UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
SECURITIES ACT OF 1933
Release No. 7771 / November 15, 1999
SECURITIES EXCHANGE ACT OF 1934
Release No. 42139 / November 15, 1999
ACCOUNTING AND AUDITING ENFORCEMENT
Release No. 1208 / November 15, 1999
ADMINISTRATIVE PROCEEDING
File No. 3-10096
____________________________________
: ORDER INSTITUTING PUBLIC
In the Matter of : ADMINISTRATIVE PROCEEDINGS
: PURSUANT TO SECTION 8A OF THE
THE CRONOS GROUP, : SECURITIES ACT OF 1933
: AND SECTION 21C
: OF THE SECURITIES EXCHANGE ACT
Respondent. : OF 1934, MAKING FINDINGS, AND
: IMPOSING A CEASE-AND-DESIST ORDER
:
_____________________________________
I.
The Securities and Exchange Commission ("Commission") deems it
appropriate that public administrative proceedings be instituted against The
Cronos Group ("Cronos" or "Respondent") pursuant to Section
8A of the Securities Act of 1933 ("Securities Act) and Section 21C of the
Securities Exchange Act of 1934 ("Exchange Act").
II.
In anticipation of the institution of these administrative proceedings,
Cronos has submitted an Offer of Settlement of The Cronos Group
("Offer") that the Commission has determined to accept. Solely for the
purpose of these proceedings, and any other proceedings brought by or on behalf
of the Commission, or in which the Commission is a party, without admitting or
denying the findings set forth herein, except as to jurisdiction of the
Commission over it and over the subject matter of these proceedings, which
Cronos admits, Cronos consents to the entry of this Order Instituting Public
Proceedings 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 ("Order") set forth below.
Accordingly, IT IS HEREBY ORDERED that proceedings pursuant to Section 8A of
the Securities Act and Section 21C of the Exchange Act be, and hereby are,
instituted.
III.
FACTS
The Commission makes the following findings:1
A. Respondent and Related Individual
1. Respondent
The Cronos Group, is a Luxembourg holding company with its operational
headquarters in Orchard Lea, England. Cronos' common stock is registered with
the Commission pursuant to Section 12(g) of the Exchange Act and is traded on
the Nasdaq market system. Cronos made its initial public offering ("IPO")
in December 1995. Cronos' common stock is traded only in the United States.2
Cronos is one of the ten largest lessors of marine cargo containers.
2. Related Individual
Stefan M. Palatin, is the former Chairman and Chief Executive Officer,
and majority shareholder of Cronos.3
Palatin was removed as CEO and, in July 1998, resigned from the board of Cronos.
He holds, or held, his Cronos stock through three Panamanian bearer share
companies, Lambert Business, Inc. ("Lambert"), Klamath Enterprises,
S.A. ("Klamath"), and Enavest Holding, S.A ("Enavest").
B. Summary
This proceeding involves Cronos' violations of the antifraud, periodic
reporting and corporate record keeping provisions of the federal securities laws
that began with its initial public offering in December, 1995 and continued in
its periodic filings and communications with shareholders through 1997 (the
"relevant period"). During the relevant period Palatin dominated and
controlled the company.
Cronos consistently misrepresented, through affirmative misstatements and
omissions in public statements and in filings with the Commission, transactions
it had with Palatin throughout the relevant period. In doing so, it concealed,
among other information, that Palatin had intercepted payments between Cronos
and one of its major customers (which Palatin also controlled); Cronos had paid
him millions of dollars in the year before the IPO; and Palatin had sold shares
in the IPO through another entity which he controlled. Following the IPO, the
company failed to disclose that it paid additional funds to Palatin immediately
after the offering and that he had pledged assets he did not own as collateral
for certain obligations owed to the company. In subsequent filings, the company
misrepresented the nature and purpose of other payments it made to Palatin as
well as the extent to which certain obligations Palatin owed to the company were
secured by collateral. Palatin controlled the company's disclosures and was the
beneficiary of the transactions which the company misrepresented in its filings.
Cronos systematically fired or demoted employees and directors who challenged or
questioned the transactions or disclosures. As a consequence, Cronos violated
the antifraud, reporting and recordkeeping provisions of the federal securities
laws during the relevant period.
