UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES ACT OF 1933 Release No. 7352 / October 2, 1996 SECURITIES EXCHANGE ACT OF 1934 Release No. 37776 / October 2, 1996 ACCOUNTING AND AUDITING ENFORCEMENT Release No. 839 / October 2, 1996 ADMINISTRATIVE PROCEEDING File No. 3-9138 ------------------------------- : ORDER INSTITUTING PROCEEDINGS In the Matter of : PURSUANT TO SECTION 8A OF THE : SECURITIES ACT OF 1933, : SECTION 21C OF THE SECURITIES AURA SYSTEMS INC., : EXCHANGE ACT OF 1934, AND ZVI KURTZMAN, : RULE 102(e) OF THE FRANCIS T. PHALEN, CPA, and : COMMISSION'S RULES OF JOSEPH BEVACQUA, CPA, : PRACTICE, MAKING FINDINGS, : IMPOSING SANCTIONS AND Respondents. : CEASE-AND-DESIST ORDER ------------------------------- I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and they hereby are, instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act"), Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"), and Rule 102(e)(1)(iii) of the Commission's Rules of Practice-[1]- against: ---------FOOTNOTES---------- -[1]- Rule 102(e)(1)(iii) of the Commission's Rules of Practice, 17 C.F.R.  201.102(e), provides in pertinent part: The Commission may censure a person or deny, temporarily or permanently, the privilege of appearing or practicing before it in any way to any person who is found by the Commission after notice and opportunity for hearing in the matter ... (iii) to have willfully violated, or willfully aided and abetted the violation of any provision of the federal securities laws, or the rules and regulations thereunder. ==========================================START OF PAGE 2====== A. Aura Systems Inc. ("Aura") to determine whether Aura violated Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 promulgated thereunder; B. Zvi Kurtzman ("Kurtzman") to determine whether Kurtzman violated Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, and caused Aura's violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a- 1 and 13a-13 thereunder; and C. Francis T. Phalen ("Phalen") to determine whether Phalen violated Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, and caused Aura's violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a- 1 and 13a-13 thereunder, and to determine, pursuant to Rule 102(e), whether Phalen willfully violated or aided and abetted violations of the foregoing provisions. D. Joseph Bevacqua ("Bevacqua") to determine whether Bevacqua violated Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder, and caused Aura's violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20 and 13a-13 thereunder, and to determine, pursuant to Rule 102(e), whether Bevacqua willfully violated or aided and abetted violations of the foregoing provisions. II. In anticipation of the institution of these administrative proceedings, each respondent has submitted an Offer of Settlement for the purpose of disposing of the issues raised in these proceedings. 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 prior to a hearing pursuant to the Commission's Rules of Practice, 17 C.F.R. Section 201.1, et seq., the respondents, without admitting or denying the findings set forth herein, except that they admit to the jurisdiction of the Commission over them and over the subject matter of these proceedings, consent to the entry of the findings and to the issuance of this Order Instituting Proceedings ("Order"). III. On the basis of this Order and the Respondents' Offers of Settlement, the Commission finds the following: ==========================================START OF PAGE 3====== A. RESPONDENTS Aura is a Delaware corporation headquartered in El Segundo, California. Aura develops, manufactures and markets components and completed products that use Aura's patented and proprietary electromagnetic technology. At all relevant times Aura's common stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act and quoted on the NASDAQ national market system under the trading symbol AURA. Kurtzman, age 49, has been the President and a director of Aura since February 1987 and is a substantial stockholder. Phalen, age 56, formerly licensed as a certified public accountant, was Senior Vice President and Chief Financial Officer of Aura from November 1988 until February 1994 and a director of Aura from 1989 until 1994. Bevacqua, age 52, is licensed as a certified public accountant by the State of California and was formerly employed as Aura's Vice President of Finance and chief accounting officer. At all relevant times, he was employed as a consultant to John Jory Company. B. FACTS 1. Summary During its 1993 and 1994 fiscal years Aura filed annual and quarterly reports that described, in false or misleading terms, its success in developing new commercial markets for products using its proprietary electromagnetic technology. Until the early 1990's, Aura depended on military sales for substantially all