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KURT L. GOTTSCHALL ([email protected]) Colorado Bar No. 28377 NOEL M. FRANKLIN ([email protected]) Colorado Bar No. 28969 Attorneys for U.S. Securities and Exchange Commission 1801 California Street, Suite 1500 Denver, Colorado 80202 Telephone: (303) 844-1000
Facsimile: (303) 844-1052
FILED
APR 25 2007
~~
UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
SOUTHERN DNISION
SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
Civil Action Number:
01 - \,\ U 5"" ~
COMPLAINT
RICHARD R. HYLLAND, Defendant.
PlaintiffSecurities and Exchange Commission ("Commission") for its complaint alleges as follows:
I. SUMMARYOFTHEACTION
1.
During the first three quarters of2002, Richard R. Hylland, the fonner chief
operating officer ("COO") and president of NorthWestem Corporation ("NorthWestern"), and other NorthWestern senior executives misled investors about the
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financial performance and operations of NorthWestern and its subsidiaries, Expanets, Inc. ("Expanets") and Blue Dot Services, Inc. ("Blue Dot"). 2. Hylland's conduct took essentially three fOIms. First, Hylland and other
NorthWestern senior executives misled investors during the relevant period about the status of the functionality ofExpanets' new computer system, which caused problems in Expanets' customer billing and collection functions. As a result ofthese problems, and with the knowledge ofHylland and other NorthWestern senior executives, Expanets failed to properly adjust its financial statements to accoWlt for Wlcollectible receivables and adjustments to customer bills, causing overstatements of NorthWestem's reported income of90% and 109% in the second and third quarters of2002, respectively. 3. Second, HyUand and other NorthWestern senior executives misled investors
about the nature of NorthWestern's and Expanets' reported income. While NorthWestern and Expanets executives publicly claimed that Expanets had achieved profitability through its operations and cost savings, Expanets' reported income during 2002 was, in large part, derived from Wldisclosed reserve reductions, which helped Expanets reach its earnings targets, and from its receipt of unusual non-compete payments. 4. Third, Hylland and other NorthWestern senior executives misled investors
about critical issues that impacted NorthWestern's liquidity. Specifically, during 2002, Hylland and other NorthWestern senior executives knew that the marketplace closely monitored cash transfers between NorthWestern and its subsidiaries as a key indicator of fmancial performance. Hylland and other NorthWestern senior executives misled the public regarding the magnitude ofeash that NorthWestern needed to transfer to both Expanets and Blue Dot. Hylland and other NorthWestern senior executives also knew of
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a substantial risk to NorthWestern's ability to collect approximately $97 million it had publicly anticipated from its sale of certain utility assets, but that NorthWestern failed to properly disclose that risk. 5. The conduct of Hylland and other NorthWestern senior executives helped
facilitate NorthWestern's completion of more than $800 million in securities offerings in September and October 2002, including raising $87.5 million in an equity offering that provided the company with operating capital to improve its liquidity position. 6. Approximately a year after this offering, and after restating its 2002 quarterly
financial results, writing offsignificant investments in Expanets and Blue Dot, and disclosing the true results of its 2002 operations, NorthWestern declared bankruptcy.
II. JURISDICTION AND VENUE
7. The Corrunission brings this action pursuant to the authority conferred upon
it by Section 20(b) ofthe Securities Act of 1933 ("Securities Act") [15 U.S.c. § 77t(b)] and Sections 21(d) and (e) of the Securities Exchange Act of 1934 C"Exchange Act") [15 U.S.C. §§ 78u(d) and (e)] for an order pennanently restraining and enjoining Defendant and granting other equitable relief. 8. This Court has jurisdiction over this action pursuant to Section 22(~) of the
Securities Act [15 U.S.C. § 77v(a)] and Sections 2ICe) and 27 of the Exchange Act [15 U.S.C. §§ 78u(e) and 78aa]. 9. Venue lies in this Court pursuant to Section 22(a) of the Securities Act and
Section 27 of the Exchange Act [15 U.S.C. §§ 77v(a) and 78aa]. 10. In connection with the transactions, acts, practices, and courses of business described in this Complaint, Hylland, directly or indirectly, made use of the means or
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instrumentalities of interstate commerce, ofthe mails, ofthe facilities of a national securities exchange, and/or of the means and instruments oftransportation or communication in interstate commerce. 11. Certain of the transactions, acts, practices and courses of business constituting the violations of law alleged herein occurred within this judicial district. Moreover, Defendant Hylland resides in this judicial district.
UI. DEFENDANT
12. Richard R. Hylland, age 46, is a resident of Sioux Falls, South Dakota. Hylland served as NorthWestern's president, COO and a member ofits board of directors from approximately May 1998 until
Ap~12003.
Hylland also served as vice-chainnan of
Expanets' board of directors from December 1997 until April 2003. Prior to Hylland's tenure as NorthWestern's COO, he served as the company's controller, treasurer and chief financial officer ("CFO"), respectively. Hylland was licensed as a certified public accountant in South Dakota in 1985, but his license is now inactive.
IY. RELATED PARTIES
13. NorthWestern Corporation, a Delaware corporation with its principal executive offices in Sioux Falls, South Dakota, operates a regulated utility business in South Dakota, Nebraska and Montana. During the period described herein, NorthWestern controlled and consolidated the financial results of two significant non utility entities, Expanets and Blue Dot. NorthWestern's common stock was registered with the Commission under Section 12(b) of the Exchange Act and traded on the New York Stock Exchange until it was delisted shortly before NorthWestern declared bankruptcy in September 2003. In November 2004, NorthWestern emerged from
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bankruptcy. Its common stock is now registered with the Commission pursuant to Section l2(b) of the Exchange Act and trades on the NASDAQ Global Select Market. 14. Expanels, Inc., fonnerly headquartered in Englewood, Colorado, provided networked telecommunications equipment and services to medium-sized businesses nationwide. Expanets was comprised of approximately 26 small telecommWlications equipment reseUers and a fonner sales division of Lucent Technologies. NorthWestern wrote off substantially all ofits investment in Expanets in its 2002 Fonn 10-K and announced its intent to sell Expanets in April 2003. In the second quarter of2003, Expanets' operations were discontinued, and in May 2004, Expanets filed for bankruptcy. Proceeds from the sale of Expanets' assets were distributed in bankruptcy. 15. Blue Dot Services, Inc., fonnerly headquartered in Sunrise, Florida and Sioux Falls, South Dakota, was fonned by North Western in 1997 and provided heating, ventilation and air conditioning ("HVAC") services nationwide. Blue Dot was comprised of more than 90 small HVAC businesses. NorthWestern wrote off substantially all of its investment in Blue Dot in the company's 2002 Form lO-K and announced its intention to sell Blue Dot in Apri12003. In the second quarter of2003, Blue Dol's operations were discontinued, and NorthWestern thereafter sold or closed each of Blue Dot's HVAC businesses.
V.
