DOB: Morton, Steven-Oxford Micro-FINE-CD Perm

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IN THE MATTER OF:

STEVEN G. MORTON ("MORTON")

OXFORD MICRO DEVICES, INC.
("OXFORD" or "OMDI")

    (Collectively "Respondents")

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FINDINGS OF FACT,
CONCLUSIONS OF
LAW AND ORDER

DOCKET NO. CF-2006-6859-S

I.  FINDINGS OF FACT

1.) The Banking Commissioner (“Commissioner”) is charged with the administration of Chapter 672a of the Connecticut General Statutes, the Connecticut Uniform Securities Act (“Act”), and the regulations promulgated thereunder (Sections 36b-31-2 to 36b-31-33, inclusive, of the Regulations of Connecticut State Agencies) (“Regulations”).
2.) On November 22, 2006, the Commissioner issued an Order to Cease and Desist (“Order”), Notice of Intent to Fine (“Fine Notice”) and Notice of Right to Hearing (collectively “Notice”) against Respondents.  (Ex. DOB 2.)
3.) On November 22, 2006, the Notice was sent by registered mail, return receipt requested, to Steven G. Morton, 39 Old Good Hill Road, Oxford, Connecticut 06478, registered mail no. RB028033264US; Oxford Micro Devices, Inc., Lantern Ridge Office Park, 731 Main Street, Building 2, Suite 3B, P.O. Box 648, Monroe, Connecticut 06468, registered mail no. RB028033278US; and William J. Sarris, Agent, 273 Canal Street, Suite 100, Shelton, Connecticut 06484, registered mail no. RB028033304US.  (Ex. DOB 2.)
4.) The Notice asserted that:
 
a. Morton is an individual whose last known address is 39 Old Good Hill Road, Oxford, Connecticut 06478; and Oxford is a Delaware corporation with its last known business address as Lantern Ridge Office Park, 731 Main Street, Building 2, Suite B3, Monroe, Connecticut 06468.
b. At all times relevant hereto, Morton was President of Oxford.
c. From at least August 1999 to May 2002, Oxford was an issuer of securities in the form of stock and warrants (“Oxford Securities”).
d. Between August 1999 and October 2000, Morton, on behalf of Oxford, offered and sold Oxford Securities to at least one Connecticut investor and several out-of-state investors, raising over $1.2 million in capital.
e. Oxford Securities were not registered under Section 36b-16 of the Act, nor had any exemption or notice filings been filed with the Securities and Business Investments Division of the State of Connecticut Department of Banking (“Department”) prior to the offer and sale of such Oxford Securities.
f. Between August 1999 to October 2000, Respondents, in connection with the offer and sale of Oxford Securities to at least one investor, failed to disclose the market risks of investing in Oxford and distributed a business plan forecasting net income of $9.7 million in Year 3, $17.0 million in Year 4, and $24.4 million in Year 5, without providing a reasonable basis for such projections.
g. Also between August 1999 and October 2000, in connection with the offer and sale of Oxford Securities, Morton, on behalf of Oxford, stated to at least one investor that Oxford would have an initial public offering (“IPO”) within a year from purchase.
h. Between March 2001 and August 2001, Morton, on behalf of Oxford, continued to solicit at least one investor to buy additional Oxford Securities.  By letter dated March 23, 2001, Morton, on behalf of Oxford, repeated that there was a possibility of Oxford having an IPO in the next two years and forecasted that Oxford would earn millions of dollars in profits during the next year.  Subsequently, by letter dated July 30, 2001, Morton, on behalf of Oxford, informed the investor that Oxford had signed a deal with a company that makes security systems for casinos in order to “supply them with large quantities of Ax36™–based video compression boards”, that there was “potential for OMDI to sell them 100,000 of our Ax36™–based video compression boards per year at a price of $500 each”, and that “they are paying us $250,000 in cash and their stock to develop a board” (“Casino Deal”).
i. At no time relevant hereto did Respondents inform the investor that the Casino Deal had fallen through and that Oxford never received $250,000 in cash and stock from the Casino Deal.  In addition, Respondents never provided the investor with any basis for Oxford’s favorable financial statement projections or complete and full disclosure concerning Oxford’s potential IPO.
j. On March 15, 2005, the Securities Division of the State of Washington Department of Financial Institutions ordered Respondents to cease and desist from violating the security registration, anti-fraud and broker-dealer and securities salesperson registration provisions of the Washington securities laws.
(Ex. DOB 2.)
5.) The Notice asserted that the conduct of Respondents constitutes, in connection with the offer, sale or purchase of Oxford Securities, directly or indirectly, employing a device, scheme or artifice to defraud; making any untrue statement of a material fact or omitting to state a material fact necessary in order to make statements made, in light of the circumstances under which they were made, not misleading or engaging in an act, practice or course of business that operates as a fraud or deceit upon investors.  Such conduct was in violation of Section 36b-4(a) of the Act, which constitutes a basis for an order to cease and desist to be issued against each Respondent under Section 36b-27(a) of the Act and for the imposition of a fine against each Respondent for one violation under Section 36b-27(d) of the Act prior to October 1, 2003.  (Ex. DOB 2.)
6.) The Notice asserted that Respondents offered and sold unregistered securities, which securities were not registered in Connecticut under the Act, in violation of Section 36b-16 of the Act.  Such violation constitutes a basis for an order to cease and desist to be issued against each Respondent under Section 36b-27(a) of the Act, as amended, and for the imposition of a fine against each Respondent for one violation under Section 36b-27(d) of the Act prior to October 1, 2003.  (Ex. DOB 2.)
7.) In the Notice the Commissioner ordered that Respondents cease and desist from directly or indirectly violating the provisions of the Act, including without limitation:  (1) employing a device, scheme or artifice to defraud, making of any untrue statement of a material fact or omitting to state a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading, or engaging in an act, practice or course of business that operates as a fraud or deceit upon any person; and (2) offering and selling unregistered securities.  (Ex. DOB 2.)
8.) In the Notice the Commissioner notified Respondents that they could request a hearing concerning the allegations set forth in the Notice.  (Ex. DOB 2.)
9.) The Notice stated that a hearing would be granted to Respondents if a written request for a hearing was received by the Department within fourteen (14) days following its receipt of the Order.  (Ex. DOB 2.)
10.) The Notice stated that the Order shall remain in effect and become permanent against Respondents if they did not request a hearing within the prescribed time period.  (Ex. DOB 2.)
11.) The Fine Notice stated that the Commissioner intended to impose a fine against Respondents, that a hearing would be held on the matters alleged in the Fine Notice on January 23, 2007 (“Fine Hearing”), and that if Respondents failed to appear at the Fine Hearing, the Commissioner may order that a maximum fine of Twenty Thousand Dollars ($20,000) be imposed on Morton and a maximum fine of Twenty Thousand Dollars ($20,000) be imposed on Oxford.  (Ex. DOB 2.)
12.) On December 6, 2006, Steven G. Morton filed an Appearance and Request for Hearing dated December 4, 2006, on behalf of Respondents.  (Ex. DOB 2.)
13.) On December 11, 2006, the Commissioner issued a Notification of Hearing and Designation of Hearing Officer.  (Ex. DOB 2.)
14.) Pursuant to the Notification of Hearing and Designation of Hearing Officer, Attorney William Nahas, Jr., was appointed Hearing Officer.  (Ex. DOB 2.)
15.) By letter dated January 3, 2007, Hearing Officer Nahas rescheduled the hearing to February 27, 2007.  (Ex. DOB 2.)
16.) On February 13, 2007, Respondents filed a Motion to Dismiss.  (Ex. DOB 6.)
17.) On February 20, 2007, Hearing Officer Nahas denied Respondents’ Motion to Dismiss.  (Ex. DOB 7.)
18.) By letter dated February 27, 2007, Hearing Officer Nahas rescheduled the hearing to April 24, 2007.  (Ex. DOB 3.)
19.) On March 26, 2007, the Commissioner issued a Redesignation of Hearing Officer, which appointed Paul A. Bobruff, Principal Attorney, as Hearing Officer.  (Ex. DOB 1.)
20.) On April 10, 2007, Respondents submitted a corporation resolution from Oxford authorizing Maureen White Morton, CFO and Director of Oxford, to represent Oxford in the hearing.  (Ex. DOB 4.)
21.) On April 16, 2007, the Commissioner issued a Redesignation of Prosecuting Attorney, which added Nirja Savill, Principal Attorney, as a Prosecuting Attorney.  (Ex. DOB 5.)
22.) The hearing was held on April 24, April 25, April 26, April 27, May 7, May 8, May 15, May 16, May 22, May 30, June 26, June 28, and July 3, 2007, at the Department.  (Tr. April 24, 2007, Volume 1 (“Tr. 1”); Tr. April 25, 2007, Volume 2 (“Tr. 2”); Tr. April 26, 2007, Volume 3 (“Tr. 3”); Tr. April 27, 2007, Volume 4 (“Tr. 4”); Tr. May 7, 2007, Volume 5 (“Tr. 5”); Tr. May 8, 2007, Volume 6 (“Tr. 6”); Tr. May 15, 2007, Volume 7 (“Tr. 7”); Tr. May 16, 2007, Volume 8 (“Tr. 8”); Tr. May 17, 2007, Volume 9 (“Tr. 9”); Tr. May 22, 2007, Volume 10 (“Tr. 10”); Tr. May 30, 2007, Volume 11 (“Tr. 11”); Tr. June 26, 2007, Volume 12 (“Tr. 12”); Tr. June 28, 2007, Volume 13 (“Tr. 13”); Tr. July 3, 2007, Volume 14 (“Tr. 14”).)
23.) Morton appeared at the hearing on his own behalf.  (Tr. 1 at 2; Ex. DOB 2.)
24.) Maureen White Morton appeared at the hearing on behalf of Oxford.  (Tr. 1 at 2; Ex. DOB 4.)
25.) Attorneys Stacey Serrano Sarlo and Nirja Savill appeared at the hearing on behalf of the Department.  (Tr. 1 at 2; Ex. DOB 5.)
26.) Oxford Computer, Inc., was incorporated in Delaware in 1991.  (Tr. 5 at 82; Exs. A and M.)
27.) Oxford Computer, Inc., changed its name to Oxford Micro Devices, Inc., in 1997. (Tr. 5 at 83; Ex. A.)
28.) Oxford is a Delaware corporation whose principal place of business between August 1999 and May 2002 was Lantern Ridge Office Park, 731 Main Street, Bldg. 2, B3, Monroe, Connecticut.  (Exs. A, M, P1-P32, Q, R, HHH, MMM, Respondent (“Resp.”). 10 and Resp. 12.)
29.) Morton was the CEO and co-founder of Oxford.  Morton was employed as the Chief Executive Officer and Chief Technical Officer of Oxford between 1998 and 2002.  (Exs. YYY, Resp. 10, Resp. 39 and Resp. 93.)
30.) Morton was also employed as President of Oxford from at least January 1, 1998, through at least February 2001.  (Tr. 2 at 141-42; Exs. M, Q, R, YY, Resp. 39 and Resp. 93.)
31.) During 1997 and 1998, Oxford employed Attorney Duane Berlin of Lev, Berlin and Dale, PC.  Attorney Berlin prepared a Stock and Warrant Purchase Agreement, a brief capitalization table prepared as of May 31, 1998, regarding Oxford and a stock certificate for Oxford.  (Tr. 11 at 46-52, 54 and 60; Exs. Resp. 82 and Resp. 90.)
32.) Attorney Berlin did not make any filings with the Department regarding Oxford, and Morton had no knowledge of any other services that Attorney Berlin provided for Oxford other than those items for which Oxford was billed by Attorney Berlin.  (Tr. 11 at 54, 60 and 67; Exs. Resp. 82 and Resp. 90.)
33.) After 1998, Respondents provided documents to investors and received funds directly rather that going through an attorney.  (Tr. 11 at 76.)
34.) Oxford prepared a document entitled “Business Plan for Oxford Micro Devices Inc., a semiconductor company making image processing as common as word processing because Images are Everywhere!”, dated December 1, 1998 (“December 1, 1998 Business Plan”), which had extensive future financial forecasts predicting sales of $5 million by year 2, and sales of $39 million in year 3, and was always available to investors upon request, but was not distributed to investors.  (Tr. 6 at 114, Tr. 12 at 76-78 and 83 and Tr. 14 at 18-19; Ex. YY.)
35.) In early 1998, two investors were provided with an earlier version of the December 1, 1998 Business Plan, which contained financials for the years 1994 to 1997.  The only substantial differences between the two versions of the business plan were the date of the document and the location of Oxford, which was located in Shelton, Connecticut, and subsequently moved to Monroe, Connecticut.  (Tr. 10 at 180-81, Tr. 12 at 77 and Tr. 14 at 19.)
36.) In 1998, Oxford’s sales were $69,026 and Oxford had a net loss of $522,631.  (Tr. 1 at 98 and Tr. 4 at 71; Ex. E.)
37.) In the fall of 1999, Oxford retained Attorney David Sass of McLaughlin & Stern, LLP to help Oxford go public when appropriate.  (Tr. 11 at 59 and 78.)
38.) Oxford did not receive an engagement letter from Attorney Sass.  (Tr. 11 at 79.)
39.) McLaughlin & Stern, LLP worked on the “Product Development and Purchase Agreement” between Oxford and GloLinuaer Computer Systems, Inc., reviewed a version of Oxford’s business plan, advised Morton to write the addendum to the Stock and Warrant Purchase Agreement and reviewed the Addendum to Stock and Warrant Purchase Agreement.  (Tr. 11 at 80 and 97; Ex. Resp. 92.)
40.) From August of 1999 to October 2000, Respondents sold more than $1.2 million of Oxford Securities to 34 investors, including eight Connecticut investors.  Morton solicited individuals to invest in Oxford Securities and signed the Stock and Warrant Purchase Agreements as President of Oxford and CEO of Oxford.  (Tr. 1 at 76 and 80 and Tr. 2 at 156-57, 164-66 and 183; Exs. B, C, O, P1-P32 and Z.)
41.) Respondents continued to offer Oxford Securities to individuals in Connecticut and other states until at least May 2002.  (Exs. YYY and Resp. 10.)
42.) The Oxford Securities were not registered with the Department.  (Tr. 2 at 180.)
43.) There were no exemption or registration filings made with the Department on behalf of Oxford prior to January 31, 2001.  (Tr. 11 at 120.)
44.) On January 31, 2001, Oxford, through McLaughlin & Stern, LLP, made a Rule 504 of Regulation D (17 C.F.R. § 230.504) (“Rule 504”) filing, which had been signed by Morton on January 22, 2001, with the Department and the Securities and Exchange Commission (“SEC”).  (Tr. 2 at 181-83 and 190-91; Exs. Q and T.)
45.) On February 8, 2001, Oxford, through McLaughlin & Stern, LLP, made a Rule 506 of Regulation D (17 C.F.R. § 230.506) (“Rule 506”) filing with both the Department and the SEC.  (Tr. 4 at 5-11; Exs. R and JJ.)
46.) Morton was the principal officer of Oxford who offered and sold the Oxford Securities from August 1999 through May 2002.  (Tr. 2 at 141 and 180 and Tr. 4 at 13-17; Exs. LL and MM.)
47.) Several of the individuals who invested in Oxford in 1999, were former high school classmates of Morton and first learned of the investment when Morton contacted them to discuss investing in Oxford or from other classmates.  (Tr. 1 at 41-42, 56, 58 and 61 and Tr. 3 at 5.)
48.) During 1999 and 2000, Morton, on behalf of Oxford, provided individuals interested in investing in Oxford with a summary business plan for Oxford, of which there were several versions, and a Stock and Warrant Purchase Agreement.  (Tr. 1 at 47, 49-50, 74 and 167, Tr. 3 at 15, 19, 62, 74 and 153, Tr. 6 at 12; Tr. 12 at 130 and Tr. 13 at 117; Exs. A, C, Y, XX, HHH, MMM, UUU-2, Resp. 1 and Resp. 60.)
49.) The business plans prepared by Morton, on behalf of Oxford, were produced in Microsoft word and the financial statements prepared by Morton were produced using a Lotus 1, 2, 3 spreadsheet, and as a result they were two separate documents.  (Tr. 12 at 114; Exs. A, C, Y, XX, HHH, MMM, UUU-2, Resp. 1 and Resp. 60.)
50.) During 1999 and 2000, several investors received a summary business plan for Oxford which did not contain Oxford financials.  These investors did not receive Oxford financials prior to investing.  (Tr. 1 at 58-59, 61, 93, 97 and 172, Tr. 3 at 18, 21 and 39-42 and Tr. 6 at 13, 29 and 72; Exs. A, HHH and UUU-2.)
51.) Morton, on behalf of Oxford, sent a cover letter dated July 27, 1999, to at least one individual prior to his investment as part of an offer to buy Oxford Securities which enclosed a document entitled “Summary Business Plan for Oxford Micro Devices, Inc. and its Internet chip division, VisualChips.com, taking the Internet to the next level” dated July 27, 1999 (“July 27, 1999 Business Plan”).  (Tr. 4 at 7-8, Tr. 9 at 142-45 and Tr. 10 at 9; Ex. Resp. 51.)
52.) In the July 27, 1999, cover letter Morton summarized the private stock offering and stated “[w]e anticipate, but cannot guarantee, going public next year and doing a stock split prior to the IPO.”  (Tr. 9 at 145; Ex. Resp. 51.)
53.) An individual who purchased Oxford Securities on August 5, 1999, received the July 27, 1999, cover letter and the July 27 1999 Business Plan prior to his investment in Oxford.  (Tr. 4 at 7-8 and 47, Tr. 10 at 9 and Tr. 12 at 60; Exs. O, Resp. 51 and Resp. 60.)
54.) Oxford also created a document entitled “Summary Business Plan for Oxford Micro Devices, Inc. and its Internet chip division, VisualChips.com, taking the Internet to the next level” dated July 30, 1999 (“July 30, 1999 Business Plan”), which was substantially the same as the July 27, 1999 Business Plan, and provided it to investors.  (Tr. 4 at 58 and Tr. 10 at 142-43; Ex. XX)
55.)
Oxford’s July 27, 1999 Business Plan and July 30, 1999 Business Plan stated, in part, that:
 
