-------------------- BEGINNING OF PAGE #1 ------------------- UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES ACT OF 1933 Release No. 7244 / November 28, 1995 SECURITIES EXCHANGE ACT OF 1934 Release No. 36519 / November 28, 1995 ADMINISTRATIVE PROCEEDING File No. 3-8886 - - - - - - - - - - - - - - - - - -x : In the Matter of : ORDER INSTITUTING : PROCEEDINGS, MAKING : FINDINGS, AND IMPOSING JERRY REVALEE, : CEASE AND DESIST ORDER KELLY F. MOLTON, AND : HERMANN GERALD DWORSCHAK : : Respondents. : - - - - - - - - - - - - - - - - - -x I. The Securities and Exchange Commission (the "Commission") deems it appropriate and in the public interest that administrative proceedings be, and they hereby are, instituted against Jerry Revalee ("Revalee"), Kelly F. Molton ("Molton"), and Hermann Gerald Dworschak ("Dworschak") (collectively, the "Respondents") pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") to determine whether the Respondents violated Section 17(a) of the Securities Act and Section 15(a) of the Exchange Act. In anticipation of the institution of these administrative proceedings, Revalee, Molton, and Dworschak have submitted Offers of Settlement ("Offers") which the Commission has determined to accept. Solely for the purpose of these proceedings, and any other proceedings brought by or on behalf of the Commission or to which the Commission is a party, and without admitting or denying the findings set forth below, herein, except as to jurisdiction, which is admitted, the Respondents consent to the issuance of this Order Instituting Proceedings, Making Findings, and Imposing a Cease-and-Desist Order ("Order") and to entry of the findings set forth below. II. FACTS On the basis of the foregoing, the Commission finds the following-[1]-: --------- FOOTNOTES --------- -[1]- The findings herein are made pursuant to Revalee's, Molton's, and Dworschak's Offers of Settlement and are (continued...) 1 -------------------- BEGINNING OF PAGE #2 ------------------- A. Respondents 1. Revalee Revalee, approximately age 53, is the sole owner and employee of Revalee Enterprises, an unincorporated venture. Revalee has never been registered with the Commission in any capacity. 2. Molton Molton, age 72, is the sole owner and employee of Molton Financial, Inc., a California corporation incorporated in 1987 to shelter income and arrange mortgage loans. He has never been registered with the Commission in any capacity. 3. Dworschak Dworschak, age 56, is the sole owner and employee of Dworschak Financial Services, Inc., a Canadian corporation incorporated in 1993 to buy and sell securities denominated as "prime bank guarantees" and other "prime bank" financial instruments. Dworschak has never been registered with the Commission in any capacity. On December 16, 1993, Dworschak was ordered by the State of Minnesota Commissioner of Commerce to cease and desist from offering or selling unregistered securities, specifically "prime bank" securities, in the State of Minnesota. B. Background This proceeding involves the conduct of Revalee, Molton, Dworschak, and others in repeatedly offering for sale certain so- called "prime bank" securities. As the Commission noted in its October 1993 "Information for Investors" Release on "So-Called 'Prime' Bank and Similar Financial Instruments," "the staffs of the federal financial institution supervisory agencies are unaware of the legitimate use of any financial instrument called a 'Prime Bank' note, guarantee, letter of credit, debenture, or similar type of financial instrument." C. Respondents Offered for Sale Prime Bank Securities Prior to July 1992, the Respondents entered into an oral arrangement to offer for sale so-called prime bank securities, including prime bank guarantees, promissory bank guarantees, prime bank notes, letters of credit, and bank instruments of guarantee. During the period from approximately 1992 through mid-1994, the Respondents offered these non-existent prime bank securities for sale to numerous investors in connection with this arrangement. Respondents offered these securities under several guises, including roll or "tranche" programs, which encouraged potential investors to make repeated investments or to roll the profits made from any eventual sale of the non-existent securities into --------- FOOTNOTES --------- -[1]-(...continued) not binding on any other person or entity named as a Respondent in this or any other proceeding. 2 -------------------- BEGINNING OF PAGE #3 ------------------- future purchases of additional so-called prime bank securities. The securities typically were offered in denominations ranging from $8.4 million to $100 million, for total investment amounts of up to $50 billion. 1. Revalee's participation Revalee arranged with Molton to supply prime bank instruments for Molton to sell. Revalee represented to Molton that he would supply these prime bank instruments at significant discounts for any investors that Molton found. In addition, Revalee claimed to have trading relationships with various broker dealers and banks and attempted to interest certain personnel associated with a registered broker-dealer in his prime bank offerings. Revalee further took steps to implement transactions in prime bank securities through accounts located at least one broker-dealer. Revalee was to earn a commission on any completed transactions. 