SUMMARY OF VIOLATIONS AND RELIEF SOUGHT
16. Defendant Hylland violated Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)] and Sections 10(b) and 13(b)(5) of the Exchange Act [15 U.S.c. §§ 78j(b) and 78m(b)(5)] and Rules IOb-5 and 13b2-l thereunder [17 C.F.R. §§ 240.10b-5 and 240.13b2-1], and aided and abetted NorthWestern's violations of Sections 13(a),
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13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act [15 U.S.C. §§ 78m(a), 78m(b)(2)(A) and 78m(b)(2)(B)] and Rules 12b-20, 13a-ll and l3a-13 thereunder [17 C.F.R. §§ 240.12b-20, 240.13a-Il and 240.13a-13], and unless restrained and enjoined will violate or aid and abet violations of such provisions. 17. The Commission also seeks an order requiring Hylland to pay a $150,000 civil penalty, pursuant to Section 20(d) ofthe Securities Act [15 U.S.C. § 77t(d)] and Section 21(d) of the Exchange Act [15 U.S.C. § 78u(d)]. 18. The Commission also seeks an order barring Hylland from serving as an officer and director of any public company for five years following the date of the entry of a Final Judgment against him, pursuant to the equitable authority of the court, and Section 21(d)(2) of the Exchange Act, as amended [15 U.S.C. § 78u(d)(2)].
VI.
A.
FACTS
Background -- NorthWestern's Expansion And The Poor Performance oflts Non-Utility Businesses Prior to 2002
19. For more than seventy years, NorthWestern operated a public utility
business, providing electricity and natural gas to customers in South Dakota and Nebraska. 20. In the late-1990s, NorthWestern formed two non-utility entities, Expanets and Blue Dot, to diversify into the potentially high-growth sectors of telecommunications and HVAC services, respectively. NorthWestern intended to acquire telecommunications and HVAC companies and then make the combined businesses more profitable. 21. NorthWestern expected that following an initial growth phase, Expanets and Blue Dot would provide substantial additional earnings and cash flow to NorthWestern through dividends
on NorthWestern's preferred stock holdings in both entities.
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22. However, despite NorthWestern's investment of hundreds of millions of dollars in Expanets and Blue Dot, both subsidiaries incurred large losses in most years and posted only small profits in other years. By December 31,2001, NorthWestern had invested $314.1 million in .Expanets and $329.9 million in Blue Dot. Despite this sizeable investment, neither Expanets nor Blue Dot had returned significant cash to NorthWestern. 23. Despite the poor performance of its non-utility subsidiaries, in February 2002, NorthWestern quadrupled its customer base for utility operations by acquiring Montana Power Company ("Montana Power") for approximately $1.1 billion. NorthWestern financed a substantial part of this acquisition by issuing $720 million in wrregistered notes.
B.
NorthWestern's Planned Equity Offering and Heightened Pressure to Meet Financial Performance Targets During 2002
24. NorthWestern's markedly increased debt used to acquire Montana Power
threatened the company's historically stable liquidity and top-tier credit ratings. Therefore, in early February 2002, NorthWestern publicly announced its.intention to conduct an equity offering, and then use the proceeds to pay down a portion of its elevated debt. Hylland and other NorthWestern senior executives also confirmed the company's public guidance of between $2.30 and $2.55 earnings per share for 2002. 25. Throughout 2002, Hylland and other NorthWestern senior executives knew that the histQrical poor performance of NorthWestem's non-utility businesses and NorthWestern's expansion of its utility operations together placed enormous pressure on the company's 2002 financial perfonnance. Hylland and other NorthWestern senior
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executives also knew that NorthWestern's equity offering planned for later in 2002 was critical to the company's liquidity situation. 26. Hylland and other NorthWestern senior executives knew that NorthWestern's ability to meet its public earnings per share guidance for 2002 was dependent in part upon achieving markedly increased profitability at Expanets and BIue Dot. 27. NorthWestern also claimed that both Expanets and Blue Dot would demonstrate significant earnings improvements that would aIIow them to "upstream" cash in the fonn of preferred stock dividends to help service and ultimately pay down NorthWestern's elevated debt. 28. Prior to the completion of more than $800 million in securities offerings by NorthWestern in Septemher and October 2002, HyIIand and other NorthWestem senior executives repeatedly told the marketplace that Expanets was operating as expected and was achieving its earnings targets. 29. However, just two months later, in December 2002, NorthWestern disclosed that Expanets would take more than $50 million of charges for uncoIIectible accounts receivable and adjustments to customer bills. 30. In April 2003, NorthWestern restated its Fonus 10-Q for the first three quarters of 2002 and erased Expanets' previously reported income. The company also disclosed significant ongoing problems with the EXPERT system, and the impact of unusual non-eompete payments on Expanets' 2002 financial results. 31. Also in April 2003, NorthWestern filed its 2002 Form 10-K, in which it wrote off substantiaIIy all of its past investment of hWldreds of millions of doIIars in
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Expanets and Blue Dot. In that filing, NorthWestern also announced that, despite past assurances, neither of these entities would generate future cash flow in sufficient amounts to help service NorthWestern's debt. 32. Over the next five months, NorthWestern's liquidity situation continued to deteriorate until the company declared bankruptcy in September 2003.
c.
Hylland's Role at NorthWestern
33. During 2002, as NorthWestern's COO and president, Hylland oversaw all of
the company's operations, including those of Expanets and Blue Dot. Furthermore, as an· accountant and NorthWestern's former CFO, Hylland had a role in key issues impacting the company's financial results, including those at Expanets and Blue Dot. As alleged below, Hylland also played a central role in NorthWestern's public communications during 2002. 34. Hylland reviewed and approved all of NorthWestern's earnings press releases and Commission filings made pursuant to the Exchange Act during 2002, including: NorthWestern's Forms 10-Q for the periods ended March 31, 2002, June 30, 2002 and September 30,2002; NorthWestern's First Amended Fonns 10-Q for the periods ended March 31, 2002 and June 30, 2002, filed with the Commission on September 20,2002; NorthWestern's Forms 8-K dated May 1,2002, August 8,2002, and November 7,2002; and NorthWestern's earnings press releases dated April 30. 2002, August 8, 2002 and November 7,2002. 35. Hylland signed the following Commission filings pursuant to the Securities Act: NorthWestern's Form S-4 filed Apri124, 2002; Form S-4/Amendment #1 filed July 12,2002; Form S-4/Amendment #2 filed August 16,2002; and Form S-4/Amendment #3
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filed September 9, 2002. Hylland also reviewed and approved the equity offering prospectus supplements that NorthWestern filed with the Commission on September 30, 2002 and October 3, 2002. 36. Hylland knew or was reckless in not knowing that NorthWestern's Form 10-Q for the first quarter of 2002 was incorporated by reference into the amended Forms S-4 filed with the Commission on July 12, 2002, August 16; 2002 and September 9, 2002. Hylland also knew or was nickless in not knowing that NorthWestern's Form lO-Q for the second quarter of2002 was incorporated by reference into the amended Fonns SA flied with the Commission on August 16,2002 and September 9, 2002, as well as the equity offering prospectus supplements that NorthWestern filed with the Commission on September 30, 2002 and October 3, 2002. 37. Hylland spoke in NorthWestern analyst conference calls on April 30, 2002, May 17,2002, August 8, 2002 and November 7,2002.
D.