“We are building a major Internet chip company specializing in image processing chips and plan to take it public next year.”  (Exs. XX at 2 and Resp. 60 at 2.)
 
With expected gross margins in excess of fifty percent and many years of difficult hardware, software tools’ and system-level development now behind us, we expect to produce large sales and high profitability in the near term with minimal investment. . . .
 
We are now at the pre-mezzanine stage where we have customers who could place multi-million dollar orders but we need more financial resources to help close and support these sales.  With our current resources, we are focusing our efforts on a small number of prospects and customers.”  (Exs. XX at 3 and Resp. 60 at 3.)
 
“Our marketing, sales and support resources are limited so we are currently limiting our efforts to working with a few potential major customers and corporate partners.  The resulting design wins could total more than several hundred thousand of our chips next year and several million in 2001.  Potential volume per customer ranges from 10,000 to 1,000,000+ of our chips per year.”  (Exs. XX at 4 and Resp. 60 at 4.)
 
“We expect sales next year to be many, many times our sales in 1999.”  (Ex. XX at 9 and Resp. 60 at 9.)
 
“We are seeking a fourth round of up to $1M from individual investors while we obtain a fifth round of $5-8M from corporate and institutional sources.  These funds will be used to expand our marketing and sales, develop follow-on products, finance inventory and prepare for an IPO next year.  Our objective is to provide a ten-fold return to investors over the next few years.  We have relatively few shares outstanding and expect to do a stock split before we go public.  Details of our fourth round stock offering are given in our Stock and Warrant Purchase Agreement.”  (Exs. XX at 9 and Resp. 60 at 10.)
56.) The July 27, 1999 Business Plan and July 30, 1999 Business Plan did not address what would occur if Oxford did not receive an investment of $10 million.  (Exs. XX and Resp. 60.)
57.) Respondents provided a document entitled “Summary Business Plan for Oxford Micro Devices, Inc. THE Internet Imaging Chip Company, taking the Internet to the next level” dated September 3, 1999 (“September 3, 1999 Business Plan”), to at least two individuals prior to their investment in Oxford in 1999.  (Tr. 1 at 42 and Tr. 3 at 13; Ex. A.)
58.)
Oxford’s September 3, 1999 Business Plan stated, in part, that:
 
“We will profit from both the sales of our products and the on-going use of them in key applications.”  (Ex. A at 2.)
 
With many years of difficult hardware, software tools’ and systems-level development now behind us, we expect to produce sales of tens of millions of dollars and high profitability in the near term with minimal investment.”  (Ex. A at 3.)
 
“We are now at the pre-mezzanine stage where we have customers who could place multi-million dollar orders, but we need more financial resources to help close and support these sales.  With our current resources, we are focusing our efforts on a small number of prospects and customers who have large potential and/or strategic value.”  (Ex. A at 3.)
 
“To help . . . prepare for an IPO . . . we launched a phenomenally successful marketing campaign. . . .
 
Our marketing, sales and support resources are limited so we are currently limiting our efforts to working with a few potential major customers and corporate partners in both Internet and non-Internet applications.  The resulting design wins could total more than several hundred thousand of our chips next year and several million in 2001.  Potential volume per customer ranges from 10,000 to 1,000,000+ of our chips per year.”  (Ex. A at 4.)
 
“We are forming an external organization . . . .  We believe this organization will provide another source of development capital for us as well as continuing visibility as we lead up to our IPO.  (Ex. A at 6.)
 
“Sales to date in 1999 have been small as we sell evaluation boards and small quantities of our chips to customers who are beginning to design our chips into their products and who are beginning to work with us to jointly develop and use our next generation of products. . . . We expect sales next year to be many, many times our sales in 1999.
 
We are seeking a fourth round of up to $1M from individual investors while we obtain a fifth round of up to $10M from corporate and institutional sources.  These funds will be used to expand our marketing and sales, develop follow-on products, finance inventory and prepare for an IPO next year.
 
As THE Internet Imaging Chip Company, we believe we can provide a far greater return over the next few years than our original objective of a ten-fold return as a conventional chip company.
 
We have relatively few shares outstanding and expect to do a stock split before we go public.  Details of our fourth round stock offering are given in our Stock and Warrant Purchase Agreement.”  (Ex. A at 11.)
59.) Oxford’s September 3, 1999 Business Plan did not address what would occur if Oxford did not receive $1 million from individual investors or $10 million from corporate institutional sources.  (Tr. 1 at 50-51 and 54-62, Tr. 3 at 18-29, 113-14 and 120-21 and Tr. 4 at 112-16; Ex. A.)
60.) During conversations with individuals in October 1999 regarding making an investment in Oxford, Morton told investors prior to their purchase of Oxford Securities that Oxford would be going public within a year.  (Tr. 1 at 58, 78 and 102, Tr. 2 at 51 and Tr. 3 at 39 and 164.)
61.) Morton also told at least one investor prior to his purchase of Oxford Securities that Oxford stock would go up seven to nine times at the time of the IPO.  (Tr. 1 at 119-20.)
62.) Morton routinely talked to investors about NeoMagic Corporation (“NeoMagic”), which had a market capitalization of $388 billion, regarding the way the semiconductor business works.  Morton used NeoMagic as an example of the growth a company could have in terms of the fabless semiconductor industry with minimal investment.  Morton, using NeoMagic as an example, informed investors that it did not take a tremendous amount of capital to increase sales from $500,000 one year to $44 million the next year.  (Tr. 10 at 29-30 and 92-93.)
63.) Morton based his financial projections on his understanding of the way the fabless semiconductor industry works.  Morton did not disclose that NeoMagic had a lot of capital and that NeoMagic’s monumental increase in sales gave them the wherewithal for going public.  (Tr. 7 at 109, Tr. 10 at 40 and 99-101.)
64.) One of the main factors that persuaded at least one individual to invest in Oxford was Morton’s promise that Oxford would be going public within a year.  (Tr. 1 at 58, 78 and 102 and Tr. 2 at 51 and 116.)
65.) Morton knew that the ability of Oxford to go public in an IPO depended upon a number of factors.  These factors included, the financial markets being receptive, the level of sales and profitability that Oxford achieved at a particular point in time and what the next time period might bring in terms of changes in sales levels and changes in profitability.”  (Tr. 7 at 35 and 118.)
66.) Respondents did not disclose in communications with investors or in the Oxford business plans distributed to investors that a potential IPO was dependent on these factors.  (Tr. 12 at 46-47.)
67.) Morton initially thought Oxford could go public in the following year, basically twelve months out.  As time passed, Morton told people progressively longer periods, two to three years out.  (Tr. 9 at 125-27.)
68.) Oxford’s various business plans stated that Respondents were seeking a fourth round of up to $1 million from individual investors or angels while they obtained a fifth round of from corporate and institutional sources of $5-8 million or $10 million depending on the business plan.  The earlier business plans stated that these funds will be used to expand our marketing and sales, develop follow-on products, finance inventory and prepare for an IPO next year, and the later business plans stated the primary use of these funds will be marketing and sales.  (Exs. A at 11, XX at 9, HHH at 14 and Resp. 60 at 10.)
69.) Morton considered the single biggest risk causing businesses to fail is failure to raise the money to execute the business plan, and Oxford’s business plan was contingent on raising the amount of money they said they needed.  (Tr. 8 at 76.)
70.) Respondents’ communications with potential investors or investors did not address what would occur if Oxford did not receive the financing it was seeking in the fourth and fifth round of financing.  (Tr. 10 at 42.)
71.) At least one individual’s decision to invest in Oxford was based on Oxford’s September 3, 1999 Business Plan, conversations with Morton and information downloaded or e-mailed to the investor.  (Tr. 3 at 175.)
72.) The business plans provided to investors by Respondents do not state that the ability to do an IPO was dependent on the sales and profitability of Oxford, because Morton considered that obvious.  (Tr. 9 at 40 and 46; Exs. A, XX, HHH, YYY, Resp. 10 and Resp. 60.)
73.) Morton was aware that there was a lengthy process from the time customers buy an evaluation board to the determination of whether or not an initial evaluation order would go into production, and that there was a long sales cycle of 18 to 24 months for products.  (Tr. 12 at 47 and 98.)
74.) Morton based his financial projections on selling 3 to 4 million chips and potential volume per customer of 10,000 to 100,000 chips per year and receiving a certain amount of capital.  Morton only provided information to investors at the “highest level”.  (Tr. 8 at 49 and Tr. 12 at 49, 95-96 and 102.)
75.) Morton did not disclose in the business plans the 18 to 24 month sales cycle and that there were contingencies such as raising sufficient capital and hiring sufficient people to be able to accomplish his projected sales volume because he believed that anyone who knows anything about the sales cycle of major companies buying components realizes it was not an overnight function.  (Tr. 12 at 47-48.)
76.) In 1999 Oxford sales were $22,155 and Oxford had a net loss of $422,606.  (Tr. 1 at 98 and Tr. 4 at 71; Ex. E.)
77.) Respondents provided a document entitled “Business Plan for Oxford Micro Devices, Inc., the Civic-minded Internet Imaging Solutions Company” dated February 24, 2000 (“February 24, 2000 Business Plan”), to at least one individual prior to his investment in Oxford in 2000.  (Tr. 6 at 7-8 and 12-13; Ex. HHH.)
78.)
The February 24, 2000 Business Plan stated, in part, that:
 
“Unlike a traditional microchip company that only profits one way, when it sells a chip, we will profit two ways.  First we will sell our products at a relatively low prices (our typical chip will sell for $10 each in million-unit quantities) but at good margins (50% to 60%).  This alone, would make us a highly profitable business and fuel a market capitalization in the billions of dollars.
 