2. Molton's solicitations Molton agreed with Revalee to find investors for non- existent prime bank securities. He recruited Dworschak to join the arrangement described above; assisted Dworschak and others in their efforts to locate investors; and acted as an intermediary for Revalee, the supplier of the prime bank securities. Molton was to receive a commission from each completed transaction. Molton directly solicited at least seven investors through written offers for the sale of prime bank or other non-existent instruments during the period December 1992 through May 1994. 3. Dworschak's solicitations Dworschak entered into various stages of written agreements to sell non-existent prime bank securities to at least thirty- five individuals, although the Commission has found no evidence that any of the transactions were completed. Additionally, Dworschak placed two advertisements in the Economist during December 1993 and May 1994, offering his own roll program described as follows: ZERO RISK prime bank instruments (purchase/sale) roll program for 1 or 10 year SLCs [standby letters of credit], PBGs [prime bank guarantees], PBNs [prime bank notes], two times per week average, through prime bank in Zurich, requires investors with minimum 8.4M USD. All funds and instruments in INVESTOR'S NAME ONLY AT ALL TIMES under bank supervised Investment Contract, earning 200,000 USD net per roll. Agent protection for additional 50,000.00 USD total per roll incorporated in contract. D. The Misrepresentations Made In Connection With the Offers of Prime Bank Securities The Respondents made numerous misrepresentations to potential investors in connection with the offers of prime bank securities. Respondents attempted to sell the securities through the use of documents and oral statements containing representations that the Respondents knew, or were reckless in not knowing, were false. At the least, the Respondents had no basis for believing that the representations were accurate. First, Respondents represented that prime bank securities were 3 -------------------- BEGINNING OF PAGE #4 ------------------- legitimate, tradable, and risk-free investments. Second, Molton, Dworschak, and others promised substantial profits from the investments. Molton offered the non-existent securities to potential investors at a stated "discount" of up to 20.5 percent of the face value of the instruments; Dworschak promised investors up to a 365 percent return on their investments each year; and others promised potential investors returns of between 50 and 300 percent annually. However, none of the Respondents had ever seen a prime bank security, engaged in a prime bank transaction, or taken any affirmative steps to investigate the accuracy of the representations made to potential investors. III. OPINION Section 17(a) of the Securities Act of 1933 prohibits fraud in the offer or sale of securities. Prime bank instruments are securities: they fall within the definition of debt securities under both Section 2(1) of the Securities Act and Section 3(10) of the Exchange Act. Furthermore, the roll and tranche programs that Respondents offered are investment contracts under the three part test set out in SEC v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946), and, hence, are securities. SEC v. Lauer, 864 F. Supp. 784, 794 (N.D. Ill. 1994), aff'd, 52 F.3d 667 (7th Cir. 1995). Furthermore, Respondents cannot escape liability under the securities laws by arguing that the securities did not exist. See id. at 792. Respondents violated Section 17(a) of the Securities Act by acting with scienter in misrepresenting or omitting material facts in connection with the offer of securities. Aaron v. SEC, 446 U.S. 690, 695-97 (1980). Each of the Respondents knew, or was reckless in not knowing, that the so-called "prime bank" securities did not exist and, of course, could not yield the extraordinary rates of return promised by the Respondents. Respondents failed to ascertain whether any factual basis existed for their representations concerning the instruments, the viability of a program based on repeated prime bank security transactions, and the alleged profitability of prime bank investments. Furthermore, each of the Respondents violated Section 15(a) of the Exchange Act by attempting to induce the purchase of securities in interstate commerce, without being registered with the Commission. IV. FINDINGS On the basis of this Order and the Respondents' Offers of Settlement, the Commission finds that: A. Revalee, Molton, and Dworschak violated Section 17(a) of the Securities Act by making misstatements or omissions of material fact in connection with the offer of the purported securities; and B. Revalee, Molton, and Dworschak violated Section 15(a) of the Exchange Act by attempting to induce the purchase of securities in interstate commerce without being registered with the Commission. 4 -------------------- BEGINNING OF PAGE #5 ------------------- V. ORDER Accordingly, the Commission hereby orders, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, that Revalee, Molton, and Dworschak permanently cease-and- desist from committing or causing any violation of, and committing or causing any future violation of, Section 17(a) of the Securities Act and Section 15(a) of the Exchange Act. By the Commission. Jonathan G. Katz Secretary 5