Problems With Expands' Computer System
38. During 2000 and 2001, Expanets developed the EXPERT infonnation
technology system to serve as a platform for virtually all of its operations, including sales, inventory, project management, billing, collections and financial statement preparation. Because of EXPERT's planned scope and impact across operations, the functionality of the system was critical to Expanets' operations and financial results. 39. Following the implementation of EXPERT in November 2001, the system was unable to perform many of the basic tasks for which it had been designed. In particular, the EXPERT system experienced serious problems in generating timely and
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accurate customer bills and tracking customer payments. For example, for approximately one month following implementation, EXPERT could not generate any customer bills. 40. Throughout the first three quarters of2002, HyIJand and other NorthWestern senior executives received detailed infonnation from Expanets and NorthWestern personnel regarding serious, ongoing problems with the EXPERT system and its impacts across Expanets' operations, particularly as to customer billing and collections. Among other things, Hylland and other NorthWestern senior executives received weekly EXPERT updates, monthly operations reports and numerous candid emaiIs regarding the system status. Hylland and other NorthWestern senior executives also participated in regular meetings regarding ongoing system problems and planned repairs. 41. NorthWestern's first quarter earnings press release, published on April 30, 2002, quoted Hylland as stating that "implementation of Expanets' new infonnation technology system infrastructure, known as EXPERT, made significant operational strides during the fIrst quarter and that order management and billing activities are fully operational." At the time Hylland made this statement, he knew that EXPERT's billing function continued to suffer serious problems and that the system still could not perform other basic tasks for which the system had been designed. Therefore, HylJand knew or was reckless in not knowing that his statement was false and misleading. 42. NorthWestern's first and second quarter Fonus 10-Q for 2002, and NorthWestern's filings to effectuate its debt and equity offerings in September and October 2002, failed to disclose any of EXPERT's functionality problems or their material impact on Expanets' operations during the quarter. Instead, NorthWestern's first and second quarter Forms lO-Q stated, without qualification, that EXPERT was "fully
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operational" and "operational," respectively. Similarly, NorthWestern's filings to effectuate its debt and equity offerings characterized the EXPERT system as "operational," again without any qualification. Hylland knew or was reckless in not knowing these characterizations of the system, and NorthWestern's failure to disclose ongoing problems or their impact on Expanets' operations, were false and misleading. 43. After its securities offerings, NorthWestern disclosed in its Form 10-Q for the third quarter of2002 and its 2002 Form IO-K that Expanets had experienced significant problems with EXPERT during the year, particularly as to billing and collections. The EXPERT system still was not functioning properly when NorthWestern decided to discontinue Expanets' operations in the second quarter of2003.
E.
Expands' Material Understatement Of Its Bad Debt Reserve
44. In anticipation that some customer accounts might prove uncollectible.
Expanets maintained a "bad debt" reserve, which had the effect of reducing Expanets' operating income. 45. In the second quarterof2002, Hylland was informed that Expanets had improperly failed to increase its bad debt reserve to account for the markedly increased difficulties with collections that resulted from the EXPERT implementation. For example, Expanets personnel infonned Hylland and other NorthWestern senior executives that Expanets had not increased reserves to account for millions of dollars of aged receivables that pre·dated implementation of the EXPERT system in November 2001. Hylland also knew or was reckless in not knowing that after EXPERT implementation, a litany of system problems was greatly hampering collection, causing millions of dollars of receivables to become badly aged and therefore likely uncollectible.
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46. Hylland therefore knew or was reckless in not knowing that Expanets improperly failed to increase its bad debt reserve to account for additional uncollectible accounts receivable in its financial statements for the second quarter of 2002. Hylland also knew or was reckless in not knowing that NorthWestern did not disclose infonnation indicating that a loss as a result ofExpanets' uncollectible accounts receivable was probable or reasonably possible in NorthWestern's second quarter Form 10-Q.
47. Hylland knew or was reckless in not knowing that serious problems with
Expanets' accounts receivable collections continued throughout the third quarter 0£2002. For example, in mid-September 2002, approximately two weeks before NorthWestern's equity offering, Expanets personnel met with Hylland and other NorthWestern senior executives to discuss Expanets' accounts receivable. At that meeting, Hylland and other NorthWestern senior executives were provided a written report and told by Expanets personnel that $52 million ofreceivables were over 180 days old, including $21 million of receivables that were over 300 days old. 48. Because these severely aged receivables were not likely to be collected, standard collection parameters suggested either writing offExpanets' receivables or increasing its bad debt reserve by $46 million. Because many of Expanets' aged receivables resulted from billing lapses and delays,
Exp~ets
personnel infonned Hylland
and other NorthWestern senior executives that they believed the bad debt reserve was understated by a lesser amount, approximately $32 million. However, Hylland and other NorthWestern senior executives knew that Expanets had not increased its reserve by any amount.
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49. On or about October 22,2002, soon after the completion of NorthWestem's debt and equity offerings, Expanets personnel again met with Hylland and other NorthWestern senior executives and informed them that Expanets' accounts receivable balance had shown virtually no improvement since the mid-September meeting. Based upon this data, Expanets personnel recommended a substantial increase in Expanets' bad debt reserve. 50. Despite his receipt of these documents, Hylland stated that, no matter how old, a11 ofExpanets' accounts receivable should be treated as collectible since Expanets had provided equipment or services to its customers. Hylland and other NorthWestern senior executives knew that Expanets did not increase its reserve as a result of the information exchanged at this meeting. 51. After NorthWestem's securities offerings, the company's third quarter Fonn
IO-Q disclosed in part that the EXPERT billing problems "may cause a need to increase
the current reserve for bad debt, which could negatively impact financial performance in future quarters." (Emphases added) Hylland knew or was reckless in not knowing that this disclosure was false and misleading because by that time, Expanets' bad debt reserve was, in fact, already materially understated. 52. In April 2003, NorthWestern filed its 2002 Fonn 10-K which included fourth quarter 2002 charges of approximately $20 million relating to Expanets' uncollectible accounts receivable, and simultaneously restated its financial results for the second and third quarters of2002, increasing Expanets' bad debt reserve for each of these periods by approximately $5. r million and $6.3 million, respectively.
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53. As a result of its improper accounting for uncollectible accounts receivable, NorthWestern overstated its income from continuing operations by approximately 19% and 39% for the second and third quarters of2002, respectively, as reported in its Fonus
IO-Q and corresponding earnings releases attached to Forms 8-K. Moreover, in its
segment reporting for Expanets, NorthWestern overstated Expanets' operating income by approximately 86% and 270%, respectively, for the second and third quarters of2002.
F.
Expanets' Material Understatement Of Its Reserve For AdJustments to
Customer BiDs 54. As a result of the inaccurate customer bills generated by the EXPERT
system, Expanets issued partial credits to affected customers. Expanets recorded these credits as "billing adjustments," which reduced both its revenue and income in the current period. Since Expanets credited customer accounts in periods after it initially recognized revenue from a transaction, Expanets maintained a "billing adjustment re~erve" for anticipated credits to customer accounts. 55. In the second and third quarters of2002, Expanets persoIUlel repeatedly' informed Hylland and other NorthWestern senior executives that due to the serious ongoing problems with EXPERT's billing function, actual and forecasted billing adjustments were continuing to outpace even the elevated levels anticipated for 2002. 56. For example, during this time, Hylland and other NorthWestern senior executives received, among other things, monthly operations reports and other updates describing billing adjustments and their negative impact on Expanets' financial results. 57. For example, in a meeting in July 2002, Expanets personnel warned Hylland and other NorthWestern senior executives that Expanets' billing adjustment reserve might be understated by as much as $30 million for 2002.
