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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 APi-?. -? . ' t.(J "'"u~7 Telephone: (303) 844-1000
,J 1.'"'\.1" r,...
Facsimile: (303) 844-1052 ~ ..
PILE.D
cur,1.
(§g 1
UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
SOUTHERN DIVISION
SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
Civil Action Number:
0 '7 -11 (/)' -,
COMPLAINT
MERLE D. LEWIS, Defendant.
Plaintiff Securities and Exchange Commission ("Commission") for its complaint alleges as follows:
I. SUMMARY OF THE ACTION
1.
During the fIrst three quarters of2002, Merle D. Lewis, the fonner chief
executive officer ("CEO") and chairman of the board of NorthWestem Corporation
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('"NorthWestern"), and other NorthWestern senior executives misled investors about the financial perfonnance and operations of NorthWestem and its subsidiaries, Expanets, Inc. ("Expanets") and Blue Dot Services, Inc. ("Blue Dot"). 2. Lewis's conduct took essentially three fonns. First, Lewis and other
NorthWestern senior executives misled investors during the relevant period about the status of the functionality of Expanets' new computer system, which caused problems in Expanets' customer billing and collection functions. As a result of these problems, and with the knowledge of Lewis and other NorthWestern senior executives, Expanets failed to properly adjust its financial statements to account for uncollectible receivables and adjustments to customer bills, causing overstatements of NorthWestern's reported income of90% and 109% in the second and third quarters of 2002, respectively. 3. Second, Lewis 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 undisclosed reserve reductions, which helped Expanets reach its earnings targets, and from its receipt of unusual non-compete payments. 4. Third, Lewis and other NorthWestern senior executives misled investors
about critical issues that impacted NorthWestern's liquidity. Specifically, during 2002, Lewis and other NorthWestern senior executives knew that the marketplace closely monitored cash transfers between NorthWestern and its subsidiaries as a key indicator of financial performance. Lewis and other NorthWestern senior executives misled the public regarding the magnitude of cash that NorthWestern needed to transfer to both
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Expanets and Blue Dot. Lewis and other NorthWestern senior executives also knew of 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 Lewis 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 off significant investments in Expanets and Blue Dot, and disclosing the true results of its 2002 operations, NorthWestern declared bankruptcy.
II. JURISDICTION AND VENUE
7. The Commission brings this action pursuant to the authority conferred upon
it by Section 20(b) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. § 77t(b)] and Sections 2I(d) and (e) of the Securities Exchange Act of 1934 ("Exchange Act") (15 U.S.C. §§ 78u(d) and (e)] for an order permanently restraining and enjoining Defendant and granting other equitable relief. 8. This Court has jurisdiction over this action pursuant to Section 22(a) of the
Securities Act [15 U.S.C. § 77v(a)] and Sections 2I(e) 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].
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10. In cOlUlection with the transactions, acts, practices, and courses ofbusiness described in this Complaint. Lewis, directly or indirectly, made use ofthe means or instrumentalities of interstate commerce, of the mails, of the facilities of a national securities exchange, and/or of the means and instruments oftransportation or commW1ication in interstate commerce. 11. Certain of the transactions, acts, practices and courses of business constituting the violations oflaw alleged herein occurred within this judicial district. Moreover,Defendant Lewis resides in this judicial district.
III. DEFENDANT
12. Merle D. Lewis, age 58, is a resident of Sioux Falls, South Dakota. Lewis became NorthWestern's CEO in February 1994 and the chainnan of its board ofdiTectors
in May 1997, positions which he held through December 2002. Lewis also served as
chairman of the board ofExpanets from December 1997 through December 2002. Prior to Lewis' tenure as NorthWestern's CEO and chairman, he worked in the company's legal department for nineteen years, and served for four years in operational roles as the company's executive vice-president and president.