of its revenue. Faced with declining military demand in the early 1990's, Aura made a strategic decision to develop new, commercial applications for its technology. As described herein, in 1993 and 1994, Aura reported materially increased revenues from nonmilitary sales, which it cited as evidence that its strategy was succeeding. The increases in nonmilitary revenues, however, resulted largely from two transactions that did not involve Aura's products or technologies. In the first transaction Aura purchased and resold computer monitors under circumstances the Respondents understood would generate little or no profit. In fiscal years 1993 and 1994 that accounted for 22% and 30%, respectively, of Aura's revenues. Aura did not disclose the circumstances of the transactions, and made false or misleading statements that its financial results evidenced its success in developing commercial markets for its products. In the second transaction, Aura entered into a sham agreement with a dry wall installation contractor which it used as the basis for ==========================================START OF PAGE 4====== improperly recognizing $1.1 million in revenue during its third quarter for fiscal 1994. Aura's President and substantial shareholder, Kurtzman, and its then Chief Financial Officer, Phalen, participated in or were aware of the details of both of those transactions, and are responsible for Aura's materially false and misleading periodic reports. Bevacqua, who was formerly Aura's Vice President of Finance and chief accounting officer, assisted Kurtzman and Phalen in the transaction with the drywall contractor, by creating false documents to make it appear that the transaction had substance. 2. Background Prior to November 1990, substantially all of Aura's revenues were derived from contracts with the U.S. Government and military defense contractors. These contracts were primarily for research and development services and for the sale of products incorporating Aura's proprietary electromagnetic technology and other microwave technology such as missile test equipment and components of communications and weapons systems. From 1988 through 1990, Aura's annual revenues increased from $484,883 to $9,055,581, primarily as a result of its military contracting. Despite the increases in revenue, Aura consistently reported quarterly and annual losses. In the early 1990s, military demand for Aura's products declined, and Aura made a strategic decision to attempt to develop commercial markets for its technology. During the relevant period, Aura was developing and attempting to market applications for its technology in video game accessories, stereo speakers, automobile engine components, medical surgical equipment and other products. During its 1993 and 1994 fiscal years Aura recognized material amounts of revenue in two transactions that had nothing to do with its proprietary electromagnetic technology. Aura did not disclose the unusual nature of those transactions and the associated revenue, and made false or misleading statements claiming that its constant or increasing revenues despite declining military sales evidenced the success of its strategic decision to enter commercial markets. 3. The Micro Computer Distribution Power Transactions a. The Agreement During the fourth quarter of its 1993 fiscal year Aura recognized approximately $2.4 million, or 67% of fourth quarter and 22% of annual revenue, from the resale of computer monitors to Micro Computer Distribution Power ("MCDP"). Aura purchased the monitors from Korea Data Systems, Inc. ("KDS"), and resold them to MCDP without performing any "value-added" service. ==========================================START OF PAGE 5====== Although they increased revenues by approximately 22%, the resales generated no income for Aura.-[2]- As a practical matter, Aura was inserted into a preexisting transaction. The monitors were originally ordered from KDS by Tech Power, Inc. ("Tech Power"). When it became clear that Tech Power would not continue in business, its general manager resigned and arranged to purchase the monitors through MCDP, a newly formed entity where he had become general manager. MCDP, however, did not purchase the monitors directly from KDS. Rather, it purchased them from Aura, which assumed the orders that Tech Power cancelled. Other than assuming Tech Power's orders, Aura had little role in the transactions. Upon arrival in the U.S., the monitors were shipped directly to MCDP. The monitors were never shipped to Aura's facilities, and Aura did not incorporate any of its technology into the monitors. Moreover, because they generated no income, Aura derived no immediate economic benefit from these resales, other than a material increase in reported revenues and a corresponding improvement in the ratio of its net losses as a percentage of revenues. Kurtzman