matter, and
intend to vigorously defend this action.
On April 7, 1998, a class action complaint was filed in the General
Court of Justice, Superior Court Division, Wake County, North Carolina, by
William Swinney and Marshall Reddy, individually and as representatives of a
class of all similarly situated sales representatives in International
Heritage, Inc. v. Stanley H. Van Etten, Clyde Savage, Larry Smith,
International Heritage, Inc., and the remaining members of the Board of
Directors for International Heritage, Inc., consisting of Barry Ackel, Jimmie
Knowles, Sabrina Wei and John Brothers, file no. 98 CVS 04277. Plaintiffs set
forth as the facts underlying the proceedings that: on or about April 28,
1995, Defendants Van Etten, Savage and Smith founded International Heritage,
Inc., a North Carolina corporation which began operating as a multi-level
marketing company; individual Defendants have operated IHI as an illegal
pyramid scheme in violation of North Carolina law, Securities laws and other
laws; all individual Defendants are on the Board of Directors; IHI has been
operated as a pyramid scheme whereby Defendants induce individuals to pay
money for the opportunity to earn commissions based upon the involvement of
others to join the scheme; the vast majority of income to both IHI and sales
representatives come from fees that Defendants induce representatives to pay
to certify and recertify "business centers" and the commissions IHI pays
representatives for inducing new representatives to pay these fees to IHI;
individual Defendants encourage representatives to focus on recruitment of new
members as opposed to sales of products; individual Defendants have, as part
of operating IHI as an illegal pyramid scheme, defrauded Plaintiffs, made
fraudulent omissions of material facts to Plaintiffs and have obtained money
from them by false pretenses; individual Defendants failed to appraise
Plaintiffs of all information it had in its possession that would affect their
decision to pay money to IHI, including information regarding product sales
that would show IHI to be an illegal pyramid scheme; individual Defendants
concealed said information with the intent of preventing Plaintiffs from
making a fully informed decision about becoming involved in IHI; Defendants
hid said information from Plaintiffs as part of a plan to give partial or
false information to Plaintiffs so that they would give IHI their money;
individual Defendants made false representations regarding the sale and
shipment of goods; individual Defendants have told Plaintiffs that no one
could make money in IHI without selling products, which they knew to be false,
and which statements were made to hide the fact that IHI was an illegal
pyramid; individual Defendants made, or had its agents or employees make
regular presentations to potential sales representatives, and existing sales
representatives, during which testimonials were given, which were meant to
have the effect, and in fact had the effect, of inducing Plaintiffs to become
involved in IHI, although Defendants knew the testimonials were misleading;
individual Defendants told Plaintiffs that IHI offered a high degree of
corporate support, minimal cash outlay, minimal time requirements, and other
significant material representations which made IHI a unique business
opportunity, all of which the Defendants knew to be false; individual
Defendants told Plaintiffs that "career kits" would be shipped in two business
days, which individual Defendants knew to be false; all actions and omissions
of individual Defendants amount to false representations and/or concealment of
material past or existing facts and/or future events that were reasonably
calculated to deceive, and in fact did deceive, Plaintiffs into paying money
to IHI; individual Defendants presented the IHI plan in such a misleading and
manipulative way as to blind Plaintiffs to the reality that IHI is an illegal
pyramid scheme and that eventually the market will become saturated and it
will be impossible to sign up new representatives; individual Defendants
basically took the "plan" from Gold Unlimited, a failed pyramid scheme based
in Kentucky, and made a few changes for appearances' sake and then began
defrauding people of their money; individual Defendants encouraged Plaintiffs
to focus on recruiting new representatives, not product sales, and to recruit
family and friends first; individual Defendants concealed the fact that only a
very small number of new representatives would actually recover any of the
money they paid to IHI; the Gold Unlimited "plan" was so similar to that of
IHI, that Defendants had to have known Plaintiffs would suffer a similar fate;
Defendants engaged in a common plan and purpose to falsely represent IHI to
the Plaintiffs and to conceal significant material facts concerning IHI and
the Defendants from Plaintiffs for the express purpose of causing Plaintiffs
to pay money to become involved in IHI when they otherwise would not have done
so; Defendants have benefitted monetarily from the actions and omissions
described at the expense of Plaintiffs; the Defendants used the mails and
other delivery services for sales materials, brochures and other IHI-related
materials; and the individual Defendants knowingly transmitted and/or caused
to be transmitted by means of wire in interstate commerce sales materials,
brochures and other IHI-related materials. Plaintiffs allege inter alia:
civil Rico, unfair and deceptive trade practices and intentional breach of
fiduciary duties. The Plaintiffs request relief as follows: to be certified
as a class, actual damages incurred, or to be incurred, treble damages,
punitive damages, costs; attorneys' fees and other relief the court deems
just. The Defendants intent to vigorously defend this action.
Item 6. Resignations of Registrant's Directors.
None; not applicable.
Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits.
None; not applicable.
Item 8. Change in Fiscal Year.
None; not applicable.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act
of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned hereunto duly authorized.
INTERNATIONAL HERITAGE, INCORPORATED
Date: 04/09/1998. By /s/ Stanley H. Van Etten
_______________________________________
President, CEO and Chairman of the Board
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
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF GEORGIA
SECURITIES AND EXCHANGE COMMISSION, : CIVIL ACTION NO.
:
Plaintiff, : 1 9 8 C V - 0 8 0 3
:
:
v. :
INTERNATIONAL HERITAGE, INC., :
STANLEY H. VAN ETTEN, :
CLAUDE W. SAVAGE, :
LARRY G. SMITH and :
INTERNATIONAL HERITAGE, INCORPORATED, :
a Nevada Corp., :
:
Defendants. :
ORDER TO SHOW CAUSE, TEMPORARY RESTRAINING
ORDER, ORDER FREEZING ASSETS, ORDER PROHIBITING
DESTRUCTION OF DOCUMENTS AND ORDER
EXPEDITING DISCOVERY
Upon the Motion of the Securities and Exchange Commission
("Commission"), upon the Certification of the Commission submitted
pursuant to Rule 65(b) of the Federal Rules of Civil Procedure, and
upon the Complaint in this action and supporting documents relied
on annexed thereto, and it appearing from the allegations set forth
in the papers submitted by the Commission that the defendants
International Heritage Inc. ("IHI"), Stanley H. Van Etten ("Van
Etten"), Claude W. Savage ("Savage") and Larry G. Smith ("Smith"),
pending final determination of this action may, unless restrained,
continue to engage in acts and practices which constitute
violations of Sections 5(a), 5(c) and 11(a) of rhe 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 ("Exchang Act"), and
that defendant International Heritage, Incorporated, a Nevada
corporation, aided and abetted by defendant Van Etten, has been violating and
unless enjoined may continue to violate Sections 10(b] and 15(d) of the
Exchange Act, 15 U.S.C. 78j(b) and 78o(d), and Rules 10b-5 and l5d-11, 17
C.F.R. 240.lOb-5 and 240.15d-11, thereunder, and it appearing that adequate
grounds exist for the issuance of this Order without prior notice to the
defendants, it is hereby,
ORDERED, that defendants show cause, if any there be, before Judge
Richard W. Story of this Court, at 9:30 o'clock in the am on the 24th day of
March, 1998, Courtroom 2306 of the United States Courthouse, Atlanta, Georgia
or as soon thereafter as the matter can be heard, why a Preliminary Injunction
pursuant to Rule 65 of the Federal Rules or Civil Procedure should not be
granted, as requested by the Commlssion.
IT IS FURTHER ORDERED that the Commission may take expedited discovery as
follows:
A. The Commission may take depositions upon oral examination subject to
three days notice prior to expiration of 30 days after service of the Summons
and Complaint upon defendants, pursuant to Rule 30(a) of the Federal Rules of
Civil Procedure;
B. Pursuant to Rule 33(a) of the Federal Rules of Civil Procedure, each
party shall answer the opposing party's interrogatories within three days of
service of such interrogatories;
C. Pursuant to Rule 34 of the Federal Rules of Civi1 Procedure, upon
request of a party, the opposing party shall produce al1 documents within
three days of service of such request;
D. Pursuant to Rule 36 (a) of the Federal Rules of Civil Procedure, a
party shall answer all of the opposing party's requests for admissions within
five days of service of such request; and
E. All written responses to the Commission's requests for discovery
under the Federal Rules of Civil Procedure shall be delivrered to the
Commission at 347S Lenox Road N.E., Suite 1000 , Atlanta, Georgia 30326-1232,
or such other place as counsel for the Commission may direct, by the most
expeditious means available.
IT IS FURTHER ORDERED that, pending determination of the Motion for
Preliminary Injunction, the assets of defendant IHI, be, and they hereby are,
frozen.
IT IS FURTHER ORDERED that defendants IHI, Van Etten, Savage and Smith
prepare and present to this Court and to the Commission written and sworn
accountings of all funds received pursuant to the scheme described in the
Commission's Complaint and of the disposition and use of said proceeds. These
accountings shall include the total amount received from investors and a
listing of all expenditures showing the amount and to whom paid and the date
of payment. The accountings shall be submitted to this Court and served
upon the Commission within 10 days from the date of entry of this Order.
IT IS FURTHER ORDERED that, pending determination of the Motion for
Preliminary Injunction, defendants IHI, Van Etten, Savage and Smith, their
officers, agents, servants, employees, attorneys, and those persons in active
concert or participation with them be, and they hereby are, restrained from,
directly or indirectly:
(1) 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;
(2) carrying securities or causing them to be carried through the mails
or interstate commerce, by means or instruments of transportation,
for the purpose of same or delivery after sale, unless and until a
regstration statement is in effect with the Commission as to such
securities;
(3) making use of any means or instruments of transportation or
communication in interstate commerce or or 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, or while a registration statement 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 5(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 Restraining Order shal1 apply to any
security or transaction which is exempt from the provisions of
Section 5 of the Securities Act, 15 U.S.C. 77e.
IT IS FURTHER ORDERED that, pending determination of the
Motion for Preliminary Injunction, defendants IHI, Van Etten,
Savage and Smith, their agents, servants, employees, attorneys and
those persons ia 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 or interstate commerce or any means or instruments
of transportation or communication in interstate commerce, or by the mails or
any facility of any nationa1 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 Seccion 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.