IV. RELATED PARTIES
13. NorthWestern, 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
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was delisted shortly before NorthWestern declared bankruptcy in September 2003. In November 2004, NorthWestern emerged from bankruptcy. Its conunon stock is now registered with the Commission pursuant to Section 12(b) of the Exchange Act and trades on the NASDAQ Global Select Market. 14. Expanets, fonnerlyheadquartered in Englewood, Colorado, provided networked telecommunications equipment and services to medium-sized businesses nationwide. Expanets was comprised of approximately 26 small telecommunications equipmentresellers and a fanner sales division of Lucent Technologies. NorthWestern wrote off substantially all of its investment in Expanets in its 2002 Form 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 ofExpanets' assets were distributed in bankruptcy. 15. Blue Dot, fonnerlyheadquartered in Sunrise, Florida and Sioux Falls, South Dakota, was formed by NorthWestern in 1997 and provided heating, ventilation and air conditioning (HHVAC") 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 10-K and announced its intention to sell Blue Dot in April 2003. In the second quarter 0[2003, Blue Dot'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 Lewis violated Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)] and Sections lOeb) and 13(b)(5) of the Exchange Act [15 U.S.C. §§ 78j(b) and 78m{b)(5)] and Rules 10b-5, 13b2-1 and 13b2-2thereunder [17 C.F.R. §§ 240.10b-S,
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240.13b2-1 and 240. 13b2-2], and aided and abetted NorthWestern's violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) ofthe Exchange Act [15 U.S.C. §§ 78m(a), 78m(b)(2)(A) and 78m(b)(2)(B)] and Rules 12b-20, 13a-11 and 13a-13 thereunder [17 c.P.R. §§ 240.12b-20, 240.13a-11 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 Lewis 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)]. 18. The Commission also seeks an order barring Lewis 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 2 1(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 onts 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 fonned two non-utility entities, Expanets and Blue Dot, to diversi fy 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.
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iii
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. 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. I 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 perfonnance ofits 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 bi llion. NorthWestern financed a substantial part of this acquisition by issuing $720 million in unregistered 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. Lewis and other NorthWestern senior executives also confinned the company's public guidance ofbetween $2.30 and $2.55 earnings per share for 2002. 25. Throughout 2002, Lewis and other NorthWestem senior executives knew that the historical poor performance of NorthWestern's non-utility businesses and
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NorthWestern's expansion of its utility operations together placed enormous pressure on the company's 2002 financial performance. Lewis and other NorthWestern senior executives also knew that NorthWestern's equity offering planned for later in 2002 was critical to the company's liquidity situation. 26. Lewis 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 Blue Dot. 27. NorthWestern also claimed that both Expanets and Blue Dot would demonstrate significant earnings improvements that would allow them to "upstream" cash in the form 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 September and October 2002, Lewis and other NorthWestern 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 milEon of charges for uncollectible accounts receivable and adj ustments to customer bills. 30. In April 2003, NorthWestern restated its Forms 10-Q for the first three quarters 0[2002 and erased Expanets' previously reported income. The company also disclosed significant ongoing problems with the EXPERT system, and the impact of unusual non-compete payments on Expanets' 2002 fmancial results.
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31. Also in April 2003, NorthWestern filed its 2002 Form lO-K, in which it
wrote off substantially all of its past investment ofhundreds of millions ofdollars in 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.
Lewis's Role at NortbWestern
33. During 2002, as NorthWestern's CEO and chainnan, Lewis oversaw all of
the company's operations, including those of Expanets and Blue Dot. In that capacity, Lewis also had a role in key issues impacting the company's financial results, including those at Expanets and Blue Dot.
34. Lewis reviewed and approved all ofNorthWestem'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 Founs 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. Pursuant to Section 906 of the Sarbanes-Oxley Act of2002 ("SOX") and Commission Order 4-460, Lewis certified NorthWestern's Fonns 10-Q for the periods
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ended June 30, 2002 and September 30,2002 and NorthWestern's First Amended Forms 10-Q for the periods ended March 3 J, 2002 andJune 30, 2002. 36. Lewis signed the following Commission filings pursuant to the Securities Act: NorthWestern's Fonn S-4 filed Apri124, 2002; Form S-4/Amendment #1 filed July 12,2002; Fonn S-4/Amendment #2 filed August 16,2002; and Fonn S-4/Amendment #3 filed September 9, 2002. Lewis also reviewed and approved the equity offering prospectus supplements that NorthWestern filed with the Commission on September 30, 2002 and October 3, 2002.