claimed that he agreed to participate in the transactions with the "hope and expectation" that it would lead to a future agreement to sell Aura's speakers to KDS. b. Aura's Disclosures Were Materially Misleading During the audit of Aura's 1993 financial statements, the partner in charge of the 1993 audit discussed the MCDP transactions with Phalen, and suggested that Aura report the MCDP revenue separately in its income statement. The audit partner believed it was important that a reader of the financial statements understand that the MCDP resale transactions generated a type of revenue different from Aura's other sales. Phalen rejected this suggestion when the audit partner was unable to cite authority under Generally Accepted Accounting Principles ("GAAP") requiring the revenue to be presented separately in the financial statements, but indicated to the audit partner that Aura would make disclosures regarding the MCDP resales in footnotes to the financial statements or in the Management's Discussion and Analysis section ("MD&A"). ---------FOOTNOTES---------- -[2]- Kurtzman agreed to sell MCDP the monitors for a price that was approximately six percent above Aura's cost. The additional six percent, however, did not cover the freight, taxes, and demurrage costs Aura incurred in importing the monitors into the U.S. Therefore, Aura actually incurred small losses on these transactions. ==========================================START OF PAGE 6====== Aura did not. The footnotes to its 1993 financial statements disclosed only that sales to MCDP accounted for 22% of revenues for the fiscal year, without acknowledging that the revenue was not related to Aura's regular business, or that it generated no income. Although the MCDP resales accounted for 22% of 1993 revenues, Aura did not discuss them in the "Description of Business" section of its 1993 Form 10-K. Nor were they disclosed in the MD&A section of its 1993 Form 10-K, although the MD&A did disclose in detail several smaller transactions, including reimbursed research and development costs of $1.4 million, other prior year revenue of $1 million, and a license fee of $500,000. In fact, the MD&A created the false impression that in fiscal year 1993, commercial sales of Aura's own products increased while Aura's reliance on sales to the military decreased. It stated: "while Fiscal 1993 revenue was about the same as in the prior year, the mix of sales shifted in Fiscal 1993 to a greater proportion of revenues being represented by parts and equipment with even less emphasis on military revenues than in prior years." The reference to "parts and equipment" includes the resales of monitors. Because those terms are undefined, the quoted passage conveys the false impression that the "parts and equipment" were manufactured by Aura or incorporated its proprietary technologies, the business as described in the filing. Without the MCDP revenue, which did not involve the sale of Aura products or services, Aura's revenue would have declined from 1992 to 1993 by $2.53 million or 23%, and the percentage of revenues from military sales would have remained approximately the same as in the previous year. Further, without the MCDP transactions, Aura's net loss would have exceeded its revenues. In subsequent fiscal periods, Aura and MCDP continued to engage in the purchase and resale to MCDP of computer monitors. Similar misleading disclosures regarding the MCDP transactions were made in quarterly reports for Aura's 1994 fiscal year, a post-effective registration statement on Form S-1, which Aura filed with the Commission on February 2, 1994, and in Aura's 1994 Form 10-K. The misleading statements in the Forms 10-K and Forms 10-Q were also incorporated by reference into a registration statement on Form S-3 which Aura filed on February 11, 1994. In July 1994, at the urging of the Commission's staff, and before the aforementioned registration statements went effective, Aura amended its 1994 Form 10-K to disclose that the 1993 and 1994 MCDP transactions involved mere resales of computer equipment and generated no income although they accounted for significant portions of revenue. Both Kurtzman and Phalen participated in drafting Aura's narrative disclosures and signed the 1993 and the ==========================================START OF PAGE 7====== initial 1994 Forms 10-K, and the registration statements.-[3]- Phalen also signed the 1994 Forms 10-Q. 4. The Transaction with John Jory Company During the third quarter of Fiscal 1994, Aura reported revenue of $4,359,682. More than a third of that revenue, $1.5 million, was derived from a transaction with John Jory Company ("Jory"), a small California construction contractor specializing in drywall installation. In 1993, Jory had hired Bevacqua, Aura's former chief accounting officer, to help it obtain financing for construction projects. Bevacqua had approached Aura for that purpose, but Kurtzman initially rejected Bevacqua's requests because such a transaction would not generate income for Aura. In October 1993, however, Aura and Jory entered into a $1.5 million transaction.