240.1Ob-5, thereunder.
IT IS FURTHER ORDERED that, pending determination of the motion for
Preliminary Injunction, defendants International Heritage Incorporated, a
Nevada corporation and Van Etten, their agents, servants, employees, attorneys
and those persons in active concert or participation with them, be and hereby
are, restrained 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
misleading, in violation of Section 15(d) of the Exchange Act, 15 U.S.C.
78o(d), and Rule 15d-11,17 C.F.R. 240.15d-1l.
IT IS FURTHER ORDERED that, pending determination of the Motion for
Preliminary Injunction, defendant International Heritage, Incorporated, a
Nevada corporation, its agents, servants, employees, attorneys and
those persons in active concert or participation with them, in connection with
the purchase or sale of securities, by use of any means or instrumentality's
of 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; or
(3) 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 10(b) of the Exchange Act, 15 U.S.C. 78j(b), and Rule
lOb-5, 17 C.F.R. 240.lOb-5, thereunder.
IT IS FURTHER ORDERED that, pending further order of this court,
defendants IRI, Van Etten, Savage and Smith, their officers, agents, servants,
employees, attorneys, any bank or financial institution holding any assets of
those defendants, and all persons in active concert or participation with
them, except any trustee, receiver or special fiscal agent appointed by this
Court, be, and hereby are, restrained from, directly and indirectly,
transferring, setting off, receiving, changing, selling, pledging, assigning,
liquidating or otherwise disposing of or withdrawing any assets and property
owned by, controlled by, or in the possession of said defendants, including,
but not limited to, cash, customers' securities, free credit balances,
fully-paid-for securities, and/or property pledged or hypothecated as
collateral for loans.
IT IS FURTHER ORDERED that, pending further order of this court,
defendants International Heritage, Incorporated, a Nevada corporation, IHI,
Van Etten, Savage and Smith, their officers, agents, employees, servants,
attorneys, and all persons in active concert or participation with them, and
each of them, are restrained and enjoined from destroying, transferring or
otherwise rendering illegible a1l books, records, papers, ledgers, accounts,
statements and ether documents employed in any of such defendants' business,
which reflect the business activities of any of the defendants, or which
reflect the transactions described by the Commission's Complaint.
IT IS FURTHER ORDERED that this Court will retain jurisdiction over this
matter and the defendants for all purposes and will order other and further
relief that this Court deems appropriate under the circumstances.
Service of this Order sha1l be effected personally upon defendants
International Heritage, Incorparated, a Nevada corporation, IHI, Van Etten,
Savage and Smith, or their attorneys or registered agents on or before the
20th day of March 1998 at or before 5:00 p.m
Done and ordered at 3:30 o'clock pm. this 16th day of March, 1998 at
Atlanta, Georgia.
/S/Richard W. Story
UNITED STATES DISTRICT JUDGE
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff, CIVIL ACTION FILE NO.
v. 1 98 CV-0803
INTERNATIONAL HERITAGE, INC.,
STANLEY H. VAN ETTEN, CLAUDE W.
SAVAGE, LARRY G. SMITH and
INTERNATIONAL HERITAGE,
INCORPORATED, a Nevada corporation,
Defendants.
ORDER APPOINTING A RECEIVER FOR DEFENDANT
INTERNATIONAL HERITAGE, INC.
Upon application of the Securities and Exchange Commission
("Commission") and having granted by separate order the Commission's
application for a temporary restraining order, the Court orders as follows:
I.
IT IS ORDERED that Lloyd T. Whitaker be and hereLy is appointed
as Receiver, for the estate of International Heritage, Inc. ("IHI") in this
matter, unless and until the Court orders otherwise. The Receiver shall not be
required to post an initial bond but at such time as the Receiver determines
the extent of the cash assets of the estate, the Receiver shall post and
maintain a bond of at least 125 percent of such assets as are under
the control of the Receiver. The estate for which Lloyd T. Whittaker is hereby
appointed Receiver is hereinafter referred to as the "Receiver Estate."
II.
IT IS FURTHER ORDERED that the Receiver shall have and possess all powers
and rights to efficiently administer and manage the Receiver Estate, including
but not 1imited to the power:
A. to take custody, control and possession of all the funds, property,
premises, leases, and other assets of or in the possession or under
the direct or indirect control of the Receiver Estate, to manage,
control, operate and maintain the Receiver Estate, to use income,
earnings, rents and profits of the Receiver Estate, with full power
to sue for and collect, recover, receive and take into possession
all goods, chattels, rights, credits, monies, effects, lands, books
and records of accounts and other paper;
B. to sell, rent, lease or otherwise hypothecate or dispose of the
assets of the Receiver Estate;
C. to pursue, resist and defend all suits, actions, claims and demands
which may now be pending or which may be brought by or asserted
against the Receiver Estate;
D. to make such payments and disbursements from the funds so taken into
his custody, control and possession or thereafter received, and to
incur such expenses as may be necessary or advisable in the ordinary
course of business in discharging his duties as Receiver;
E. to open bank accounts in the name of the Receiver on behalf of the
Receiver Estate;
F. to engage and employ others (without Court approval), including but
not limited to consultants, attorneys, accountants, experts and
employees of the Receiver, to assist him in his duties except that
any payment to others for their services shall be subject to Court
approval;
G. to take any action which could be taken by the officers, directors,
partners and trustees of the Receiver Estate;
H. to suspend, terminate or grant a leave of absence to any employees of
the Receiver Estate; and
I. to take such other action as may be approved by this Court.
III.
IT IS FURTHER ORDERED that no person holding or claiming any position of
any sort with the Receiver Estate shall possess any authority to act by or on
behalf of any of the Receiver Estate, except as authorized by the Receiver.
IV.
IT IS FURTHER ORDERED that no shareholders, directors, officers,
partners or trustees of IHI shall exercise any of their rights or powers with
respect to the Receiver Estate until further order of the Court.
V.
IT IS FURTHER ORDERED that the defendants, as well as their agents,
servants, employees, attorneys, any persons acting for or on behalf of the
Receiver Estate, and any persons receiving notice of this order by personal
service or otherwise, are hereby restrained and enjoined from disposing,
transferring, exchanging, assigning or in any way conveying any property or
assets of the Receiver Estate and from the transaction of any business of the
Receiver Estate except with the approval of the Receiver.
VI.
IT IS FURTHER ORDERED that defendants International Heritage,
Incorporated, a Nevada corporation, Stanley H. Van Etten ("van Etter"), Claude
W. Savage ("Savage") and Larry G. Smith ("Smith"), as well as their agents,
servants, employees, attorneys, any persons acting for or on behalf of the
Receiver Estate, and any persons receiving notice of this order by personal
service or otherwise, having possession of the property, business, books,
recording, accounts or assets of the Receiver Estate are hereby directed to
deliver the same to the Receiver, his agents and/or employees.
VII.
IT IS FURTHER ORDERED that defendants International Heritage,
Incorporated, a Nevada corporation, Van Etten, Savage and Smith, their agents,
servants, employees, nominees, attorneys and entities under their direct or
indirect control shall cooperate with and assist the Receiver and shall take
no action, directly or indirectly, to hinder, obstruct, or otherwise interfere
with the Receiver, in the performance of his duties.
VIII.
IT IS FURTHER ORDERED that any brokerage institution, financial
institution, bank, savings and loan, mutual fund, or any other person,
partnership, or corporation maintaining or having custody or control of any
brokerage or deposit account or other asset of the Receiver Estate or under
its control, and that receives actual notice of this order by personal
service, facsimile transmission or otherwise shall, within three (3) business
days of receipt of that notice, file with the Court and serve on the Receiver
and counsel for the Commission a certified statement setting forth, with
respect to each such account or other asset, the balance in the account or
description of the assets as of the close of business on the date of receipt
of the notice.
IX.
IT IS FURTHER ORDERED that the Receiver shall perform an accounting of
all funds received by defendant IHI, and of the disposition and use of such
funds.
X.
IT IS FURTHER ORDERED that the Receiver shall have the power to compel,
including by subpoena, the appearance and testimony of all persons and the
production of the originals of any records, of any sort whatsoever, within the
possession, custody or control of any person, in performing his duties
hereunder. The Receiver's authority under this paragraph shal1 not be
construed to require the waiver by any person of any validly asserted
privilege.
XI.
IT IS FURTHER ORDERED that, on thirty (30) days written notice from the
Receiver, defendants International Hertiage, Incorporated, a Nevada
corporation, Van Etten, Savage and Smith shall make themselves available for
deposition and shall produce to the Receiver the originals of any records in
their custody, possession or control relating to the financial affairs, from
January 1995 through the present, of defendant IHl. This paragraph shall not
be construed to require the waiver by any person of any validly asserted
privilege.
XII.
IT IS FURTHER ORDERED that the Receiver may investigate the defendants,
current and former employees of IHI, and related parties in connection with
discovering additional information as it relates to activities of defendant
IHI. The Receiver shall have the authority to investigate regarding such
related parties and employees prior to filing any litigation, and shall have
the express authority to order consumer reports in the course of any such
investigation.
XIII .
IT IS FURTHER ORDERED that the Receiver and any person engaged or
employed by the Receiver, are entitled to reasonable compensation from the
assets of the Receiver Estate, subject to the prior approval of the Court.
IT IS FURTHER ORDERED that the Receiver shall be espowered, but is not
required, to file voluntary petitions for relief under Title 11 of the United
States Code (the Bankruptcy Code) for the Receiver Estate. If a bankruptcy
petition is filed, the Receiver shall become, and shall be empowered to
operate each of the Receiver Estates as a debtor in possession. The Receiver
shall have all of the powers and duties as provided a debtor in possession
under the Bankruptcy Code to the exclusion of any other person or entity.
XV.
IT IS FURTHER ORDERED that the Receiver, should he elect to file
petitions under Title 11 of the United States Code for the Receiver Estate,
shall have 15 days from the date of such filing to file with the Bankruptcy
Court to file any lists or schedules required to be filed with such petitions,
this Court recognizing that the Receiver will require time to assemble such
data for filing.
XVI.