C. Facts
1. Background: Cronos, Contrin and the Public
Offering
In the 1970's and 1980's, Palatin and another investor formed or acquired
several companies which owned and managed shipping containers and then assembled
a corporate structure which became Cronos in the early 1990s. Palatin
consolidated his control of these companies in 1991 when he purchased his
partner's interest in these companies as well as other holdings including
Contrin S.A. ("Contrin"), a related group of companies in Austria, and
another privately held entity which owned containers ("TOEMT").
Palatin thereafter exercised sole control over Cronos even though the shares he
purchased from his former partner were pledged to secure his obligation to pay
the purchase price in installments over a period of years.
In early 1994, Palatin and Cronos began the process of registering the
company's common stock for sale in the United States. Although Cronos was
organized under the laws of Luxembourg and had its operational headquarters in
the United Kingdom, it sought to register and sell its shares exclusively in the
United States. In mid-1994, the company temporarily abandoned the process but
resumed the effort in mid- 1995. On December 7, 1995, the Commission declared
the registration statement effective. The IPO resulted in the sale of 3,643,000
shares, inclusive of underwriters' overallotment, at $10 each, resulting in
proceeds, before expenses, of $36,430,000. Following the offering, Palatin
controlled 52.9% of the outstanding stock and as a result, dominated and
controlled Cronos.
2. Misrepresentations and Omissions in the Offering Documents
The registration statement and offering materials Cronos used to effect the
IPO contained material misstatements and omissions which concealed the following
facts: in 1994, at Palatin's direction, Contrin made payments totaling $2.6
million to him which were intended for Cronos; Cronos paid him another $500,000
which it owed Contrin; Cronos disbursed $7.5 million to Palatin, purportedly as
a loan to a third party, during the 11 months preceding the IPO; and Palatin,
through a company he owned or controlled, sold shares in the IPO.
a. Misrepresentations and Omissions Concerning a Contingent Liability and
Payments to Palatin
In 1994, Contrin, which at the time was controlled by Palatin, placed an
order with Cronos to purchase containers. In connection with the order, it made
partial payments totaling $2.6 million. On Palatin's instruction, Contrin paid
the funds to bank accounts under Palatin's personal control rather than to
Cronos. Nevertheless, he issued a receipt on behalf of Cronos acknowledging the
company's receipt of the funds. Cronos' books did not reflect receipt of the
payments. Some months later, other employees of the company canceled Contrin's
purchase order for nonpayment. Subsequently, receivers assumed control of the
Contrin affiliates which had ordered the containers and they asserted claims
against Cronos for the $2.6 million.4
Similarly, in late 1994, Cronos paid Palatin $500,000 which it owed to
Contrin. Cronos recorded the disbursement to Palatin as a payment to Contrin.
When Contrin subsequently asserted a claim for the $500,000, Cronos paid the
funds but recorded it as an "advance" or loan to Contrin rather than a
past due distribution payment. When Cronos later attempted to offset the advance
against an amount which it owed, Contrin disputed the offset and asserted a
claim for the $500,000.5
In its registration statement and prospectus Cronos misrepresented the
relationship between the company, Palatin and Contrin. The company did not
disclose that Palatin, through a company he controlled, owned and controlled
Contrin. Instead, it characterized Contrin as a customer with whom the company
did business on an arms length basis. More importantly, Cronos failed to
disclose its contingent liability of $2.6 million to Contrin created by the
payments to Palatin in 1994.6
b. Payments to Palatin Mischaracterized as a Loan to a Third Party
Shortly after Palatin bought out his partner in 1991, acquiring Cronos,
Contrin and TOEMT, he caused Cronos to purchase containers from TOEMT. As
partial consideration for the purchase, in 1991, Cronos issued 90,000 shares of
convertible preferred stock to TOEMT.7
Shortly after this transaction, Palatin directly or indirectly, formed Barton
Holdings Ltd. ("Barton")8
and transferred TOEMT and the preferred shares to it.