-[4]- a. The Sham Transaction In October 1993, Bevacqua and the president of Jory met with Kurtzman and Phalen at Aura's offices to discuss the transaction. During that meeting Kurtzman requested that Jory provide Aura with a purchase order. When the president of Jory responded that Jory did not have or use purchase orders, Kurtzman dictated a purchase order which Phalen edited and had typed. This purchase order described a $1.5 million transaction whereby Jory ordered from Aura $1.2 million in "engineering services including thermal and structural analysis as well as drawings per attached specification sheets," and $300,000 in "materials per attached specification sheet." Subsequently, Aura issued a corresponding invoice to Jory. Aura arranged for Jory to "pay" for this purchase. To do that, Aura routed $1.1 million to Jory through Kane Konstruction ("KK"), a small flooring company owned by Bevacqua's friend, John Kane.-[5]- Aura issued KK a fictitious purchase order, ---------FOOTNOTES---------- -[3]- Phalen signed the 1993 Form 10-K as Chief Financial Officer and the 1994 Form 10-K as a director. -[4]- Approximately four months later in February 1994, Aura provided Jory approximately $200,000 in financing for the purchase of construction materials. Aura did so by issuing a check to Heart Drywall, an inactive company owned by one of Jory's two principals. Aura also initially improperly recorded the entire amount to be repaid as revenue. This accounting was corrected before Aura's financial results were announced. -[5]- The remaining $400,000 was carried as an account receivable on Aura's books, purportedly for a technical study on (continued...) ==========================================START OF PAGE 8====== dated October 23, 1993, that purported to subcontract out for the goods and services "sold" to Jory. Aura's purchase order called for $852,000 in "Engineering Services including Thermal and Structural Analysis and drawings," and $248,000 in "Required Materials per attached specification sheet." Bevacqua obtained a sheet of KK letterhead, which he used to prepare an invoice that matched Aura's original purchase order and purported to bill Aura for the services and materials described in the purchase order. There was no transaction with KK. Kane did not provide services or material to Aura or Jory and had no involvement in preparing the invoice to Aura. Kane testified that he first saw the invoice and the purchase order in January 1994, when Bevacqua handed him a package of documents related to the Jory transaction.-[6]- Nevertheless, between December 13, 1993 and January 8, 1994, Aura issued nine cashiers checks to KK, for a total of $1.1 million, purportedly to pay for the goods and services described in its purchase order and the fictitious KK invoice. Bevacqua periodically delivered those checks to Kane. At Bevacqua's direction, Kane endorsed the checks and simultaneously purchased cashiers checks payable to Jory, which he gave to Bevacqua. Bevacqua deposited them into a newly opened account in Jory's name on which Bevacqua was a signatory, and almost simultaneously Bevacqua wrote a repayment check to Aura. All of the funds disbursed to KK were repaid to Aura in that fashion within three days. b. Aura's False Form 10-Q ---------FOOTNOTES---------- -[5]-(...continued) vibration cancellation technology. A document that is supposed to be the report of that technical study exists. Jory, however, provided absolutely no technical specifications or requirements to Aura in ordering the report. Jory principals were unsure what the report would contain although they hoped it would be of some use to them. Six months after they received it, the Jory principals had not determined how or if the information in the report could be applied to their business. Jory did not fully pay Aura for the report, and in 1994, Aura reserved or wrote off the outstanding amounts. On April 28, 1995, Bevacqua agreed, among other things, to assume $280,000 representing Jory's liability to Aura for the report, and to indemnify Jory for any liability arising from the transaction. -[6]- Bevacqua also requested Kane to sign certain invoice listings and other documents related to the three construction projects. Kane testified that he did not know what the documents related to and signed them only at Bevacqua's request. ==========================================START OF PAGE 9====== Aura recorded the Jory transaction as $1.5 million in revenue earned in the third quarter of fiscal 1994. It offset the "revenues" with $1.1 million in subcontracting "expenses" -- the payments to KK. Aura should not have recognized $1.1 million of the $1.5 million from the Jory transaction as revenue, and thus its financial statements for the third quarter were materially false.