In addition . . . we will also profit from the on-going use of our products.  They will pay us annuities.  We foresee tens of millions of transactions being made daily using our chips and firmware in security applications . . . .  A net fee of only a penny per transactions would result in hundreds of millions of dollars in additional revenues to us and fuel a market capitalization for us in the tens of billions of dollars.”  (Ex. HHH at 2.)
 
Many years of difficult hardware, software tools’ and systems-level development are now behind us.  Numerous inventions have been made and patents are being issued. . . . The majority of the funds raised will support marketing and sales, not R&D.  We expect to produce sales of several million dollars within twelve months of our obtaining financing, and to become quite profitable and produce $25 million in sales within twenty-four months.
 
For this we need an investment of $10 million, staged $5M and $5M.”  (Ex. HHH at 3.)
 
“Currently, our marketing, sales and support resources are limited so we are limiting our efforts to working with a few manufacturers in both Internet and non-Internet applications.  The resulting design wins could total a hundred thousand of our chips within 12 months of our receiving financing and several million within 24 months.
 
Potential volume per manufacturer ranges from 10,000 to 1,000,000+ of our chips per year.”  (Ex. HHH at 4.)
 
“We incurred small losses in 1997 to 1999 as we completed several fundamental parts of our software tools and evaluation boards, began building a brand name, began marketing our A236 Chip, began developing applications for the A236, and started work on our next-generation products, the A336/A436, with two major potential partners.”  (Ex. HHH at 12.)

“We have a very simple capital structure.  We very little debt, an accrued liability of about $750K as of July 1, 1999 and only one class of stock, Class A Common Voting Stock.
 
We are seeking a fourth round of up to $1M from angels while we obtain a fifth round of $10M from corporate and institutional sources.  The $10M can be staged at $5M and $5M.
 
The primary use of these funds will be marketing and sales. . . .
 
[W]e believe we can provide a far greater return over the next few years than the original objective of a ten-fold return as a conventional chip company.
 
We have relatively few shares outstanding and expect to do a stock split before going public.  Details of our fourth round stock offering are given in our Stock and Warrant Purchase Agreement.”  (Ex. HHH at 14.)
79.) Under the caption “Financials” the February 24, 2000 Business Plan stated that financials are “[a]vailable on request under Non-Disclosure Agreement.”  (Ex. HHH at 14.)
80.) The February 24, 2000 Business Plan did not contain financial statements.  (Ex. HHH.)
81.) At least one investor who received the February 24, 2000 Business Plan did not sign the nondisclosure agreement and did not receive Oxford’s financial statements.  (Tr. 6 at 29 and 72.)
82.) The February 24, 2000 Business Plan did not address what would occur if Oxford did not receive an investment of $10 million staged $5 million and $5 million.  (Tr. 6 at 76; Ex. HHH.)
83.) After reviewing the materials regarding the investment provided by Respondents and conversations with Morton, investors that had decided to invest would receive a Stock and Warrant Purchase Agreement to execute.  (Tr. 1 at 66-67, 78-80, 118-20 and 122-26, Tr. 3 at 37-41, 47-49 and 152-53, Tr. 4 at 17 and Tr. 6 at 6-9, 16-17 and 83-84.)
84.) The Stock and Warrant Purchase Agreements which were executed by investors in Oxford specified the price of shares of Oxford stock, the existence of a warrant to purchase additional shares and the price of the warrant.  (Tr. 1 at 66 and Tr. 3 at 172-74; Exs. C, Y, Z and P1-P32.)
85.)
The Stock and Warrant Purchase Agreement provided to investors from August 1999 through July 2000 under the heading “REPRESENTATIONS AND WARRANTITES OF BUYER” included a disclaimer stating:
 
“Buyer also hereby represents to the Company that he/she/it has experience in investing in high risk situations and has had an opportunity to review documentation provided by the Company and to ask questions of Company’s management.  Buyer recognizes that an investment in the Company may result in the complete loss of the investment.”  (Exs. C at 5, P2-P10 at 5, P12-P20 at 5, Y at 6 and Z at 4.)
 
“Buyer also recognizes that documentation provided by Company may contain forward-looking statements.  In some cases one can identify forward-looking statements by terminology such as ‘may,’ ‘will,’ ‘should,’ ‘potential,’ ‘continue,’ ‘expects,’ ‘anticipates,’ ‘intends,’ ‘plans,’ ‘believes,’ ‘estimates’ and similar expressions.  These statements are based on Company’s current beliefs, expectations and assumptions and are subject to a number of risks and uncertainties that may change at any time and without notice.  Actual results and events may vary significantly from those discussed in the forward-looking statements.”  (Exs. C at 6, P2-P10 at 6, P12-P20 at 6, Y at 6-7 and Z at 4-5.)
86.)
The Stock and Warrant Purchase Agreement provided to investors from August 2000 through October 2000 under the heading “REPRESENTATIONS AND WARRANTITES OF BUYER” included a disclaimer stating:
 
“Buyer also hereby represents to the Company that he/she/it is an accredited investor, has experience in investing in high risk situations and has had an opportunity to review documentation provided by the Company and to ask questions of Company’s management.  Buyer recognizes that an investment in the Company may result in the complete loss of the investment.”  (Exs. P21-P32 at 4-5.)
 
“Buyer also recognizes that documentation provided by Company may contain forward-looking statements.  In some case one can identify forward-looking statements by terminology such as ‘may,’ ‘will,’ ‘should,’ ‘potential,’ ‘continue,’ ‘expects,’ ‘anticipates,’ ‘intends,’ ‘plans,’ ‘believes,’ ‘estimates’ and similar expressions.  These statements are based on Company’s current beliefs, expectations and assumptions and are subject to a number of risks and uncertainties that may change at any time and without notice.  Actual results and events may vary significantly from those discussed in the forward-looking statements.”  (Exs. P21-P32 at 5.)
87.) The Stock and Warrant Purchase Agreements provide details of the fourth round offering.  (Tr. 3 at 173.)
88.) In October 2000, Morton distributed to investors an Addendum to Stock and Warrant Purchase Agreement that stated, “[w]e are taking the first steps toward preparing for an IPO.”  (Tr.1 at 78 and Tr. 3 at 65; Exs. C at 1, P1-P10 at 1, P12-P20 at 1 and CC.)
89.) Oxford received last of its investment capital in approximately October 2000.  (Tr. 11 at 45.)
90.) In an e-mail responding to an investor’s e-mail inquiry regarding making the IPO, Morton responded “[n]o date set yet.  Maybe a year.  Am meeting with our securities counsel in NYC on Wednesday about it.”  (Tr. 9 at 123; Ex. Resp. 52.)
91.) In 2000, Oxford sales were $26,655 and Oxford had a net loss of $615,915.  (Tr. 1 at 98 and Tr. 4 at 71; Ex. E.)
92.) During the period 1998 through 2000, Oxford only sold sample quantities for evaluation, approximately 15 A236 evaluation boards with chips, but no production orders followed.  (Tr. 12 at 96-98 and 100-03; Ex. Resp. 33.)
93.) Oxford employed Michael Isenberg (“Isenberg”) to provide investor relations services to investors in Oxford from July 15, 2000, for 10 months.  (Tr. 10 at 136 and 169; Ex. Resp. 22.)
94.) In February 2001, Oxford breached its employment agreement with Morton when it deferred payment of his salary to conserve funds.  (Tr. 5 at 29 and Tr. 9 at 77; Ex. CCC.)
95.) On February 12, 2001, Isenberg drafted an e-mail regarding a meeting he had with Morton about Oxford, including the fact that Oxford had enough cash for the next 18 months at the present burn rate.  (Tr. 4 at 22-24 and Tr. 10 at 144; Ex. Resp. 5.)
96.) On February 12, 2001, Morton responded to Isenberg regarding Isenberg’s proposed e-mail to investors stating, in part, that “[y]ou should have opened with a strong positive statement. . . . You pose everything in the negative -- ‘depressed sector’, ‘no orders of significance’, ‘credibility’ -- no one likes to read negative news, it obscures the good news”.  Morton told Isenberg to communicate to investors, “Oxford is doing a wonderful job in a difficult market on a small amount of money.”  (Tr. 4 at 23-24; Ex. OO.)
97.) On February 12, 2001, Isenberg sent out two investor updates, which included Morton’s proposed revisions, to 17 of the approximately 40 investors in Oxford.  (Tr. 8 at 140 and Tr. 10 at 140-42 and 147; Ex. Resp. 75.)
98.) Morton, on behalf of Oxford, sent an investor a letter dated March 23, 2001, in response to an inquiry about the potential return on investment from the investor’s current and any future investment in Oxford.  (Tr. 1 at 131-33, Tr. 2 at 39-45 and Tr. 12 at 125; Ex. K.)
99.)
Morton’s March 23, 2001, letter states, in part, that:

“My forecast is that next year, OMDI can earn (after tax) $7 million, assuming we raise the additional capital we need etc.  Using a trailing PE of 50 (the lower figure given above), we would achieve a valuation of $350 million in two years’ time.  If you back this down to today, even using a large discount figure of 50% per year, OMDI’s present value is $87 million – a valuation that is far more than you paid, and, you received options in addition to the stock, effectively lowering the price you paid even more.
 
So, if OMDI were to go public in two years, the company would have increased in value by about 12 times compared to the valuation of the company when you invested. . . . We expect a dilution of about 20% to raise the additional capital we need, reducing your gain to 0.8 x 17x = 13.6x over a three-year period.  If you hold your investment longer, we foresee (but do not guarantee) a gain of 20x or more over a five-year period – surely making your investment in OMDI the most profitable investment you ever made.”  (Ex. K at 1-2.)
100.) Oxford had no orders of significance at the time of the March 23, 2001, letter.  (Tr. 4 at 22-24 and Tr. 10 at 144-45; Exs. OO, Resp. 5 and Resp. 75.)
101.) In June 2001, Morton, on behalf of Oxford, signed a “Product Development and Purchase Agreement” (“GCSI Agreement”) with two of the principals of GloLinuaer Computer Systems, Inc. (“GCSI”), a company that made security systems for casinos.  (Tr. 10 at 90-93; Exs. D and Resp. 61.)
102.) The GCSI Agreement provides that Oxford shall receive as compensation and GCSI shall provide to Oxford a cash payment of $50,000 and 4 percent of outstanding capital stock of GCSI.  (Tr. 10 at 94; Ex. Resp. 61.)
103.) Pursuant to the GCSI Agreement, Oxford received $50,000 from GCSI as compensation, $10,000 on July 24, 2001, and $40,000 on November 26, 2001. (Tr. 10 at 99; Exs. ZZ and AAA.)
104.) Oxford received a stock certificate dated July 23, 2001, certifying that Oxford is the owner of 102,000 shares of GCSI.  The stock certificate indicated that the corporation is authorized to issue 100,000 shares.  (Tr. 10 at 101-02; Ex. Resp. 64.)
105.) GCSI had not issued any stock at the time it issued the stock certificate to Oxford.  (Tr. 10 at 101 and Tr. 12 at 57-58; Ex. Resp. 64.)
106.) According to a letter dated July 23rd, 2001 to Morton from GCSI, the enclosed stock certificate shows Oxford owning 120,000 shares of GCSI stock, even though the stock certificate certifies that Oxford is the owner of 102,000 shares of GCSI stock.  The letter indicated that Oxford’s percentage of ownership would remain at 4% of the authorized shares of GCSI, since GCSI decided to change the amount of initially authorized shares in GCSI from 100,000 to 3,000,000 shares prior to issuing the stock certificate to Oxford.  (Tr.10 at 101-02; Ex. Resp. 64.)
107.) On July 30, 2001, Morton, on behalf of Oxford, provided a document entitled “Confidential Update for Investors in Oxford Micro Devices” dated July 30, 2001 (“July 30 2001 Update”), to investors in Oxford.  (Tr. 1 at 81-82 and 111, Tr. 3 at 67-68, Tr. 6 at 23 and Tr. 10 at 102-10; Exs. D, DD, Resp. 67 and Resp. 68.)
108.)
The July 30, 2001 Update states, in part, that:
 
“This letter is an update on how we are growing and how we have adjusted our marketing, sales and hiring strategies to produce more revenue sooner with fewer expenses. . . .
 