Between January and November, 1995, Cronos disbursed approximately $7.5
million dollars directly or indirectly to Palatin which it characterized as a
loan to Barton. The first two disbursements totaling $1.125 million were made to
Barton's Swiss bank account. Palatin's lawyer controlled the account and the
funds were disbursed from the account to discharge financial obligations of
Palatin. Thereafter, between May and November, 1995, Cronos made net payments
totaling $6.375 million directly to Palatin's bank accounts in the UK and
Austria. It appears that at least the majority of these funds were used to pay
his personal expenses. At Palatin's direction, Cronos disclosed and recorded
these payments as a loan to Barton.9
Cronos' registration statement and prospectus identified Barton as a debtor
of the company and therefore, a related party to the issuer, but the materials
failed to disclose that Barton was owned or controlled by Palatin. The offering
materials also failed to disclose that prior to the IPO Cronos had paid $7.5
million to Palatin, representing an advance of proceeds he expected from selling
the shares he held in the name of Barton.10
c. Misrepresentations Concerning the Identity of the Selling Shareholder
in the IPO
In connection with the IPO, Barton was identified as a selling shareholder
and its 90,000 preferred shares were converted into 454,156 shares of common
stock and sold, generating proceeds of $4,096,194. The offering materials
identified Barton as a related party but attributed this status to its
shareholdings and, as previously described, its status as a debtor of Cronos.
The company failed to disclose in the offering materials that Palatin
beneficially owned the shares sold in Barton's name. As a result, the company
concealed the more material fact that Palatin was selling a portion of his
shares in the IPO.
3. Misrepresentations and Omissions in Annual and Other Filings
a. Cronos Advances Additional Funds to Palatin Immediately
Following the IPO
Just weeks after the closing of the IPO, Cronos, on December 29, 1995, paid
another $1.5 million to Palatin. The company recorded the payment in its
financial records as another advance to Barton. The company did not disclose in
its offering materials that it would continue to make advances to Palatin. In
subsequent annual and periodic filings Cronos failed to disclose that this
payment went to Palatin.
This $1.5 million payment increased substantially the preexisting unsecured
receivable due nominally from Barton. Immediately prior to the IPO, the
outstanding balance was $7.5 million. After offsetting the pro rata fourth
quarter dividend on the preferred shares from the loan balance, the payment of
IPO proceeds reduced the balance due to $3.2 million. The December 29 payment of
$1.5 million increased the unsecured unpaid balance to $4.7 million.
b. Palatin Guarantees the Barton Loan and Pledges Collateral He Did Not
Own
In early January 1996, Cronos' auditors learned of the $1.5 million
additional advance made nominally to Barton.11
They were concerned because they had not known that the company would advance
additional funds after the IPO. During the course of the audit, the auditors
raised the issue of the $4.7 million unsecured receivable from Barton and
requested financial information to substantiate its ability to repay the loan
or, alternatively, a guarantee of the loan by a third party such as a commercial
bank. No financial information or guarantee was provided in response to this
request. Eventually, under pressure from the auditors and others, Palatin agreed
to guarantee the loan and to pledge as collateral for his guarantee the
1,030,303 shares of Cronos he had purchased from his partner in 1991.
Palatin knew, but neither he nor Cronos disclosed, that a material defect
impaired the value of the collateral: these Cronos shares were held by a bearer
share Panamanian company ("Lambert") which Palatin did not own. Shares
of Lambert were held by a trustee to secure Palatin's obligation to pay
installments of the purchase price to his former partner. Palatin had paid less
than half the purchase installments at the time of his pledge and was entitled
to only a proportionate interest in Lambert and the Cronos shares it held.12
In effect, Palatin did not own the shares he pledged to secure his guarantee of
the purported Barton loan. This defect raised serious questions concerning the
value of the collateral, the collectibility of the purported Barton loan and the
value of the loan as an asset on the company's balance sheet. Cronos failed to
disclose this impairment in its annual and periodic filings with respect to
1996.