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58. For the third quarter of2002, Expanets personnel informed Hylland and other NorthWestern senior executives that actual billing adjustments for the quarter had significantly exceeded its original and revised projections. 59. As a result ofreceiving this infonnation throughout 2002, Hylland knew or was reckless in not knowing that Expanets improperly failed to increase its billing adjustment reserve in the second and third quarters of 2002. Hylland further knew or was reckless in not knowing that NorthWestern had not disclosed in its Fonns 10-Q for the second or third quarters of2002, or in its Commission filings to effectuate its debt and equity offerings, that losses resulting from billing adjustments were probable or reasonably possible. 60. In April 2003, NorthWestern restated its financial results for the first three quarters of 2002, increasing the billing adjustment reserve by $33 million. For the
,
second and third quarters of2002, NorthWestern's restated financial results corrected the understatement ofExpanets' billing adjustment reserve by reducing reported quarterly revenue by approximately $10.1 million and $5.4 million, respectively. As a result of Expanets' improper accounting for billing adjustments, NorthWestern overstated its income from continuing operations by approximately 46% and 31 % for the second and third quarters 0[2002, respectively, as reported 1n its Fonns 10-Q and corresponding earnings releases attached to Fonns 8-K. ill its segment reporting for Expanets, NorthWestern overstated Expanets' operating income by approximately 1094% and 164%, respectively, for the second and third quarters of 2002.
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G.
Expands' Reserve Reductions
61. During the second and third quarters of2002, Expanets reduced amounts
recorded in at least fourteen reserve accounts that it maintained on its balance sheet, the effect of which was to materially increase NorthWestern's and Expanets' reported income over that same period. HylJand knew or was reckless in not knowing about these reductions, their material impact on the company's results of operations. and NorthWestern's failure to properly disclose this information regarding Expanets' quality of earnings. 62. From at least May 2002 through the filing of NorthWestern's Form lO-Q for the second quarter 2002, Expanets personnel informed Hylland and other NorthWestern senior executives through various communications, including emails, written reports and/or verbal communications, that they planned to or had reduced Expanets' reserves during the second quarter, and that these reserve reductions had materially increased Expanets reported income.
I
63. For purposes of the second quarter 2002 alone. approximately $8.8 million ofExpanets' reported income was derived from reserve reductions. This amount was material in that it represented approximately 80% of Expanets' reported segment operating income of$11 million and approximately 27% of NorthWestern's income from continuing operations for that quarter. 64. Through his communications with Expanets, Hylland knew or was reckless in not knowing that a material portion of NorthWestem's and Expanets' reported results of operations for the second quarter 2002 was derived from Expanet5' reserve reductions.
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65. Both NorthWestern's Fonn IO-Q for the second quarter 2002 and its corresponding earnings release issued in August 2002 failed to disclose the material impact of these reductions on NorthWestern's and Expanets' results of operations for that quarter. Hylland knew or was reckless in not knowing about these material omissions from NorthWestern's Form 10-Q and earnings release attached to Fonn 8-K. 66. Furthermore, during NorthWestern's August 2002 analyst call, Hylland mischaracterized Expanets' second quarter reported income as representative of its recurring "run rate." This statement was false and misleading because Hylland knew or was reckless in not knowing that Expanets' reported income for the second quarter had been materially impacted by various non-recurring reserve reductions, and thus was not representative of its true run rate. 67. Following NorthWestern's filing of its Fonn lO-Q for the second quarter 2002 and through the completion of more than $800 million in securities offerings by NorthWestern in September and October 2002, Expanets continued to inform Hylland and other NorthWestern senior executives through various communications, including emails, written reports and/or verbal communications, of its planned or actual reduction of reserves over the remainder of2002. 68. Up through the completion of more than $800 million in securities offerings by NorthWestern in September and October 2002, a material portion ofNorthWestern's and Expanets' income for that period of 2002 was derived from Expanets' reserve reductions. Through his communications with Expanets prior to these filings, Hylland knew or was reckless in not knowing about the materiality of these reductions.
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69. NorthWestern's Commission filings to effectuate its debt and equity offerings in September and October 2002, respectively, failed to properly disclose the material impact of Expanets' reserve reductions on NorthWestern's and Expanets' results of operations. Hylland knew or was reckless in not knowing about these material omissions from NorthWestern's Commission filings. 70. Following NorthWestern's completion of its securities offerings, and up through the filing of its Fonn 10-Q for the third quarter 2002, Expanets continued to inform Hylland and other NorthWestern personnel through emails, written reports and/or verbal communications of its planned or actual reduction of reserves for the third quarter and the remainder of 2002. 71. For example, during an operations review meeting with Expanets management in October 2002, Expanets personnel discussed with Hylland and other NorthWestern senior executives the possible reduction of $4.2 million of additional balance sheet reserves during the third quarter of 2002. As a result, Expanets reduced its reserves by $4.2 million during the third quarter of2002, thereby increasing NorthWestern's and Expanets' reported income.
n.
Approximately $27 million of Expanets' income was derived from reserve
reductions during the third quarter of2002. With this income, Expanets was able to report $8.7 million of operating income rather than a substantial loss. In addition, with this income, NorthWestern was able to report $14.6 million of income from continuing operations for that quarter rather than a loss. Accordingly, the amount of Expanets' reserve reductions for the third quarter 2002 was material to both NorthWestern's and Expanets' results of operations for that period.
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73. Through his communications with Expanets, Hylland knew or was reckless in not knowing that a material portion of NorthWestem's and Expanets' reported results of operations for the third quarter 2002 was derived from Expanets' reserve reductions. 74. Both NorthWestern's Form 10-Q for the third quarter and its corresponding earnings release issued in November 2002 failed to properly disclose the material impact ofExpanets' reserve reductions. Hylland knew or was reckless in not knowing about these material omissions from NorthWestern's Fonn 10-Q and earnings release attached to Form 8-K.
H.
Expanets' Unusual Transactions
75. In conjWlction with Expanets' acquisition ofcertain assets of a competitor.
Expanets agreed in March 2000 that, in exchange for payments from the competitor, Expanets would not solicit specific business of the competitor's customers. Expanets' competitor was obligated to make these "non-compete" type of payments to Expanets until March 2005. These payments were not characteristic of Expanets' regular operations and therefore represented unusual transactions. 76. Throughout 2002, Hylland and other NorthWestern senior executives knew that Expanets would be receiving these non-compete payments. Furthennore, throughout 2002, Expanets personnel infonned Hylland and other NorthWestern senior executives through various communications, including emails, written reports and/or verbal communications, about the actual and projected impacts of these non-compete payments on Expanets' reported income for 2002. 77. ill the first quarter of 2002, NorthWestern reported in its segment disclosures that Expanets had an operating loss ofapproximately $2.7 million. Approximately $9.3
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million of Expanets' income came from the non-compete payments. The $9.3 million also represented approximately 25% ofNorthWestem's consolidated income from continuing operations for the quarter. Accordingly, the amount of these non-compete payments was material to the operating results of both NorthWestern and Expanets for that period. 78. In the second quarter of 2002, NorthWestern reported in its segment disclosures that Expanets had operating income of approximately $11 million. Approximately $10 million of Expanets' income came from the non-compete payments. The $10 million also represented approximately 31 % ofNorthWestern's consolidated income from continuing operations for the quarter. Accordingly, the amount of these non-compete payments was material to both the operating results of NorthWestem and Expanets for that period. 79. In the third quarter of2002, NorthWestern reported in its segment disclosures that Expanets had operating income of approximately $8.7 million. Approximately $15.3 million of Expanets' income came from the non-compete payments. The $15.3 million also represented approximately 68% of NorthWestern's consolidated income from continuing operations for the quarter. Accordingly, the amount of these non-compete payments was material to the operating results of both NorthWestern and Expanets for that period. 80. NorthWestern's Forms lO-Q for the first three quarters of2002, its corresponding earnings releases for those quarters, and its filings to effectuate its debt and equity offerings in September and October 2002, respectively, failed to properly
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disclose Expanets' receipt of these unusual non-compete payments and their material effect on Expanets' and NorthWestern's reported results of operations for those periods. 81. Through his communications with Expanets throughout 2002, Hyl1and knew or was reckless in not knowing about the material impact of these non-compete payments, and he knew or was reckless in not knowing that NorthWestern's Commission filings and corresponding earnings press releases attached to Forms 8-K during 2002 failed to properly disclose the impact to NorthWestern'S and Expanets' reported results of operations.
