U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 18618 / March 10, 2004

Accounting And Auditing Enforcement
Release No. 1974 / March 10, 2004

Securities and Exchange Commission v. Ed Johnson and MERL Holdings Inc.com, Civ. No. 02-5490 (D.N.J.)(Brown, J.).

JURY FINDS ED JOHNSON, A CONVICTED FELON AND FORMER CEO OF MERL HOLDINGS INC.COM, LIABLE FOR ACCOUNTING FRAUD AND INSIDER TRADING.

On March 8, 2004, following a two-week trial, a federal jury in Trenton, New Jersey found for the Commission on all counts in an accounting fraud, insider trading and false filing case against Ed Johnson, the former Chief Executive Officer, Chairman of the Board, and President of MERL Holdings Inc.com. In its complaint, the Commission had alleged that Johnson inflated the assets and financial results of MERL in two registration statements filed by the company with the Commission and disseminated to the public. The jury found that Johnson violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rule 10b-5 promulgated thereunder, in connection with a multi-faceted fraud designed to raise $25 million in the public securities markets.

According to the complaint, Johnson, age 54, orchestrated the fraudulent scheme in four ways. First, Johnson improperly consolidated Essex Industries, Inc. ("Essex") in MERL's 1997 and 1998 financial statements, which accounted for all of the company's revenues recorded in the income statements for those years. Essex also comprised virtually all of MERL's assets in 1997 and for 363 days in 1998. The complaint alleged that MERL's consolidation of Essex was improper because, among other things, Johnson and MERL had been specifically enjoined by a Virginia state court from exerting any control over Essex. On July 24, 1998, Johnson entered into a Settlement and Security Agreement with Essex's owner which continued the severe restrictions on MERL's ability to control Essex. Because of the injunction and the Security Agreement, Johnson's consolidation of Essex's operating results in its financial statements violated Generally Accepted Accounting Principles ("GAAP").

Furthermore, in MERL's second registration statement, a Report on Form 10-SB filed with the Commission on May 31, 2000, Johnson represented that Essex was still a subsidiary and business segment of MERL when, in reality, MERL no longer owned Essex.

Second, Johnson artificially inflated the value of assets that MERL had acquired from Hanold Bookstores, Inc. and Hanold Schoolwear, Inc. ("Hanold"), in exchange for shares of MERL's preferred stock (with a par value of $10.00 per share). Among other things, Johnson valued a Hanold customer list at $1.6 million when he knew that his valuation was not substantiated by any documentary or evidentiary support. The complaint alleged that Johnson's treatment of the customer list and other Hanold assets was improper and violated GAAP.

Third, the complaint alleged that the textual portions of both registration statements materially mischaracterized the financial health of MERL. An objective view of the company was that it was in dire financial straits because of severe liquidity problems, drastically declining sales, disappearing customers and numerous legal problems. For example, one of MERL's subsidiaries, MERL School Stores, Inc., had closed all of its stores and laid off all of its employees one month prior to the filing of the Form 10-SB. Yet the Form 10-SB represented that MERL intended to hire "additional employees" to accommodate an alleged growth in MERL School Stores' business.

The complaint alleged that Johnson had a clear understanding of MERL's bleak financial position and future prospects but, in the textual portions of the registration statements, improperly painted a falsely prosperous and optimistic picture of the company and did not disclose the liquidity problems, negative sales trends, and adverse developments that had battered the company.

Fourth, the complaint alleged that Johnson committed a fraudulent act in the Form 10-SB by representing that MERL did not believe that any of its officers or directors had been involved in any legal proceedings material to an evaluation of their ability or integrity when, in fact, Johnson himself had been criminally convicted in 1990 for willful misapplication of funds when he had been the CEO of Magnolia Federal Savings & Loan Association in Knoxville, Tennessee.

Finally, the complaint alleged that Johnson benefited from his fraudulent scheme by avoiding losses or becoming unjustly enriched by selling MERL stock and using material nonpublic information concerning MERL's accounting irregularities and true financial condition.

Although he resigned as Chief Executive Officer, Chairman of the Board and President of MERL shortly after this civil enforcement action commenced, Johnson continues with the company as a "consultant" and an "advisor" to the board of directors. His wife, G. Carol Johnson, is the acting President of MERL.

The Court will hold further proceedings concerning remedies. The Commission seeks to enjoin Johnson permanently from violating Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder, and seeks civil monetary penalties against Johnson. The Commission further seeks to bar Johnson permanently from serving as an officer or director of any public company and also seeks under section 603 of the Sarbanes-Oxley Act of 2002 to bar him permanently from any future participation in the offering of any penny stock. Finally, the Commission seeks disgorgement, prejudgment interest and penalties from Johnson for his insider trading.

http://www.sec.gov/litigation/litreleases/lr18618.htm