[A] company that makes security systems for casinos has signed a deal with us to supply them with large quantities of Ax36™–based video compression boards. . . .
 
We are to be their exclusive supplier of video compression devices . . . .  There is the potential for OMDI to sell them 100,000 of our Ax36™–based video compression boards per year at a price of $500 each.  And, they are paying us $250,000 in cash and their stock to develop a board that is optimized for them.  We can thus profit twice, from our sale of boards to them, and their equity appreciation using our boards. . . .
 
Production should start in 6 months.”  (Ex. D at 1.)
109.)
The July 30, 2001 Update under the heading “Product Development” discusses new products and new revenue streams, and referring to the replacement of Oxford’s current chip states, in part, that:
 
“The development of the A436™ is going more slowly than anticipated . . . .  Major portions of the A436™ development are done, including design specification, software tools, an extensive battery of test programs to verify its proper operation before it is manufactured, and most of the detailed design of the chip itself.  The most complex and time-consuming-to-develop parts of the chip have been tested successfully using the battery of test programs.”  (Ex. D at 3-4.)
110.)
The July 30, 2001 Update under the heading “Favorable Impact of Global Economic Factors upon OMDI” states, in part, that:
 
We recognize that many investors find it difficult to pick potential winners from losers in the current economic climate.  This section explains how we benefit from factors, including excess telecommunications capacity and excess manufacturing capacity in semiconductors and personal computers, which have caused problems for other businesses. . . .
 
In a nutshell, factors that have hurt other companies are bullish for OMDI, which focuses on, and has unique capability for, digital imaging, because it is now much more feasible, both technically and economically, to store and communicate vast quantities of images[.]”  (Ex. D at 5-6.)
111.) The July 30, 2001 Update also contains a statement that “[i]nvestors have become much more risk adverse, often not understanding the difference between various market segments among technology companies.  This I believe is the single biggest risk to our success.”  (Tr. 1 at 231 and Tr. 6 at 63; Ex. D at 7.)
112.) The July 30, 2001 Update under the heading “Capital Raising” states “OMDI is currently raising an addition round of financing.  If you are interested in participating, please contact us for details.”  (Tr. 1 at 86 and 137; Ex. D at 7.)
113.) Morton based his statement in the July 30, 2001 Update that “they are paying us $250,000 in cash and their stock”, when Oxford actually received $50,000 in cash and a stock certificate certifying that Oxford is the owner of 102,000 shares of GCSI stock, on Morton’s being told by GCSI that was what their stock was worth.  Morton’s understanding of GCSI’s valuation of their own stock was based on GCSI’s President telling him that GCSI had been negotiating with an equity investment partner, whom Morton believed to be Quest, and that GCSI’s President told Morton that he expected to close that investment soon.  (Tr. 5 at 33-36, Tr. 10 at 103 and Tr. 13 at 12-13; Exs. D, Resp. 61 and Resp. 64.)
114.) GCSI was never a publicly traded stock.  (Tr. 5 at 37.)
115.) Respondents never informed the investors that they had $50,000 in cash and the rest in the form of a stock certificate.  (Tr. 5 at 35.)
116.) Respondents never informed investors that the GCSI’s stock Oxford had received was worthless or that Oxford was not attributing any revenue to the Casino Deal, although Oxford did not include any revenues from the Casino Deal in the documents entitled “Business Plan April 12, 2002” and “Business Plan April 16, 2002”.  (Tr. 1 at 111, Tr. 3 at 68, Tr. 5 at 38; Exs. D, DD, YYY and Resp. 10.)
117.) In 2001 Oxford sales were $52,396 and Oxford had net losses of $690,705.  (Tr. 1 at 98 and Tr. 4 at 71; Ex. E.)
118.) Respondents distributed the documents entitled “Business Plan April 12, 2002” and “Business Plan April 16, 2002” to as many investors as they could reach during the middle of April to the middle of May 2002.  (Tr. 9 at 19-20, 26-38, 43-56, 62-63, 65-67 and 76; Exs. YYY, Resp. 9, Resp. 10, Resp. 24, Resp. 40, Resp. 41 and Resp. 49.)
119.) Morton followed up the mailing and e-mailing with phone calls from the middle of April to the middle of May 2002.  (Tr. 9 at 56.)
120.) Morton’s objective in distributing the documents entitled “Business Plan April 12, 2002” and “Business Plan April 16, 2002”and contacting the investors was to obtain additional investments from current investors in Oxford.  (Tr. 9 at 41 and 53-54; Ex. Resp. 40.)
121.) In the cover letter attached to the documents entitled “Business Plan April 12, 2002” and “Business Plan April 16, 2002” the last paragraph stated “[w]e need to raise $250,000 immediately, followed by a larger sum by July 1 for working capital, to put our new system into production, and to market and sell it widely.  Can you help?” (Tr. 9 at 46; Exs. Resp. 9, Resp. 18, Resp. 23, Resp. 43 and Resp. 44.)
122.)
The document entitled “Business Plan April 12, 2002” states, in part, that:
 
“Theses events [the recent events of 9-11] have caused a surge in demand from airports, utilities and governments for video systems[.] . . .
 
We decided to sell . . . [the digital video security system] in response to the attacks of 9-11 to meet the needs of the marketplace, and to produce more revenue sooner and with higher margins.  It can be put into production quickly, in Q4 2002, contingent on funding.  We are seeking $10 million in equity capital for working capital, to put our digital video security system into production, and finance the full-scale marketing and sales of it.  We expect to reach breakeven within one year of receiving these funds.”  (Ex. YYY at 4.)
 
“We are seeking $10M of equity capital.  These funds will take us to break-even within twelve months of receipt.  Our total operating expenses for Forecast Year 1 are forecast at $5.2 million.  Forecast Year 1 begins upon receipt of funds sought.”  (Ex. YYY at 21.)
 
“The funds will provide working capital, enable us to put our digital video security system into production, and do full scale marketing and sales of it.  In Forecast Year 1, approx. 50% of the funds sought will be used for working capital, and of the balance, 50% will be used for product development, 30% for marketing and sales and 20% for operations.”  (Ex. YYY at 21.)
 
Our objective is an IPO in 18 months from receipt of funds sought, or sale of all or part of the business to another company.  (Ex. YYY at 21.)
123.) Page 24 of the document entitled “Business Plan April 12, 2002” contains Sales Forecast Years 1 to 3 with a date of April 12, 2002.  The Sales Forecast provides for total sales of $9,300,000 for year 1, $26,601,734 for year 2 and $78,964,144 for year 3.  (Ex. YYY at 24.)
124.) Oxford adopted a unanimous written consent of Board of Directors dated April 13, 2002, which, in part, terminated Oxford exclusive worldwide rights to the Ax36 image processor, acknowledged that Oxford breached its employment agreement with Morton in February 2001 when Oxford, unable to raise needed funds, chose to defer payment of his salary, acknowledged that Oxford under the terms of a $50,000 promissory note to Morton and Maureen White Morton had defaulted on a $50,000 loan secured by Oxford’s equipment, fixtures, inventory and accounts receivable and relinquished title to said property to Morton and Maureen White Morton.  (Tr. 9 at 69, 72 and 77; Ex. CCC.)
125.)
The document entitled “Business Plan April 16, 2002” states, in part, that:
 
“Theses events [the recent events of 9-11] have caused a surge in demand from airports, utilities, governments and the private sector for video systems[.] . . .
 
We decided to sell . . . [the digital video security system] in response to the attacks of 9-11 to meet the needs of the marketplace, and to produce more revenue sooner and with higher margins.  It can be put into production quickly, in Q4 2002, contingent on funding.  We are seeking $10 million in equity capital for working capital, to put our digital video security system into production, and finance the full-scale marketing and sales of it.  We expect to reach breakeven within one year of receiving these funds.  We expect to reach breakeven within one year of receiving these funds.  (Ex. Resp. 10 at 4.)
 
“We are seeking $10M of equity capital.  These funds will take us to break-even within twelve months of receipt.  Our total operating expenses for Forecast Year 1 are forecast at $5.2 million.  Forecast Year 1 begins upon receipt of funds sought.”  (Ex. Resp. 10 at 21.)
 
“The funds will provide working capital, enable us to put our digital video security system into production, and do full scale marketing and sales of it.  In Forecast Year 1, approx. 50% of the funds sought will be used for working capital, and of the balance, 50% will be used for product development, 30% for marketing and sales and 20% for operations.”  (Ex. Resp. 10 at 21.)
 
“Our objective is an IPO in 18 months from receipt of funds sought, or sale of all or part of the business to another company.”  (Ex. Resp.10 at 21.)
126. Page 24 of the document entitled “Business Plan April 16, 2002” contains Sales Forecast Years 1 to 3 with a date of April 13, 2002.  The Sales Forecast provides for total sales of $9,300,000 for year 1, $26,601,734 for year 2 and $78,964,144 for year 3.  (Ex. Resp. 10 at 24.)
127. The documents entitled “Business Plan April 12, 2002” and “Business Plan April 16, 2002” did not state that Oxford was out of money and needed an investment to continue operations.  (Exs. YYY and Resp. 10.)
128. Respondents did not disclose in the documents entitled “Business Plan April 12, 2002” and “Business Plan April 16, 2002” that they provided to investors that Oxford was having a lot of key overseas people going without pay.  (Tr. 9 at 73; Exs. YYY and Resp. 10.)
129. Respondents did not disclose in the documents entitled “Business Plan April 12, 2002” and “Business Plan April 16, 2002” they provided to investors that Morton had actually been entitled to pull the exclusivity of the Ax36 patents about a year and a half before.  (Tr. 9 at 69 and 71-72; Exs. YYY and Resp. 10.)
130. Respondents did not disclose in the documents entitled “Business Plan April 12, 2002” and “Business Plan April 16, 2002” they provided to investors that Oxford breached its employment agreement with Morton in February 2001 when Oxford, unable to raise needed funds, deferred payment of Morton’s salary or that Morton and Maureen White Morton had gone without salary for a year and a half.  (Tr. 9 at 69, 72 and 77; Exs. CCC, YYY and Resp. 10.)
131. Oxford did not disclose in the documents entitled “Business Plan April 12, 2002” and “Business Plan April 16, 2002” they provided to investors that Oxford had almost run out of money and had only weeks left of operation if Oxford received no further capital.  (Tr. 12 at 143; Exs. YYY and Resp. 10.)
132. One investor who received the document entitled “Business Plan April 16, 2002” responded to Morton on April 22, 2002, stating “Opportunities abound!”  (Tr. 12 at 146; Exs. Resp. 44 and Resp. 45.)
133. Another investor who received the document entitled “Business Plan April 16, 2002” responded to Morton on April 24, 2002, stating “I applaud what you’ve done and how much you’ve done. IQuite [sic] incredible”.  (Tr. 10 at 159 and 162 and Tr. 12 at 146-148; Ex. Resp. 78.)
134. Oxford did not go public because it is extremely expensive, there is a huge amount of time required, and Oxford did not have the necessary actual realized sales.  (Tr. 10 at 170-171; Ex. Resp. 79.)
135. Oxford did not receive any production orders for its chips.  (Tr. 12 at 98.)
136. On May 6, 2002, Morton prepared an e-mail, which, in part, informed investors that no one in Oxford management had drawn a salary in over a year, explained the difficulties in going public and that “[w]ith the huge demand we see for our new products, our time is much better spent building sales and profits than trying to go public at this time.”  The e-mail also stated that “it is not in the best interests of OMDI to go public now.  It is, however, our intention to go public as soon as practical.”  (Tr. 10 at 162-163 and 169-171 and Tr. 12 at 143; Ex. Resp. 79 at 4.)
137. The May 6, 2002, e-mail also stated “[w]e are now simultaneously doing another small capital raise, to continue ramping up slowly, as well as a larger raise for large-scale production, marketing and sale of our products. . . . The simple fact is that we need more equity capital.  We need it quickly, as I have said in my e-mails, and our looking to our current investors to provide it.  We are staging the raise, raising a small amount, up to US$500,000 while we raise a larger amount.  This is detailed in the Business Plan I sent to you.”  (Ex. Resp. 79 at 4.)
138. Oxford did not disclose in the May 6, 2002, e-mail that Oxford had run out of money and would become dormant within weeks if Oxford received no further capital.  (Ex. Resp.79.)
139. Oxford adopted a unanimous written consent of Board of Directors dated May 31, 2002, which, in part, acknowledged that since Oxford had run out of money that Oxford would become dormant with the exception of those activities deemed necessary to support one customer, the security system venture being formed my Morton.  (Tr. 9 at 78-79; Ex. DDD.)

II.  CONCLUSIONS OF LAW

A.  Violation of Section 36b-4(a) of the Act –
Fraud in Connection with the Offer and Sale of any Security

Section 36b-4(a) of the Act provides that:

No person shall, in connection with the offer, sale or purchase of any security, directly or indirectly:  (1) Employ any device, scheme or artifice to defraud; (2) make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, or (3) engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.