c. Cronos Fires and Demotes Employees Who Question the Accuracy of Its
Disclosures
Cronos' financial employees and general counsel became concerned after a
number of events including, but not limited to, the December 29 payment to
Palatin, the claims asserted by Contrin and allegations in the Austrian press
concerning Palatin's misuse of Contrin and ownership of Barton. They confronted
Palatin and demanded that the company retain independent counsel to investigate
these matters. Instead, Cronos fired the general counsel and removed the other
protesting employees from the board of directors. It directed its outside
securities counsel, which had represented it in the IPO, to investigate the
matter. Counsel resigned immediately after issuing its final report of the
investigation to the company. Cronos thereafter refused to provide a copy of the
report to its auditors, the employees who demanded the investigation, or others.
d. Cronos Advances Additional Funds to Palatin and the Auditors Resign
In October, 1996, shortly after receiving counsel's final report, Cronos paid
another $1.5 million to a bank account controlled by Palatin.13
At the time, the company and Palatin had engaged investment bankers in an
attempt to sell either the company or Palatin's shareholdings. The agreements
with the investment bankers did not call for advance payments or escrow of fees.
Nevertheless, the company's accounting staff at Palatin's direction, disbursed
$1.5 million to an account controlled by Palatin and recorded the payment as an
escrow for investment banking fees. In fact, shortly after the funds were
deposited to Palatin's account, he used the funds for personal expenses, a
deposit in a private bank, and cash withdrawals.
When the company's auditors learned of the payment, they attempted to audit
it. Cronos and Palatin refused to cooperate with the audit, other than to
provide copies of the investment banking agreements. Cronos refused to provide
any documentation concerning the payment, the account to which the funds were
deposited or the status of the funds. The issue of the payment became a source
of conflict within the company and between the company and its auditors.
While the audit continued, in early 1997, Palatin instructed company
employees to disburse another $2 million to his bank account, claiming it would
be added to the escrow for investment banking fees. Employees alerted the
company's auditors and ultimately refused to carry out the instruction. As a
consequence, Cronos fired its CFO and general counsel and demoted its chief
operating officer who reported the issue to the auditors and balked at carrying
out Palatin's instruction to disburse the funds.
While the controversy regarding these matters continued, Cronos appointed to
its board of directors Palatin's long time associate and personal attorney. When
the new board of directors met on January 16, 1997, Palatin told them that the
$1.5 million had been returned to the company and he produced a forged letter
from his bank confirming that the funds had been repaid. After the board meeting
had adjourned and the only independent director had departed, Palatin reconvened
the meeting and requested that the board authorize the company to loan him up to
$4 million. Believing that the purportedly "escrowed" funds had been
repaid, they authorized the loan conditioned upon a pledge of an additional 1
million shares of Palatin's Cronos stock. In fact, the $1.5 million had not been
repaid and was not returned to the company until late January, 1997, after
Cronos advanced $3.7 million to Palatin pursuant to the loan which the board
authorized on January 16. 14
The company's auditors, while attempting to audit the repayment, learned that
the bank confirmation Palatin had provided to the board had been forged and that
Palatin's assurances to them and the board that the funds had been repaid were
false. Thereafter, Cronos and Palatin refused to cooperate with the audit. The
auditors reported their concern that an illegal act may have occurred to the
board and requested that it investigate the matter. The board of directors
refused to investigate or resolve the related audit issues. On February 3, 1997,
the company's auditors resigned and provided Cronos with the report required
under Section 10A of the Exchange Act.15
Ultimately, Palatin defaulted on all amounts he owed to Cronos. The current
outstanding principal balance is $6,227,423.16
The company also made a provision of $4,733,000 on December 31, 1997 with
respect to Palatin's loans.
Cronos subsequently hired new auditors to complete the audit for the year
ended December 31, 1996. The new auditors did not audit the circumstances
surrounding the $1.5 million purported escrow payment. The company recorded the
payment as of year-end as a receivable from a related party. In its 1996 Form
20-F, Cronos falsely disclosed that the funds had been escrowed for professional
fees at year end.
