Source: https://www.sec.gov/litigation/complaints/complr17481.htm
Timestamp: 2019-04-18 20:23:14+00:00

Document:
1. During its fiscal year ended December 31, 1999, Byron Lerner ("Lerner") caused Teltran to materially overstate its revenues and earnings contrary to Generally Accepted Accounting Principles ("GAAP"). The company improperly recognized revenue by recording its purchase of ChannelNet Ltd. ("CNET") on its books as of June 1, 1999, when in fact, it did not acquire CNET until August 6, 1999. The incorrect financial results were reported in various periodic reports filed with the Commission and disseminated to the investing public during 1999 and 2000.
2. Teltran also disseminated misleading revenue, earnings per share and stock price projections, as well as misleading information concerning its chances for being listed on the American Stock Exchange ("AMEX"). Specifically, in May 1999, Teltran began projecting 1999 revenues of $30 million and earnings per share of $.30. Teltran repeated these projections throughout the year and made false and misleading statements concerning its prospects for 1999 after it became known that the projections would not be met. During 1999, Teltran also republished analyst reports on its Internet website that projected that Teltran's stock price would increase from about $10 to $75 per share and that Teltran would earn $2 - $5 per share in 2000. These reports also stated that Teltran would be listed on AMEX "imminently" and that Teltran's stock price would massively increase when it began trading on AMEX. Teltran knew or had reason to know that there was no reasonable basis for these projections, and the company misled investors by republishing the analyst reports on its website.
3. Finally, Lerner was unjustly enriched by his sale of 21,350 shares of Teltran stock between August 18, 1999, and November 29, 1999. Lerner sold these shares while he knew or recklessly disregarded that Teltran: (1) had incorrectly consolidated the acquisition of CNET as of June 1, 1999; (2) made false and misleading statements concerning Teltran's AMEX listing prospects, revenue, stock price and earnings per share projections; and (3) would not be able to reach its $30 million revenue and $.30 earnings per share projections for 1999. Lerner avoided losses of approximately $78,000 on these sales.
4. By virtue of the acts alleged herein, the defendant, among other things, violated, or aided and abetted violations of, statutes and rules prohibiting fraud in the securities markets, requiring maintenance of accurate books and records by public companies, and requiring that financial information be accurately reported by public companies to the SEC and the public.
5. This Court has jurisdiction pursuant to Section 22 of the Securities Act [15 U.S.C. §77v(a)] and Sections 21 and 27 of the Exchange Act [15 U.S.C. §§ 78u and 78aa].
6. The SEC brings this action seeking a permanent injunction, disgorgement and civil penalties pursuant to Securities Act Section 20(b) [15 U.S.C. §§ 77t(b)] and Exchange Act Sections 21(d) and (e)[15 U.S.C. §§ 78u(d) and (e)].
7. The defendant, directly or indirectly, used the means and instrumentalities of interstate commerce, or of the mails, or the facilities of a national securities exchange in connection with the acts, practices and courses of business alleged herein.
8. Teltran, a Manhattan based telecommunications company, provided Internet telephony, 1-900 services and traditional carrier services in the United States and abroad. During the relevant time period, Teltran also operated a website at www.Teltran.com. Public trading in Teltran's stock started in 1996 and Teltran became a reporting company with the Commission in March 1999. Teltran's common stock is currently quoted in the "pink sheets" after having been removed from the OTC Bulletin Board in July 2000. During the relevant time period, Teltran's stock traded at a high of $15.688 per share. Teltran's shares are currently quoted at about $.05 per share.
9. Byron Lerner ("Lerner"), age 57, resides in New York, and has been the Chairman, President and Chief Executive Officer of Teltran since June 1997.
10. On May 7, 1999, Teltran issued a press release announcing that it had entered into a letter of intent to acquire CNET, a U.K. company owned by Barclay Brydon, a British company headquartered in London. The press release stated that CNET specialized in internet telephony services and that the transaction was scheduled to close on June 1, 1999. The acquisition was designed to enhance Teltran's internet telephony capability abroad and help Teltran meet its revenue and earnings targets for 1999 and 2000.