I.
NorthWestern's Intercompany Advances to Expanets and Blue Dot 82. Throughout 2002, NorthWestern and the marketplace focused on cash
movements between NorthWestern and its subsidiaries as a critical metric ofthe subsidiaries' operational perfonnance and NorthWestern's consolidated liquidity. It was therefore important that both Expanets and Blue Dot demonstrate the ability to provide cash to NorthWestern during 2002 to help NorthWestern service its debt load. However, Hylland and other NorthWestern senior executives were informed that neither entity was providing meaningful cash to NorthWestern, that NorthWestern was actually required to fund these operations more than originally planned, and that NorthWestern failed to properly disclose this information. 83. For example, EXPERT's inability to generate any customer bills in late 2001 and early 2002 and other billing problems that followed caused Expanets' cash flow from operations during the first quarter of 2002 to be a deficit of approximately $68.7 million.
As a result, NorthWestern provided Expanets with significant intercompany advances
during the first quarter of 2002 to enable Expanets to pay operating and other expenses,
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including a scheduled amount on a third-party credit facility. By the end of the first quarter of2002, NorthWestern's intercompany advances to Expanets totaled $63.3 million. 84. Similarly, during the first quarter of 2002, NorthWestern provided Blue Dot with approximately $21 million in cash advances so that Blue Dot could payoffa large credit facility and operating expenses when due. NorthWestern's outstanding intercompany advances to Blue Dot totaled approximately $37.1 million at the end of the first quarter of2002.
85. NorthWestern's intercompany advances to Expanets and Blue Dot during the
first quarter demonstrated that these businesses were continuing to require further investments from NorthWestern, rather than providing cash to the consolidated entity. NorthWestern's need to advance funds to Expanets and Blue Dot was information that was necessary to understand NorthWestern's financial condition and was reasonably likely to impact NorthWestern's liquidity.
86. As a result of various communications, including emails, written reports
andlor verbal communications, Hylland and other NorthWestern senior executives were informed about NorthWestern's first quarter intercompany advances to both Expanets and Blue Dot.
87. Hylland and other NorthWestern senior executives were also informed about
the effect these advances had on NorthWestern's financial condition, inclUding their likely impact to its liquidity, and that such information was material to the public, including analysts and rating agencies.
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88. NorthWestern's Form IO-Q for the first quarter of2002 failed to properly disclose NorthWestern's intercompany advances to Expanets or Blue Dot, including the significance of those advances to NorthWestern's liquidity. Given Hylland's knowledge of NorthWestem's intercompany advances to Expanets and Blue Dot at the time ofthis filing, Hylland knew or was reckless in not knowing about these material omissions from NorthWestern's Form IO-Q. 89. Furthermore, during NorthWestern's analyst call conducted in April of 2002, Hylland misstated the magnitude of NorthWestern's continuing financial support of Expanets over the first four months of2002. Thereafter, during NorthWestern's analyst call conducted in May 2002, Hylland also misstated that Expanets had made a payment on a credit facility, when, in fact, NorthWestern had provided funds for the payment. Given Hylland's knowledge ofNorthWestern's intercompany advances to Expanets at the time of these respective calls, Hyl1and knew or was reckless in not knowing that these statements were false and misleading. 90. During the second quarter of2002, EXPERT's continuing billing and collections problems caused Expanets' cash collections to lag significantly behind expected levels. Therefore, NorthWestern provided Expanets with additional intercompany advances to help Expanets pay operating expenses and another scheduled amount on a third-party credit facility. By the end of the second quarter, the balance of NorthWestern's intercompany advances to Expanets totaled $113.4 million. 91. During the second quarter of 2002, Blue Dot paid back some of the cash previously advanced by NorthWestern. Nevertheless, the quarter-end balance of
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NorthWestern's outstanding intercompany advances to Blue Dot still totaled approximately $22.8 million. 92. As a result of various communications, including emails, written reports andlor verbal communications, Hylland and other NorthWestern senior executives were infonned about NorthWestern's second quarter intercompany advances to both Expanets and Blue Dot. 93. NorthWestern disclosed in its Form lO-Q for the second quarter of2002 that it made intercompany advances to Expanets. However, NorthWestern failed to properly disclose its intercompany advances to Blue Dot or any information about the significance of the intercompany advances to either subsidiary. Given Hylland's knowledge of NorthWestern's intercompany advances to Expanets and Blue Dot at the time ofthis filing, Hylland knew or was reckless in not knowing about these material omissions from NorthWestern's Fonn IO-Q. 94. NorthWestern did not properly disclose the existence and significance of its intercompany advances to both Expanets and Blue for the first and second quarters of 2002 until NorthWestern filed amended Forms lO-Q for those quarters in September 2002.
J.
The Colstrip Utility Asset Sale
95. Also critical to NorthWestern's liquidity during 2002 was its anticipated
receipt of approximately $97 million from an asset sale. Hylland knew or was reckless in not knowing that final closure of the sale was at risk but that NorthWestern failed to properly disclose that risk and its impact to NorthWestern's liquidity.
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96. In February 2002, when NorthWestern purchased Montana Power, NorthWestern became the successor-in-interest to a contract for the sale of certain assets known as the "Colstrip" transmission assets ("Colstrip assets"). The contract called for a payment of approximately $97 million to NorthWestern upon the satisfaction of certain conditions. During the second quarter of 2002, NorthWestern announced that it expected to collect the proceeds from the sale ofthe Colstrip assets by June or July 2002. 97. Throughout 2002, Hylland and other NorthWestern senior executives knew that the sale of the Colstrip assets was significant to ~orthWestern because receipt of the $97 million would enhance NorthWestern's liquidity position by allowing it to pay down various debt obligations. Accordingly, analysts and rating agencies tracked the status of the sale. 98. Between May and July 2002, the other party to the Colstrip assets sale contract repeatedly informed NorthWestern that it would not close the sale until the parties were able to resolve other claims. Through various communications during that period. including emails, written reports andlor verbal communications. Hylland and other NorthWestern senior executives were infonned about the other party's position. 99. On August 5, 2002, NorthWestern filed but did not serve a complaint against the other party to the Colstrip asset sale in a Montana State court. Among other things, the complaint alleged that the other party was obligated to close the sale and pay NorthWestern the proceeds. 100. Through various corrununications with NorthWestern personnel. prior to the filing of NorthWestern's second quarter Fonn Io-Q. Hylland and other NorthWestern senior executives were infonned about NorthWestern's filing of its complaint.