IT IS FURTHER ORDERED that, except by leave of this Court, all
creditors and other persons seeking money damages or other relief from any
defendants in this action, and all others actions on behalf of any such
creditors and other persons, including sheriffs, marshals, and all officers
and deputies, and their respective attorneys, servants, agents and employees,
are, until further order of this Court, hereby stayed and restrained from
doing anything to interfere with the possession, recovery or management by the
Receiver of the property and assets owned, controlled, belonging to, or in the
possession of the Receiver Estate, or to interfere with the Receiver in any
manner during the pendency of this proceeding.
XVII.
IT IS FURTHER ORDERED that the Receiver is authorized to communicate with
all such persons as he deems appropriate to inform them of the status of this
matter and the financial condition of the Receiver Estate.
XVIII.
IT IS FURTHER ORDERED that the Receiver is authorized to record this
Order with government offices and to serve this Order on any person as he
deems appropriate in furtherance of his responsibilities in this matter.
XIX.
IT IS FURTHER ORDERED that the Receiver shall promptly notify the Court
and counsel for the Commission of any failure or apparent failure of the
defendants to comply in any way with the terms of this Order.
XX.
IT IS FURTHER ORDERED that, except for an act of gross negligence, the
Receiver and al1 persons engaged or employed by him shall not be liable for
any loss or damage incurred by the defendants, or any other person, by reason
of any act performed or omitted to be performed by the them in connection with
the discharge of their duties and responsibilities in this matter.
XXI.
IT IS FURTHER ORDERED that during the pendency of this Order defendants
Van Etten, Savage and Smith shall report their income and the sources of all
income in writing to counsel for the Commission and to the Receiver of his
designee on a weekly basis. Such reports shall contain such detail as the
Receiver determines to be necessary for the fulfillment of his duties
hereunder. The defendants shall deliver their reports by facsimile
transmission to counsel for the Commission and to the Receiver by 12:00 p.m.
Eastern time on the Wednesday following the week to which each report relates.
XXII.
IT IS FURTHER ORDERED that the Receiver shall file periodic reports with
the Court, and contemporaneously with the filing of such reports, serve a copy
of such report on counsel for the Commission. The Receiver is directed to file
such reports on at least a quarterly basis for the duration of the
Receivership.
XXIII.
This Court shall retain jurisdiction for purposes or enforcing the terms
of this order.
IT IS SO ORDERED this 16th day of March l998.
/s/Richard W. Story
UNITED STATES DISTRICT JUDGE
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION
SECURITIES AND EXCHANGE )
COMMISSION, )
)
Plaintiff )
) CIVIL ACTION FILE NO:
v. ) 1-98-CV-0803
INTERNATIONAL HERITAGE, )
INC., STANLEY H. VAN ETTEN, )
CLAUDE W. SAVAGE, LARRY G. )
SMITH AND INTERNATIONAL )
HERITAGE, INCORPORATED, )
a Nevada Corp., )
)
Defendants.
ORDER
Upon the oral motion of the Defendants International Heritage, Inc. and/or
International Heritage, Incorporated (collectively "IHI") seeking relief and
clarification of the Order to Show Cause, Temporary Restraining Order, Order
Freezing Assets, Order Prohibiting Destruction of Documents, and Order
Expediting Discovery entered on March 16, 1998, as well as the Order
Appointing A Receiver for Defendant International Heritage, Inc., also entered
on March 16, 1998, and following a hearing on March 17, 1998, and a telephone
conference with counsel for IHI, the Securities and Exchange Commission and
the Receiver and his counsel on March 18, 1998, the Court, with agreement of
the participating parties, hereby ORDERS, until further order of the Court,
that the Receiver shall permit IHI:
(1) To accept new product sales orders (other than orders in
connection with obtaining new Independent Retail Sales
Representatives ["New IRSRs"] or new Retail Business Centers ["New
RBCs"]), including but not limited to sales of long distance
telephone services, from IRSRs who were authorized to sell IHI
products as of March 16, 1998 ("Existing IRSRs"); provided,
however, IHI shall not deposit payments, process credit card
authorizations or ship any product merchandise except with respect
to IHI's company-branded line of nutritional and skin care
products, and IHI shall be authorized to complete and ship
outstanding and paid orders for IHI's company-branded line of
nutritional and skin care products to its Existing IRSRs and other
customers. It is further provided that subject to the limited
exception set forth in subparagraph (2) hereof, and in strict
compliance with the terms thereof, under no circumstances, pending
further order of this Court, shall IHI or anyone on behalf of IHI
solicit any person to become a New IRSR or to obtain or purchase
any New RBC or any similar income opportunity interest from IHI
through purchases of IHI products or otherwise. In offering IHI
products for sale, neither IHI nor any agent or representative
thereof shall use any written sales material or make any verbal
representation which describes or discusses any New RBC or similar
new income opportunity interest offered by IHI, whether
as a New IRSR or otherwise;
(2) to sponsor training meetings for Existing IRSRs as shown on the
attached Exhibit "A" hereto; provided, however, that only Existing
IRSRs shall be permitted to attend such training meetings and IH1
may not conduct, sponsor or participate in any meetings or other
gatherings for the express or implied purpose of recruiting New
IRSRs. It is recognized by the Court on the representation of
counsel for IHI that one purpose of the training meetings is to
advise and educate those Existing IRSRs in attendance regarding
the new commission/compensation plan recently put in place by IHI,
and that a presentation on and of that plan necessarily involves
compensation related to the sales efforts and results of possible
"down line" New IRSRs that may be recruited by such Existing IRSRs
in attendance. Reference in explaining the new compensation plan
to the possible recruitment by an Existing DISR of one or more
possible New IRSRs ("down line" New IRSRs) in the future is
expressly approved. Provided, however, that all such training
meetings shall begin and conclude with the reading by IHI of an
express disclaimer prepared by the Receiver and approved in
advance by the Court stating that the purpose of the meeting is
limited to educating those Existing IRSRs in attendance on IHI
product lines and the commission/compensation structure applicable
for selling IHI product, and that the presentation and discussion
of the new IHI commission/compensation plan involving possible
future "down line" New IRSRs during the meeting expressly is not a
request or solicitation for the recruitment of New IRSRs and that
IHI is prohibited by order of this Court from accepting, and until
further order of this Court will not accept, applications for New
IRSRs or any such similar persons or positions. No recruitment or
solicitation shall take place at any such training meeting;
(3) to communicate with its Existing IRSRs by telephone, facsimile, or
other written means and/or through IHI's various voicemail systems
that no New IRSR applications will be solicited by them or
processed by IHI; and
(4) to conduct business pursuant to the sole direction of the
Receiver.
The Receiver is authorized and directed to make payments of unpaid wages
to IHI employees for work previously performed for and on behalf of IHI as is
appropriate in his sole discretion, within guidelines verbally conveyed to the
Receiver by the Court on March 17, 1998.
Unless and until further order by the Court, individual Defendants Van
Etten, Savage and Smith are hereby enjoined and prohibited from any
involvement whatsoever in the operations of IHI, including but not limited to
the training meetings referred to in subparagraph (2) hereof, and are not to
enter the premises of IHI at any of its locations.
Except as modified herein, all other terms and conditions of prior orders
entered by the Court in this matter shall remain in place, full force and
effect.
IT IS SO ORDERED this 19th day of March, 1998.
/s/
UNITED STATES DISTRICT JUDGE
Exhibit "A"
International Heritage Incorporated [letterhead]
Upcoming Area Events
March 21, 1998 Edison, New Jersey
Trainer: Jeff Hooks
Crown Plaza Hotel 125 Raritan Center Parkway Edison, NJ
(732) 225-8300
Hosts: Jeff & Bert Bueno, (732) 828-3073
Stephanie Field & Davit Mack, (973) 762-5409
Houston, Texas
Trainer: Steve Gagnier
South Shore Harbor Resort 2500 South Shore Blvd League
City, TX (281) 334-1000
Hosts: Mark & Kim Ledger, (281) 996-9168
Boca Raton, Florida
Trainer: Gary Raser
Hilton Hotel 100 Fairway Drive (Just East of 1-95 &
Hillsboro Blvd)
Deerfield Beach, FL (954) 427-7700
Host: Marty Stern, (561) 997-6211
Medicine Hat, Alberta
Trainer: Johnny Daniell
German Harmony Hall First Street, SE Redcliff, AL
Host: Jay Lundy, (403) 528-4165
Albuquerque, New Mexico
Trainer: Keith Yarbrough
Albuquerque Marriott 2101 Louisiana Blvd., NE (505) 881-6800
Host: Robert Gibson, (505) 797-4572
Spokane, Washington
Trainer: Derek Stryker
Doubletree Hotel N. 1100 Sullivan Rd. Spokane, WA
(509) 924-9000
Host: Greg Tiegs, (509) 586-2283
Garden City, Kansas
Trainer: Theresa Goetz
Wheatlands Convention Center 1408 E Fulton Garden City, KS
(716) 276-2387
Host: Dianne Farr, (316) 277-2479
Vancouver, British Columbia
Trainers: Richard Larkin, Kerry Brown
Delta Pacific Resort & Conference Centre Grand Pacific
Ballroom 10251 St. Edwards Dr.
Richmond, B.C (604) 278-9611
Hosts: Dave & Trish Martin, (604) 572-8949
Greg Bright, (604) 535-9397
Litchfield Beach, South Carolina
Trainer: Richard Hamilton
Litchfield Beach & Golf Resort Hwy 17 Pawley's Island, SC
(800) 845-1897
Hosts: Nina & Marty Runion, (803) 527-2727
Detroit, Michigan
Trainer: Pat Hutton
Sterling Inn 34911 Van Dyke Ave. Sterling Heights, Ml
(910) 979-1400
Hosts: Janice & Skip Pelletier, (810) 566-4922
Orlando, Florida
Trainer: Ken Rudd
Maitland Civic Center 641 S. Maitland Ave. Maitland, FL
(407) 647-2111
Hosts: Rich & Rita Masi, (407) 876-0770
Corpus Christi, Texas
Trainer: John Brothers
Bay Front Plaza Convention Ctr. 1901 Northshore Line Blvd
(512) 883-8543
Hosts: Ron & Barbara Young, (512) 853-1989
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION
SECURITIES AND EXCHANGE )
COMMISSION, )
)
Plaintiff, )
)
vs. ) CIVIL ACTION FILE NO.