11. By June 1, 1999, despite each side's interest in completing the deal, they had not agreed upon certain material terms of the sale. Consequently, no contract was executed by that date.
12. By July 1, 1999, the parties still had not finalized all material terms of the deal, and had not executed a written contract.
13. On July 15, 1999, Teltran and Barclay Brydon executed a written contract. However, the contract specifically stated that Teltran had not completed its due diligence review and permitted Teltran to terminate the agreement. The contract also provided that the parties would enter into other related agreements, including an agreement for the purchase of Atlantic Corporation ("Atlantic"), which was another company owned by Barclay Brydon, and an agreement for the purchase of the assets needed to run the businesses.
14. During the next month, the lawyers for both sides resolved most of the open issues and, on August 16, 1999, the CNET acquisition was completed. At the closing, the parties also executed a contract for the purchase of Atlantic and the related equipment.
15. Despite the fact that Teltran and Barclay had not executed a binding contract until July 15, 1999, and the acquisition did not close until August 16, 1999, Teltran recorded the acquisition of CNET, for accounting purposes, as of June 1, 1999.
16. Under APB Opinion No. 16, "Business Combinations," a company may book an acquisition earlier than the closing date only if the buyer had "effective control" of the target company by the earlier date. As set forth above, Teltran did not obtain effective control of CNET until the closing of the acquisition on August 16, 1999. As a result, Teltran could not record the CNET acquisition as of June 1, 1999, and in doing so, Teltran incorrectly added to its reported results CNET's pre-acquisition results from operations for June, July and half of August 1999. In addition, about 10% of the CNET revenues Teltran recorded actually pertained to the Atlantic transaction, which never closed.
17. On August 19, 1999, Teltran filed its Form 10-QSB for the quarter ended June 30, 1999. Lerner signed the Form 10-QSB as President, CEO and Principal Financial and Accounting Officer. In this filing, Teltran reported revenues of $456,720 and $540,179 for the three-month and six-month periods ended June 30, 1999, respectively. If Teltran had used the correct date for the CNET acquisition, revenue for these periods would have been $99,881 and $183,340, or 78% and 64% lower, respectively.
18. On November 8, 1999, Teltran filed its Form 10-Q for the quarter ended September 30, 1999. Lerner signed the Form 10-Q as President, CEO and Principal Financial and Accounting Officer. In this filing, Teltran reported revenues of $2,267,570 and $2,807,749 for the three-month and nine-month periods ended September 30, 1999, respectively. If Teltran had used the correct date for the CNET acquisition, revenues for these periods would have been $366,277 and $549,617, or 83% and 80% lower, respectively. The Form 10-Q also failed to disclose that the revenues were generated due to the consolidating of the acquisition as of June 1, 1999, and incorrectly characterized the revenues as being derived from internet telephony, when, in fact, the revenues were predominantly generated from 1-900 services.
19. On April 12, 2000, Teltran filed its December 31, 1999, Form 10-K. Lerner signed the Form 10-K as President, CEO and Director. In this filing, Teltran reported revenues of $2,453,189 for the year-ended December 31, 1999. If Teltran had used the correct date for the CNET acquisition, revenues for the year would have been $1,041,815, or 58% lower. The MD&A section of the Form 10-K also stated that the reason for the increase was due to "the generation of additional VOIP sales of our international telecommunications network." This misrepresented the increase in revenues as coming from VOIP (internet telephony services), rather than from 1-900 services.