D. Disclosure Violations and False Financial Statements
1. Disclosure Requirements for Related Party
Transactions
According to Generally Accepted Accounting Principles ("GAAP"), an
issuer's financial statements are complete only when they contain all material
information necessary to represent validly the underlying events and conditions.17
According to Statement of Financial Accounting Standards No. 57 ("FAS
57"), financial statements are not complete and reliable unless they
contain additional explanations of and information about related-party
transactions. FAS 57 defines related parties to include the principal owner of
an enterprise and its management, as well as their affiliates. FAS 57 requires
that the disclosure of material related party transactions include: (1) the
nature of the relationship involved; (2) a description of the transactions for
each of the periods for which income statements are presented, and such other
information deemed necessary to an understanding of the effects of the
transaction on the financial statements; (3) the dollar amounts of transactions
for each of the periods for which income statements are presented; and (4)
amounts due from or to related parties as of the date of each balance sheet
presented and, if not otherwise apparent, their terms and manner of settlement.
Section 210.4-08(k) of Regulation S-X states that related party transactions
should be identified and the amounts stated on the face of the balance sheet,
income statement, or statement of cash flows.
Item 404(a) under Regulation S-K requires a description of transactions
exceeding $60,000 between the registrant and any of its directors or executive
officers or any member of their immediate families.18
Item 404(a) requires disclosure of the person and the person's relationship to
the registrant, the nature of the person's interest in the transaction, and,
where practicable, the amount of the person's interest in the transaction.
2. Material Deficiencies in Cronos' Filings
a. Registration Statement and Prospectus
Cronos' registration statement and prospectus contained false and misleading
information concerning material facts and omitted material facts with respect to
Palatin's relationship with Barton and Contrin, the payments to Palatin in 1994
by Contrin and Cronos, and the disbursements to Palatin which were falsely
characterized as loans to Barton. Cronos' financial statements did not reflect
the contingent liability created by the 1994 payments to Palatin by Contrin.19
Moreover, it failed to disclose that Palatin, the chairman and CEO, through
Barton, was a selling shareholder in the IPO.20
b. 1995 Form 20-F
Cronos' 1995 Annual Report on Form 20-F contained the same misstatements and
omissions with respect to Barton, Contrin, the Barton loan, and contingent
liabilities as the registration materials. The 1995 Form 20-F also failed to
disclose that an additional $1.5 million had been disbursed to Palatin after the
IPO closed. The filing also stated that Palatin had guaranteed the Barton loan
and secured his guarantee with a pledge of Cronos shares. It failed to disclose
that Palatin lacked the authority to pledge all of the shares identified in the
filing. The filing also overstated the value of the collateral and the
underlying loan.
c. 1996 Form 20-F
The company's 1996 Annual Report on Form 20-F contained the same
misstatements and omissions of material facts as the 1995 Form 20-F. In
addition, the 1996 Form 20-F also contained misstatements and omissions
concerning the $1.5 million purportedly escrowed for investment banking fees. In
addition, the 1996 Form 20-F failed to disclose the material uncertainty as to
the recoverability, and thus the value, of the receivable, reflected as an asset
on the company's balance sheet as a result of the purported Barton loan. By
1996, Palatin had defaulted on his obligations to his former partner, further
impairing his rights to the property he pledged. The uncertainty as to the
recoverability of his loans materially increased in 1996 as a result of his
default. Disclosure of the uncertainty was necessary in order to make the
statements made by the company concerning the value of the receivable not
misleading.21
d. 1997 Form 20-F
Cronos' 1997 Annual Report on Form 20-F contained the same or similar
misstatements and omissions with respect to the $1.5 million payment, Barton,
Contrin and the purported Barton loan. However, the company disclosed facts
concerning the impairment of the collateral pledged by Palatin. The company
disclosed that his former partner had asserted a claim against 55% of Lambert
and to 55% of the 1,030,303 Cronos shares which Palatin had pledged as
collateral. As a result only 463,636 shares valued at year's end at
approximately $2.3 million collateralized Palatin's obligation to pay Cronos
$5.5 million plus accrued interest.
e. Other Filings
The misstatements and omissions set forth above were also contained in
periodic and other filings with the Commission during 1996 and 1997. Cronos
filed these materials as attachments to Forms 6-K, because as a foreign private
issuer, it was not required to file Form 10-Q.22
The Proxy Statement for the Annual Shareholders Meeting, which was attached to
the Form 6-K filed on May 21, 1996, contained misstatements and omissions of
material facts similar to those in the 1995 Form 20-F. Similarly, the Proxy
Statement attached to Form 6-K, filed on June 19, 1997, contained misstatements
and omissions similar to those in the 1996 Form 20-F. During 1996 and 1997,
Cronos also filed other Forms 6-K, to which it attached quarterly reports. The
quarterly reports also contained false and misleading financial statements
because the unaudited financial statements did not disclose the transactions
Palatin had with the company and the uncertainty with respect to the collateral
Palatin pledged to secure his guarantee, and later assumption, of the Barton
loan.