) 1 98-CV-0803-RWS
)
INTERNATIONAL HERITAGE, INC., )
et al. )
)
Defendants. )
DEFENDANTS' MEMORANDUM IN OPPOSITION TO PLAINTIFF'S
MOTION FOR A PRELIMINARY INJUNCTION AND
OTHER EQUITABLE RELIEF
I. PRELIMINARY STATEMENT
The SEC, acting ex parte and in the guise of furthering the public
interest, has obtained a Temporary Restraining Order and other unwarranted,
draconian relief designed to destroy the Defendants' legitimate business and
the livelihood of tens of thousands of people. The SEC took this surprise
action even though the SEC has known the details of the Defendants' business
for more than eighteen months and has never advised them of the matters it
alleges here. Defendants International Heritage, Inc. ("IHI" or the
"Company"), Stanley H. Van Etten ("Mr. Van Etten"), Claude W. Savage ("Mr.
Savage"), Larry G. Smith ("Mr. Smith") and International Heritage Incorporated
("Heritage Incorporated") (collectively the "Defendants") respectfully submit
this Memorandum in Opposition to the SEC's request to continue these
oppressive measures pending trial. As outlined below and as will be
demonstrated at the evidentiary hearing scheduled to commence March 24, 1998,
the SEC's action is neither necessary nor appropriate, either factually or
legally, and is designed to pretermit any opportunity for the Company and
certain of its principals to defend themselves here and to prevent them from
otherwise engaging in legitimate business activity.
II. FACTS
A. History and Overview
1. The Company
International Heritage, Inc. ("IHI") is engaged principally in the direct
sale of nutritional and skin care products, telecommunications products, fine
gold and precious stone jewelry, collectibles and pro-line golf products and
accessories in the United States and Canada. IHI uses a network marketing
distribution system to market these products of recognized value through
catalog sales utilizing a network of independent retail sales representatives
("IRSRs") and catalog sales to end users. IRSRs are independent contractors
who sell products from IHI at retail to the public or purchase them for
personal consumption. IHI develops marketing materials used by IRSRs
including, but not limited to, sales brochures, audio and video tapes,
training manuals and business forms. Prospective IRSRs are only required to
purchase a career kit for $100 to become affiliated with the company. No
other material purchases are required for an individual to become an IRSR and
to build a retail sales organization. IRSRs may purchase, at their option,
additional marketing materials from the company to help develop their sales
skills to assist in marketing company products and sponsoring and training new
IRSRs.
IHI negotiates for and secures the rights, through contract, license or
other agreements, to market and sell the various products available to IRSRs.
IHI's product lines include jewelry from E.B. Harvey, Jewels by Evonne and
John Kragh Jewelers as well as fine collectible products manufactured by
Lalique, Mark Hopkins, Sorrento, Mont Blanc, Lladro, Chilmark, Swarovski, Reid
& Barton, Hummel, Bosca, Armani and other premium manufacturers. Additionally,
in March 1997, IHI introduced long-distance telephone service for both
residential and business customers from BTI (one of the nation's largest
long-distance suppliers, based in Raleigh, North Carolina) and a new pro-line
of golf products including golf equipment, clubs and accessories manufactured
by Callaway, TaylorMade, King Cobra, Topflight, Titleist and others. The
Company believes it is one of the first network marketing or direct sales
companies to sell golf clubs, equipment and accessories.
IHI has recently added a toll-free product order department which allows
retail customers and IRSRs to telephone IHI directly to place catalog orders.
Retail customers can purchase from IHI product catalogs which will have an
IRSR identification number, and upon order entry, the IRSR responsible for
distributing the catalog shall receive a commission from the sale.
2. Operations and Physical Plant
IHI uses state-of-the-art technology and a full staff to service its
IRSRs and retail customers. Customer service agents answer phones Monday
through Saturday. There are several bilingual service agents, proficient in
various languages, available to service IHI's IRSR and retail customers.
Business is processed and entered on a daily basis. IRSRs also have
technology support available 24 hours a day via the International Data
Communications Center ("IDCC"), Fax on Demand, and the Internet to assist and
provide support for all facets of the business. IHI conducts its operations
through its headquarters in Raleigh, North Carolina, and presently leases
approximately 60,000 square feet of office space for its executive offices and
operation center. The Company employs more than 200 individuals, a large
portion of which are minorities, handicapped individuals, and single parents.
Additionally, the Company services its Canadian IRSRs through approximately a
7,800 square foot facility located in Toronto. This facility serves as the
executive office, customer service and fulfillment facility for IHI's Canadian
operations.
3. Compensation Plan
IRSRs are compensated for sales of IHI products in accordance with the
Company's compensation plan (the "Plan"). The Plan is copyrighted under
federal law and, under IHI's written directions, IRSRs are not permitted to
modify or create any derivative form or version of the Plan when presenting
the business. IRSRs are required to purchase a retail business training kit
for $100, which is the Company's cost, but no other payment is required of a
person who wants to become an IRSR and benefit financially from their IHI
relationship.
IRSRs can benefit financially under the Plan in several ways. First,
IRSRs may sell IHI products at a normal retail price to consumers, generating
a profit for themselves directly, based on the difference between retail and
the representative's cost (the wholesale price paid by an IRSR).
Second, IRSRs may undertake to build a retail sales organization ("RSO")
and earn commissions on sales made by other IRSRs in the RSO ("override
commissions") as well as bonuses by helping or managing other IRSRs in their
RSOs. Before an IRSR may qualify to benefit from the sales of other IRSRs, he
or she must establish and qualify a retail business center. This, too, may be
accomplished by an IRSR without the payment of any monies to IHI for anything
other than wholesale products (nutritional and skin care products through
IHI's preferred customer program and the sale of BTI long distance telephone
services) which the IRSR receives and uses in his or her business or
personally. In addition, an IRSR can purchase other wholesale products, which
the IRSR can sell at retail price or use in his or her business or personally.
Until March 13, 1998, when, as described below, the Company announced at its
annual meeting for IRSRs the new plan authorized by the IHI Board of
Directors, an IRSR could also certify a retail business center by making a
down payment on the product being purchased and earning out the rest of the
purchase price from commissions on sales to or by those in his RSO. But here
too, no cash benefit was received by an IRSR until the product ordered by the
IRSR was paid for fully and shipped by the Company.
Finally, IRSRs can benefit by saving money on their discounted wholesale
purchases of Company products for personal use.
Under the Plan, the maximum earning potential for a single retail
business center is $1,000 per week in override commissions on retail sales of
company products and $1,500 per week in bonuses, for a maximum total
compensation of $2,500 per week. Each retail business center must requalify
every quarter in order to permit the IRSR to continue earning override
commissions and bonuses. In order to requalify, the retail business center
must accumulate certain minimum business volume. As noted above, the
Company's compensation Plan has been modified as a result of the IHI Board of
Directors' decision in November 1997 to eliminate any possibility of an IRSR
being able to establish a retail business center without someone, whether a
customer or the IRSR, paying for and receiving retail products.
IRSRs have quarterly retailing requirements of 12 company products, six
of which must be sold to non-IRSRs in order to earn override commissions and
bonuses. The Company's new compensation plan, which involves detailed
training, organization, and product materials which had been under preparation
for several months, is called the Flex-Level Compensation Plan (the "Flex
Plan"). It provides a unique type of compensation for IRSRs for the sale of
the Company's nutritional and skin care products. The Flex Plan is intended
to work in conjunction with the Company's base compensation plan and provide
various degrees of commissions on the sales of nutritional and skin care
products.
IHI's marketing programs, compensation plans and operations have been
structured to fit within the "Amway safeguards" in order to avoid either the
appearance or fact that IHI is operating an illegal pyramid scheme. These
safeguards were recognized as appropriate in the 1979 Federal Trade Commission
Amway decision In the Matter of Amway Corp., 93 F.T.C. 618 (1979).
4. Competition
IHI operates in a highly competitive business and competes with a number
of established network marketing companies, including Amway (disposable goods
distribution), Shaklee (health products distribution) and Mary Kay (beauty
products distribution). IHI competes not only for the sale of products, but
also for the services of successful IRSRs. Additionally, IHI competes with
traditional storefront retail sellers of fine jewelry, fine collectibles, and
pro-line golf products.
5. Compliance
Regulations regarding network marketing companies are complex and
overlapping and vary from jurisdiction to jurisdiction. Network sales
programs are affected by combinations of business opportunity, franchise,
securities, anti-pyramid, network distribution and state lottery statutes, as
well as U.S. Post Office lottery and Federal Trade Commission fraud
regulations. IHI has taken significant measures to comply with the various
laws that would apply to it in the jurisdictions in which it currently
operates and has created a training program and Compliance Department
("Compliance") to monitor IRSR adherence to IHI's policies and procedures
designed to ensure compliance with the various laws that govern its business.
IHI's corporate compliance department currently employs fourteen (14) persons
whose primary functions are to investigate and discipline violations of IHI's
policies and procedures. IHI devotes significant efforts and resources to
monitoring its operations and sales force.
6. The Individual Defendants
Mr. Van Etten is the President, Chief Executive Officer ("CEO") and
Chairman of the Board of IHI and Heritage Incorporated. Messrs. Savage and
Smith are Directors of IHI and Heritage Incorporated and are IRSRs, but they
are not involved in the day-to-day management of the business.
B. The SEC Action
On March 16, 1998, the SEC, after spending approximately eight months
conducting an informal private investigation into the activities of IHI
(during which IHI voluntarily produced voluminous materials and provided four
(4) persons for testimony as requested by the SEC, including the three
individual Defendants named in this action), filed a Complaint for Injunctive
and Other Relief in this Court. The Complaint alleges violations of
Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Sections
10(b) and 15(d) of the Securities Exchange Act of 1934, and Rules 10b-5 and
15d-11 promulgated thereunder. The SEC seeks disgorgement and civil penalties
against the Defendants. At the same time, the SEC sought and obtained,
without any notice whatsoever to the Company or any of the individual
defendants, a Temporary Restraining Order and the draconian relief of a
Receiver and an asset freeze. On March 18, 1998, after a hearing where the
SEC strenuously opposed any relief for the Company from the Court's March 16,
1998, Orders, the Court entered a clarifying Order under which the Company is
allowed to keep its doors open and engage in sharply curtailed business
activity, which, if continued for any appreciable period, will result in a
total shut-down
of the Company.