The Notice alleged that Respondents violated Section 36b-4(a) of the Act by, in connection with the offer, sale or purchase of Oxford Securities, directly or indirectly, employing a device, scheme or artifice to defraud; making untrue statements of a material fact or omitting to state material facts necessary in order to make statements made, in light of the circumstances under which they were made, not misleading, or engaging in an act, practice or course of business that operates as a fraud or deceit upon investors.


Preemption

Respondents argue, without citation to decisional authority, that federal law preempts and therefore precludes this enforcement proceeding.  See National Securities Markets Improvement Act of 1996 (NSMIA), 15 U.S.C. § 77r.  NSMIA’s savings clause, 15 U.S.C. § 77r(c)(1), provides that the State “shall retain jurisdiction under the laws of such State to investigate and bring enforcement actions with respect to fraud and deceit, or unlawful conduct by a broker or dealer, in connection with securities or securities transactions.”  Contrary to Respondents’ claim, Connecticut is not precluded from exercising its enforcement authority, even where “covered securities” are involved, and Connecticut’s authority to enforce its laws under the Act, in connection with fraud and/or with material omissions which would mislead investors in connection with the offer, sale, or purchase of securities, remains intact.  See Papic v. Burke, 2007 Conn. Super. LEXIS 820 (Conn. Super. Ct. 2007).


Untrue Statements or Omissions in Connection with the Offer or Sale of Oxford Securities

The record reveals that Respondents made offers and sales of Oxford Securities from Connecticut to individuals inside and outside of Connecticut.  The record also establishes that Respondents made oral and written communications to investors prior to their initial investment and subsequently, to solicit new sales.  Respondents contend that communications made prior to the potential investor receiving the Stock and Warrant Purchase Agreement were not made in connection with the offer or sale of the Oxford Securities and that the potential investors could not rely on these communications.  Respondents only support for this position is the fact that the investor could only purchase Oxford Securities by executing the Stock and Warrant Purchase Agreement, which contained a section entitled “REPRESENTATIONS AND WARRANTIES OF BUYER” and listed the purchase price of Oxford Securities.  The Supreme Court in SEC v. Zandford, 535 U.S. 813 (2002), construing the phrase “in connection with the purchase or sale of any security” as used in Section 10b of the Securities and Exchange Act of 1934 and SEC Rule 10b-5 adopted a broad reading of the phrase and stated that the requirement “must be read flexibly, not technically and restrictively.” Id. at 821 (citation omitted).  Courts have given an expansive construction to the “in connection with” requirement regarding the purchase or sale of any security.  United States v. Russo, 74 F.3d 1383, 1392 (2d Cir. 1996).  “[I]t is enough that the fraud alleged ‘coincide’ with a securities transaction”.  Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71, 85 (2006).  Respondents’ oral and written communications to investors regarding Oxford prior to the investors’ receipt of the Stock and Warrant Purchase Agreement were part of Respondents’ attempts to solicit the sale of Oxford Securities and, therefore, were made in connection with the offer, sale or purchase of a security.

Respondents assert that all the positive statements made in Oxford’s various business plans provided by Respondent’s to potential investors and investors, and in Respondents’ other communications with potential investors and investors were literally true, on their face, or couched in predictive or forward-looking language such as “will” and “expects”, and were not meant to be a promise.  Morton testified that all of the financial forecasts assumed that Respondents had raised the additional capital that Oxford needed, and that Oxford going public was a critical assumption.

“A material fact is a fact that a reasonable investor would have considered significant in making investment decisions.  A fact need not be outcome determinative for it to be material.  On the other hand, an omitted fact may be immaterial if the information is trivial . . . or is so basic that any investor could be expected to know it”.  Lehn v. Dailey, 77 Conn. App. 621, 628 (2003) (internal quotation marks omitted) (citations omitted).  “[T]he standard for determining whether a particular omission involved a material fact is an objective rather than a subjective one”.  Id. at 629.

An omitted fact or untrue statement is material if it would have assumed significance in the investment deliberations of a reasonable investor.  Basic Inc. v. Levinson, 485 U.S. 224 (1988).  “It does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change . . . [the investment decision]. . . . Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”  TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976) (alteration in original).

As opposed to common law fraud, reliance by an investor is not required for a regulator to allege a claim under Section 36b-4(a)(2) of the Act.  See, e.g., SEC v. Todt, 2000 U.S. Dist. LEXIS 2087 (2000), aff’d 2001 U.S. App. LEXIS 6042 (2001); Secretary of State, Sec. Div. v. Tretiak, 22 P.3d 1134 (Nev. 2001).  Scienter by the violator is also not a requirement of Section 36b-4(a)(2) of the Act in an enforcement proceeding brought by a regulator.  See also Lehn, 77 Conn. App. 621; Papic, 2007 Conn. Super. LEXIS 820.  Even in a private cause of action for damages, Connecticut courts have held that negligent misrepresentations or omissions are sufficient to impose liability under Section 36b-4(a)(2) of the Act.  See Lehn.

The record reveals that between August 1999 to October 2000, Respondents violated Section 36b-4(a)(2) of the Act by failing to disclose market risks of investing in Oxford in the offering materials Respondents distributed to potential investors and investors, and in the oral communications Morton had with these individuals.  The various business plans distributed between August 1999 to October 2000, to potential investors and investors, contained statements from Respondents about preparing for an IPO next year, planning to take Oxford public next year and doing a stock split before they go public, with expected gross margins in excess of fifty percent.  In addition, these business plans indicated that many years of difficult hardware, software tools’ and system-level development were behind Respondents, and that Respondents expected to produce large sales and high profitability in the near term with minimal investment and sales next year to be many, many times Oxford’s sales in 1999.

Oxford’s July 27, 1999 Business Plan, July 30, 1999 Business Plan and September 3, 1999 Business Plan contained statements about Oxford having customers who could place multi-million dollar orders.  These business plans also included statements about limiting Respondents’ efforts to working with a few potential major customers and corporate partners and that the resulting design wins could total more than several hundred thousand of Oxford’s chips next year and several million in 2001.  In addition, these business plans also included statements regarding seeking a fourth round of financing up to $1 million from individual investors while obtaining a fifth round of $5-8 million or $10 million from corporate and institutional sources, depending on the business plan, indicated that that these funds will be used to expand their marketing and sales, develop follow-on products, finance inventory and prepare for an IPO next year.  Oxford’s July 27, 1999 Business Plan, July 30, 1999 Business Plan, September 3, 1999 Business Plan and February 24, 2000 Business Plan contained statements about potential volume per customer ranges from 10,000 to 1,000,000+ of our chips per year.

Oxford’s July 27, 1999 Business Plan and July 30, 1999 Business Plan indicated that Respondents’ objective was “to provide a ten-fold return to investors over the next few years.”  Subsequently, Respondents altered this statement in the September 3, 1999 Business Plan and February 24, 2000 Business Plan to indicate that Respondents believed that they could “provide a far greater return over the next few years than our original objective of a ten-fold return as a conventional chip company.”  The September 3, 1999 Business Plan and February 24, 2000 Business Plan also explained how Respondents would profit from both the sales of Oxford’s products and the on-going use of the products in key applications.

While the business plans indicated that Oxford needed more financial resources to help close and support these multi-million dollar sales, the business plans did not state that funds were necessary to keep Oxford operating.  Respondents failed to disclose in their communications with potential investors or investors what would happen if Oxford did not receive the financing it was seeking in the fourth and fifth round of financing.  Morton acknowledged that Respondents never stated factors in communications to potential investors or investors that Respondents considered to be public knowledge.  Respondents did not disclose that there was a long sales cycle of 18 to 24 months for Oxford’s products, that financial projections were all based on Oxford receiving a certain amount of capital and sales.  In addition, Respondents did not adequately disclose risk factors, such as Oxford’s operating at a loss, significant competition in the industry and risk factors regarding proceeding with an IPO or failing to raise the necessary capital to execute Oxford’s business plans.  Morton failed to disclose this information to potential investors or investors, even though he considered the single biggest risk causing businesses to fail is the failure to raise the money to execute the business plan and Oxford’s business plan was contingent on raising the amount of money Respondents said they needed.  As a result of such material omissions, Respondents’ communications misled investors as regarding Oxford’s sales prospects, financial health and other risk factors related to the investment in Oxford.

The failure to disclose risk factors and the past negative earnings of issuers, and the failure to disclose or misrepresenting the speculative nature of the securities being recommended to customers violates the anti-fraud provisions of the securities laws.  See SEC v. Hasho, 784 F. Supp. 1059 (S.D.N.Y. 1992).  “Material facts include not only information disclosing the earnings. . . of a company but also those facts which affect the probable future of a company and which may affect the desires of investors to buy, sell or hold the company’s securities.”  Id. at 1108 (internal quotation marks omitted) (citation omitted).  In addition, the failure to disclose to investors in advertisements and sales materials provided to investors the risks of competition from other entities, and the risk that actual revenue may be considerably less than projected revenue have been found to be material facts.  In the Matter of International Quarter Phones, Inc., Blue Sky L. Rep. (CCH)  73,818 (Tex. Admin. Proc. 1993).  See also Flowers v. Hubbard, Blue Sky L. Rep. (CCH)  73,571 (Del. Ch. 1991); and In the Matter of The Wynwood Company, Blue Sky L. Rep. (CCH)  71,878 (Mont. State Aud. Off. Sec. Dept. 1983).

The various business plans distributed to investors made claims such as Oxford “will” profit from sales, and that the company expected to produce sales of “tens of millions of dollars”.  Such statements were made without including any corresponding risk factors or cautionary language.  Morton’s verbal communications with investors also failed to include risk factors or cautionary language.  Morton told one investor that he was updating sales forecasts as a result of all the new sales opportunities coming along, including one with an $8 billion trucking company.  Another investor was only aware of the risks associated with Oxford based on his prior investment experience, not as a result of anything Morton communicated to him.  In addition, the investors who appeared at the hearing did not receive financial statements prior to investing and Respondents did not disclose to many of the prospective investors and investors during 1999 and 2000, the extent of losses that Oxford was experiencing during 1998 and 1999.  Respondents had a duty to disclose such negative information in their communications with prospective investors and investors.  Respondents’ optimistic statements about the prospects of the business without including past performance information that would be useful to a reasonable investor in assessing those statements was a materially misleading omission of past performance information.  See SEC v. Merchant Capital, LLC, 2007 U.S. App. LEXIS 7665, *58 (11th Cir. 2007).

The Notice alleged that between August 1999 to October 2000, Respondents, in connection with the offer and sale of Oxford Securities to at least one investor, distributed a business plan forecasting net income of $9.7 million in Year 3, $17.0 million in Year 4, and $24.4 million in Year 5, without providing a reasonable basis for such projections.  During Morton’s deposition before the Department in December 2004, Morton testified to distributing two business plans to investors during the time period from August 1999 to October 2000, one of which, the December 1, 1998 Business Plan, had extensive future financial forecasts.  During the hearing, Morton testified that his deposition testimony was in error, and that the December 1, 1998 Business Plan had not been distributed to investors during late 1999 and 2000, although a similar business plan had been distributed to investors in 1998.  The Department disputed Morton’s claim that his deposition testimony was in error, because Morton did not notify the Department that his prior testimony was incorrect until after the Department’s witnesses had finished testifying and none of the witnesses testified that they had received the December 1, 1998 Business Plan.  Morton testified that after the deposition he reviewed Respondents’ records and discovered that he had not sent the December 1, 1998 Business Plan to anyone.  None of the witnesses testified to receiving the December 1, 1998 Business Plan and the only copy of this business plan in the record was provided to the Department by Morton.  The December 1, 1998 Business Plan is the only evidence in the record that Respondents distributed a business plan forecasting the net income alleged in the Notice between August 1999 to October 2000.  The only evidence that the December 1, 1998 Business Plan was distributed to investors was Morton’s deposition testimony, which he explained was incorrect.  Therefore, the Department has not met its burden of establishing that the December 1, 1998 Business Plan was distributed by Respondents during the relevant time periods in the Notice.

The record establishes that between August 1999 and October 2000, in connection with the offer and sale of Oxford Securities, Morton, on behalf of Oxford, stated to at least one investor that Oxford would have an IPO within a year.  During discussions with individuals in October 1999 regarding making an investment in Oxford, Morton stated Oxford would be going public within a year.  During the hearing, Morton denied making this statement to investors, but the investors provided credible testimony that Morton had made this statement to them.  One investor testified that one of the main factors that persuaded him to invest in Oxford was Morton’s promise that Oxford would be going public within a year.  Morton testified that he would never have made these statements, because he was aware that Oxford’s ability to go public was dependent on a number of factors and that all his statements to investors used words like “plan”, “anticipate”, “hope” to do an IPO within the coming year.  Morton also testified that as market conditions deteriorated, that the period of time for Oxford’s IPO was “stretched out” in his communications.  The record is clear that Morton discussed Oxford going public with investors prior and subsequent to their investment, told at least one investor prior to purchasing Oxford Securities that Oxford was going public within a year and that Morton never disclosed any risk factors to investors regarding Oxford’s ability to do an IPO, because Morton thought these risk factors were obvious and he was intent on taking Oxford public.  Predictive statements about Oxfords intentions to go public must be based in fact and disclosed with all related material facts.  See, e.g., Berko v. SEC, 316 F.2d 137 (2d Cir. 1963); SEC v. R.A. Holman & Co, Inc., 366 F.2d 456 (2d Cir. 1966).  Respondents’ discussions with investors regarding an IPO by Oxford without disclosing the related material facts is a violation of Section 36b-4(a)(2) of the Act.

