SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.

Litigation Release No. 16609 / June 26, 2000

Accounting and Auditing Enforcement Release No.1279 / June 26, 2000

SECURITIES AND EXHANGE COMMISSION V. DCI TELECOMMUNICATIONS, INC., JOSEPH J. MURPHY, RUSSELL B. HINTZ, and GRACE P. MURPHY, Case No. 00 Civ. 4664 (RWS) (S.D.N.Y. filed June 23, 2000)

SEC FILES MICROCAP ACCOUNTING FRAUD CASE AGAINST DCI TELECOMMUNICATIONS, INC. AND TWO OF ITS OFFICERS, AND SETTLES RELATED PROCEEDINGS AGAINST AUDITORS

The Securities and Exchange Commission ("Commission") announced today that on June 23, 2000, it filed a microcap accounting fraud complaint against DCI Telecommunications, Inc. (`DCI") and its Chief Executive Officer, Joseph J. Murphy, and Chief Financial Officer, Russell B. Hintz. The complaint also names Murphy's wife, Grace P. Murphy, as a relief defendant who is alleged to have received tainted proceeds from the fraudulent conduct of the other defendants. This enforcement action follows a temporary trading suspension that the Commission ordered on May 3, 1999 based on questions raised regarding the accuracy and adequacy of DCI's financial statements. See Exchange Act Rel. No. 41358 (May 3, 1999).

The Commission's complaint, filed in the United States District Court for the Southern District of New York, alleges that between March 1995 and June 1999, DCI improperly accounted for seven acquisitions and grossly overvalued a purported $15 million contract and $5 million promissory note. According to the complaint, DCI's improper accounting caused the financial statements in five of DCI's Forms 10-K and twelve of its Forms 10-Q to be materially false and misleading. The complaint alleges that DCI's accounting fraud victimized investors who were deceived into believing DCI was a vibrant, high-growth telecommunications company, as well as the owners of several small businesses who sold their companies to DCI in exchange for near-worthless DCI stock.

In addition, the complaint alleges that DCI used its false financial statements to raise $9 million in equity financing through Regulation D and Regulation S private placements and to acquire a distribution contract that DCI subsequently sold for an additional $9 million. The complaint further alleges that DCI improperly raised additional funds by using its employees as conduits to sell S-8 stock to the public and kick back the sale proceeds to DCI.

The Commission charges DCI with violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 ("Securities Act") and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder, and seeks a permanent injunction, disgorgement of ill-gotten gains with prejudgment interest, and civil penalties from and against DCI.

According to the complaint, the persons responsible for DCI's accounting fraud were its CEO, defendant Joseph J. Murphy, and its CFO, defendant Russell B. Hintz. The complaint alleges that both Murphy and Hintz knew, or were reckless in not knowing, that DCI's acquisitions accounting did not comply with generally accepted accounting principles and that DCI grossly overvalued the purported $15 million contract and $5 million promissory note. The complaint further alleges that Murphy and his wife were unjustly enriched by DCI's payment of their personal expenses, and that the Murphys and Hintz were unjustly enriched by the sale of DCI common stock during the fraud. The Commission charges Murphy and Hintz with violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, and with aiding and abetting DCI'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. The complaint seeks a permanent injunction, disgorgement of ill-gotten gains with prejudgment interest, and civil penalties from and against both Murphy and Hintz, and disgorgement with prejudgment interest from Murphy's wife.

The complaint further alleges that Murphy is liable as a control person, under Section 20(a) of the Exchange Act, for DCI's violations of 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, because he failed to exercise due care in his supervision of the company's accounting practices. The complaint also charges Murphy with orchestrating the scheme by which DCI improperly raised capital by using its employees as conduits to sell S-8 stock to the public in violation of Sections 5(a) and 5(c) of the Securities Act. The Commission alleges that, by engaging in the conduct described in the complaint, Murphy has demonstrated his substantial unfitness to serve as an officer or director of a publicly traded company, and thus seeks a permanent officer and director bar against him pursuant to Section 20(e) of the Securities Act and Section 21(d) of the Exchange Act.

In a related matter, also on June 23, 2000, the Commission instituted and settled administrative proceedings against DCI's independent auditor, Schnitzer & Kondub, PC, and its two partners, Richard B. Kondub, CPA, and Ross J. Schnitzer, CPA, pursuant to Rule 102(e) of the Commission's Rules of Practice. Without admitting or denying the Commission's substantive findings, the accounting firm consented to an order denying it the privilege of appearing or practicing before the Commission as an accountant, and both Kondub and Schnitzer consented to an order denying them the privilege of appearing or practicing before the Commission as accountants with the right to apply for reinstatement after 5 years. See Exchange Act Rel. No. 42979 and AAER. No. 1278 (June 23, 2000).