III. ARGUMENT
A. The Legal Standards Applicable To This Action
The SEC cannot prevail on its motion for a preliminary injunction unless
it can make a "proper showing" that "any person is engaged or is about to
engage in acts or practices" in violation of the Securities Act or the
Exchange Act. Section 20(b) of the Securities Act, 15 U.S.C. Section
77t(b); Section 21(d)(1) of the Exchange Act 15 U.S.C. Section 78t(d)(1).
To make such a proper showing, the SEC must offer "positive proof" of the
likelihood of future violations, which requires the SEC to "go beyond the mere
fact of past violations and offer `positive proof' of the likelihood of
further violations in the future." SEC v. Warner, 674 F. Supp. 841, 844 (S.D.
Fla. 1987); SEC v. Blatt, 583 F.2d 1325, 1334 (5th Cir. 1978). Where the SEC
fails to make a showing of the "reasonable likelihood" that a defendant will
violate the securities laws prior to the date for trial, the SEC's motion for
preliminary injunction must be denied. SEC v. Warner, 674 F. Supp. 841, 844
(S.D. Fla. 1987); see also SEC v. Caterinicchia, 613 F.2d 102 (5th Cir.
1980).
In determining whether an injunction should issue in SEC cases, the
courts have looked to the totality of the circumstances, and fashioned a group
of factors to be considered:
(1) the egregiousness of the defendant's actions;
(2) the isolated or recurrent nature of the infraction;
(3) the degree of scienter involved;
(4) the sincerity of the defendant's assurances against future
violations;
(5) the defendant's recognition of the wrongful nature of his conduct;
and
(6) the likelihood that the defendant's occupation will present
opportunities for future violations.
SEC v. Blatt, 583 F.2d 1325, 1334 n.29; SEC v. Nadel, No. 90-6401, 1991 U.S.
Dist. LEXIS 17849 (S.D. Fla. Aug. 28, 1991); SEC v. Carriba Air, Inc., 681
F.2d 1318, 1322 (11th Cir. 1982).
As demonstrated below, the SEC cannot satisfy the requirement of
"positive proof" of the likelihood of future violations.
The legal standards applicable to the other continuing interlocutory
relief sought by the SEC show why the SEC is not entitled to that relief here.
First, in deciding whether or not to appoint a receiver, the Court must
determine that appointment of a receiver is "necessary to prevent the
dissipation of a defendant's assets pending further action by the court." SEC
v. the American Bd. of Trade, Inc., 830 F.2d 431, 436 (2d Cir. 1987). The
Fifth Circuit has stated that the appointment of a receiver is necessary "in
instances in which the corporate defendant, through its management, has
defrauded members of the investing public; in such cases, it is likely that,
in the absence of the appointment of a receiver to maintain the status quo,
the corporate assets will be subject to diversion and waste." SEC v. First
Fin. Group, 645 F.2d 429, 438 (5th Cir. 1981). Only upon a "prima facie
showing of fraud and mismanagement" may the Court appoint a receiver. SEC v.
Keller Corp., 323 F.2d 397, 403 (7th Cir. 1963). Obviously, this is not
relief to be granted lightly; it invariably rings the death knell for the
receivership entity.
Second, while the freezing of assets in an SEC enforcement action may be
used to assure that funds which become due can be collected, SEC v. Unifund
SAL, 910 F.2d 1028, 1041 (2d Cir. 1990), the decision to order a temporary
freeze of assets in an SEC enforcement action "requires particularly careful
consideration." SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082, 1105 (2d
Cir. 1972). An unwarranted freezing of assets will undoubtedly undermine the
Court's goal of compensating investors, should the SEC ultimately prevail,
because the freeze will disrupt the Company's business affairs so as to
financially destroy the business. Id. at 1106. Therefore, in determining
whether to order an asset freeze, "the court must weigh `the deleterious
effects' the freeze may have on the defendants' business against `the
considerations indicating the need for such relief.'" SEC v. Current Fin.
Servs., Inc., 783 F. Supp. 1441, 1443 (D.D.C. 1992) (citing Manor Nursing, 458
F.2d at 1106).
B. The SEC's Claims Are Without Merit
The Establishment of IHI's Business Centers Do Not Involve The Sale
of Securities
The sine qua non of an SEC action is the offer, purchase or sale of a
security; otherwise the SEC has no authority to be here and the Court has no
jurisdiction to act. Here, the SEC contends that the Company's method of
establishing retail business centers, at least in part, involves the sale of a
security. While the SEC may have had a colorable--but incorrect--argument on
this point in the past, there is no question that IHI's present operation
permits no serious argument that the sale of securities is involved. We
analyze both the past and present business arrangements below.
The SEC contends that the Defendants are offering and selling securities
in the form of "investment contracts" as defined at Section 2(1) of the
Securities Act (15 U.S.C. Section 77b(1)), and Section 3(a)(10) of the
Exchange Act (15 U.S.C. Section 78c(a)(10)). Although the term "investment
contract" is included in the definition of a security under both Acts, the
term was not given any substance until the Supreme Court's landmark opinion in
SEC v. W.J. Howey & Co., 328 U.S. 293 (1946).
In Howey, the Supreme Court stated that "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...." Howey, 328 U.S.
at 298-99, 66 S.Ct. at 1103.
The SEC correctly notes (Memorandum in Support, p. 15) that the Eleventh
Circuit has recognized the Howey test, as rearticulated in United Hous.
Found., Inc. v. Forman, 421 U.S. 837 (1975), thusly: "the presence of an
investment in a common venture premised on a reasonable expectation of profits
to be derived from the entrepreneurial or managerial efforts of others."
Villeneuve v. Advanced Bus. Concepts Corp., 730 F.2d 1403, 1404 (11th Cir.
1984) (en banc). Paying lip service to this controlling law, the SEC glosses
over the heart of the element it must prove to prevail: that any expectation
of profits is to be derived from the entrepreneurial or managerial efforts of
others. Thus, the SEC contends, without any support whatsoever, that "the IHI
program was plainly designed and marketed to give an investor the expectation
that the fabulous returns he would receive would come from the efforts of
other individuals in his `downline.'" (Memorandum in Support, p. 16).
This contention is erroneous and demonstrates the fallacy of the SEC's
position here. First, no one can seriously suggest that the IHI program has
ever provided an "expectation of fabulous returns." It cannot be disputed
that all of IHI's materials specify the maximum weekly commission compensation
to an IRSR for business center sales by his or her RSO as $2,500 per week with
detailed explanations showing the amount of retail product sales and hard work
necessary to achieve these results. Moreover, the IHI materials stressed the
necessity for IRSRs to work with those in their RSOs to make a success of the
business.
Second, unlike all of the cases cited by the SEC where the common
enterprise was with, and the expectation of profits derived from the efforts
of, the promoters or an existing third party, here the SEC makes the
incredible leap of logic that the "efforts of others" element is satisfied by
those in the IRSR's potential "downline." But a prospective IRSR could hardly
have a reasonable expectation of profits to be derived from the efforts of
people not even in the enterprise yet and who may not even have been known to
the potential IRSR. The SEC's theory here not only flies in the face of the
law; it flies in the face of logic.(1)
Thus, upon application of the key element here, the "efforts of others"
element of the Howey test, the Court will see that the argument is no more
than a plea that this Court disregard what the Supreme Court has said and
accept the SEC's view that, essentially "any efforts" from even unknown others
meets the Howey test. Acceptance of the SEC's contention would be contrary to
binding precedent and would stand the investment contract test on its head.
Even if the "efforts of others" the SEC pointed to were the efforts of
IHI, the SEC's case would still fail. For example, in Villeneuve, en banc,
the Eleventh Circuit held that the Defendant there was not selling securities
in the form of investment contracts because the "efforts of others" test was
not met. The purchaser of an area agreement for a self-watering, flower
planter business was required to periodically check and restock his displays
with planters he ordered from the defendant once the defendant identified and
established locations for the business. The Court held that it could discern
no basis for concluding that the profits which the purchaser of the area
agreement expected to
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(1) While the SEC does provide a handful of anecdotal declarations from
people who never even became involved in the program to recite their
understanding of IHI's program, that hardly suffices as the kind of evidence
necessary to prove that the IHI program involved a security.
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<PAGE>
realize were to be derived from the defendants' entrepreneurial or managerial
efforts. Id. at 1404.
In the instant case, IRSRs earn substantial profit from retail product
sales. IHI representatives must participate in the training and management of
their down-line sales organizations to foster their productivity.
Additionally, they must have 12 retail sales of product including six to
non-IRSRs each quarter in order to earn override commissions and bonuses. No
retail sales business volume is generated by recruiters. IRSRs meet with
prospective purchasers, negotiate with local business for catalog placement,
organize sales and training meetings and frequently work long hours to
maximize the potential for their businesses. It is the efforts of the IRSRs,
not of others, which are significant to their profit.
The success of distributors' IRSRs depends on their efforts in selling
the products and services offered by IHI. To that end, representatives are
required to become familiar with and market the Company's products. They must
attend regular training programs and engage in significant efforts involved in
the ordering and delivery of products. While representatives may be
successful in building sales organizations, the success of those sales
organizations and the ability of any representative to receive a profit is
dependent upon their ability to market the Company's products and services.
In order for any business center to receive any override commission or bonus,
retail sales business volume ("RSBV") of 1000 must be generated by each of the
two subordinate legs of the retail business center. That can only be done by
the sale of product by the subordinate representative or sales to him or her
for either resale or personal consumption. That subordinate representative's
recruitment of other individuals as distributors for the Company is
insufficient to generate the business volume necessary to create any override
commission or development bonus. Accordingly, IRSR's expectations of profit
are not inextricably tied to the efficacy of the Company's efforts. The SEC's
oft stated contention that commissions and bonuses can be earned without any
product being "shipped"-even though not really relevant-is simply wrong.