37. Lewis knew or was reckless in not laiowing that NorthWestern's Form 10-Q
for the first quarter of 2002 was incorporated by reference into the amended Fonns S-4 filed with the Commission on July 12, 2002, August 16,2002 and September 9, 2002. Lewis also knew or was reckless in not knowing that NorthWestern's Fonn 10-Q for the second quarter of2002 was incorporated by reference into the amended Fanns S-4 filed 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. 38. Lewis signed management representation letters to NorthWestern's outside auditor for the periods ended March 31, 2002, June 30, 2002, and September 30, 2002,
and for purposes of NorthWestem's filings to effectuate its equity offering in October
2002.
D. Problems With Expanets' Computer System
39. During 2000 and 2001, Expanets developed the EXPERT infonnation teclmology system to serve as a platform for virtually all of its operations, including
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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. 40. Following the implementation of EXPERT in November 2001, the system was unable to perfonn many of the basic tasks for which it had been designed. In particular, the EXPERT system experienced serious problems in generating timely and accurate customer bills and tracking customer payments. For example, for approximately one month following implementation, EXPERT could not generate any customer bills. 41. Throughout the first three quarters of2002, Lewis and other NorthWestern senior executives received detailed information 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, Lewis and other NorthWestern senior executives received weekly EXPERT updates, monthly operations reports and numerous candid emails regarding the system status. Lewis and other NorthWestern senior executives also participated in regular meetings regarding ongoing system problems and planned repairs. 42. NorthWestern's first and second quarter Forms 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 10-Q stated, without qualification, that EXPERT was "fully operational" and "operational," respectively. Similarly, NorthWestern's filings to effectuate its debt and equity offerings characterized the EXPERT system as
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"operational:' again without qualification. Lewis 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 Fonn lO-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.
Expanets' 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 ofrepucing Expanets' operating income. 45. In the second quarter of 2002, Lewis 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 Lewis 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. Lewis 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. Lewis 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 of2002. 47. Lewis knew or was reckless in not knowing that serious problems with Expanets' accounts receivable collections continued tluoughollt the third quarter of 2002. For example, in mid-September 2002, approximately two weeks before NorthWestern's equity offering, Expanets personnel met with Lewis and other NorthWestern senior executives to discuss Expanets' accounts receivable. At that meeting, Lewis and other NorthWestern senior executives were provided a written report and told by Expanets personnel that $52 million of receivables 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 off Expanets' receivables or increasing its bad debt reserve by $46 million. Because many of Expanets' aged receivables resulted from billing lapses and delays, Expanets personnel infonned Lewis and other NorthWestern senior executives that they believed the bad debt reserve was understated by a lesser amount, approximately $32 million. However, Lewis and other NorthWestern senior executives !mew that Expanets had not increased its reserve by any amount. 49. On or about October 22,2002, soon after the completion of NorthWestem's debt and equity offerings, Expanets personnel again met with Lewis and other NorthWestern senior executives and informed them that Expanets' accounts receivable balance had shown virtually no improvement since the mid-September meeting. Based
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upon this data, Expanets personnel recommended a substantial increase in Expanets' bad debt reserve. However, Lewis and other NorthWestern senior executives knew that Expanets did not increase its reserve as a result of the information provided during this meeting. 50. NorthWestern's third quarter Form lO-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)
Lewis 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.
5J. Lewis also knew or was reckless in not knowing that NorthWestern's
management representation letters to its auditor for the periods ended June 30, 2002 and September 30,2002, and for those letters issued in support of NorthWestern's equity offering in October 2002, did not properly disclose the infonnation related to Expanets' bad debt reserve. 52. In April 2003, NorthWestern filed its 2002 Form 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 ofthese periods by approximately $5.1 million and $6.3 million, respectively. 53. As a result of its improper accounting for Wlcollectible accounts receivable, NorthWestern overstated its income from continuing operations by approximately 19% and 39% for the second and third quarters of 2002, respectively, as reported in its Forms
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lO-Q and corresponding earnings releases attached to Fonns 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.