Morton’s communications misled several investors into believing that an IPO was imminent and that their investment would go up seven to nine times upon such public offering.  Predictive statements made in written and oral communications such as “funds will be used to . . . prepare for an IPO next year”, “to become quite profitable and produce $25 million in sales within 24 months” and the stock will be worth seven to nine times its current value when public must have a reasonable basis in fact.  In addition, even if predictive statements are couched in extensive cautionary language, such affirmative representations may be deemed immaterial in light of the total information provided to investors.  However, “[t]he cautionary language must be meaningful:  boilerplate will not suffice.  A disclaimer does not provide per se immunity, precisely because the disclaimer must be meaningful and tailored to the risks the business faces.”  Merchant, 2007 U.S. App. LEXIS 7665 at *55.  “[P]redictions as to future events may implicitly represent to the investor that they have a reasonable basis in fact.  See, e.g., Berko, 316 F.2d 137.  “[S]tatements of opinion which have a firm historical or factual basis are not actionable.  However, unfounded predictions of future performance are impermissible.” American Microtel, Inc. v. Sec’y of State, 3 Mass. L. Rep. 479, *19 (Mass. Super. 1995) (internal quotation marks omitted) (citations omitted).  Morton repeatedly asserted that he did not make any guarantees, however, “[t]he fraud is not ameliorated where the positive prediction about the future performance of securities is cast as opinion or possibility rather than as a guarantee.  Such material statements violated the anti-fraud provision if no adequate basis existed for making such a statement.”  Hasho, 784 F. Supp. at 1109.  The record does not establish that Morton had a reasonable basis for his statements concerning Oxford’s IPO.  Morton was aware that taking Oxford public involved a number of factors and steps, but did not disclose these risk factors and did not present a basis for his assertions that the company would be going public within the year.

The record establishes that between March 2001 and May 2002, Morton, on behalf of Oxford, continued to solicit Oxford’s investors to buy additional Oxford Securities.  Morton, on behalf of Oxford, sent an investor a letter dated March 23, 2001, in response to an inquiry about the potential return on investment from the investor’s current and any future investment in Oxford.  The March 23, 2001, letter included Morton’s forecast that:

[N]ext year OMDI can earn (after tax) $7 million, assuming we raise the additional capital we need, etc.  Using a trailing PE of 50 (the lower figure given above), we would achieve a valuation of $350 million in two years’ time.  If you back this down to today, even using a large discount figure of 50% per year, OMDI’s present value is $87 million – a valuation that is far more than you paid, and, you received options in addition to the stock, effectively lowering the price you paid even more.

So, if OMDI were to go public in two years, the company would have increased in value by about 12 times compared to the valuation of the company when you invested. . . . We expect a dilution of about 20% to raise the additional capital we need, reducing your gain to 0.8 x 17x = 13.6x over a three-year period.  If you hold your investment longer, we foresee (but do not guarantee) a gain of 20x or more over a five-year period – surely making your investment in OMDI the most profitable investment you ever made.

In the March 23, 2001, letter, Morton, on behalf of Oxford, states that there was a possibility of Oxford having an IPO in the next two years and forecasted that Oxford would earn millions of dollars in profits during the next year, with the only disclosure “assuming we raise the additional capital we need etc.”  Predictive statements about Oxfords financial projections must be based in fact and disclosed with all related material facts.  See, e.g., Berko, 316 F.2d 137; R.A. Holman & Co, Inc., 366 F.2d 456.  Respondents did not disclose in the March 23, 2001, letter that:  during the period 1998 through 2000 Oxford only sold sample quantities for evaluation, approximately 15 A236 evaluation boards with chips, but no production orders followed; in 2000 Oxford sales were $26,655 and Oxford had a net loss of $615,915; as of February 2001, Oxford only had enough cash for the next 18 months; in February 200l, Oxford breached its employment agreement with Morton when it deferred payment of his salary to conserve funds; and Oxford had no orders of significance at the time of the March 23, 2001, letter.  There was also no discussion in the March 23, 2001, letter regarding any risks factors relating to Oxford going public in two years or raising the additional capital Respondents were seeking.  As stated previously, Respondents’ statements about the prospects of the business and predictions of substantial price rises without including past performance information that would be useful to a reasonable investor in assessing those statements or a reasonable basis for the future revenue projections was a materially misleading omission.  See, e.g., Merchant, 2007 U.S. App. LEXIS 7665.  Respondents’ failure to disclose to investors the related material facts to Respondents’ financial projections is a violation of Section 36b-4(a)(2) of the Act.

The record reveals that on July 30, 2001, Morton, on behalf of Oxford, provided the July 30, 2001 Update to investors.  The July 30, 2001 Update informs investors that Oxford is currently raising an additional round of financing and that if they are interested in participating, they should contact Oxford for details letter.  Therefore, the July 30, 2001 Update is a solicitation of addition capital from current investors.  In the July 30, 2001 Update, Morton, on behalf of Oxford, informed investors that Oxford had signed a deal with a company that makes security systems for casinos in order to “supply them [GCSI] with large quantities of Ax36™–based video compression boards”, that there was “potential for OMDI to sell them [GCSI] 100,000 of our Ax36™–based video compression boards per year at a price of $500 each”, and that “they [GCSI] are paying us $250,000 in cash and their stock to develop a board”.  The July 30, 2001 Update also informs investors of Respondents’ opportunities to profit from both Respondents’ sale of boards to GCSI and GCSI’s equity appreciation using Respondents’ boards.  The July 30, 2001 Update also informs investors that production should start in 6 months, discusses new products and new revenue streams and indicates that global economic factors that have hurt other companies are bullish for Oxford, without disclosing other risk factors.  Page 7 of the July 30, 2001 Update does contain a statement that “[i]nvestors have become much more risk adverse, often not understanding the difference between various market segments among technology companies.  This, I believe, is the single biggest risk to our success.”

The record reveals that in June 2001, Morton, on behalf of Oxford, had signed the GCSI Agreement with two of the principals of GCSI.  Pursuant to the GCSI Agreement, Oxford received $50,000 in cash and 4 percent of outstanding capital stock of GCSI, not “$250,000 in cash and their [GCSI’s] stock” as stated in the July 30, 2001 Update.  Morton based his statement in the July 30, 2001 Update that “they are paying us $250,000 in cash and their stock” on Morton’s being told by GCSI that was what their stock was worth.  Morton had no independent valuation of GCSI’s stock, but relied on GCSI’s valuation of their own stock, which GCSI’s President told Morton was based on negotiations with a potential equity investment partner that GCSI’s President expected to close an investment with soon.  GCSI had not issued any stock at the time it issued the stock certificate to Oxford and GCSI was never a publicly traded stock.

Respondents never informed the investors that they had received $50,000 in cash and the rest in the form of a stock certificate, even though the GCSI Agreement expressly provides that Oxford would receive $50,000 in cash and 4% of outstanding capital of GCSI.  Respondents never informed investors that GCSI had not issued any stock prior to the time it issued the stock certificate to Oxford, that GCSI was never a publicly traded stock and that there was no market for GCSI stock.  Respondents did not inform investors that Morton had no independent valuation of GCSI’s stock, but instead relied on GCSI’s valuation of their own stock, which was not based on an actual investment, but was allegedly based upon a potential equity investment in GCSI that a corporation was considering making.

Respondents’ July 30, 2001 Update misled investors as to the value of the compensation that Oxford had received from GCSI by its material omissions relating to the value of a corporate asset.  See Wigham v. Muehl, Blue Sky L. Rep. (CCH)  72,471 (Fla. Dist. Ct. App. 1987).  Morton omitted material facts when he told investors that Oxford had just signed the Casino Deal for $250,000 in cash and stock.  Morton’s omissions misled investors regarding the compensation Oxford received, because he did not disclose to investors the amount of cash that Oxford received or that the stock that Oxford received was 4 percent of outstanding capital stock of GCSI, which was not publicly traded or independently valued.  Respondents’ misleading statements concerning the GCSI Agreement violated Section 36a-4(a)(2) of the Act.

Respondents were not attributing any revenue from sales to GCSI by April 2002 and did not include any revenue from the Casino Deal in the April 12, 2002 Business Plan or April 16, 2002 Business Plan.  Respondents, however, never informed investors that Oxford was not attributing any revenue from sales to GCSI, even though Respondents had stated in the July 30, 2001 Update that there was “potential for OMDI to sell them 100,000 of our Ax36™–based video compression boards per year at a price of $500 each.”

Respondents failed to update investors when they had reason to believe that the anticipated sales were not going to occur.  The statement regarding potential sales by Oxford of 100,000 of their Ax36™–based video compression boards per year at a price of $500 ($50,000,000 per year) made to investors in a letter soliciting additional investments is material to a reasonable investor.  In fact, one investor testified that the letter gave him hope for the future of Oxford.  Yet another investor testified that he had interpreted the letter to mean that the deal had been finalized and Oxford was sure to receive the anticipated sales.  (Tr. 1 at 86-87.)  “The law in this and other Circuits establishes a general duty to correct under Section 10(b) and Rule 10b-5:  ‘it is now clear that there is a duty to correct or revise a prior statement which was accurate when made but which has become misleading due to subsequent events.’”  Kamerman v. Steinberg, 123 F.R.D. 66, 72 (S.D.N.Y. 1988) (quoting Ross v. A. H. Robbins Co. Inc., 465 F. Supp. 904, 908 (S.D.N.Y. 1979), rev’d on other grounds, 607 F.2d 545 (2d Cir. 1979), cert. denied, 446 U.S. 946 (1980)).  Rather than permit investors to believe that the Casino Deal was proceeding on course as Morton solicited them for additional capital via the April 12, 2002 Business Plan and April 16, 2002 Business Plan, Respondents had a duty to revise their prior statements to investors.

Respondents did not disclose any basis for Oxford’s financial projections it made to potential investors and investors, the assumptions used in arriving at financial projections, or provide ranges of financial projections such as best and worst case scenarios, or historical financial statements, but only provided information to investors at the “highest level”.  When making projections of the market valuation or potential worth of a company, factors such as the names, financials and services of companies used for comparison, along with the hypothetical financial or operational assumptions, should be disclosed.  In the Matter of American Microtel, Inc., Blue Sky L. Rep. (CCH)  73,600 (Nev. Admin. Proc. 1992).  Respondents did not disclose the basis for their projections to investors, but stated during the hearing that the projections were based on the way the fabless semiconductor industry works.  During the hearing, Morton pointed to the disclaimer in the Stock and Warrant Purchase Agreement as constituting cautionary language.  However, “[t]he cautionary language must be meaningful:  boilerplate will not suffice.  A disclaimer does not provide per se immunity, precisely because the disclaimer must be meaningful and tailored to the risks the business faces.”  Merchant, 2007 U.S. App. LEXIS 7665 at *55.

In addition, Respondents did not provide complete and full disclosure concerning Oxford’s potential IPO.  Statements concerning a potential public offering and future earnings are clearly material to a reasonable investor.  In SEC v. Platinum Inv. Corp., 2006 U.S. Dist. LEXIS 67460 (S.D.N.Y. 2006), the court stated that a seller’s representations concerning an issuers plans to go public within months and its price at such time of offering were of the type “so obviously important to the investor, that reasonable minds cannot differ on the question of materiality”.  Id. at *8 (internal quotation marks omitted) (citation omitted).  In Computer Enters., Inc. v. Aronson, 2002 U.S. Dist. LEXIS 7150 (S.D.N.Y. 2002), an officer of a company was held to have omitted material facts when, inter alia, he advised the purchaser that funds raised would be used for an imminent IPO.

Similarly, Morton did not provide any support for his financial projections.  All the various business plans distributed to potential investors and investors made sales predictions of millions of dollars in the near future.  The September 1999 Business Plan distributed to at least two investors predicted that Oxford would “produce sales of tens of million of dollars and high profitability”, the February 2000 Business Plan provided to another investor predicted that Oxford would “become quite profitable and produce $25 million in sales within 24 months”, and the June 2000 Business Plan provided to another investor predicted revenues of $2 million in 2001 and $25 million in 2002.  There were many factors that would have had to have occurred to realize such revenues including thousands of chips sales, when the record reveals that less than 20 chips were sold in the course of three years.

In addition, Respondents’ April 12, 2002 Business Plan and April 16, 2002 Business Plan contain Sales Forecast Years 1 to 3 with total sales of $9,300,000 for year 1, $26,601,734 for year 2 and $78,964,144 for year 3, and indicated that Respondents’ objective was IPO in 18 months from receipt of funds sought, or sale of all or part of the business to another company.  These business plans were distributed to investors in an attempt to obtain addition investments.  While the business plans indicated that Forecast Year 1 begins upon receipt of funds sought, these predictions occurred without disclosing that raising the additional capital was a critical assumption.  These predictions also assumed that Oxford was going public and had achieved a certain amount of capital and sales.  Respondents made these predictions even though Oxford had significant losses from 1998 through 2001, including net losses of $690,705 in 2001.

