UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES ACT OF 1933 Release No. 7443 / August 28, 1997 SECURITIES EXCHANGE ACT OF 1934 Release No. 38988 / August 28, 1997 ACCOUNTING AND AUDITING ENFORCEMENT Release No. 946 / August 28, 1997 ADMINISTRATIVE PROCEEDING File No. 3-9379 : : In the Matter of : ORDER INSTITUTING A PUBLIC : PROCEEDING PURSUANT TO SECTION NGAI KING TAK, : 8A OF THE SECURITIES ACT OF 1933 EVELYN A. WONG, and : AND SECTION 21C OF THE SECURITIES HAROUTIOUN K. AYDJIAN, : EXCHANGE ACT OF 1934, MAKING : FINDINGS AND IMPOSING A CEASE- Respondents. : AND-DESIST ORDER : : I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that a public administrative proceeding be, and hereby is, instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Ngai King Tak (also known as Tony Ngai) ("Ngai"), Evelyn A. Wong ("Wong") and Haroutioun K. Aydjian ("Aydjian"). II. In anticipation of the institution of this proceeding, Ngai, Wong and Aydjian have submitted Offers of Settlement ("Offers") for the purpose of disposing of the issues raised by this proceeding. Solely for the purposes of this proceeding and any other proceeding brought by or on behalf of the Commission or to which the Commission is a party, Ngai, Wong and Aydjian, without admitting or denying the findings set forth herein, except that ======END OF PAGE 1====== Ngai, Wong and Aydjian admit to the jurisdiction of the Commission over them and over the matters set forth in this Order Instituting a Public Proceeding Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Making Findings and Imposing a Cease-and-Desist Order ("the "Order"), consent to the entry of this Order. The Commission has determined that it is appropriate and in the public interest to accept the Offers and accordingly is issuing this Order. III. FACTS On the basis of this Order and Ngai's, Wong's and Aydjian's Offers, the Commission finds<(1)> that: A. Respondents 1. Ngai, age 49, is a resident of Hong Kong. Ngai is the Executive Director and forty percent owner of McKowan Lowe & Co., Ltd. ("McKowan Lowe"). McKowan Lowe is a privately-held Hong Kong corporation headquartered in Kowloon, Hong Kong. 2. Wong, age 41, is a resident of Hong Kong. Wong has been a director of McKowan Lowe since 1986. 3. Aydjian, age 43, is a resident of Morristown, New Jersey. He is the president and sole shareholder of Angie's Shoes & Leather Goods, Inc.("Angies"), a privately-held company located in Palmyra, New Jersey that sells footwear for women. B. The Issuer Jasmine Ltd. ("Jasmine") is a Delaware corporation headquartered in Pennsauken, New Jersey. During the period relevant to this Order, Jasmine designed, imported and supplied fashion footwear and handbags for women to retail stores. The common stock of Jasmine is registered with the Commission pursuant to Section 12(b) of the Exchange Act. Jasmine traded on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") until it was delisted on April 5, 1995. On January 6, 1996, Jasmine filed for protection under Chapter 11 of the Bankruptcy Code, and on July 1, 1996, Jasmine's bankruptcy was converted to a Chapter 7 liquidation. C. Jasmine's Initial Public Offering 1 The findings herein regarding Ngai, Wong and Aydjian are made pursuant to Ngai's, Wong's and Aydjian's Offers of Settlement and are not binding on any other person or entity in this or in any other proceeding. ======END OF PAGE 2====== Jasmine became a public company in an initial public offering ("IPO") in December 1993, which netted approximately $8.6 million in offering proceeds. The Registration Statement that Jasmine filed with the Commission in connection with its IPO included Jasmine's September 30, 1992 and 1993 audited financial statements. Those financial statements were materially false and misleading and concealed the fact that Jasmine was insolvent at the time of its IPO. As discussed below, the false audit confirmations executed by Ngai and Wong of McKowan Lowe and Aydjian of Angies assisted Jasmine in concealing its true financial condition from its independent auditors and directly contributed to the inclusion of materially false and misleading financial statements in Jasmine's Registration Statement. D. Jasmine Conceals Its Liability to McKowan Lowe Jasmine purchased its footwear products from its buying agent, McKowan Lowe. The footwear was manufactured by factories principally located in China and Taiwan. As Jasmine's agent, McKowan Lowe was responsible for, among other things, placing orders with the factories, providing the raw materials, and arranging for shipping of the footwear. McKowan Lowe paid the manufacturers for the finished product and, in turn, invoiced Jasmine for the cost of the footwear plus a five percent commission. As a result of that arrangement, from 1991 to 1993, Jasmine owed McKowan Lowe an average of approximately $15 million. During that period, approximately $11 million to $13 million of the balance owed to McKowan Lowe represented old, past-due invoices that Jasmine had not paid. Jasmine's senior management concealed the true amount that Jasmine owed McKowan Lowe by recording fictitious claims against McKowan Lowe in Jasmine's books and records. Jasmine's senior management booked the phony claims for the express purpose of hiding Jasmine's true financial condition from its banks and in connection with