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101. NorthWestern's Fonn lO-Q for the second quarter of2002 improperly failed to disclose the ongoing dispute regarding the Colstrip assets and the effect of that dispute on NorthWestern's financial condition, including its impact on NorthWestern's liquidity. Hylland knew or was reckless in not knowing about this material omission from NorthWestern's Fonn IO-Q. 102. On September 4, 2002, NorthWestern served its complaint on the other party to the Colstrip sale and subsequently disclosed the existence of its lawsuit in its Commission filings to effectuate its debt and equity securities offerings in September and October 2002. 103. [n May 2005, NorthWestern announced that it had settled the lawsuit by agreeing to retain the Colstrip assets in exchange for, among other things, a $9 million payment from the other party.
FIRST CLAIM FOR RELIEF
(Violation of Section 17(3)(1) of the Securities Act [15 U.S.C. § 77g(a)O») 104. Paragraphs 1 through 103 are hereby realleged and incorporated by reference. 105. As a result of the foregoing, Hylland directly and indirectly, with scienter, in the offer or sale of NorthWestem securities, by use of the means or instruments of transportation or communication in interstate commerce or by use of the mails, has employed a device, scheme, or artifice to defraud. 106. Hylland thereby violated, and unless restrained and enjoined, will violate Section 17(a)(1) ofthe Securities Act.
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SECOND CLAIM FOR RELIEF
107. Paragraphs 1 through 103 are hereby realleged and incorporated by reference. 108. Hylland directly and indirectly, with scienter, in the offer or sale of NorthWestern securities, by use of the means or instruments oftransportation or communication in interstate commerce or by use of the mails, has obtained money or property by means of untrue statements of material fact or omissions to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or engaged in transactions, practices, or courses of business which have been or are operating as a fraud or deceit upon the purchasers of NorthWestern securities. 109. Hylland violated, and unless restrained and enjoined, will violate Section 17(a)(2) and 17(a)(3) of the Securities Act.
THIRD CLAIM FOR RELIEF
110. Paragraphs 1 through 103 are hereby realleged and incorporated by reference. 111. Hylland directly and indirectly, with scienter, in connection with the purchase or sale of NorthWestern securities, by use of the means or instrumentalities of interstate commerce or by use of the mails, employed devices, schemes, or artifices to defraud; made untrue statements of material fact or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under
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which they were made, not misleading; or engaged in acts, practices, or courses ~f business which had been and are operating as a fraud or deceit upon the purchasers or sellers of such securities. 112. Hylland violated, and unless restrained and enjoined, will violate Section lOeb) of the Exchange Act and Rule lOb-5 thereunder.
FOURTH CLAIM FOR RELIEF CViolation of Section 13(b)(S) oftbe Exchange Act [15 U.S.C. § 78mCb)(5)]
and Rule 13b2-1 thereunder [17 C.F.R. § 240.13b2-1)) 113. Paragraphs 1 through 103 are hereby realleged and incorporated by reference. 114. Hylland knowingly failed to implement a system ofintemal accounting controls, and directly or indirectly falsified or caused to be falsified books, records or accounts described in Section 13(b)(2)(A) of the Exchange Act. 115. Hylland violated, and unless restrained and enjoined, will violate Section 13(b)(5) of the Exchange Act [15 U.S.C. § 78m(b)(5)] and Rule I3b2-l thereunder [17 C.F.R. § 240. 13b2-l].
FIFTH CLAIM FOR RELIEF
(Aiding and Abetting NorthWestern's Violation of Section 13(a) ofthe
Exchan2e Act [15 U.S.C. § 78m(a)] and Rules t2b-20, 133-11 and 13a-13
thereunder [17 C.F.R. §§ 240.t2b-20, 240.133-11 and 240.13a-13))
116. Paragraphs 1 through 103 are hereby realleged and incorporated by reference. 117. NorthWestem, an issuer ofa security registered pursuant to Section 12(b) of the Exchange Act, filed materially misleading quarterly and current reports with the Commission.
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118. By reason of the foregoing, NorthWestern violated Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Rules 12b-20, 13a-ll and 13a-13 thereunder [17 C.F.R. §§ 240.12b-20, 240. 13a-lI and 240. 13a-13]. 119. Hylland knew bfNorthWestern's violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-11 and 13a-13 thereunder and substantially assisted NorthWestern in committing these violations. 120. Hylland aided and abetted NorthWestern's violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-ll and 13a-13 thereunder, and unless restrained and enjoined will continue to aid and abet violations ofthese provisions.
SIXTH CLAIM FOR RELIEF (Aiding and Abetting NorthWestern's Violation of Section 13(b)(2)(Al ofthe Exchange Act 115 U.S.C. § 78m(b)(2)(A)])
121. reference. 122. NorthWestern failed to make and keep books, records, and accounts, Paragraphs 1 through 103 are hereby realleged and incorporated by
which, in reasonable detail, accurately and fairly reflected the company's transactions and dispositions of its assets. 123. By reason of the foregoing, NorthWestern violated Section 13(b)(2)(A) of
the Exchange Act [15 U.S.c. § 78m(b)(2)(A)]. 124. Hylland knew or was severely reckless in not knowing of NorthWestern's
violations of Section 13(b)(2)(A) of the Exchange Act and substantially assisted NorthWestern in committing these violations.
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125.
Hylland aided and abetted NorthWestern's violations of Section
13(b)(2)(A) of the Exchange Act, and unless restrained and enjoined will continue to aid and abet violations of these provisions.
SEVENTH CLAIM FOR RELIEF
(Aiding and Abetting NorthWestern's Violation of Section
13(b)(2)(B) of the Exchange Act [15 U.S.C. § 78m(b)(2)(B)])
126. reference. 127.
Paragraphs 1 through 103 are hereby realleged and incorporated by
NorthWestern failed to devise and maintain a system ofintemal
accounting controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in confonnity with generally accepted accounting principles or any other criteria applicable to such statements and to maintain accoWltability for assets. 128. By reason of the foregoing, NorthWestern violated Section 13(b)(2)(B) of
the Exchange Act [15 U.S.c. § 78m(b)(2)(B)]. 129. Hylland knew or was severely reckless in not knowing of NorthWestern's
violations of Section 13(b)(2)(B) of the Exchange Act and substantially assisted NorthWestern in committing these violations. 130. Hylland aided and abetted NorthWestern's violations of Section
13(b)(2)(B) of the Exchange Act, and Wlless restrained and enjoined will continue to aid and abet violations of these provisions.
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PRAYER FOR RELIEF
WHEREFORE, the Conunission respectfully requests that the Court:
I.
Find that Hylland conunitted the violations alleged..
II.
Enter an Injunction, in a fonn consistent with Rule 65(d) of the Federal Rules of Civil Procedure, pennanently restraining and enjoining Hylland from violating, directly or indirectly, the provisions of law and rules alleged in this complaint.
III.
Issue an Order requiring Hylland to pay a $150,000 civil penalty pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)] and Section 21(d) of the Exchange Act [15 U.S.C. § 78u(d)].
IV.
Issue an Order pursuant to Exchange Act Section 21(d)(2), as amended by Section
305 ofthe Sarbanes-Oxley Act. [15 U.S.C. 78u(d)(2)], or pursuant to the equitable
authority of the court, barring Hylland from serving as an officer and director of any public company for five years following the date of the entry of a Final Judgment against him.
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v.