Expands' Material Understatement Of Its Reserve For Adjustments to Customer Bills
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 reserve" for anticipated credits to customer accounts. 55. In the second and third quarters of2002, Expanets persormel repeatedly informed Lewis 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, Lewis and other NorthWestern senior executives received, among other things, monthly operations reports and other updates describing billing adjustments and their negative impact on Expanets' fmancial results. 57. For the third quarter of2002, Expanets personnel infonned Lewis and other NorthWestern senior executives that actual billing adjustments for the quarter had significantly exceeded its original and revised projections. 58. As a result of receiving infonnation throughout 2002, Lewis 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.
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59.
Lewis also knew or was reckless in not knowing that NorthWestern's
management representation letters to its auditor for the periods ended June 30, 2002 and September 30, 2002, and for those letters issued in support of NorthWestem's equity offering in October 2002, did not properly disclose the information related to Expanets' billing adjustment reserve. 60. In April 2003, NorthWestern restated its financial results for the first three quarters of2002, jncreasing the billing adjustment reserve by $33 million. For the second and third quarters of 2002, NorthWestern's restated financial results corrected the understatement of Expanets' billing adjustment reserve by reducing reported quarterly revenue by approximately $10.1 million and $5.4 million, respectively.
61. As a result ofExpanets' improper accounting for billing adjustments,
NorthWestern overstated its income from continuing operations by approximately 46% and 31 % for the second and thjrd quarters of 2002, respectively, as reported in its Forms 10-Q and corresponding earnings releases attached to Forms 8-K. In its segment reporting for Expanets, NorthWestern overstated Expanets' operating income by approximately 1094% and 164%, respectively. for the second and third quarters of 2002. G. Expanets' Reserve Reductions 62. During the second and third quarters of 2002, 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. Lewis knew or was reckless in not knowing about these reductions, their material impact on the company's results of operations, and
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NorthWestern's failure to properly disclose this information regarding Expanets' quality ofeamings. 63. From at least May 2002 through the filing of NorthWestern's Form lO-Q for the second quarter 2002, Expanets personnel infonned Lewis 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. 64. 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. 65. Through his communications with Expanets, Lewis knew or was reckless in not knowing that a material portion ofNorthWestenfs and Expanets' reported results of operations for the second quarter 2002 was derived from Expanets' reserve reductions. 66. Both NorthWestern's Form 10-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. Lewis knew or was reckless in not knowing about these material omissions from NorthWestern's Form IO-Q and earnings release attached to Form 8-K. 67. Following NorthWestern's filing of its Form 10-Q for the second quarter 2002 and through the completion of more than $800 million in securities offerings by
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NorthWestern in September and October 2002, Expanets continued to infonn Lewis 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 of NorthWestern's and Expanets I income for that period of 2002 was derived from Expanets' reserve reductions. Through his communications with Expanets prior to these filings, Lewis knew or
was reckless in not knowing about the materiality of these reductions.
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 ofExpanets' reserve reductions on NorthWestern's and Expanets' results of operations. Lewis 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 Form lO-Q for the third quarter 2002, Expanets continued to infonn Lewis and other NorthWestern senior executives 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 Lewis and other NorthWestern senior executives the possible reduction of$4.2 million of additional balance sheet reserves during the third quarter of2002. As a result, Expanets reduced its
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reserves by $4.2 million during the third quarter of2002, thereby increasing NorthWestern's and Expanets' reported income. 72. 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.
73. Through his communications with Expanets, Lewis knew or was reckless in
not knowing that a material portion ofNorthWestern'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. Lewis knew or was reckless in not knowing about these material omissions from NorthWestern's Form 10-Q and earnings release attached to Form 8-K.
H.