-[7]- In addition, the MD&A narrative was false. It states that revenue increases "resulted from continued expansion of sales in the commercial sector" without disclosing the Jory transaction. Footnotes to the financial statements state only that "sales of engineering services. . . to another customer for the nine months ended November 30, 1993 accounted for 11% of the Company's revenues." (Emphasis added.) On January 18, 1994, Aura announced its third quarter results with the headline: "AURA SYSTEMS REPORTS THIRD QUARTER IMPROVEMENTS; REVENUES INCREASE 87.5% TO A RECORD LEVEL, LOSS DECLINES 41.6%." The press release discusses "increased production and acceptance of the Aurasound speakers", high force actuators, and "Interactor" products, but omits reference to the Jory transaction despite the fact that the transaction accounted for more than a third of third quarter revenue. Absent the Jory transaction, revenue increased by only 34% for that quarter. c. Restatement On May 19, 1994, Aura issued a press release stating that for fiscal year 1994, it would report revenues of $17,469,825. Two weeks later it filed its 1994 Form 10-K and reported revenues of only $16,369,825 -- $1.1 million less than initially reported. The lower revenues resulted from a reversal of $1.1 million of the revenues related to the Jory transaction. Aura reversed these revenues after Commission staff inquiries and after being advised to do so by an outside accounting consultant. In addition, in August 1994, at the urging of the Commission's staff, Aura restated its third quarter 1994 financial statements to delete $1.1 million of the Jory revenue. Aura also amended ---------FOOTNOTES---------- -[7]- Respondents have characterized the transaction with Jory as one involving a $1.1 million "credit accommodation" and the sale of a $400,000 technical study on vibration cancellation technology. This characterization is belied by the descriptions of the transaction set forth in the various invoices and purchase orders described above. It also fails to explain why the funds were routed through KK, and is at odds with the fact that Jory received no economic benefit from the $1.1 million "credit accommodation," since those funds were immediately returned to Aura. Even if respondents' characterization of the transaction as a "credit accommodation" were credible, it would not justify the accounting treatment. Repayment of a loan is not revenue under GAAP. ==========================================START OF PAGE 10====== its 1994 Form 10-K to describe the transaction with Jory and to disclose that the $1.1 million represented merely a "credit accommodation," and not sales. C. LEGAL ANALYSIS 1. Applicable Law Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit the use of manipulative and deceptive practices in connection with the purchase or sale of a security. Section 17(a) of the Securities Act prohibits similar conduct in the offer or sale of securities. Violations of Section 10(b) of the Exchange Act and Section 17(a)(1) of the Securities Act require proof of scienter. Section 17(a)(2) of the Securities Act prohibits the obtaining of money or property by means of untrue statements or omissions to state material facts. Section 17(a)(3) prohibits transactions, practices, or courses of business which operate as a fraud or deceit upon the purchaser. Violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act can be established without a showing of scienter. See Aaron v. SEC, 446 U.S. 680, 702 (1980). Section 13(a) of the Exchange Act requires all issuers with securities registered under Section 12 of the Exchange Act to file such periodic reports as the Commission shall prescribe by its rules and regulations. Rules 13a-1 and 13a-13 require issuers to file annual reports and quarterly reports, respectively. Inherent in Section 13(a)'s reporting requirement is the requirement that all reports be complete and accurate. SEC v. Savoy Industries, Inc., 587 F.2d 1149, 1165 (D.C. Cir. 1978), cert. denied, 440 U.S. 913 (1979). A violation of Section 13(a) occurs, regardless of the issuer's state of mind, if annual or quarterly reports contain materially false or misleading information. The term material refers to "those matters as to which there is a substantial likelihood that a reasonable investor would attach importance in determining whether to buy or sell the securities registered." 