The April 12, 2002 Business Plan and April 16, 2002 Business Plan provided to investors did not disclose the true state of Oxford’s financial condition and omitted many material facts, including:  the long sales cycle for Oxford’s products, Morton had terminated Oxford’s exclusive worldwide rights to the Ax36 image processor and Morton had actually been entitled to pull the exclusivity of the Ax36 patents about a year and a half before, Oxford had breached its employment agreement with Morton in February 2001 because Oxford was unable to raise needed funds, Morton and Maureen White Morton had gone without salary for a year and a half, Oxford had defaulted on a $50,000 promissory note to Morton and Maureen White Morton which was secured by Oxford’s equipment, fixtures, inventory and accounts receivable, Oxford was having a lot of key overseas people going without pay, and Oxford had almost run out of money and had only weeks left of operation if Oxford received no further capital.

Two investors who received the April 16, 2002, business plan responded quite favorably and obviously did not understand Oxford’s financial circumstances based on the material provided by Respondents.  On May 31, 2002, Oxford adopted a unanimous written consent of Board of Directors, which, in part, acknowledged that since Oxford had run out of money that Oxford would become dormant with the exception of those activities deemed necessary to support one customer.  Respondents had not previously disclosed that that Oxford had run out of money and would become dormant in the near future if Oxford received no further capital.

Respondents contend that risks were disclosed to investors because of a risk disclaimer contained in the Stock and Warrant Purchase Agreements signed by investors, and the investors could not make an investment in Oxford without executing a Stock and Warrant Purchase Agreement.  The Stock and Warrant Purchase Agreements included a disclaimer that “[b]uyer recognizes that an investment in the Company may result in the complete loss of the investment.”  The Stock and Warrant Purchase Agreements also included a disclaimer that documentation provided by Oxford “may contain forward-looking statements.  In some cases one can identify forward-looking statements by terminology such as ‘may,’ ‘will,’ ‘should,’ ‘potential,’ ‘continue,’ ‘expects,’ ‘anticipates,’ ‘intends,’ ‘plans,’ ‘believes,’ ‘estimates’ and similar expressions.  These statements are based on Company’s [Oxford’s] current beliefs, expectations and assumptions and are subject to a number of risks and uncertainties that may change at any time and without notice.  Actual results and events may vary significantly from those discussed in the forward-looking statements.”

The record reveals that the Stock and Warrant Purchase Agreements were often provided to investors after the investors had received and reviewed one of the business plans, had conversations with Morton and had made a decision to invest based on the information they had been provided.  In addition, the Stock and Warrant Purchase Agreements often were not referenced in the business plans.  The disclaimer language in the Stock and Warrant Purchase Agreements does not provide a defense to the prior written and oral statements made to investors by Respondents, which a reasonable investor would have considered significant in making investment decisions.  “[T]he existence of contradictory written statements, in an integration clause or otherwise, does not provide a defense to the charge of preinvestment materially misleading oral statements.  Indeed, to permit the seller of securities to discharge, or to defeat, his statutory obligation of truthfulness to the buyer merely by attaching an integration clause to a subscription agreement would enfeeble the statute.”  Marram v. Kobrick Offshore Fund, Ltd., 2004 Mass. LEXIS 557, *25-26, (Mass. 2004) (citations omitted).

In conclusion, the record establishes that Respondents omitted material facts from their communication with Oxford investors, including market risks, bases for financial projections, factors affecting Oxfords plans to go public and facts relating to the Casino Deal.  The record further establishes that the conduct of Respondents constitutes, in connection with the offer, sale or purchase of any security, employing any device, scheme or artifice to defraud, making of any untrue statements of material facts or omitting to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, or engaging in any act, practice or course of business which operates as a fraud or deceit upon any person.  Such conduct constitutes a violation of Section 36b-4(a) of the Act, which was a basis for an order to cease and desist pursuant to Section 36b-27(a) of the Act that was issued against Respondents on November 22, 2006, for one violation each under Section 36b-27(a) of the Act.


Reliance on Counsel and Advice of Department and Section 36b-31(h) of the Act

Respondents contend that they engaged suitable counsel who handled all of Respondents’ securities filings and Respondents did not rely on the advice of counsel and try to perform the filings themselves.  In addition, Respondents contend that that they relied on the advice of the Department and engaged suitable counsel and that such reliance relieves them of liability pursuant to Section 36b-31(h) of the Act.  Section 36b-31(h) of the Act provides that:

No provision of sections 36b-2 to 36b-33, inclusive, imposing any liability applies to any act done or omitted in good faith in conformity with any regulation, form, order, advisory interpretation or no action determination of the commissioner, notwithstanding that the regulation, form, order, advisory interpretation or no action determination may later be amended or rescinded or be determined by judicial or other authority to be invalid for any reason.

Respondents raised reliance on counsel as a reason that they are relieved of liability for any violations of sections 36b-2 to 36b-33, inclusive, of the Act.  Morton testified that he submitted certain documents, such as the addendum to the Stock and Warrant Purchase Agreement, to counsel for review and approval prior to their release to investors.  Compliance with securities laws cannot be avoided simply by retaining outside counsel to prepare required documents.  See SEC v. Savoy Industries, Inc., 665 F.2d 1310 (D.C. Cir. 1981).  The record reveals that Respondents’ counsel’s involvement was insufficient to establish a defense of reliance on counsel under the securities laws.  Federal courts have held that the extent of an attorney’s involvement is a significant factor in establishing a fraud claim against counsel.  See, e.g., Walco Invs., Inc. v. Thenen, 881 F. Supp. 1576 (S.D. Fla. 1995); Ames v. Uranus, Inc., 1994 U.S. Dist. LEXIS 12639 (Kan. 1994).  In Ames v. Uranus, the court found that an attorney was not liable for fraud relating to an offering memorandum when the clients created the documents for themselves and only gave them to their attorney to review.  The court stated “[t]here is no evidence that they [counsel] had any control over what did or did not ultimately end up in the confidential memorandum . . . .  There is no evidence that any of the . . . [attorneys] ever vouched for the accuracy of the information in the document in any way.”  Id. at 24-25.  Similarly, Morton produced no evidence that legal counsel had signed off on his communications with investors or was paid to conduct a due diligence investigation regarding the factual representations made in the business plans.  In addition the record does not establish that counsel drafted or reviewed the business plans to conform to securities law requirements.  Although scienter by the violator is not a requirement in this case, in cases where scienter is required to establish a violation “[a] person asserting reliance upon the advice of counsel as a defense must establish that he made a complete disclosure of the intended action, requested counsel’s advice regarding the legality of the intended action, received counsel’s advice that the intended conduct was legal, and relied in good faith on that advice.”  In re Seavey, 2003 SEC LEXIS 716, *21 (SEC Admin. Proc. 2003), aff’d, 111 Fed. Appx. 911 (9th Cir. 2004).  See also SEC v. Savoy Indus., Inc., 665 F.2d 1310 (D.C. Cir. 1981).  Respondents have not presented any evidence regarding any representations that were not already included in any communications that may have been reviewed by legal counsel or that legal counsel was hired to review and approve the business plans.  There is no evidence that legal counsel had any control over what did or did not ultimately end up in the communications to potential investors or investors, that legal counsel had any part in the dissemination of the document, or that legal counsel ever vouched for the accuracy of the information in the documents in any way.  The record does not establish that Respondents made a complete disclosure to counsel regarding the intended communications to potential investors and investors, requested counsel’s advice regarding the legality of the Respondents intended communications or whether they complied with the Act, or received and relied in good faith on counsel’s advice that the intended conduct was legal.  Therefore, Respondent has not established a valid defense of reliance on counsel.

In connection with the offer or sale of Oxford Securities, the Respondents do not point to any action or omission that was done in conformity with any regulation, form, order, advisory interpretation or no action determination of the commissioner.  There is no evidence in the record that the Department ever issued any regulation, form, advisory interpretation or no action determination indicating that a person in connection with the offer, sale or purchase of any security, directly or indirectly could (1) employ any device, scheme or artifice to defraud; (2) make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, or (3) engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.  Advice to engage suitable counsel does not qualify as a regulation, form, order, advisory interpretation or no action determination of the commissioner.  There is also no evidence in the record regarding any regulation, form, order, advisory interpretation or no action determination of the Commissioner that Respondents were conforming to being subsequently amended or rescinded or being determined by judicial or other authority to be invalid for any reason.  Therefore, Section 36b-31(h) of the Act does the not relieve Respondents of liability for any act or omission under the provisions of sections 36b-2 to 36b-33, inclusive.


B.  Violation of Section 36b-16 of the Act –
Offer and Sale of Unregistered Securities

Section 36b-16 of the Act provides that:

No person shall offer or sell any security in this state unless (1) it is registered under sections 36b-2 to 36b-33, inclusive, (2) the security or transaction is exempted under section 36b-21, or (3) the security is a covered security provided such person complies with any applicable requirements in subsections (c), (d) and (e) of section 36b-21.

Section 36b-3(19) of the Act defines the term “security” to mean, in pertinent part, “any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement”.

The record establishes that the Oxford Securities fall within the definition of the term “security” as defined in Section 36b-(19) of the Act.

The record establishes that Morton was the CEO and co-founder of Oxford and was employed as the Chief Executive Officer and Chief Technical Officer between 1998 and 2002.  Morton was also employed as President of Oxford from at least January 1, 1998 through at least February 2001.

The record establishes that from August of 1999 to October 2000 Respondents offered and sold more than $1.2 million of Oxford Securities to 34 investors, including eight Connecticut investors, from Oxford’s principal place of business at Lantern Ridge Office Park, 731 Main Street, Bldg. 2, B3, Monroe, Connecticut.  Respondents continued to offer Oxford Securities to individuals in Connecticut until May 2002.  Furthermore, Morton solicited individuals to invest in Oxford Securities and signed the Stock and Warrant Purchase Agreements as President of Oxford and CEO of Oxford.


Registration of Oxford Securities under Section 36b-16 of the Act

The record reveals that the Oxford Securities were not registered with the Department and that there were no securities notice filings made concerning the sales of Oxford Securities during the period beginning in August 1999 through October 2000.  A Rule 504 filing, which was signed by Morton on January 22, 2001, was made on January 31, 2001; and a Rule 506 filing was made on February 8, 2001, with both the Department and the SEC.  At no time during the course of the offers and sales of Oxford Securities were the securities registered, exempt or covered securities that complied with the notice requirements of the Act.


Applicability of Rule 504 and Rule 506

During the hearing, Morton testified that he relied on Rule 504 and Rule 506 exemptions during the time frame of the Notice.  Respondents contend that the Oxford Securities were either exempt pursuant to Section 36b-16(2) of the Act as a result of a Rule 504 filing or deemed covered securities pursuant to Section 36b-16(3) of the Act as a result of a Rule 506 filing.  In order to prevail on the claim that Respondents’ offer and sale of Oxford Securities absent registration was not a violation of Section 36b-16 of the Act; Respondents must prove that both registration exemptions apply, since neither the Rule 504 nor Rule 506 filings cover all of the sales of Oxford Securities during the relevant time period.  The record reveals that the Rule 504 filing listed sales of Oxford Securities to five accredited investors totaling $160,000 and for sales of Oxford Securities to three non-accredited investors totaling $60,000 for a total of $220,000 of the Oxford Securities.  The Rule 506 filing listed 19 sales to investors totaling $900,000.

“The burden is on defendant to prove that a registration exemption applies.  SEC v. Ralston Purina Co., 346 U.S. 119, 126, 73 S. Ct. 981, 97 L. Ed. 1494 (1953)  (‘Keeping in mind the broadly remedial purposes of federal securities legislation, imposition of the burden of proof on an issuer who would plead the exemption seems to us fair and reasonable.’); see also Byrnes v. Faulkner, Dawkins & Sullivan, 550 F.2d 1303, 1311 (2d Cir. 1977); Rosen ex rel. Egghead.com, Inc. v. Brookhaven Capital Mgmt. Co., 194 F. Supp. 2d 224, 228 (S.D.N.Y. 2002)  (‘Courts have also specifically held in the securities context that defendants have the burden to plead and prove statutory exemptions.’).”  SEC v. Opulentica, 479 F. Supp. 2d 319, 328 (D.N.Y. 2007).  See also State v. Andresen, 256 Conn. 313 (Conn. 2001).
 
Respondents also contend that the National Securities Markets Improvement Act of 1996 (NSMIA), Pub. L. No. 104-290, 110 Stat. 3416, preempts state securities registration laws and that the Department has no authority to regulate the sales of Oxford Securities listed in the Rule 506 filing.  Contrary to Respondents’ assertion, “NSMIA preempts state securities registration laws with respect only to those offerings that actually qualify as ‘covered securities’ according to the regulations that the SEC has promulgated.”  Brown v. Earthboard Sports USA, Inc., 481 F.3d 901, 912 (6th Cir. 2007).  Therefore, states are permitted to regulate Rule 504 offerings, and NSMIA does not preempt state laws with respect to a notice filing with the state of non-“covered securities”.