Expanets' Unusual Transactions
75. In conjunction with Expanets' acquisition of certain assets of a competitor in
March 2000, Expanets agreed 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
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until March 2005. These payments were not characteristic ofExpanets' regular operations and therefore represented unusual tral1:Sactions. 76. Throughout 2002, Lewis and other NorthWestern senior executives knew that Expanets would be receiving these non-compete payments. Furthennore, throughout 2002, Expanets personnel infonned Lewis 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. In the first quarter 0[2002, NorthWestern reported in its segment disclosures that Expanets had an operating loss of approximately $2.7 million. Approximately $9.3 million of Expanets' income came from the non-compete payments. The $9.3 million also represented approximately 25% of NorthWestern's consolidated income from continuing operations for the quarter. Accordingly, the amount ofthese non-compete payments was material to the operating results of both NorthWestern and Expanets for that period. 78. In the second quarter of2002, NorthWestern reported in its segment disclosures that Expanets had operating income of approximately $11 million. Approximately $10 million ofExpanets' income carne from the non-compete payments. The $10 million also represented approximately 31 % of NorthWestern's consolidated income from continuing operations for the quarter. Accordingly, the amount ofthese non-compete payments was material to both the operating results of NorthWestem and Expanets for that period.
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79. In the third quarter of 2002, 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 Fonus
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 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, Lewis knew or was reckless in not knowing about the material impact ofthese non-compete payments, and he knew or was reckless in not knowing that NorthWestern's Commission filings and corresponding earnings press releases attached to Fonns 8-K during 2002 failed to properly disclose the impact to NorthWestern's and Expanets' reported results of operations.
1.
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 of the subsidiaries' operational perfonnance and NorthWestern's consolidated liquidity. It was therefore important that both Expanets and Blue Dot demonstrate the ability to provide
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cash to NorthWestern during 2002 to help NorthWestern service its debt load. However, Lewis and other NorthWestern senior executives were infonned that neither entity was providing meaningful cash to NorthWestern. that NorthWestern was actually required to fund these operations more than originally p tanned, and that NorthWestern failed to properly disclose this information. 83. 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 ofapproximately $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, 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 payoff a large credit facility and operating expenses when due. NorthWestern's outstanding intercompany advances to Blue Dot totaled approximately $37.1 million at the end oftbe first quarter of2002. 85. NorthWestern's intercompany advances to Expanets WId 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 BIue Dot was infonnation that
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was necessary to understand NorthWestern's fmandal condition and was reasonably likely to impact NorthWestern's liquidity. . 86. As a result ofvarious communications, including emails, written reports and/or verbal communications, Lewis and other NorthWestern senior executives were infonned about NorthWestern's first quarter intercompany advances to both Expanets and Blue Dot. 87. Lewis and other NorthWestern senior executives were also infonned about the effect these advances had on NorthWestern's financial condition, including their likely impact to its liquidity, and that such infonnation was material to the public, induding analysts and rating agencies. 88. NorthWestern's Form lO-Q for the first quarter of 2002 failed to properly disclose NorthWestern's intercompany advances to Expanets or Blue Dot, including the significance of those advances to NorthWestern's liquidity. Given Lewis's knowledge of NorthWestern's intercompany advances to Expanets and Blue Dot at the time of this filing, Lewis knew or was reckless in not knowing about these material omissions from NorthWestern's Form lO-Q. 89. During the second quarter of 2002, 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 sch~duled 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.
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90. During the second quarter of2002, Blue Dot paid back some of the cash previously advanced by NorthWestern. Nevertheless, the quarter-end balance of NorthWestern's outstanding intercompany advances to Blue Dot still totaled approximately $22.8 million. 91. As a result ofvarious communications, including emails, written reports andlor verbal communications, Lewis and other NorthWestern senior executives were informed about NorthWestern's second quarter intercompany advances to both Expanets and Blue Dot. 92. NorthWestern disclosed in its Fonn IO-Q for the second quarter of 2002 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 Lewis's knowledge of NorthWestern's intercompany advances to Expanets and Blue Dot at the time of this filing, Lewis knew or was reckless in not knowing about these material omissions from NorthWestern's Form 10-Q. 93. 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 Fonus 10-Q for those quarters in September 2002.