20. For the second quarter of 1999, Teltran issued a press release entitled "Teltran Breaks Even In Second Quarter. Preliminary Estimates Show July Revenues at $1 Million." The press release, published on August 16, 1999, quoted Lerner as stating: "We are very pleased with the progress that the company has made in the second quarter as evidenced by our steadily increasing revenue base. These figures show that Teltran International is clearly on the threshold of profitability and early third quarter numbers substantiate that fact." The press release added that preliminary figures showed Teltran generated $1 million of revenue during July. The press release also quoted Lerner as stating, "This one-month figure nearly doubles all revenues for the first half of the year and is indicative of increased traffic from ongoing operations and contracts. We remain confident that we are on schedule to reach or exceed all previously announced projections."
21. However, the press release failed to mention that Teltran achieved these results only because it had consolidated the CNET acquisition as of June 1, 1999, and that, without using this effective date, Teltran would not have had $1 million in revenues for July 1999. The press release also implied that the steadily increasing revenue base and telephony traffic resulted from actions brought about by Teltran; in fact, most of the revenues were from consolidating the CNET acquisition as of June 1, 1999.
22. For the third quarter of 1999, Teltran issued a press release entitled, in part, "Company Reports Earnings Per Share of 5 Cents" and "Revenues Increase Nearly 500% During The Third Quarter." The press release, published on November 4, 1999, stated that Teltran had achieved strong, across-the-board growth, particularly from its expanding presence in broadband and Internet related services such as VOIP. The release quoted Lerner as stating: "revenues have dramatically increased each quarter reflecting increased demand for our products" and "we believe the quarter-to-quarter growth that has been reported thus far in 1999 reflects the direction in which the company is headed and we are confident this trend will continue as additional locations come online in the fourth quarter." This earnings release did not disclose that the revenues were generated due to the consolidation of CNET as of June 1, 1999, and, like the Form 10-Q, falsely characterized the revenues as internet telephony related, when in fact, the revenues were predominantly generated from 1-900 services.
23. During 1999, Teltran had no system to evaluate the collectibility of its accounts receivable balances. In fact, nobody from Teltran examined the receivables to determine whether they were collectible. Teltran's deficient internal controls resulted in a double-booked accounts receivable of $796,134 during the quarter ended September 30, 1999.
24. In April 1999, Teltran started an Internet website at www.teltran.com. Teltran included an investor-relations section on this site to provide shareholders and potential investors with information about the company, including all of Teltran's press releases and favorable reports written by third parties.
25. Between July and October 1999, Teltran published several reports written by Stockreporter.de, an online stock newsletter based in Germany, on the investor-relations section of its website. At the bottom of each report Teltran also included a hyperlink to the Stockreporter.de website, www.stockreporter.de. The reports also contained disclaimers indicating that Stockreporter.de had created the reports on an unsolicited basis for no compensation, and noted that Stockreporter.de would accept "no claim for any kind of warranty."
26. Nonetheless, by posting them on its website, Teltran adopted the Stockreporter.de reports. Several of these reports included false and misleading statements concerning the status of Teltran's AMEX application. For example, on July 12, 1999, Teltran republished a Stockreporter.de report on its website announcing that Teltran would be listed on the AMEX or NASDAQ "at the latest the end of September." A subsequent report was posted by Teltran on its website, entitled, in part, "Stockreporter.de discovers that Teltran is finally going to be listed at the major American Stock Exchange." The report stated that, "being listed on AMEX will massively influence the share price in a positive way" and noted interest in Teltran from institutional investors. On August 18, 1999, Teltran republished another report written by the Stockreporter.de. This report reiterated a strong buy recommendation due, in part, to Teltran's "imminent" listing on AMEX.
27. However, at the time Teltran republished these Stockreporter.de reports, Lerner knew or recklessly disregarded that Teltran did not meet AMEX's listing guidelines and had not received a favorable preliminary listing eligibility opinion. As a result, Teltran could not have been listed unless AMEX officials granted a waiver of its listing criteria. Such waivers had historically been granted to only about one-third of the companies needing one. In Teltran's case, AMEX officials had made numerous comments casting substantial doubts on Teltran's eligibility. Nonetheless, Teltran did not qualify the Stockreporter.de statements and materially misrepresented its potential listing status with AMEX.