Section 36b-31-21b-9b(h) of the Regulations provides, in part, that a Rule 504 filing must be made “[p]rior to the first sale of securities in this state”.  (Emphasis added.)  In addition, Section 36b-21(e) of the Act provides, in part, that, “[a]ny person who offers or sells a security that is a covered security under Section 18(b)(4)(D) of the Securities Act of 1933 shall file a notice with the commissioner within fifteen days after the first sale of such a security in this state.”  (Emphasis added.)  Oxford did not comply with such filing requirements.  The Rule 504 and Rule 506 filings were made by Oxford in January and February 2001, respectively, well after August of 1999 when Respondents made the first sale in the fourth round stock offering to individual investors and not until after Respondents had sold more than $1.2 million in Oxford Securities to 34 investors.  As a result of such late filings, the sales of Oxford Securities listed in the Rule 504 filing were not exempt under Section 36b-16(2) of the Act, and the sales of Oxford Securities listed in the Rule 506 offering were not covered securities that complied with the applicable notice requirements in Section 36b-21(e) of the Act.

Section 36b-31-21b-9b(i) of the Regulations provides, in part, that “[f]ailure to timely file the notice required by this section shall not, in and of itself, preclude reliance on the exemption”.  The record reveals that not only were Oxford’s filings made more than a year after the first sale and approximately four months after the last sale, but also Oxford failed to comply with the written disclosures required prior to any sale pursuant to Rule 504; and the Oxford Securities were not covered securities under federal law.  In order for a Rule 506 offering to be deemed a covered security and exempt from state regulation, it must satisfy the federal requirements governing covered security offerings.  Further, similar to any securities exemption, the burden of proving a Rule 506 exemption is on the person claiming it.  See, e.g., Buist v. Time Domain Corp., 926 So. 2d 290 (Ala. 2005).  The record reveals that Oxford would not be entitled to a Rule 506 exemption because Oxford’s filing on February 8, 2001, was made with the SEC approximately a year and half after the first sale of Oxford Securities to an individual investor in the fourth round of financing and approximately three years after the first sale of Oxford Securities, not within 15 days, as required by Rule 503(17 CFR § 230.503).


Reliance on Counsel and Advice of Department and Section 36b-31(h) of the Act

Respondents also raised reliance on counsel as an explanation for Respondents’ offer and sale of Oxford Securities absent registration.  Even if there were evidence, which is lacking in this case, that Morton was advised by counsel that Respondents could offer and sell Oxford Securities absent registration, the Connecticut Supreme Court has refused to recognize reliance on counsel as a defense to an alleged violation of Section 36b-16 of the Act.  See Andresen, 256 Conn. 313.  The Court explained that while reliance on counsel may negate the specific intent element of violations, in instances where only general intent is required, the argument of reasonable, good faith reliance on the advice of counsel must fail.  Id. at 341-342.

As previously noted, Respondents contend that they relied on the advice of the Department and engaged suitable counsel who handled all of their securities filings, and that such reliance relieves them of liability pursuant to Section 36b-31(h) of the Act.

Respondents do not point to any action or omission that was done in conformity with any regulation, form, order, advisory interpretation or no action determination of the Commissioner.  There is no evidence in the record that the Department ever issued any regulation, form, advisory interpretation or no action determination indicating that a corporation located in Connecticut could offer and sell securities to individuals located inside and outside this state without such securities being registered, exempt or covered securities in compliance with the Act.  Advice from the Department to Respondents to engage suitable counsel does not qualify as a regulation, form, order, advisory interpretation or no action determination of the Commissioner.  Therefore, Section 36b-31(h) of the Act does the not relieve Respondents of liability for any act or omission under the provisions of sections 36b-2 to 36b-33, inclusive, of the Act.

In conclusion, the record establishes that Respondents sold Oxford Securities, which are securities as defined in Section 36b-3(19) of the Act.  The Oxford Securities were not registered in Connecticut under the Act as required by Section 36b-16 of the Act, nor were they exempt from registration under Section 36b-21 of the Act, nor were they covered securities.  The record further establishes that such offer and sale of Oxford Securities absent registration constitutes a violation of Section 36b-16 of the Act.


C.  Authority to Issue Order to Cease and Desist and Impose Fine

Section 36b-27(a) of the Act, provides, in pertinent part, that:

Whenever it appears to the commissioner after an investigation that any person has violated, is violating or is  about to violate any of the provisions of sections 36b-2 to 36b-33, inclusive, . . . or that the further sale or offer to sell securities would constitute a violation of said sections . . . the commissioner may, in the commissioner’s discretion, order (1) the person . . . to cease and desist from the violations . . . of the provisions of said sections . . . or from the further sale or offer to sell securities constituting or which would constitute a violation of the provisions of said sections . . . .  After such an order is issued, the person named in the order may, within fourteen days after receipt of the order, file a written request for a hearing.  Any such hearing shall be held in accordance with the provisions of chapter 54.

Section 36b-27(a) of the Act, as amended, authorizes the Commissioner to order a person to cease and desist from violating the Act.

Section 36b-27(d) of the Act, prior to October 1, 2003, provided, in pertinent part, that:

(1)  Whenever the commissioner finds as the result of an investigation that any person or persons have violated any of the provisions of sections 36b-2 to 36b-33, inclusive, . . . the commissioner may send a notice to such person or persons by registered mail, return receipt requested . . . .  Any such notice shall include:  (A) A reference to the title, chapter, regulation, rule or order alleged to have been violated; (B) a short and plain statement of the matter asserted or charged; (C) the maximum fine that may be imposed for such violation; and (D) the time and place for the hearing.  Such hearing shall be fixed for a date not earlier than fourteen days after the notice is mailed.

(2)  The commissioner shall hold a hearing upon the charges made unless such person or persons fail to appear at the hearing.  Said hearing shall be held in accordance with the provisions of chapter 54.  After the hearing if the commissioner finds that the person or persons have violated any of the provisions of sections 36b-2 to 36b-33, inclusive, . . . the commissioner may, in the commissioner’s discretion and in addition to any other remedy authorized by said sections, order that a fine not exceeding ten thousand dollars per violation be imposed upon such person or persons. . . . The commissioner shall send a copy of any order issued pursuant to this subsection by registered mail, return receipt requested, . . . to any person or persons named in such order.

Section 36b-27(d)(2) of the Act (prior to being amended by Public Act 03-259) authorizes the Commissioner to order the imposition of a fine for each violation of the Act in an amount not exceeding Ten Thousand Dollars ($10,000) per violation in addition to any other remedy authorized by the Act.

Section 4-177 of the Connecticut General Statutes provides, in pertinent part, that:

(a)  In a contested case, all parties shall be afforded an opportunity for hearing after reasonable notice.

(b)  The notice shall be in writing and shall include:  (1) A statement of the time, place, and nature of the hearing; (2) a statement of the legal authority and jurisdiction under which the hearing is to be held; (3) a reference to the particular sections of the statutes and regulations involved; and (4) a short and plain statement of the matters asserted.

The Order issued by the Commissioner complied with Section 36b-27(a) of the Act and Section 4-177 of the Connecticut General Statutes

The Fine Notice issued by the Commissioner complied with Section 36b-27(d) of the Act and Section 4-177 of the Connecticut General Statutes.

The Commissioner finds that Respondents violated Section 36b-4(a) of the Act, and Section 36b-16 of the Act.

The Commissioner finds that the record requires the issuance of a permanent order to cease and desist against Respondents from directly or indirectly violating the provisions of the Act, including without limitation:  (1) employing a device, scheme or artifice to defraud, making of any untrue statement of a material fact or omitting to state a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading, or engaging in an act, practice or course of business that operates as a fraud or deceit upon any person, and (2) offering and selling unregistered securities.

The Commissioner finds that:  (a) Respondents’ violations of Section 36b-16 of the Act form the basis for the imposition of a fine against Respondents for one violation each under Section 36b-27(d) of the Act prior to October 1, 2003; and (b) Respondents’ violations of Section 36b-4(a) of the Act form the basis for the imposition of a fine against Respondents for one violation each under Section 36b-27(d) of the Act prior to October 1, 2003.


D.  Public Interest

Section 36b-31(a) of the Act provides, in pertinent part, that:

The commissioner may from time to time make . . . such . . . orders as are necessary to carry out the provisions of sections 36b-2 to 36b-33, inclusive[.]

Section 36b-31(b) of the Act provides, in pertinent part, that:

No . . . order may be made . . . unless the commissioner finds that the action is necessary or appropriate in the public interest or for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of sections 36b-2 to 36b-33, inclusive.

Section 36b-31(b) of the Act requires that the Commissioner find that an order is necessary or appropriate in the public interest or for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of sections 36b-2 to 33b-33, inclusive.  Although the Commissioner is not required to make all these findings to make an order, since Section 36b-31(b) is clearly in the disjunctive, all of these elements are present in this case.  While the term “public interest” is not defined in the Act, courts have determined that words of wide generality, like “public interest”, must take their meaning from the substantive provisions and purposes of the legislation and the words must be interpreted in the context of the regulatory scheme, see NAACP v. Federal Power Comm’n, 425 U.S. 662 (1975); N.Y. Central Sec. Corp. v. United States, 287 U.S. 12 (1932); and “it is for the legislature to determine what is in the public interest . . .”.  Brosnan v. Sacred Heart Univ., 1997 Conn. Super. Lexis 2815, *47 (1997) (internal quotation marks omitted) (quoting West v. Egan, 18 Conn. Supp. 447, 450 (1953)).  “’[T]he primary purpose behind [CUSA] was to institute comprehensive registration requirements and thereby improve surveillance of securities trading.’  (Internal quotation marks omitted.)  State v. Andresen, 256 Conn. 313, 329, 773 A.2d 328 (2001).  ‘[S]tate securities laws, or “blue sky laws,” are remedial statutes . . . see also Securities & Exchange Commission v. C.M. Joiner Leasing Corp., 320 U.S. 344, 353, 64 S.Ct. 120, 88 L.Ed. 88 (1943) (noting that state securities laws have “dominating purpose to prevent and punish fraudulent floating of securities”); Connecticut National Bank v. Giacomi, 233 Conn. 304, 320, 659 A.2d 1166 (1995) (noting that state securities laws contain antifraud provisions, require registration of brokers and sellers of securities and registration of securities themselves); People v. Landes, 84 N.Y.2d 655, 660, 645 N.E.2d 716, 621 N.Y.S.2d 283 (1994) (“purpose of [New York securities] statute is remedial: to protect the public from fraudulent exploitation in the offering and sale of securities”).  In 1977, the Connecticut legislature formally adopted the Uniform Securities Act (Uniform Act).”  (Citation omitted; footnote omitted; internal quotation marks omitted.)  State v. Andresen, supra, 256 Conn. at 322-23.”  Papic, 2007 Conn. Super. LEXIS 820.  Thus, the “public interest” as it relates to the purposes of the Act includes requiring registration of securities and protecting the public from fraudulent exploitation in the offering and sale of securities, which are both key elements in the network of safeguards the legislature has enacted to protect the public investor.

In this case, Respondents’ actions in violation of the Act involved disregarding a regulatory prohibition on offering and selling unregistered securities, and in connection with the offer and sale of unregistered securities, directly or indirectly, making an untrue statement of material fact or omitting to state a material fact necessary in order to make the statement made, in light of the circumstances under which they are made, not misleading in Respondents written and oral communications with Oxford investors regarding the IPO, GCSI Agreement, financial projections, market risks, and failure to provide material facts regarding Oxford’s financial condition in Respondents’ ongoing solicitation of investors.  In addition, investors were harmed in connection with such offer and sale by Respondents’ because investors based their decision to invest in Oxford on the information provided by Respondents.  Consequently, the Commissioner finds that based upon the nature of Respondents’ actions in violation of the Act, the facts require the imposition of a fine against Respondents for Respondents’ violations of Section 36b-16 of the Act and 36b-4(a) of the Act in an amount equal to the maximum permitted by Section 36a-27(d) of the Act as in effect prior to October 1, 2003 and that this order imposing fine against Respondents is necessary and appropriate in the public interest and for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of Sections 36b-2 to 36b-33, inclusive, of the Act.

The Commissioner finds that the issuance of an order to cease and desist and imposition of a fine against Respondents is necessary and appropriate in the public interest and for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of Sections 36b-2 to 36b-33, inclusive, of the Act.


III.  ORDER

Having read the record, I hereby ORDER, pursuant to Section 36b-27(a) of the Act, as amended, and Section 36b-27(d)(2) of the Act (prior to being amended by Public Act 03-259), that:

1. The Order to Cease and Desist that was issued against Steven G. Morton on November 22, 2006, be made PERMANENT;
2. The Order to Cease and Desist that was issued against Oxford Micro Devices, Inc., on November 22, 2006, be made PERMANENT;
3. A fine of Twenty Thousand Dollars ($20,000) be imposed against Steven G. Morton, to be remitted to the Department of Banking by cashier’s check, certified check or money order, made payable to “Treasurer, State of Connecticut”, no later than 30 days from the date the Order is mailed;
4. A fine of Twenty Thousand Dollars ($20,000) be imposed upon Oxford Micro Devices, Inc., to be remitted to the Department of Banking by cashier’s check, certified check or money order, made payable to “Treasurer, State of Connecticut”, no later than 30 days from the date the Order is mailed; and
5. This Order shall become effective when mailed.


________/s/_________
Howard F. Pitkin
Banking Commissioner

Dated at Hartford, Connecticut
this 30th day of January 2008.


This Order was mailed by registered mail,
return receipt requested, to Respondents
on January 30, 2008.

Steven G. Morton                   Registered Mail No. RB027867182US
39 Old Good Hill Road
Oxford, CT 06478


Administrative Orders and Settlements