The SEC cannot sustain its burden that International Heritage business
centers constitute securities because the expectation for profits derived
solely from the efforts of others is not present.
C. The Defendants Have Not Committed Fraud
The SEC has alleged that the Defendants have engaged in conduct violative
of the securities anti-fraud provisions. To prevail, the SEC must prove that
the Defendants, acting with scienter,(2) made material representations or
omitted material facts in the offer or sale of securities. The SEC alleges
such fraud in the establishment of retail business centers (contending they
are securities), in connection with the sales of IHI notes offered in a
non-public offering in 1997, and in an SEC filing on Form 8-K made in March
1998. None of these allegations has merit: some are
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(2) Except as to Sections 17(a)(2) and (3) of the Securities Act.
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<PAGE>
unsupported and unsupportable in fact and the remainder are immaterial as a
matter of law.
First, the facts. The SEC contends that the Defendants failed to
disclose increased losses to investors in IHI's 1997 note offering. But, the
increased losses were disclosed. Second, the Commission alleges that IHI
failed to disclose that it was operating a pyramid scheme, that it was a model
of corporate compliance and regulatory [sic] right, as well as certain
background information relating to Mr. Van Etten.
1. The Materiality Test
The Commission's allegations are immaterial. In Basic Inc. v. Levinson,
485 U.S. 224 (1988), the Court expressly adopted, in the context of
Section10(b) and Rule 10b-5 claims, the materiality standard set forth in
TSC Indus. v. Northway, Inc., 426 U.S. 438 (1976). The Levinson Court
endorsed a fact-specific inquiry which "depends on the significance the
reasonable investor would place on the withheld or misrepresented
information." 485 U.S. at 240.
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(3) See the Declarations of Sarah Johnson; Arnold N. Troeh, Ph.D.; Alan J.
Moore; Steve A. Lee; Steven K. Hagen; James P. Mayo; Lynn Simonson and Eunice
Simonson; Jean Wedin; BCD Farms, Inc.; Mark S. Griffin, M.D.; Donald C. Olson
and TamiJo Olson; Dorcas Liu; Lois Coonc; Pamela A. Johnson; Gale Simonson and
Leroy Simonson; Claude H. Lewis; William D. Griffin (Leisure Time Rentals);
Eric J. Geoffroy; Lloyd Geoffroy, Jr.; Harry B. Mains; John A. Neal; Richard
Masi; Randall J. Johnson; John D. LeBlanc; Charles T. Hilton, Jr.; Josette A.
Broussard; Carlan J. Hanks; Randy Tolf; Jeffery Langness; Norbert Louis Ming;
Egbert Louis Ming; Howard J. Hammond; Daniel R. Madung; and David Martin and
Tricia Martin, filed contemporaneously with this Memorandum.
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<PAGE>
In TSC Industries, the Court held that the general standard of
materiality is: "[a]n omitted fact is material if there is a substantial
likelihood that a reasonable shareholder would consider it important in
deciding how to vote."(4) 426 U.S. at 449. The Court further explained this
standard as, "there must be a substantial likelihood that the disclosure of
the omitted fact would have been viewed by the reasonable investor as having
significantly altered the total mix' of information made available." Id.
2. Defendants Are Not Engaged in An Illegal Pyramid Scheme
The Commission has alleged that IHI's business activities constitute an
illegal pyramid scheme and therefore necessarily runs afoul of the securities
antifraud provisions. Nothing can be further from the truth. IHI is a
legitimate network marketing company engaged in the sale of quality products
and services to its distributors and on a retail basis.
The focus of pyramid schemes is to exact a substantial fee from
participants for the right to recruit other participants into the program.
The marketing plans generally require a person seeking to become a distributor
to pay a large sum of money as an entry fee (called a "headhunting fee") or to
purchase a large amount of nonreturnable inventory ("inventory loading"). In
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(4) The Court adopted this standard for Section 10(b) and 10b-5 in
Levinson, but in TSC Industries the standard was in the context of Rule 14a-9.
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<PAGE>
exchange, the new distributor would secure the right to recruit others who
would, in turn, pay large sums of money as headhunting fees or purchase large
amounts of inventory with some of this money going to the recruiter.
In the program described in SEC v. Koscot Interplanetary, Inc., 497 F.2d
473 (5th Cir. 1974) a favorite reference in the SEC's Memorandum, different
levels of participation in the marketing plan were available, offering
different levels of compensation, for varying amounts of investment. For an
investment of $1,000, a supervisor could receive a 55% discount from retail
price on goods. In addition, if that supervisor introduced a prospect to
Koscot, he/she would receive $600 of the $1,000 investment. Thus, by securing
two new investors, a distributor could begin to turn a profit. A person could
also invest $5,000 with Koscot to purchase cosmetics at an even greater
discount and sponsorship of a $5,000 investor would result in a $3,000
commission. Thus commissions were directly tied to recruitment. Id. at 475.
Another tactic used in pyramid schemes is the avoidance of an explanation
of the program to potential recruits prior to their attendance at a meeting.
Promoters hold out the prospect of substantial earnings but say nothing about
the nature and workings of the program with the objective of tantalizing
prospective members through the elements of "curiosity, enthusiasm and money."
In Koscot, for example, sales trainees and independent sales agents were
encouraged to present a false facade of success to encourage recruits to
invest. Finally, in a pyramid scheme, the product is vastly overpriced and
merely incidental to the real business of the scheme which is the endless
recruitment of additional salespersons.
IHI's business is markedly different than that traditionally associated
with a pyramid scheme. The distributors are not required to pay large sums of
money as "headhunting fees," nor are they required to purchase a large amount
of nonreturnable inventory. All that is required to become an IRSR for IHI
is, as noted above, the payment of the $100 to purchase the not-for-profit
career kit. Moreover, unlike Koscot, IRSRs begin on an equal footing in terms
of potential compensation. The International Heritage program is fully and
completely explained through the use of a scripted presentation and a slide
show (although a flow chart may be used in some cases). The Company has
strict policies against diverging from the script. Finally, while the
potential maximum earnings for a retail business center are spelled out in the
presentation, with associated warnings that these numbers are not "meant as
income projections, nor are they indicative of any [IRSR's] existing or future
income." In fact, IRSRs are prohibited from making specific income
projections and the use of hypotheticals in explaining the compensation
program is clearly indicated as such.
The IHI program is designed to promote the generation of profits through
the retail sales of products to the consuming public, ensure a conservative,
realistic presentation of both the program and business opportunity to
prospective representatives, and provide a fairly priced and demonstrably
beneficial service to its members. It is not a case in which the only effort
required of a representative is to secure other representatives to participate
in the program. Company materials, presentations and communications
repeatedly emphasize that a company representative or director must expect to
work hard at retail selling in order to turn a profit in his or her business.
Moreover, as the SEC's own exhibits show, IHI strives to ensure that its
program is marketed without unnecessary hype, "get rich quick" stories, or
misrepresentations about the business. Finally, all representatives agree
they must exercise supervisory responsibilities upon all other representatives
within their sales group. There is no question that IHI is marketing a fairly
priced, intrinsically valuable product. The intrinsic worth of its product
and effectiveness of IHI's basic marketing objective of selling merchandise to
the retail consumer distinguish the IHI opportunity from the pyramid schemes
of the past.
IRSRs do not receive commissions or profit from their recruitment of
other individuals, but through the building of a retail sales organization
engaged in the sale of IHI's products and services. Theoretically, in a
pyramid scheme, a market may become saturated and the supply of new potential
recruits dry out leaving most of those involved without a means of recouping
the money they paid to join. The mathematical saturation approach, while
attractive for the SEC's purposes of alleging fraud, is posited without regard
to the actual facts, or even reality. Its use as a government tool to make
such fraud charges was explicitly rejected more than twenty years ago in
Ger-Ro-Mar, Inc. v. Federal Trade Comm'n, 518 F.2d 33 (2d Cir. 1975). In
Ger-Ro-Mar, the court noted
The sole evidence to support the Commission's holding that the plan
is inherently unfair and deceptive, is a mathematical formula, which
shows that if each participant in the plan recruited included only
five new recruits each month and each of those recruited five
additional recruits in the following month, and this process were
allowed to continue, at the end of only 12 months the number of
participants would exceed 244 million, including presumably the
entire staff of the FTC. The Commission concludes that this, in
effect, is the impossible dream and that the siren song of
Symbra'Ette must be stilled. . . . However, we live in a real world
and not fantasyland.
. . . [T]he fact is that Symbra'Ette, which commenced business in
1963, did not reach its peak in distributorships until 1972 when it
had attracted some 3,635 distributors. The record does not indicate
the geographical distribution of these vendors, and we have no study
or analysis in the record which would realistically establish that
some recruiting saturation exists which would make the entry of
additional distributors and the recruitment of others potentially
impossible in any practical sense. While the Commission need not
establish actual deception by the testimony of disappointed
entrepreneurs, it has failed entirely to establish a potential
threat. Not all Americans aspire to the calling in issue and not
all who are attracted will continue indefinitely. Id. at 37.
(footnote omitted).
In any event, concerns of saturation are not present in IHI's business.
First, it must be pointed out, there is a natural, significant attrition rate
of approximately 20% among people involved in the network marketing business.
Additionally, since business owners are encouraged to sell products to
friends, relatives, business associates, etc., there is little overlap in the
distribution network for product.
3. IHI Did Not Misstate its Attitude Regarding Compliance
The SEC also alleges that the Defendants have misrepresented IHI's
approach to the myriad regulatory bodies it faces. IHI's representations
regarding its approach to corporate compliance and regulatory relations is not
a misrepresentation. The Staff has alleged that IHI's belief and
representation that it is "regulatory [sic] right" constitutes
misrepresentation in light of the firm's agreements with the North Carolina
Attorney General's office, the Georgia Department of Consumer Affairs, and the
State of Florida to assure that IHI's programs comply with the laws of those
respective States. To the contrary, these matters reflect not a history of
non-compliance, but rather corporate intent and philosophy of dealing with its
business and the regulations governing its business in a forthright and
responsible manner. Rather than burying its corporate head in the sand, IHI
strives to work with its regulators to remain in good standing and to address
in a timely and forthright manner any concerns which those regulatory bodies
may possess. Moreover, in no case has any state or federal agency precluded
IHI from conducting business in their jurisdiction.