its IPO. At fiscal year-end 1992, Jasmine falsely reduced its liability to McKowan Lowe from $14.9 million to $3.6 million by subtracting $11.3 million of phony claims, described in Jasmine's records as "credits not issued." At fiscal year-end 1993, Jasmine falsely reduced its liability to McKowan Lowe from $15.7 million to $2.1 million by subtracting $13.6 million of phony claims. Jasmine's president, managing director and controller were responsible for entering the fictitious "credits" in Jasmine's records even though the "credits" lacked any supporting documentation. E. Ngai and Wong Sign False Audit Confirmations In preparation for its fiscal 1993 audit and in order to hide the McKowan Lowe liability from Jasmine's independent auditors, Jasmine's senior management directed McKowan Lowe to remove from its books the oldest unpaid invoices totalling between $11.5 million and $13.3 million. Jasmine's managing director explained to Ngai and Wong in a June 1993 facsimile that such action was necessary because "[Jasmine's independent auditors] will be auditing [Jasmine's] books beginning in two weeks and this must be done before this." In July 1993, Jasmine's controller requested from Ngai facsimile copies of McKowan Lowe invoices with the ======END OF PAGE 3====== $11.5 million removed "for auditing purposes." On October 19, 1993, in furtherance of the effort to ensure that Jasmine's independent auditors would not discover Jasmine's true liability to McKowan Lowe, Jasmine's managing director faxed Ngai and Wong directions to confirm to the independent auditors an indebtedness of only $2.6 million instead of the $15.7 million actually owed. On October 28, 1993, McKowan Lowe, in response to Jasmine's directive, sent a materially false audit confirmation to Jasmine's independent auditors for an accounts receivable balance of $2.4 million. The confirmation was signed by Wong and authorized by Ngai. Subsequently, on November 22, 1993, Ngai signed and submitted another false audit confirmation to Jasmine's independent auditors which stated, among other things, that the accounts payable due from Jasmine to McKowan Lowe was $2.4 million. To further support the false audit confirmations, McKowan Lowe provided the independent auditors with a detailed schedule which failed to show Jasmine's total indebtedness to McKowan Lowe as of September 30, 1993, and instead only showed an indebtedness of $2.4 million. Ngai's and Wong's false audit confirmations assisted Jasmine in concealing from its independent auditors that Jasmine had materially understated its liability to McKowan Lowe at fiscal year-end 1993 and that the "credits not issued" were fictitious. As a result, Jasmine's 1993 financial statements, which were included in its Registration Statement filed with the Commission in connection with Jasmine's IPO, were materially false and misleading. F. Jasmine Books Phony Sales to Angies From at least 1990 through 1995, Angies purchased, at close-out prices, damaged, returned, mismatched and other types of defective shoes from Jasmine and either resold the shoes through its own retail outlet or to other distributors or retailers. Angies typically paid Jasmine $2 to $3 per pair and, on occasion, paid up to $6 per pair. Aydjian or his assistant would typically pick up the shoes at Jasmine's warehouse and pay for the shoes in cash or by check at the time of pickup. During fiscal 1993, Jasmine repeatedly sent invoices for shoe purchases to Angies which reflected prices per pair and quantities sold that were substantially greater than the agreed-upon terms for transactions between the two companies. When Aydjian questioned Jasmine about its practice of sending invoices which did not reflect the true terms of the transactions between the two companies, Jasmine's managing director told Aydjian not to worry because "the invoices are for Jasmine's internal purposes only, and should not be of any concern to Angies." During fiscal 1993, Jasmine falsely recorded on its books and records net sales of $678,000 to Angies. In fact, during that year Angies purchased, for cash, no more than $125,000 worth of shoes from Jasmine. Thus, at fiscal year-end 1993, Jasmine's financial statements, which were ======END OF PAGE 4====== included in its Registration Statement for the IPO, materially overstated income by $553,000 because of the recording of the phony sales to Angies. In addition, Jasmine reflected on its books and records a false accounts receivable balance due from Angies of $418,000. G. Aydjian Signs a False Audit Confirmation On November 12, 1993, Aydjian, on behalf of Angies, received a written confirmation request from Jasmine's independent auditors in connection with the audit of Jasmine's fiscal 1993 financial statements. The confirmation request stated, in part, that Jasmine's auditors "are now engaged in an audit of [Jasmine's] financial statements as of September 30, 1993 and for the year then ended. In connection with the audit, we request that you indicate the day you picked up the goods for the following invoices." The confirmation request listed seven invoices and the dollar amount of each invoice. At the urging of Jasmine's managing director, Aydjian indicated on the confirmation that goods were picked up on September 30, 1993. Aydjian then signed the confirmation and caused the