17 C.F.R.  240.12b-2. See also, Basic v. Levinson, 485 U.S. 224, 231-32 (1988); TSC Industries, Inc. v. Northway, 426 U.S. 438, 449 (1976). Rule 12b-20 requires that periodic reports contain such further information as is necessary to make the required statements, in light of the circumstances under which they are made, not misleading. Section 13(b)(2)(A) of the Exchange Act requires an issuer to make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of its assets. Rule 13b2-1 provides that no person shall, directly or indirectly, falsify or cause to be falsified, any book, record or account subject to Section 13(b)(2)(A). Rule 13b2-2 provides that no director or officer of ==========================================START OF PAGE 11====== an issuer shall, directly or indirectly, make or cause to be made a materially false or misleading statement, or omit to state a material fact to an accountant in connection with any audit or the preparation or filing of any document or report required to be filed with the Commission. Section 13(b)(2)(B) of the Exchange Act requires issuers to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP. 2. The MCDP Transactions Aura violated Section 13(a) of the Exchange Act and Rules 13a-1, 13a-13 and 12b-20 thereunder by failing to discuss the MCDP resale transactions in the narrative sections of its 1993 and 1994 Forms 10-K and its 1994 Forms 10-Q. Item 101(c)(1)(i) of Regulation S-K requires issuers to describe their business and to "state for each of the last three fiscal years the amount or percentage of total revenue contributed by any class of similar products or services which accounted for 10 percent or more of consolidated revenue in any of the last three fiscal years or 15 percent or more of consolidated revenue, if total revenue did not exceed $50,000,000 during any of such fiscal years." Item 303 of Regulation S-K requires issuers, in the MD&A section, to discuss, among other things, significant components of revenues that should be described in order to understand the registrant's results of operations. It also requires issuers to describe material events and uncertainties known to management that would cause reported financial information not to be necessarily indicative of future operating results or of future financial condition, and events or transactions that would cause a material change in the relationship between costs and revenues. Aura should have discussed the MCDP resale transactions pursuant to Item 101(c)(1)(i) of Regulation S-K because they accounted for approximately 22% of fiscal year 1993 revenues and approximately 30% of fiscal year 1994 revenues. Aura also should have disclosed them in its MD&A sections. The resale transactions were in substance window dressing transactions that did not reduce Aura's net loss but that, as reported, materially increased revenues and had a favorable effect on the ratio of net losses as a percentage of revenues. They were unusual in that they did not involve products manufactured by Aura or products that incorporated Aura's technology. As a result, the resales were not indicative of Aura's future operating results and a description of them was necessary to fully understand Aura's current operating results. Without a discussion of the MCDP transactions, the MD&A disclosures in Aura's reports conveyed the misleading impression that its revenues, including those from the MCDP resales, involved Aura's technology and thus that Aura was ==========================================START OF PAGE 12====== successfully developing commercial markets for its products and services. That these transactions did not materially affect Aura's earnings, or that Aura consistently reported losses during this period, does not render them immaterial or excuse Aura's failure to disclose them. Both Kurtzman and Phalen participated in drafting the narrative portions of Aura's filings, and both were responsible for the materially misleading disclosures regarding the MCDP resale transactions. Kurtzman negotiated the MCDP transactions on Aura's behalf and therefore understood both the size and the unusual nature of the MCDP resale transactions. Phalen discussed with Aura's auditor the size and unusual nature of the transactions, and the need to describe the transactions in its 1993 Form 10-K. Despite their understanding that the transactions were large and unusual, neither Kurtzman nor Phalen included a meaningful discussion of the MCDP resale transactions in Aura's public reports. As a result, Kurtzman and Phalen caused Aura's violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13. 3. The Jory Transaction Aura, Kurtzman and Phalen violated the antifraud, reporting and corporate recordkeeping provisions of the securities laws, and Bevacqua violated the corporate recordkeeping provisions, in connection with the Jory transaction. Aura's registration statement on Form S-1 and its third quarter 1994 Form 10-Q, which was incorporated by reference into its registration statement on Form S-3, included financial statements that reflected $1.1 million in fictitious revenue from the Jory transaction.