4. Mr. Van Etten's Personal Bankruptcy Was Not Required to be Disclosed
The extent to which the SEC is willing to go to allege fraud here is
shown by the smear that it was fraudulent for the Defendants not to disclose
Mr. Van Etten's prior personal bankruptcy and related IRS tax lien. The IRS
tax lien occurred in June of 1990 and Mr. Van Etten filed personal bankruptcy
in March of 1991, as a result of a significant tax liability and the
commencement of foreclosure proceedings on his home. On the advice of
counsel, in the interest of protecting himself and allowing time in which to
deal with these problems, Mr. Van Etten filed his personal bankruptcy as a
defensive maneuver. With the exception of a small portion of his obligations
which were discharged, Mr. Van Etten ultimately satisfied all of his financial
obligations, including the tax lien. But these items are not material facts
requiring disclosure under the federal securities laws.
The Staff's suggestion that such information might have been required to
be closed, assuming arguendo that IHI is engaged in the sale of securities, is
without merit. Item 401 of Regulation S-K requires the disclosure of personal
bankruptcies of company management that are material and have occurred within
the five years prior to the date of entry (emphasis added). Mr. Van Etten's
personal bankruptcy is not material as a matter of law with respect to the
Form 8-K filed by International Heritage, Inc. on or about March 6, 1998, as
well as the "term sheet" for the convertible notes offering dated July 1997,
as outside of the five-year limitation contemplated by Regulation S-K.
Item 401(f) of Regulation S-K states that the required disclosure for
involvement in certain legal proceedings regarding directors, persons
nominated to become a director or executive officers is disclosure of those
proceedings which occurred during the past five years and which are material
to an evaluation of the ability or integrity of such persons; some courts,
however, have required disclosure of legal proceedings outside this five year
limitation. See SEC v. Scott, 565 F.Supp. 1513, 1527 (S.D.N.Y. 1983), aff'g,
734 F.2d 118 (2d Cir. 1984); Bertoglio v. Texas Int'l Co., 488 F.Supp. 630,
661 (D. Del. 1980) (finding that five years was only a minimum disclosure
standard); but see United States v. Yeaman, No. 96-51-03, 1997 U.S. Dist.
LEXIS 2678, *31-2 (E.D. Pa. Mar. 10, 1997) (finding that SEC release numbers
5949 and 5758 are inconsistent with plain language of Regulation S-K, and
therefore SEC's interpretation of duty to disclose outside five years is
incorrect).
In Bertoglio, the court noted that "[p]laintiff's proxy materials
disclosed some, though not all, of Ling's financial history . . . [which
presented] TI shareholders . . . with an unflattering, though arguably
incomplete, picture of Ling's financial background." 488 F.Supp. at 659-60.
This left the shareholders "unaware of arguably relevant indicators of Ling's
fitness to serve as a director." Id. at 660. Plaintiff's defense was that
the episode was outside the five-year required reporting period. Id. at 661.
The court stated that the five-year disclosure period was only a guideline and
other material legal proceedings(5) must be disclosed. Id. The court
explained that the policy considerations around the adoption of the five-year
rule "likely revolve[d] around the diminishing relevance of `ancient
history'." Id. The court stated that it was likely ancient history to report
a "ten or fifteen year old incident [which] mars an otherwise unblemished
record." Id. The omission in this case, however, was material because it
"was the first in a series of securities law and business difficulties for Mr.
Ling that continue until the present time." Id.
In Scott, the court found the omission of an almost twenty year old
insurance fraud conviction to be material. 565 F.Supp at 1527. The court
found this omission material under the TSC Industries materiality standard;
however, the court also noted that "Scott actually filed an affidavit to the
contrary in support of Cayman Re's application for a reinsurance license."
Id. The court found that the filing of this affidavit was "a conscious and
deliberate intent to withhold . . . obviously relevant information." Id. at
1528.
The Yeaman decision explained the distinction between incomplete
disclosures about legal proceedings and the failure to
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(5) The Court used the TSC Industries test for materiality.
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<PAGE>
disclose proceedings where there is no duty to disclose. The court explained
that Rule 12b-20 "provides that once disclosure has been made, the issuer must
be sure to add all other and further material information needed to insure
that the disclosures, which have been made, are not materially misleading."
1997 U.S. Dist LEXIS 2678 at *18. Proceedings outside the five year period,
however, which were not part of a misleading disclosure, need not be
disclosed. Id. at *29. The court held the SEC's interpretation that the
five-year period was only a guide was inconsistent with the plain language of
Regulation S-K itself. Id. at *31. The court noted that the SEC was fully
capable of amending the regulation to achieve a desired result, which was
evidenced by the fact that in 1978 the SEC reduced the required disclosure
period from 10 to 5 years. Id. at *33 n.14.
Both the Bertoglio and Scott decisions appear to be consistent with the
Yeaman opinion because they involved misleading disclosure rather than lack of
disclosure with no duty to disclose.
5. IHI Did Not Make Material Misrepresentations in Connection with the
Sale of Convertible Notes
The Commission has also alleged that the Company committed fraud in
connection with its sale of convertible notes between August 5, 1997, and
October 31, 1997. The Staff alleges that IHI failed to disclose adverse
financial information which came to its attention during the course of that
offering.
The Staff alleges that the term sheet for the notes offering set forth
financial information disclosing an operating loss of approximately $1.9
million during the first four months of 1997, and further that the term sheet
did not disclose that by the time of the offering IHI's losses had increased
to $7.6 million and that IHI was facing a severe shortage of operating funds.
For the reasons set forth below, it is clear that the Staff's allegations are
without merit.
IHI relied upon competent, experienced counsel to advise it in connection
with the offering of these securities. A determination was made that that
specific disclosure concerning the extent of losses and the updating of the
term sheet was not required given the oral disclosures to prospective
investors.
In connection with any subscription to the note offering, investors were
required to represent that:
(a) that they have carefully read the term sheet and understand
and have evaluated the risks of an investment in the notes;
(b) have been provided with the opportunity to obtain additional
information concerning the offering of the notes or the Company;
(c) have been given the opportunity to ask questions of and
receive answers from the Company or its representatives concerning
the notes or an investment in the notes and have been given a
further opportunity to verify the accuracy of that information;
(d) that an investment in the note was speculative and involved a
high degree of risk of loss of the entire investment
The term sheet for the offering included audited financial statements
from the Company as of December 31, 1997. Those financial statements
indicated an operating profit of approximately $1.3 million. Additionally,
the term sheet included unaudited financial information which reflected an
operating loss for the first four months of 1997 of approximately $1.9
million, or a substantial "swing" in profitability of approximately $3.2
million. The Risk Factors section of the term sheet discloses adverse
information with respect to the prospects for the Company's profitability and
the probability of management success in enhancing probability.
Specifically the term sheet states that the proceeds of the note offering
will be used for working capital, general corporate purposes and expansion of
Company office space. At page 10 of the term sheet, the Company notes that
it:
. . . anticipates that the net proceeds of the Offering, together
with existing resources and cash generated from operations, if any,
should be sufficient to satisfy the Company's working capital
requirements through the end of 1997; however, there can be no
assurance that the Company's working capital requirements during
this period will not exceed its available resources or that these
funds will be sufficient to meet the Company's long-term cash
requirements for operations, including repayment of the Notes upon
maturity. In the event the Company's plans or assumptions change or
prove to be inaccurate, or the net proceeds of the Offering together
with cash generated from future revenues, if any, prove to be
insufficient to fund operations (due to unanticipated expenses,
problems or otherwise), the Company may find it necessary and/or
advisable to reallocate some of the net proceeds within the
above-described categories or to use portions thereof for other purposes
and therefore management will have significant discretion regarding
how and when such proceeds will be applied. (emphasis added).
Additionally, at page 13, the term sheet indicates:
History of Operating Losses; Uncertainty of Future Profitability.
The Company was incorporated on April 28, 1995, and from that date
until June 21, 1995, the Company's operations consisted primarily of
raising capital, developing a business plan, implementing business
policies, recruiting professional advisors and administrative
activities. During this development stage, the Company incurred
losses of approximately $225,000. From the date of inception
through December 31, 1996, the Company had accumulated losses of
$617,572. As of December 31, 1996, the Company had stockholders'
equity of $305,827 and its current liabilities exceed its current
assets by $1,664,390. . . . The Company had net income of
$1,312,251 for the year ended December 31, 1996. However, the
Company lost $1,808,813 during the first four months of 1997
primarily due to the decline in margins from the Company's
commission pay out structure. There can be no assurance that the
Company's strategy to increase profitability will be successful or
that the Company will be profitable in the future.
6. The Form 8-K Filed by the Company on March 6, 1992 Was Not
Materially Misleading
The Staff has alleged that the Form 8-K filed by the Company on March 6,
1998, and signed by Mr. Van Etten 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.
In United States v. Matthews, 787 F.2d 38 (2d Cir. 1986), the court
considered an appeal from a criminal conviction for violations of Section 14A
and SEC Rule 14A-9 promulgated thereunder. The charge on which Matthews was
convicted alleged that Matthews was elected to the Board of Directors of
Southland Corporation in 1981 by means of a proxy statement which failed to
disclose, among other things, that he was a member of a conspiracy "to bribe
members of the New York State Tax Commission in order to obtain favorable
rulings on tax matters of interest to Southland." Id. at 39. In reversing
Matthews' conviction on these counts, the court held "that Matthews was not
legally required to confess that he is guilty of an uncharged crime in order
that Southland's shareholders could determine the morality of his conduct."
Id. at 49. In the instant case, International Heritage is operating a
legitimate business enterprise and not a pyramid scheme as alleged by the
Commission. Under the Matthews doctrine, the Company was not required to
disclose that it was operating as a pyramid scheme when in fact it was not and
did not believe it to be so.