confirmation to be returned to Jasmine's independent auditors. As executed, the confirmation was materially false and misleading in that it represented that the invoices listed on the confirmation request were legitimate when, in fact, the invoices represented fictitious sales transactions. Aydjian's false audit confirmation assisted Jasmine in concealing from its independent auditors that Jasmine had materially overstated its sales to Angies at fiscal year-end 1993 and that the accounts receivable from Angies were fictitious. As a result, Jasmine's 1993 financial statements, which were included in its Registration Statement for the IPO, were materially false and misleading. IV. OPINION A. Applicable Law Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder collectively proscribe the making of materially false and misleading statements and omissions in connection with the offer, purchase or sale of securities. Rule 13b2-1 of the Exchange Act prohibits any person from, directly or indirectly, falsifying or causing the falsification of any books, records, or accounts. Exchange Act Rule 13b2-2 prohibits officers and directors of an issuer from, directly or indirectly, making or causing to be made materially false or misleading statements, or omitting to state, or causing ======END OF PAGE 5====== another person to omit to state, any material fact in order to make statements made not misleading, to an accountant in connection with any audit or examination of the financial statements required to be filed with the Commission, or the preparation or filing of any document or report required to be filed with the Commission. Jasmine's senior management violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by filing a Registration Statement with the Commission that contained, among other things, the materially false and misleading 1993 year-end financial statements discussed above. Jasmine's senior management also violated Exchange Act Rule 13b2-1 by recording fictitious claims against McKowan Lowe and by including nonexistent accounts receivable balances due from Angies in Jasmine's books and records. Further, in connection with the foregoing, Jasmine's senior officers provided materially false and misleading information to Jasmine's independent auditors, in violation of Rule 13b2-2 of the Exchange Act. B. Ngai, Wong and Aydjian Caused Violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Exchange Act Rules 10b-5, 13b2-1 and 13b2-2 Ngai's, Wong's and Aydjian's submission of false audit confirmations to Jasmine's independent auditors was one of the factors which caused the auditors to issue an unqualified report on Jasmine's 1993 year-end financial statements which inaccurately stated that the financial statements complied with Generally Accepted Accounting Principles when, in fact, such financial statements were materially false and misleading. By executing false audit confirmations and by failing to inform the independent auditors of Jasmine's true liability to McKowan Lowe, Ngai and Wong caused violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Exchange Act Rules 10b-5, 13b2-1 and 13b2-2. Similarly, by executing a false audit confirmation and by failing to inform the independent auditors of the true nature of Angie's sales transactions with Jasmine, Aydjian caused violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Exchange Act Rules 10b-5, 13b2-1 and 13b2-2. Reliance on third-party confirmations is an integral and vital part of the auditing process. As the Commission found in In the Matter of Troy Lee Wood, Exch. Act Rel. No. 37905, AAER No. 852 (October 31, 1996), "[s]ubversion of the [auditing] process corrupts the integrity of the audit and can injure investors by facilitating the injection of false financial information into the marketplace." In this instance, Ngai, Wong and Aydjian undermined the audit process by submitting false audit confirmations to Jasmine's auditors which assisted Jasmine and its officers in filing a materially false and misleading Registration Statement with the Commission, understating Jasmine's liabilities, recording false sales and lying to auditors. The Commission will not tolerate conduct, such as that described herein, which directly undermines the integrity of the disclosure ======END OF PAGE 6====== process. V. FINDINGS Based on the above, the Commission finds that Ngai, Wong and Aydjian caused violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Exchange Act Rules 10b-5, 13b2-1 and 13b2-2. VI. OFFERS OF SETTLEMENT Ngai, Wong and Aydjian have submitted Offers in this proceeding which the Commission has determined to accept. Ngai, Wong and Aydjian, in their Offers, consent to this Order making findings, as set forth above, without admitting or denying such findings, and ordering them to cease and desist from violating, or causing violations of, Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Exchange Act Rules 10b-5, 13b2-1 and 13b2-2. VII. ORDER Accordingly, IT IS HEREBY ORDERED, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, that Ngai, Wong and Aydjian CEASE AND DESIST from committing or causing any violation and any future violation of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Exchange Act Rules 10b-5, 13b2-1 and 13b2-2. By the Commission. Jonathan G. Katz Secretary ======END OF PAGE 7======