28. The Stockreporter.de reports also contained stock price and earnings per share projections for fiscal 2000. For example, on July 6, 1999, Teltran republished a report entitled "Stockreporter.de analyzed huge new profit potentials for Teltran (TLTG) with a new price target of 60$ - 75$." On October 5, 1999, Teltran also republished a Stockreporter.de report estimating a year 2000 earnings per share of $2 - $5 for fiscal 2000. However, Lerner had no reasonable basis to permit Teltran to publish these projections.
29. In early 1999, Teltran began issuing press releases predicting that Teltran would generate $30 million in revenue and earn $.30 per share for 1999. One press release, dated March 24, 1999, quoted Lerner as stating "[w]ith our current contracts and others we have out for signature, it appears that my previous projection of $30 million in revenue with an earnings per share of $.30 will easily be met, if not exceeded." Another press release, dated April 23, 1999, quoted Lerner as stating "I am very comfortable with the 1999 and 2000 revenue and earnings projections published in the report as we fully expect to achieve our earnings per share estimate of $.30 for 1999 and $.65 for 2000."
30. On May 14, 1999, Teltran issued its first quarter earnings release which stated "we remain confident that we will meet or exceed our 1999 earnings projections of $.30 per share." Teltran reiterated this guidance on May 25, 1999, when it announced that the company had received another "strong buy" recommendation from Stock-Tipper.com, and stated, "we feel that TLTG can achieve revenue growth of $30 million and earn .30/share for 1999 (coming from zero growth)."
31. Despite numerous setbacks and delays in implementing its Internet telephony contracts, on August 16, 1999, Teltran issued an earnings release for quarter-ended June 30, 1999, that quoted Lerner as stating "we remain confident that we are on schedule to reach or exceed all previously announced projections." The next day, Teltran republished on its website a Stockreporter.de. report containing an interview between Stockreporter.de and Lerner, during which Lerner was asked if he was going to increase his $.30 earnings per share estimate for 1999. The release quoted Lerner as stating that he preferred to remain conservative in his estimates, but the possibility of exceeding them existed.
32. In September 1999, Teltran's investor-relations department e-mailed investors information confirming statements that had been made by Lerner. For example, on September 9, 1999, Teltran's investor-relations manager stated in an e-mail, "our projection was for 30 cents per share in 1999 and we continue to stand behind it." On September 16, 1999, the investor-relations manager also stated in an e-mail, "Teltran continues to stand behind all previously announced projections including earnings of 30 cents per share this year and $1 per share next year." As late as November 8, 1999, the investor-relations manager told an investor that "At present we still expect to meet all projections."
33. In mid-November 1999, Lerner found out that WorldCom, the owner of Ozemail, was selling its Internet telephony network to ITXC Corp. Because of this sale, Teltran could not continue to transmit calls because it had to modify its Internet telephony gateways to work on ITXC's system, which resulted in a delay of several months before it could recommence processing calls.
34. On November 29, 1999, Teltran issued a press release stating that CNET would run 3.5 million minutes of calls per month with Norweb Telecom beginning in December 1999. The next day, at the direction of Lerner, Teltran's investor-relations manager sent an e-mail about the ITXC deal to investors and told one of them that "there is no cause for concern. The effect is only positive for Teltran." In addition, on December 6, Teltran issued a press release stating that the ITXC acquisition of Ozemail "immediately accelerates Teltran's opportunities." It was not until March 23, 2000, when Teltran announced revenues of only $5.6 million for the year-ended December 31, 1999, that Teltran disclosed that the equipment and network transition resulted in a 60 to 90 day period where the equipment was operating at limited capacity.