-[8]- Moreover, both the Form 10-Q and the January 18, 1994 press release contained misleading statements regarding third quarter 1994 revenues. The Form 10-Q's only reference to the transaction fails to identify Jory and states that 11% of revenues resulted from "engineering services." It thus creates the false impression that the revenue related to Aura's core business. The January 18 press release furthers this false impression by attributing Aura's increased revenue to various Aura products without disclosing that the revenue improperly recognized from the Jory transaction represented more than one quarter of total revenue. Kurtzman, Phalen and Bevacqua knew or were reckless in not knowing that the Jory transaction was a sham. All three participated in the October 1993 meeting where the transaction ---------FOOTNOTES---------- -[8]- Neither of the two registration statements went effective until after Aura amended the third quarter 1994 Form 10-Q in August 1994 to delete the $1.1 million of revenue that was improperly recognized on the Jory transaction. ==========================================START OF PAGE 13====== was discussed and the fictitious Jory purchase order was drafted. That purchase order contained a false description of the Jory transaction, which Aura used in its own fictitious purchase order to KK, and Bevacqua used in preparing the fictitious invoice from KK to Aura. Aura maintained the fictitious documents relating to the Jory transaction, and used them as the basis for improperly recognizing revenue from the Jory transaction. The documents were also made available to Aura's auditors in connection with the audit of Aura's 1994 financial statements. Thus, in connection with the Jory transaction, Aura violated Section 17(a) of the Securities Act and Sections 10(b), 13(a) and 13(b)(2)(A) and (B) of the Exchange Act and Rules 10b-5, 12b-20 and 13a-13 thereunder.-[9]- Kurtzman and Phalen violated Section 17(a) of the Securities Act and Section 10(b) and Section 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 thereunder. Each also caused Aura's violations of Sections 13(a) and 13(b)(2)(A) and (B) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder. Bevacqua willfully violated Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder, and willfully aided and abetted and caused Aura's violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rule 13a-13 thereunder. IV. FINDINGS On the basis of this Order and the Offers of Settlement submitted by the respondents, the Commission finds that: A. Aura violated Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder; B. Kurtzman violated Section 17(a) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 thereunder and caused ---------FOOTNOTES---------- -[9]- Kurtzman's and Phalen's knowledge that the financial statements were false and the disclosures misleading is imputed to Aura and satisfies the scienter requirement for Section 17(a)(1) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. See SEC v. Manor Nursing Center Inc., 458 F.2d 1082, 1096-7 (2d Cir. 1972); Kirkland v. E.F. Hutton and Company, Inc., 564 F.Supp. 427, 447 (E.D.Mich. 1983); SEC v. Blinder, Robinson & Co., Inc., 542 F.Supp. 468, 476, n.3 (D.Colo. 1982), aff'd., Fed.Sec.L.Rep. (CCH) 99,491, at 96,856 (10th Cir. 1983), cert. denied, 469 U.S. 1108 (1985). ==========================================START OF PAGE 14====== Aura's violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder; and C. Phalen willfully violated Section 17(a) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 thereunder and willfully aided and abetted and caused Aura's violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. D. Bevacqua willfully violated Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder, and willfully aided and abetted and caused Aura's violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder. V. In view of the foregoing, the Commission has determined it is in the public interest to accept the Respondents' Offers of Settlement. Accordingly, IT IS HEREBY ORDERED THAT: A. Aura, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, cease and desist from committing or causing any violation and any future violation of Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder; B. Kurtzman, pursuant to Section 8A of the Securities Act, and Section 21C of the Exchange Act, cease and desist from committing or causing any violation and any future violation of Section 17(a) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 thereunder and from causing any violation and any future violation of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder; and C. Phalen, pursuant to Section 8A of the Securities Act, and Section 21C of the Exchange Act, cease and desist from committing or causing any violation and any future violation of Section 17(a) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, and from