The Staff also challenges language in the Company's Form 8-K with respect
to the Commission's informal investigation and the Company's responses to the
Staff's requests for information. The Staff does not dispute that the Company
has been cooperating with the Staff for approximately eight months and that
the Commission instituted this action without any prior notice or opportunity
to be heard on behalf of the Company. The Company had been engaged in
discussions and continuing production of documents and information to the
Staff through and including the commencement of this action, all without the
Staff's having to resort to subpoena or the Commission's subpoena enforcement
process. In fact, as recently as March 11, 1998, the Company provided
additional information to the Staff pursuant to its verbal requests. However,
given the Company's ongoing and complete cooperation with the Staff prior to
the commencement of this action, the Staff's suggestion that the Company's
disclosures relating to the Commission's investigation in the Form 8-K are
materially false is without merit.
To date, none of the Defendants have been found to have violated state or
federal securities laws or to have engaged in any fraudulent conduct. The
Commission's allegations in this action are just that -- mere allegations.
The Staff's argument is premised entirely upon the Court's acceptance of their
argument that the distributorships or business centers established by
representatives of the Company constitute investment contracts. Moreover, as
more fully set forth above, the Commission's allegations of fraud in
connection with the offering of certain convertible note interests are totally
without merit. It is unlikely that the Commission will be able to establish
by the positive proof required a "reasonable likelihood" Defendants will
violate federal securities laws.
As the Staff points out in its Complaint, the Company has been the
subject of inquiry or investigation by several state agencies charged with
enforcing the anti-pyramid laws in that state. The Company has addressed each
state's concern and reached an appropriate resolution of those concerns which
does not require the Company to cease any aspect of its operations or
business. Far from being indicative of prior violations, these actions
confirm the legitimacy and appropriateness of the Company's business plan.
The Company has throughout its history, tried to conduct itself in
accordance with applicable state and federal laws, employing legal, accounting
and industry professionals to guide it through the myriad of regulations
governing its business. There is no evidence which suggests that Defendants
operated or attempted to operate with any fraud or deceit in the conduct of
its business activities. Nor can it be said that the Company acted with
reckless disregard to such issues.
When the SEC sought its ex parte relief, the Court did not have the
opportunity to weigh "the deleterious effects" of its freeze order on IHI's
business, and those effects are ruinous. If IHI is unable to compensate its
sales representatives, all of whom are independent contractors, and its
employees or to purchase, pay for and receive or ship its products, it is
effectively out of business. To the extent that the goal of the freeze order
was to protect the assets in the event the SEC ultimately prevails, the freeze
order will have exactly the opposite effect. So long as the freeze order
remains in place, the Company will disintegrate leaving nothing to satisfy any
claims against the Company.
The Staff has offered no evidence that the Company or Company management
has or is about to engage in "the dissipation of . . . [D]efendants' assets .
. . ." SEC v. American Bd. of Trade, Inc., supra at 436. Moreover, the
Commission has not sustained its burden to prove that the corporate assets
will be subject to diversion and waste. International Heritage is an ongoing
viable business engaged in the manufacture and purchase for resale of quality
products. There is no evidence to suggest that corporate officers or
management have been "looting" the corporation. To the contrary, in an effort
to enhance the Company's profitability, management has undertaken numerous
steps, including the acceptance of cuts and deferrals in compensation in order
to better manage the Company's assets.
[Remainder of page intentionally left blank]
<PAGE>
IV. CONCLUSION
Based on the foregoing, the SEC Motion for a Preliminary Injunction and
Other Equitable Relief should be denied and the ex parte Orders, as modified
by this Court's Order of March 18, 1998, should be dissolved.
Respectfully submitted,
/s/Michael K. Wolensky
Michael K. Wolensky, Esq.
Georgia Bar No. 773125
Robert G. Brunton, Esq.
Georgia Bar No. 090784
David J. Gellen, Esq.
Georgia Bar No. 289172
Kutak Rock
Suite 2100
225 Peachtree Street, N.E.
Atlanta, GA 30303-1731
(404) 222-4600
Brent E. Wood, Esq.
Wood & Francis, PLLC
P.O. Box 164
Raleigh, NC 27602
919/282-0801
Counsel for Defendants
<PAGE>
CERTIFICATE OF SERVICE
This is to certify that I have this day caused to be served a copy of the
DEFENDANTS' MEMORANDUM IN OPPOSITION TO PLAINTIFF'S MOTION FOR A PRELIMINARY
INJUNCTION AND OTHER EQUITABLE RELIEF, by hand delivery, properly addressed as
follows:
William P. Hicks, Esq.
District Trial Counsel
United States Securities and
Exchange Commission
3475 Lenox Road, NE, Suite 1000
Atlanta, GA 30326-1232
Joel Piassick, Esq.
Kilpatrick Stockton LLP
Suite 2800
1100 Peachtree Street, N.E.
Atlanta, GA 30309-4530
This 24th day of March, 1998.
/s/Michael K. Wolensky
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.
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(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.
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<PAGE>
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
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(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.
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<PAGE>
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
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(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.
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<PAGE>
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.
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(8) A representative could have a maximum of three outstanding RBA's per
business center.
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<PAGE>
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
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(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).
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<PAGE>
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
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(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.
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<PAGE>
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
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(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.
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<PAGE>
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
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(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.
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<PAGE>
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.
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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."
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<PAGE>
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
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF GEORGIA
SECURITIES AND EXCHANGE COMMISSION, )
)
Plaintiff, )
)
vs. ) CIVIL ACTION NO.
) 1-98-CV-0803-RWS
INTERNATIONAL HERITAGE, INC., )
STANLEY H. VAN ETTEN, CLAUDE W. SAVAGE, )
LARRY G. SMITH and )
INTERNATIONAL HERITAGE, INCORPORATED, )
a Nevada corporation, )
)
Defendants. )
)
________________________________________)
NOTICE OF POSTING OF CASH BOND AND ORDER APPROVING CASH BOND
WHEREAS, in open Court on 27 March 1998 and in the above-captioned civil
action pending in this Court between the Securities and Exchange Commission
(hereinafter "SEC"), as Plaintiff, and the Defendants International Heritage,
Inc. and International Heritage, Incorporated (hereinafter "Defendants IHI")
and other individual Defendants, an Order was entered from the bench by the
Honorable Richard W. Story, pending formalization of a subsequent written
order, requiring the Defendants IHI to post a dischargeable bond in the amount
of Five Million Dollars ($5,000,000.00) to assure that the liquid assets of
the Defendants IHI are not diminished during the pendency of this action and
that such principal sum will be available to satisfy any amounts that may be
ordered paid by the Defendants IHI in this proceeding; and
WHEREAS, the Defendant Stanley H. Van Etten, in his individual capacity,
and acting as a Surety on behalf of the Defendants IHI (hereinafter "Surety"),
has tendered and has agreed to transmit to the Clerk of Court for the United
States District Court for the Northern District of Georgia, Atlanta Division
(hereinafter "Clerk of Court"), for deposit into the Registry of the Court the
sum of Five Million Dollars ($5,000,000.00) cash (hereinafter "Bond") to
assure that the liquid assets of the Defendants IHI are not diminished during
the pendency of this action and to apply to any judgment for damages and/or
order granting disgorgement or other monetary relief against the Defendants
IHI, or either of them, up to the principal amount of Five Million Dollars
($5,000,000.00) that may result from this proceeding; and
WHEREAS, the Bond deposited by the Clerk of Court into the Registry of
the Court shall be held pursuant to the terms of this order.
NOW, THEREFORE, BASED UPON THE FOREGOING, THE COURT HEREBY ORDERS that:
1. The Bond posted by the Surety shall be deposited into the Registry
of the Court to assure that the liquid assets of the Defendants IHI are not
diminished during the pendency of this action and to make available at least
the principal amount of Five Million Dollars ($5,000,000.00) to apply to any
judgment for damages and/or any order granting disgorgement or other monetary
relief against the Defendants IHI, or either of them in this proceeding.
2. The condition of the obligation of the Bond is such that if the SEC
shall fail to obtain a judgment for damages or an order granting disgorgement
or other monetary relief against the Defendants IHI or either of them in this
case, then this obligation shall be null and void and the principal amount of
the Bond together with any then undisbursed accrued interest thereon shall be
returned to the Surety upon receipt by the Clerk of Court of an order
releasing the Bond; otherwise, the Bond shall remain in full force and effect,
pending further order of this Court.
3. A further condition of the obligation of the Bond is that if the SEC
obtains a judgment for damages and/or an order granting disgorgement or other
monetary relief against the Defendants IHI or either of them in this case, and
that judgment is and any order granting disgorgement or other monetary relief
are satisfied in whole or in part from the assets of the Defendants IHI either
in full or, alternatively, in at least the principal amount of Five Million
Dollars ($5,000,000.00), the principal amount of the Bond or any unapplied
part of the principal amount of the Bond shall be returned to the Surety;
otherwise, the Bond shall remain in full force and effect, pending further
order of this Court.
4. The Bond posted by the Surety shall be placed by the Clerk of Court
in a Registry of Court account by the Clerk of Court which will yield the
highest interest rate possible, with any interest earned being paid to and for
the benefit of the Surety quarterly, after any appropriate fees are deducted
in accordance with any applicable laws which govern the activities of the
Clerk of Court.
5. The Defendants IHI may replace all or a portion of this Bond with a
conventional, pre-approved surety bond containing exactly the same terms and
conditions during the period that the Bond remains in place, so long as the
replacement principal Bond amount shall not be less than Five Million Dollars
($5,000,000.00), provided that all aspects of the replacement are approved in
advance by this Court and an additional order is entered by this Court
approving the replacement of the Bond and further provided that no more than
one (1) such Bond replacement shall be proposed by the Defendants IHI.
6. In the event that the Surety shall no longer be employed by or serve
as an officer or director or be a shareholder of either of the Defendants IHI,
then the Defendants IHI may, with the advance approval of this Court, replace
this Bond either with a separate cash bond, or with a conventional,
pre-approved surety bond containing precisely the same terms and conditions;
provided, however, in no event shall the Bond be replaced unless and until the
collective principal Bond amount is at least Five Million Dollars
($5,000,000.00) and all aspects of the replacement are approved by a written
order entered by this Court.
Entered this ______ day of ____________, 1998
________________________________________________
The Honorable Richard W. Story
District Court Judge
SURETY
______________________________________
Stanley H. Van Etten
