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[QUOTE]Originally posted by wallymac: [QB] Scienter is clearly present here. The repeated and outlandish nature of the misleading statements by Conversion and Harris shows recklessness, if not outright knowledge of the falsity of their claims. Harris controls Conversion. Accordingly, his scienter is imputed to it. SEC v. Manor Nursing Centers, Inc., 458 F. 2d 1082, fn18 (2d Cir. 1972). 2. Conversion Violated Reporting Provisions Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-11 thereunder require certain issuers to file with the Commission annual and current reports containing, among other things, financial statements prepared in conformity with the requirements of the Commission's rules and regulations. In addition, Rule 12b-20 under the Exchange Act requires that such reports contain, in addition to disclosures expressly required by statute and rules, such other information as is necessary to ensure that the statements made in those reports are not, under the circumstances, materially misleading. The requirement that an issuer file reports under Section 13(a) embodies the requirement that such reports be true and correct. See SEC v. Savoy Industries, Inc., 587 F.2d 1149, 1165 (D.C. Cir. 1978). Regulation S-X provides that financial statements not prepared in conformity with GAAP are presumed to be inaccurate. 17 C.F.R. § 210.4-01(a)(1). Conversion violated Section 13(a) and Rules 12b-20, 13a-1 and 13a-11 on five separate occasions, when it filed current reports on Forms 8-K and 8-K/A on September 26 and 29, 2006, and annual reports on Forms 10-KSB and 10-KSB/A on October 16, 17, and 19, 2006 containing the material misstatements discussed above. 3. Harris Aided and Abetted Conversion’s Reporting Violations Section 20(e) of the Exchange Act defines “aiding and abetting” to include rendering substantial assistance in the violation. Harris aided and abetted Conversion’s violations of Section 13(a) of the Exchange Act by knowingly recording fictitious assets on the company’s financial statements, and by otherwise describing fictitious assets in those reports. He did this on five separate occasions, corresponding with Conversion’s filing of the Forms 8-K and 8-K/A filed on September 26 and 29, 2006, and the annual reports on Forms 10-KSB and 10-KSB/A filed on October 16, 17, and 19, 2006. 4. Harris Falsely Certified Reports Exchange Act Rule 13a-14 requires principal executive and financial officers to certify in quarterly and annual Commission filings that, among other things, they have read the filing; that it does not contain any untrue statements, or omissions, of material facts; that the filing fairly presents the financial condition and results of operations and cash flows of the issuer; and that they have disclosed to the audit committee and auditors all significant deficiencies of internal controls of the company. Harris violated Rule 13a-14 on three separate occasions, when he knowingly certified the fraudulent financial statements included in Conversion’s Forms 10-KSB and 10-KSB/A filed on October 16, 17, and 19, 2006. __________________ D. INJUNCTIVE AND RELIEF IS APPROPRIATE In analyzing the need for injunctive relief, courts focus on whether there is a reasonable likelihood that the defendant, if not enjoined, will engage in future illegal conduct. See, e.g., SEC v. Bonastia, 614 F.2d 908 (3d Cir. 1980); SEC v. Commonwealth Chemical Securities, Inc., 574 F.2d 90, 100-101 (2d Cir. 1978). In determining the likelihood of future violations, the totality of the circumstances is to be considered. SEC v. Murphy, 626 F.2d 633, 655 (9th Cir. 1980). In granting or denying injunctive relief, courts have considered the following factors: 1. the egregiousness of the violations; 2. the isolated or repeated nature of the violations; 3. the degree of scienter involved; 4. the sincerity of the defendant's assurances, if any, against future violations; 5. the defendant's recognition of the wrongful nature of his conduct; 6. the likelihood that the defendant's occupation will present opportunities (or lack thereof) for future violations; and 7. the defendant's age and health. In this case, permanent injunctive relief is appropriate because Harris orchestrated a massive fraudulent scheme through Conversion’s false press releases and Commission filings. The misconduct occurred on a repeated basis, even in the short time period (less than one