E. Cronos Failed To Make and Keep Adequate Books and Records and
Failed To Maintain an Adequate System of Internal Controls
1. Cronos Failed To Make and Keep Adequate Books
and Records
Cronos' books and records did not accurately reflect the transactions with
Contrin and Palatin. Payments to Palatin were reflected in the books as payments
to Contrin and Barton, and the $500,000 repayment to Contrin was recorded as an
advance. The contingency associated with the $2.6 million in payments which
Contrin made to Palatin in 1994 was not reflected in Cronos' books and records.
The company's books and records also did not reflect the uncertainty as to the
recoverability of the loans to Palatin. The company also inaccurately recorded
the payment of $1.5 million to Palatin in October 1996 as an escrowed investment
banking fee. As a result, the company's books and records did not accurately and
fairly reflect the disposition of assets and transactions with related parties.
2. Cronos Failed To Maintain an Adequate System
of Internal Controls
Cronos represented in its registration statement and prospectus that related
party transactions, above a threshold amount of $250,000, would be entered into
on an arm's length basis, reviewed and approved by the non-interested members of
the board, and reviewed by the company's independent accountants as part of
their audit of the company's year end financial statements. This policy was not
maintained with respect to the December 1995 payment of $1.5 million to Palatin
which was characterized as a loan to Barton. The payment was not approved by
independent board members. Similarly, in October 1996, the company paid another
$1.5 million to Palatin. The transaction was not submitted to non-interested
directors for approval, and both the company and Palatin hindered the auditors
review of the transaction. Thus, the company failed to maintain controls with
respect to related party transactions, contrary to representations in the
filings with the Commission.
IV.
LEGAL DISCUSSION
A. Violations of the Antifraud Provisions of
the Securities Act and the Exchange Act
Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5 prohibit the
making of materially false and misleading statements in connection with the
purchase or sale of any security. Section 17(a) of the Securities Act prohibits
the making of false and misleading statements in the offer or sale of
securities. Violations of the antifraud provisions require proof of scienter. See
Aaron v. SEC, 446 U.S. 680 (1980). To violate Section 17(a)(2), or
Section 17 (a)(3) of the Securities Act, however, a defendant need not act with
scienter. Aaron v. SEC, 446 U.S. at 701-702. In the case of a
corporation, the scienter of officers and employees is imputed to the
corporation. See SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082
(2nd Cir. 1972). Here, Palatin's scienter is imputed to Cronos for the purpose
of establishing Cronos' violations.
Cronos failed to accurately disclose transactions the company had with
Palatin. These false and misleading disclosures appeared in registration
materials and periodic filings with the Commission during the years 1995, 1996
and 1997. The false and misleading disclosures were material because an investor
would consider the related party transactions important to making an investment
decision. Certain of Cronos' filings also contained misrepresentations
concerning the security Palatin pledged to secure his loan from the company. The
loan constituted a material asset on the company's balance sheet and the
impairment of that asset would have been important to an investor.
Accordingly, Cronos' nondisclosure and false disclosures in its registration
materials with respect to related party transactions and the contingent
liability resulting from Palatin's receipt of payments from and due to Contrin
violated Section 17(a) of the Securities Act and these and subsequent false
disclosures concerning related party transactions and the value of collateral
pledged to the company violated Section 10(b) of the Exchange Act and Exchange
Act Rule 10b-5.