causing any violation and any future violation of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder; D. Phalen, pursuant to Rule 102(e)(1)(iii) of the Commission's Rules of Practice, is denied the privilege of ==========================================START OF PAGE 15====== appearing or practicing before the Commission as an accountant. E. After three years from the date of this Order, Phalen may apply to the Commission by submitting an application to the Office of the Chief Accountant which requests that he be permitted to resume appearing or practicing before the Commission as: 1. a preparer or reviewer, or a person responsible for the preparation or review, of financial statements of a public company to be filed with the Commission upon submission of an application satisfactory to the Commission in which Phalen undertakes that, in his practice before the Commission, his work will be reviewed by the independent audit committee of the company for which he works or in some other manner acceptable to the Commission; 2. an independent accountant upon submission of an application containing a showing satisfactory to the Commission that: a. Phalen, or any firm with which he is or becomes associated in any capacity, is and will remain a member of the SEC Practice Section of the American Institute of Certified Public Accountants Division for CPA Firms ("SEC Practice Section") as long as he appears or practices before the Commission as an independent accountant; b. Phalen or the firm has received an unqualified report relating to his or the firm's most recent peer review conducted in accordance with the guidelines adopted by the SEC Practice Section; and c. Phalen will comply with all applicable SEC Practice Section requirements, including all requirements for periodic peer reviews, concurring partner reviews, and continuing professional education, as long as he appears or practices before the Commission as an independent accountant. 3. The Commission's review of any request or application by Phalen to resume appearing or practicing before the Commission may include consideration of, in addition to the matters referenced above, any other matters relating to Phalen's character, integrity, professional conduct, or qualifications to appear or practice before the Commission. F. Bevacqua, pursuant to Section 21C of the Exchange Act, cease and desist from committing or causing any violation and any future violation of Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder, and from causing any violation and any future violation of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) and Rules 12b-20 and 13a-13 thereunder; and ==========================================START OF PAGE 16====== G. Bevacqua, pursuant to Rule 102(e)(1)(iii) of the Commission's Rules of Practice, is denied the privilege of appearing or practicing before the Commission as an accountant. H. After three years from the date of this Order, Bevacqua may apply to the Commission by submitting an application to the Office of the Chief Accountant which requests that he be permitted to resume appearing or practicing before the Commission as: 1. a preparer or reviewer, or a person responsible for the preparation or review, of financial statements of a public company to be filed with the Commission upon submission of an application satisfactory to the Commission in which Bevacqua undertakes that, in his practice before the Commission, his work will be reviewed by the independent audit committee of the company for which he works or in some other manner acceptable to the Commission; 2. an independent accountant upon submission of an application containing a showing satisfactory to the Commission that: a. Bevacqua, or any firm with which he is or becomes associated in any capacity, is and will remain a member of the SEC Practice Section as long as he appears or practices before the Commission as an independent accountant; b. Bevacqua or the firm has received an unqualified report relating to his or the firm's most recent peer review conducted in accordance with the guidelines adopted by the SEC Practice Section; and c. Bevacqua will comply with all applicable SEC Practice Section requirements, including all requirements for periodic peer reviews, concurring partner reviews, and continuing professional education, as long as he appears or practices before the Commission as an independent accountant. 3. The Commission's review of any request or application by Bevacqua to resume appearing or practicing before the Commission may include consideration of, in addition to the matters referenced above, any other matters relating to Bevacqua's character, integrity, professional conduct, or qualifications to appear or practice before the Commission. By the Commission. ==========================================START OF PAGE 17====== Jonathan G. Katz Secretary