35. Despite these statements and assurances, by June 30 and September 30, 1999, Teltran had only reported revenues of $540,179 and $2,807,749, respectively, more than $25 million short of its $30 million revenue projection. Teltran also continued to publish its outdated 1999 earnings guidance on its Internet website until April 2000.
36. Lerner sold 21,350 shares of Teltran stock between August 18, 1999, and November 29, 1999. Lerner sold these shares during a period when Teltran had not disclosed that it had improperly consolidated the acquisition of CNET as of June 1, 1999, and had not disclosed the financial impact of using this earlier effective date in its June 30, 1999, Form 10-QSB, its September 30, 1999, Form 10-Q or in the company's second and third quarter earnings releases published on August 17, 1999 and November 14, 1999. Lerner also sold these shares during a time period when Teltran was touting its prospects for an AMEX listing. It was not until December 20, 1999, that Teltran disclosed that AMEX had not approved its application and had not granted a waiver of its listing guidelines. Consequently, Lerner sold these shares while he knew or recklessly disregarded that Teltran had improperly consolidated the acquisition of CNET as of June 1, 1999, and that Teltran had not disclosed that it needed a waiver to become listed on AMEX. Lerner avoided losses on these sales of about $78,000.
37. Paragraphs 1 through 36 are realleged and incorporated herein by reference.
38. Section 17(a) of the Securities Act prohibits materially false or misleading statements or omissions in connection with the offer or sale of any security. A person violates this provision by intentionally or recklessly making material misstatements or omissions in Commission filings or in other statements disseminated to investors.
39. By reason of the foregoing, defendant violated Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)].
40. Paragraphs 1 through 39 are realleged and incorporated herein by reference.
41. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit materially false or misleading statements or omissions in connection with the purchase or sale of any security. A person violates these provisions by intentionally or recklessly making material misstatements or omissions in Commission filings or in other statements disseminated to investors.
42. By reason of the foregoing, defendant violated Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] promulgated thereunder.
43. Plaintiff realleges and incorporates herein by reference paragraphs 1 through 42 above.
44. Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder require issuers with securities registered under Section 12 of the Exchange Act to file annual and quarterly reports with the Commission and to keep this information current. The obligation to file such reports embodies the requirement that they be true and correct. Exchange Act Rule 12b-20 further requires that such reports contain any additional information necessary to ensure that the required statements in the reports are not, under the circumstances, materially misleading. Information regarding the financial condition of a company is presumptively material. Financial statements in a Commission filing that do not comply with GAAP are presumed to be misleading.
45. By reason of the foregoing, defendant aided and abetted Teltran's violations of Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Rules 12b-20, 13a-1, and 13a-13 [17 C.F.R. §§ 240.12b-20, 240.13a-1, and 240.13a-13] promulgated thereunder.
46. Plaintiff realleges and incorporates herein by reference paragraphs 1 through 45 above.
47. Section 13(b)(2)(A) of the Exchange Act requires Section 12 registrants to make and keep books, records, and accounts that accurately and fairly reflect the transactions and dispositions of their assets. Section 13(b)(2)(B) of the Exchange Act requires such registrants to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that, among other things, transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain the accountability of assets.
48. By reason of the foregoing, defendant aided and abetted Teltran's violations of Section 13(b)(2)(A) and Section 13(b)(2)(B) of the Exchange Act [15 U.S.C. § 78m(b)(2)(A) and 15 U.S.C. § 78m(b)(2)(B)] and violated Rule 13b2-1 [17 C.F.R. § 240.13b2-1] promulgated thereunder.
49. Plaintiff realleges and incorporates herein by reference paragraphs 1 through 48 above.
50. Section 13(b)(5) of the Exchange Act prohibits a person from knowingly circumventing or knowingly failing to implement a system of internal accounting controls or knowingly falsifying any book, record, or account.
51. By reason of the foregoing, defendant violated Section 13(b)(5) of the Exchange Act [15 U.S.C. § 78m(b)(5)].
(d) granting such other relief as this Court may deem just and proper.

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