B. Violations of the Reporting Requirements
Under GAAP, Cronos' transactions with Palatin were material related party
transactions that should have been reported. The disclosures and financial
statements in Cronos' Forms 20-F for 1995 and 1996 and Forms 6-K filed in 1996
and 1997 contained material misstatements concerning the related party
transactions. Further, Cronos' 1997 Form 20-F did not contain audited financial
statements for the year ended December 31, 1995. In addition, the company did
not disclose the uncertainty associated with the collateral pledged by Palatin
and the contingencies associated with the Contrin payments intercepted by
Palatin. Consequently, Cronos violated Section 13(a) of the Exchange Act and
Exchange Act Rules 12b-20, 13a-1 and 13a-16.
C. Violations of Books and Records and Internal Controls Provisions
Cronos' books and records did not accurately reflect the disposition of
assets with respect to Contrin, Barton and Palatin. By maintaining false and
misleading books and records, Cronos violated Section 13(b)(2)(A) of the
Exchange Act and Exchange Act Rule 13b2-1.
In addition, Cronos failed to maintain an adequate system of internal
accounting controls sufficient to provide reasonable assurance that its related
party transactions were recorded as necessary to permit the preparation of its
financial statements in conformity with GAAP. As a result, Cronos violated
Section 13(b)(2)(B) of the Exchange Act.
V.
FINDINGS
Based on the foregoing, the Commission finds that Cronos committed violations
of Section 17(a) of the Securities Act, Sections 10(b), 13(a), 13(b)(2)(A), and
13(b)(2)(B) of the Exchange Act, and Exchange Act Rules 10b-5, 12b-20, 13a-1,
13a-16, and 13b2-1.
VI.
ORDER
Based on the foregoing, the Commission deems it appropriate to accept the
Offer of Settlement submitted by the Respondent and accordingly,
IT IS HEREBY ORDERED, pursuant to Section 8A of the Securities Act and
Section 21C of the Exchange Act, that:
A. Cronos cease and desist from committing or causing any violation or future
violation of Section 17(a) of the Securities Act, Sections 10(b), 13(a),
13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Exchange Act Rules 10b-5,
12b-20, 13a-1, 13a-16, and 13b2-1.
IT IS FURTHER ORDERED, that Cronos shall comply with the following
undertakings:
B. Cronos undertakes to:
(1) designate an agent for service of process in the United States within 10
business days of the date of the Order; and
(2) upon reasonable request by the Commission or its staff, and on reasonable
notice, and without service of a subpoena, provide documents or other
information, and accept service and take all reasonable actions to make its
officers, directors, employees and agents available to testify truthfully at any
interview, investigative testimony, deposition, at any judicial proceeding
related to the Order, and at any administrative proceeding arising as a result
of the Commission's investigation entitled In the Matter of The Cronos Group,
and in any future investigations or inquiries from the staff or the Commission.
Cronos agrees that this ongoing and future cooperation commitment shall be a
condition of employment or continued employment of its officers, directors,
employees and agents and that these persons shall be apprised of such commitment
within 10 business days of the date of the Order, or, if in the future, at the
outset of their employment. This provision shall not be construed to waive
applicable attorney-client, work product or other privileges recognized under
federal law of Cronos and its officers, directors, employees and agents, if
asserted timely and in good faith.
By the Commission.
Jonathan G. Katz
Secretary
Footnotes
1 The findings herein are
made pursuant to the Offer that Cronos submitted and are not binding on any
other person or entity in this or any other proceeding.
2 From December 1995
through December 1998, Cronos reported as a "foreign private issuer"
as defined by Exchange Act Rule 3b-4. In its 1999 fiscal year, Cronos began
reporting as a United States issuer.
3 In May 1998, Palatin was
arrested by Austrian governmental authorities as a result of allegations of
financial fraud and he is presently awaiting a criminal trial in the matter.
4 Palatin lost control of
some of the Contrin entities when they were placed in receivership as a result
of their deteriorating financial condition.
5 Cronos acted at
Palatin's instructions with respect to all material matters relating to the
$500,000 payment. With respect to the original payment, he told others at Cronos
that Contrin owed him the funds and had authorized the company to pay him
directly.
6 Contrin has asserted
several claims against Cronos, including ones created by the payments to Palatin
in 1994. At this time, Contrin's claims against Cronos have not been resolved.
7 The preferred shares
earned dividends of $900,000 annually.
