==========================================START OF PAGE 1====== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. Litigation Release No. 14981 / July 16, 1996 Accounting and Auditing Enforcement Release No. 803 / July 16, 1996 Securities & Exchange Commission v. Earl V. Young, United States District Court for the Northern District of Texas, C.A. No. 3- 96CV1985-T (N.D. Tex. July 15, 1996). The Securities and Exchange Commission announced that it filed a civil injunctive action in the United States District Court for the Northern District of Texas against Earl V. Young, a former director of Automated Telephone Management Systems, Inc. ("ATM"). In its complaint, the Commission alleges that Young knew, or was reckless in not knowing, that ATM's financial statements, for fiscal 1993 were materially misstated. The materially misstated financials were included in an annual report on Form 10-K for 1993, filed with the Commission on January 13, 1994. Specifically, the Commission alleged that Young knew that ATM had prematurely recognized revenue from a sale and signed ATM's Form 10-K for fiscal 1993. Young, a member of ATM's audit committee, also failed to notify ATM's independent auditors of the improper revenue recognition. Without admitting or denying the Commission's allegations, Young consented to the entry of a judgment against him, permanently enjoining Young from committing future violations of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5 and 13b2-2 thereunder, and ordering Young to pay a civil money penalty in the amount of $15,000. The Commission also announced that it has concluded a related civil injunctive action that was filed on November 1, 1995 in the United States District Court for the Northern District of Texas against ATM, Akhilesh Chandoke, the former president, chief executive officer, and director of ATM, Frank Mzyk, the former controller and principal accounting officer of ATM, and David Jacobs, the former secretary and vice president of sales at ATM. Securities and Exchange Commission v. Automated Telephone Management Systems, Inc., Akhilesh Chandoke, Frank C. Mzyk and David H. Jacobs, United States District Court for the Northern District of Texas, Civil Action No. 395-CV-2613-X (Litigation Release No. 14710; Nov. 2, 1995) In the previous action, the Commission had alleged that Chandoke, Mzyk, and Jacobs engaged in a fraudulent scheme to inflate ATM's revenue for the fiscal year ended September 30, 1993. The Commission alleged that the defendants arranged for a third party to sign a fictitious sales contract, and that ATM recognized $1.3 million in revenue from the transaction, which accounted for twenty-five percent of ATM's revenue for fiscal year 1993. The Commission further alleged that the defendants convinced an ATM customer to backdate a contract in order to facilitate the inclusion of the revenue in ATM's financial statements for the fiscal year ended September 30, 1993. In addition, the Commission alleged that the defendants concealed inventory, created fictitious invoices, and backdated ATM internal documents to conceal the fraud from ATM's auditors. The Commission alleged that Chandoke, Mzyk and Jacobs were responsible for material misrepresentations and omissions concerning ATM's transactions in a periodic report filed with the Commission. Additionally, the Commission alleged that the defendants made materially false statements and omitted to disclose material information to ATM's auditors in connection with the audit of ATM's financial statements. On January 30, 1996, the district court, pursuant to the Commission's motion, entered a default judgment against ATM, enjoining it from violations of Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) of the Exchange Act, and Rules 10b-5, 12b-20, 13a-1, and 13a-13 thereunder. On March 26, 1996 and March 28, 1996 respectively, the district court entered agreed judgments against Chandoke and Mzyk, permanently enjoining them from committing future violations Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5, 13b2-1, 13b2-2 thereunder, and imposing a ten-year officer and director bar against each of them. The Commission agreed to waive imposition of civil money penalties on the basis of Mzyk's and Chandoke's sworn inability to pay. On April 1, 1996, the court entered a default judgment against Jacobs, enjoining him from future violations of Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5, 13b2-1, 13b2-2 thereunder, and permanently prohibiting him from serving as an officer or director of a reporting company. In related criminal proceedings, Chandoke, on November 13, 1995, and Jacobs, on April 1, 1996, each pleaded guilty to one count of bank fraud and, after a criminal trial, a jury acquitted Mzyk of bank fraud. The criminal charges against the men stemmed from fraudulently inflated ATM receivables that were provided to Comerica Bank as collateral for a line of credit. Chandoke and Jacobs are awaiting sentencing.