month) charged in the Complaint. Moreover, it is clear from Harris’s comments in open court and from his pleadings that he still does not recognize, or at least does not acknowledge, the wrongful nature of his conduct. Still in his thirties and with no apparent means of support but for future fraudulent activity, Harris poses a significant danger of additional violations. As discussed in paragraph G, below, Plaintiff is requesting a hearing on this motion in which to present evidence of the substantial harm caused to numerous investors by Harrris’s and Conversion’s actions. E. HARRIS SHOULD BE BARRED FROM ACTING AS AN OFFICER OR DIRECTOR IN THE FUTURE In light of the egregiousness of Harris’s fraud, this Court should issue an Order pursuant to Section 21(d)(2) of the Exchange Act [15 U.S.C.§ 78u(d)(2)] permanently prohibiting Harris from acting as an officer or director of any issuer that has a class of securities registered with the Commission pursuant to Section 12 of the Exchange Act [15 U.S.C. § 78l] or that is required to file reports with the Commission pursuant to Section 15(d) of the Exchange Act [15 U.S.C.§ 78o(d)]. F. CIVIL PENALTIES SHOULD BE IMPOSED In addition, Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange Act provide that the Commission may seek to have a court impose civil penalties. First tier penalties for violations arising after February 14, 2005 may be imposed up to the larger of $6,500 for a natural person or $65,000 for any other person, or the amount of ill-gotten gain. When the violation involves fraud, second tier penalties may be imposed up to $65,000 for a natural person or $325,000 for any other person. A “third tier” civil penalty of up to the larger of $130,000 for a natural person or $650,000 for any other person, or the amount of ill-gotten gain may be imposed when any provision of the Securities Act or the Exchange Act is violated, if the violation involved fraud or deceit and the violation resulted in substantial losses or created a significant risk of substantial losses to other persons. See 17 C.F.R. § 201.1003. The SEC requests that the Court order Harris and Conversion to pay substantial civil penalties in amounts determined by the Court to be appropriate. As discussed above, their violations clearly involved fraud and deceit. In addition, their violations resulted in very substantial losses to many, many investors, as Plaintiff will demonstrate through evidence to be presented in the hearing it has requested on this motion. Harris was the chief architect of Conversion’s fraud, and the person it acted through in making every misrepresentation charged in the Complaint. Harris clearly acted with scienter. As Conversion’s chief executive officer at all relevant times, his state of mind is imputed to the company. See Armstrong, Jones & Co. v. SEC, 421 F.2d 359, 362 (6th Cir.), cert. denied, 398 U.S. 958 (1970); SEC v. Interlink Data Network of Los Angeles, Inc., No. Civ. A93-3073, 1993 WL 603274 at *9, (C.D. Cal. Nov. 15, 1993), rev’d on other grounds, 77 F.3d 1201 (9th Cir. 1996). In light of the high degree of scienter associated with the charged fraudulent activities and the enormous losses to investors that flowed from them (which Plaintiff will show at the requested hearing), substantial civil penalties are appropriate in this case for each violation committed by Defendants. G. ADDITIONAL INFORMATION AND REQUEST FOR A HEARING Plaintiff requests that the Court order a hearing on this Motion for Default Judgment, so that it may present evidence concerning the amount of civil penalties appropriate for the Court to order. Specifically, Plaintiff plans to present the testimony of victims who purchased shares of Conversion at tremendously inflated prices after relying on the fraudulent misrepresentations made by Defendants charged in the Complaint. These victims will explain the substantial losses that they suffered, and the effects of those losses on their daily lives. In addition, Plaintiff plans to present the testimony of a staff accountant of the Commission, to quantify for the Court the approximate total losses to investors flowing from Defendants’ fraudulent misrepresentations. Finally, Plaintiff will present evidence of Defendant Harris’s plan to enrich himself and his family members through stock sales during his fraudulent manipulation of Conversion’s stock price. CONCLUSION [/QB][/QUOTE]
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