8 Barton was formed by
Palatin's attorney who, in turn, was appointed as Barton's agent. The attorney
and a sub-agent he employed opened a bank account in Switzerland in Barton's
name. The majority of deposits to that account, including the dividends on the
preferred shares originally issued to TOEMT and subsequently transferred to
Barton, were paid out on the instructions of the attorney to discharge
obligations owed by Palatin. All payments from Cronos to Barton went either
through the Swiss account or directly to Palatin. No one at Cronos other than
Palatin was permitted to communicate or engage in dealings with Barton. When
Contrin's financial condition deteriorated to the point where it became a
potential liability for Palatin, he transferred Contrin to Barton. These and
other facts compel the conclusion that Palatin formed and controlled Barton and
used it to conceal his role in certain transactions and his ownership of certain
assets, including, but not limited to, those discussed in this Order.
9 Palatin told others at
Cronos that Barton was in the process of changing banks and could not receive
direct transfers of funds from the company. He contended that he was advancing
funds to Barton from his personal accounts and he directed the company to
reimburse him by transferring funds directly to his accounts.
10 In fact, the IPO
shares sold at a price significantly below that which Palatin and Cronos had
initially anticipated. Originally, they anticipated that the proceeds to Barton
from the sale of its shares in the IPO would be sufficient to retire the debt.
Because the actual offering price was lower than anticipated, after Barton's
share of the proceeds were paid to Cronos, a substantial loan balance remained.
11 Palatin had
represented to the auditors that Barton was the debtor and that he had no
interest, direct or indirect in Barton. The auditors accepted his
representations.
12 At the time of the
pledge, Palatin had rights to 463,636 of the 1,030,303 shares of Cronos that he
had pledged. The value of these shares was less than the loan balance.
13 Cronos first
attempted to disburse the funds to Palatin's attorney. Palatin had instructed
the attorney, upon receipt of the funds, to forward the money to him. When
attempts to wire the funds to the attorney failed, Cronos disbursed the funds
directly to an account controlled by Palatin.
14 Palatin used
proceeds from the loan to repay the $1.5 million to Cronos.
15 Section 10A of the
Exchange Act provides auditors with procedures to follow, including notification
of the company's management and under certain circumstances the Commission, when
in the course of an audit they detect or become aware of information indicating
that an illegal act has or may have occurred. Here, the auditors resigned after
providing a report to the board that concluded that an illegal act may have
occurred that had a material effect on the financial statements, that senior
management and the board had not taken appropriate remedial action and the
failure of management and the board to take remedial action was reasonably
expected to warrant a restatement or the auditors resignation from the
engagement. The auditors resigned from the engagement shortly thereafter. The
last remaining independent director resigned on the same day the auditors
resigned and then at Palatin's direction his former partner was appointed to the
board.
16 The outstanding
balance reflects an offset for the value of the collateral which Palatin pledged
to secure his loans and which was sold following his default.
17 See Qualitative
Characteristics of Accounting Information, Statement of Financial Accounting
Concepts No. 2 (Fin. Accounting Standards Bd. 1980).
18 As a foreign
private issuer during the relevant period, Cronos needed only to provide
information in its annual filing to the extent that it had disclosed to its
security holders or otherwise made public the information specified in Item 404.
See Regulation S-K, Instructions to Item 404. Cronos voluntarily disclosed
certain information during the relevant period, therefore it was obligated to
provide the information in its Forms 20-F for 1996 through 1998.
19 Accounting for
Contingencies, Statement of Financial Accounting Standards No. 5, ยง 10
(Fin. Accounting Standards Bd. 1975), requires disclosure of a contingency when
there is at least a reasonable possibility that a loss or an additional loss may
have been incurred.
20 Item 507 of
Regulation S-K requires a registrant to identify selling shareholders on Form
F-1.
21 Item 9 of Form 20-F
requires a registrant to describe, among other things, internal and external
sources of liquidity and events and uncertainties that may result in material
changes in the registrant's liquidity. Palatin's technical default of the sales
agreement associated with the pledged collateral raised an uncertainty regarding
recoverability of the loan to Palatin.
22 See Exchange
Act Rule 13a-16.
http://www.sec.gov/litigation/admin/34-42139.htm