Grant such other relief as this Court may deem just or appropriate. Dated:
Respectfully submitted,
KURT L. GOTTSCHALL NOEL M. FRANKLIN Attorneys for Plaintiff U.S. Securities and Exchange Commission 1801 California Street, Suite 1500 Denver, CO 80202 Phone: (303) 844-1000 Fax: (303) 844-1052
~A.·~
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FILk::I)
APR 2 ~~) 2007
UNlTBD STATES DISTRICf couRT DISTlUCf OF SOUTH DAKOTA
~~
0
SBCUUl1ESAlIDEXCHANGB . COMMISSION,
ctfD Adioa Namber:
l - 1.1 U)" ?'
Plaintift
RICBAlU> R. BYU..AND,
CONSENT OF RICHARD BYU..AND
a.
1.
Defeadant Ricbald R. HyJlaod rnorClJdaDtH) waives service of a summons aod
the complaint in this acUOD, eaten a geoenlllppOl[llDCC, aad admits die CourfsjuriBdictioD over
Dcfmdaol and over tbo subject malta' oftbia aotion. 2.
Without admitting or _yins the aI1optioas oftbo complaint (CllOOCIpt 18 to
pcisonal and subject malter'jurisdiction, wbidl DeftmdIDt admits). DefaJdaId ba'oby coueota to
Che entry ofabe final Judgmalt in the form attached hereto (the "Ymall1Jdamenf") IDd
.
incorpcnted byMfinDce heniD, wbi~ amoaa otb« 1biDp:
(I.) penn8Dlll1tJy cqoiDs lIDl1 RlIItaiDs DoftrDdDt fi:oD1 violation ofScc:tioo 17(a)
. or~e Securities Act of 1933 ("Socmitics Aa") [15 U.S.C. § T1q(a)], and·ScctiODS 1O(b)
8Dd 13{bX5) oftbe Soeuritiee Exr.Jump Ad of1934 ('"Bxdlln&e Act") [15 U.S.c. If
78j{b) aDd 78m(bXS)] and:Ru1lllll~S aod 13b2-J fherauDder[17 C.F'.R. fi 240.1~S 1 '
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aDd 240.13b2-11; lIDd IIidIDg IDd abetting violations ofSectioos 13(a), 13(b)(2XA) and
13(b)(2)(B) ofthc Exchange Act [IS U.S.c. §§ 78m(a), 78m(b)(2XA) ad 78m(b)(2)(B)]
andR.n1clI2b-20.13a-1l aDd 13..13 thIRunder [17 c.F.R. §§ 240.12b-20, 24O.13a-11
and 240.13..13]; and
(1)). orden; J>diDfant 1Dpay a civil penalty in the amount ofS I50.000 purwmt to
.Section 20(cl) olthe Securltiell Ad [IS U.s.c. § 71t(d)] aod ScctiOD 21(d) oltho
BE~Ad [15 U.S.c.
§ 7&(d)].
3.
DefaJdaot agRlCI that he sball DOt leek or accept directly or iDdmlctIy.
~ or iDdeami1icItioG ftom any somec, iDcIucJiDg'" DDt limited to paymeat ~
punllJ8D1 to any iJIsmaDr.o policy, with Rprd to any civi!.peuJty IIDOUDls that DefiDJaDt pays
pm8UiiJl to tho F'mal Judgmmt. nganDee:e ofwbdher rAJcb penalty amounta or 1lIIY pert thereof
.am addlld to a diBtn'butioo f\md or 0CbczwiJcs used for the beoefit ofUweslon. Defimdant fudber
IIgl1lCII that he Iba1l not claim.
uaen. at apply for a tD decIuctim1 or eu: c:zedit with mprd to 8I1y
federal. sID. or 10eaJ tax for any pa1II1ty amounts 1hIt Dcft:Ddant pl)'l pmuaot to the Fmal
111damcnt. RgIIIdlea ofwbether' such penalty IIDOUI1ls or lIlY part thereof., added to a
-distribution fund or otht:nrilc used b'the btuofit ol mvca1mS.
-t.
De:!eDdmt waivaI the eaIry offtnctings of&ct IIIK,i c:oodllliona of'1aw punwmt to
Rule stof the Fedc:nl Ru10I
ofCivil PIocedure.
S.
Dcfcndaat waives the riabt.. if any, to a jury trial BD4 to appeal ftom the entry of
tho F'mal Judgmast 6.
Defeadant ClIlkira into 1bilI eo.em YOhmtaiilyand tqJreIQdS that'no Ibrcats,
olfmJ..promites. or indocemmts of any kiDd have been made bytbe CmmriaiOll pr any
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member, oflicer, employae, ~~ ClI' repteeeutative oftbe Commission CO induco Defeodmt to
7.
Defeadant qteeI that fJ:rls Consent IIbalI be iDcorporated into the F"mal Jndgmmt
with the same fon:c aD
. 8.
~t·
will not oppoac'the GlCcm:cmeut oftho FiaalludgmaJl on the ground,
.
ifany exiIta, fbat it fajl8 io comply with lWle 6S(d) ofdle Fedeta1 Rades ofCivil ~ IDd
hczeby WIhea anyobjection buocl1hcrcon.
9.
DefeDdant waives senrioe oftbe Fmall'udgmc:uI m188J'CC' that entry ofttle F"1P8l
1udgment by 1M Court IDd 1l1iDg with the Clelt oftho Court.will CObIlilute DOtico to DdcadaDt·
.ofits tamllDlI cooditioDa. Deft:ndaut tbrther qrccs to provide COUD8Ol for tho Coninriaion.
within 1birty da)'l after'the F'mal Judplalt is filed with 1he Clcd: oltho CoUlt, with III afIida\Iit
or dcdamtioo. staling dlIt Dcfc::ndaDt baa ftlCeived and ftl8d a copy oftbe Ymal JlJdgmflllt 10.
CoasiBtclDt wi1h 17 ColA 202.S(t}. this Ccm8art reeol\w oo1y 1he claims U8eded
againJt DdaJdant in tbii civil proewMn,g DefabJant acl:nowledges that DO promjJo or
~ v eof the CommiIsion with ~ 10 my c::riminalliabiJity 1bat may havo arisen or
~y .ri.e frcmi. the 1ids underlying this ICtion Ol"imunmity 1iom any aocb ~ liabiHiy.
DcfClDdant WaiVClS any claim ofDoub1c Jeopardy based upon the IICU1anaItof1hiJ procccdin&
ioo1~ the impoIition of Illy mucdy Of c:MJ pcoaIty hefeiD.
Dofimdmt tbrthcr d:DoMedges
that the Court's amy of· perm8DIIIt ~\DIdion IDI)' bve col1alcral CODSeqUODCeI UDder:federal
orstaao law ad the Mea 8IId ~platioqa of 1IC1f.RauJatory oqaaizatioDs.licmJiq boalda. aDd
otber~ orpaizItioaa. Such col1aten1 OODICqUClJiOClS iDel. but Ir'O DOt IiDWod 10. a
8taIUtory disquaJi6cati0ll wi1h I'eIpOCt to manbenhip. or partidpltiou in. or aaociatkm with a
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member o~ a self.f'egU1atory orpnizalion. 'l1WI st3tUt:ory disqualification hal coasequences chat
are 8q)arate fiom any sanction imposed in lID admbristndiw pmcceding In addWoo., in any disciplinary PJOOCCCIins bcfurc thCCammiuimt baRd on the eotry of1ba iDJ\lDCtiOa in Ibis
ae:t:ion. Dcfeodant nncJcratands Iha1 be lIba1I DOt be permitted to coutest 1bc factual allegations of
·the OODlpJaiot in 1bia action.
11.
Defeodaot UDdcntanda IDd I&fl'CS to comply with the Qvnnriujon'. policy "not
to pcnnjt a dcfa:Idant or RllIpOIldCllt to COQIClnt to · judgmcat 0( Order tbIt impoees alllDCCioo
while den)'iDs the alkptioo in the comp1aintor ordcd'orpRlceeclingl,- 17 C.P.R. t 202.S. In
comP1imco with tbia policy, DefiwIant apes:
(i) DO( to take any lICtioa or to make or pamit to
be made any public staummt dcn)'iD&. directly or indinlctly. any Illeaation hi the complaiut or
~ tIM: iiupresaion that the complaint fa widloat filcfuaI bail;
aDd (u) that apoa tho fiIia8 of
tbia Consent" Dcfmdant bCtdJy widJdraYr'l any papcn fi1al in this action to tho exteat 1hat tbBy . daly any ll1cgldioo in the compJamt. 1fI>divfant bn:aches 1bis asreemeut. the Commission . maypdition the Court ~ vac810 the FmaJ.1udsmem mel R8Iom 1hiJ 8CtioD 10 its Ktivo cIocbt.
Nothiaa in Ibia para&nIIlb aft'eeta Defeodant'a:
, a party.
12.
(i) tcetimoaiel obIigatioas; oc eu') right to teb
lepJ or factual poaiIioos in Iitiption or other legal ~ in wbkh the Commission is DOl
'Defamot hereby wlivcl any rigbtB UDder the Equal ACCClIS to Jultice Ad, the
SmaJIBusinelsRep1ltory HD&m:emem FainulaActaf 1996, oranyotberproYisionoflaw1D seck from the United States. or any tpDCy. or my oOicill oftbe United States acting in bia or
. .
her offi.cial capacity, din:ct1y cw iDdirectly, rdmbunemem oflttiOmey's fees or other fees,
expense&, or COdllJ ex:peIIded by Det'eDd1l!t to defimd IpiDIt thiJ action.
For 1beIe~
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DcfaJdaot agrees that Dcftudmt u not the preYaitiDg party in tbi8 action since the parties have
reached a sood faith 1ClUlc:meD1.
13. 10 ClOIDleCtion with tbi8 action aad any relaled judicial or adminiItrative
pMClOcding or invc&tiption commcmccd by the CommIssion «to which the Commiaioo is a party. Defendanr (i) agrees to appear and be int«vicWecl by Con"Di.aon staft'. such times aDd places 88 the saa« rcquesta upon reallODlb1c IIOtice; (Ii) will IICCqJt .mce by mIiJ c.: flcliDu1e
trasmiuiOll of noticf8 or subpoeaas i:aued by the Commission
mr cIocameatlJ or teatimaoy at
dtpwritiCVJs· bclarinss. or trWs. or in (lOIIJIeetioD with aay related iDvestiptioa by ()1InmisMa
staft; (iii) appoin1& Dcftmdmt"e undenigaed auomey as apat 10 receive ICl'Vice of such :atICic:cs
mllUbpoalas; (iy) with rapcct to IIUCIl notices and subpoeDas. wUws tile ta.rilorial1imitB OD
ICIVice contained iII Rulo 45 of1hc FCldenl Rules ofCiviJ Procodure aDd any appIieablc local rules. provided tIIIt 1bcpartyRlqUCltiDg the tati"lOO)" Iflia:ubarlcl ~ tnvel.1odain& IDI1
1Ubsi8tl:Dcc CllpaI8el at tho ~ U.s. GowI:mneal per diem 1IIe8; and (Y) consentlI to
peaonaljurisdiction ovet Dofmdant in any United States DiIIrict Court b~ of
cabciJJa' any IUch subpoc:ua.
14.
DefcodIot agrcm tbal1be Commiuion may prc8CDt the FiDallndgmmt to the
Court 1iIr si~ aDd ~Uywithout ~DOtice.
,.
Case 1:04-cv-01494-JJF
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15.
Defendant agrees that this Court sba1J retain jurisdiction oVa' this matter for the
P1UJ)06e of enforcing the terms oftile Finalludgment
On ~ L \'.2007. 'K't-\W ~ £ !\-(I\,",,~ · a person known to me, personally appeared before me and acknowledged execUting the foregoing Consent
~----Commission c:xpires:
..:OMMISSION EXPIRES
A.UGUST 14,2012
6
Case 1:04-cv-01494-JJF
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Page 41 of 90
UNrrBD STATBS DJS11UCfCOURT
DISTRlCI'OF SOUIH DAKOTA
SBCUlU'l1BSAND BXCHANGB COMMISSION,
PIaiDtift: .
Y·.
~IUDGMENT AS
.lUCHAlU> R. HYJ..I.ANI>.
TO DUENDANT .
BJCJIARD R. BYLLAND
The Securities and BxdJaDge Commissioo having filed · Complaint lIDd Dcfc:IIdant
BichaRl R. HyUand ~ baviDg eatend &peralappearmce; cousmted to the Comt'l
juriediction ovc::r Dofeadant aad the 1Uhjce:t matter oftbis action; ClODIIalkd to amy oftbis Final
Judsmcnt without IdmiUiDg or dalJios the lllcpIions.ofthe Ccliq)1aint (except as CO
juriBdWtion)i waived fjndb;lp of&ct ami coac1uIioos oflaw; IUd W8ived my rigbt to IpPCIII
fiom this Final Judgment
1
rr_IS HBREBY ORDBRBD. ADJUDGFJ)" AND DBCRBBD that Defa1daDt aDd
DefeodanfJ Ig'iIIIltI. aervanta. emp~ IUOm8)'I, aDd all ~ ill active coaoert or
. plrticipadon with than wbo receive IICIuIJ DOtico oflbW FhW Judpacm by pcnond IClrYico or
Case 1:04-cv-01494-JJF
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Page 42 of 90
otbcawise are pcmumently ros1lained and enjoined from violating.
17(a) ofthc Securities Ar:t af1933 ~tiC'8 Ad") [15 U.s.C. § 77q(a)]. byuaiiag any means or instrumenta oftransportatioD or COIDDIIJDicatio iD intentatc oommerc:e or by using the mails,
cIimctlyor inditfJCtIy:
(a) . (b)
to employ 8DY deYice. echemo. or artifice to cl.eft1Wd, or
10 olJtain JDOIlO)" or property byD1Olll8 ofmy untrue ctatemc:Pt ofa IDItcrW fact or
any omission to state a material fact MoNSIUy in order to make the statementa made. in Ii3bt of
dIC circumJtauces 1IDd.cr which they were IDlIdo, DOt mialMcuD8f or
(e)
to eosaP in IlDY tnIPaction, pnICtk:e. f1! 00UDlC ofbusinesa which opcaalti or
would operate lUll &aud 01' deceit upon the purdIucr.
nIT IS HERBBY ORDBRBD. ADJUDGBD. AND DBCRBBD that Defeodaa.t 8I1d
Do.fcadaa1'. 8geuts. Ba'YII1t8, employees. attomc)'B, IIDd III pcnoD8 in 8Ctivc ooocert or
puti.ciplfion with them who m:eiw Idual notice oftbis Fiaalludpcm by pcnoual service or
otIH:rwise am ~y eatraiDed and eqjoiDed fi'om \IioJdiDs, directly or irdiRd1y. Sedion
1O(b)orabe Securitica Bxc:bImF Act of1934 (the "BxchaDgeActi U5 U.S.C. § 78j(b)J aod . Rulo
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