J.
The Colstrip Utility Asset Sale
94. Also critical to NorthWestern's liquidity during 2002 was its anticipated
receipt of approximately $97 million from an asset sale. Lewis knew or was reckless in
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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. 95. 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 ofcertain conditions. During the second quarter of 2002, NorthWestern announced that it expected to collect the proceeds from the sale of the Colstrip assets by June or July 2002. 96. Throughout 2002, Lewis and other NorthWestern senior executives knew that the sale of the Colstrip assets was significant to NorthWestern 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. 97. Between May and July 2002, the other party to the Colstrip assets sale contract repeatedly infonned 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 and/or verbal communications, Lewis and other NorthWestern senior executives were informed about the other party's position. 98. 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.
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99. Through various communications with NorthWestern personnel, prior to the filing of NorthWestem's second quarter Fonn lO-Q, Lewis and other NorthWestem senior executives were infonned about NorthWestern's filing of its complaint.
100. NorthWestern's Form 10-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. Lewis knew or was reckless in not knowing about this material omission from NorthWestern's Fonn IO-Q. 101. 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. 102. In 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
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105. Lewis thereby violated, and unless restrained and enjoined, will violate Section 17(a)(l) of the Securities Act.
SECOND CLAIM FOR RELIEF
CViolatlon of Sections 17(1)(2) and 17(a)(3)
of the Securities Act [15 U.S.C. § 779(8)(2) and (3)])
106. Paragraphs I through 102 are hereby realleged and incorporated by reference. 107. Lewis directly and indirectly, with scienter, in the offer or sale of NorthWestern securities, by use of the means or instruments of transportation 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.
108. Lewis violated, and unless restrained and enjoined, will violate Section 17(a)(2) and 17(a)(3) of the Securities Act.
THIRD CLAIM FOR RELIEF
(Violation of Section 10(b) of the Exchange Act and
Rule lO(b)(Sl thereunder lIS U.S.C. §§ 78i
109. Paragraphs 1 through 102 are hereby realleged and incorporated by reference. 110. Lewis 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;
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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 which they were made, not misleading; or engaged in acts, practices, or courses of business which had been and are operating as a fraud or deceit upon the purchasers or sellers of such securities. 111. Lewis violated, and unless restrained and enjoined, will violate Section 10(b) of the Exchange Act and Rule 10b·5 thereunder.
FOURTH CLAIM FOR RELIEF
114. Lewis Violated. and unless restrained and enjoined, will violate Section
l3(b)(5) of the Exchange Act [15 U.S.C. § 78m(b)(5)] and Rule Bb2-1 thereunder [17 C.F.R. § 240.13b2-1J.
FIFTH CLAIM FOR RELIEF (Violation of Excbange Act Rule 13b2-2 117 e.F.a. § 240.13b2-2])
115. reference. 116. Lewis directly or indirectly made or caused to be made materially false or Paragraphs 1 through 102 are hereby realleged and incorporated by
misleading statements, or omitted to state material facts necessary in order to make the statements made, in light of the circwnstances under which they were made, not
2B
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misleading, to NorthWestern's independent auditor in connection with an audit or examination of NorthWestern's financial statements or in the preparation or filing of NorthWestern's documents or reports filed with the Commission. 117. By reason of the foregoing, Lewis violated, and unless restrained and
enjoined will violate Exchange Act Rule 13b2-2.
SIXTH CLAIM FOR RELIEF
(Aiding and Abetting ofNortbWestern's Violation of Section 13(8) of
the Exchange Act [15 U.S.C. § 78m's)) and Rules 12b-20, 13a-ll and
133-13 thereunder [17 C.F.R §§ 240.12b-20, 240.13a-l1 and 240.13a-13n
118. Paragraphs 1 through 102 are hereby realleged and incorporated by reference. 119. NorthWestern, an issuer of a secwity registered pursuant to Section 12(b) of the Exchange Act, filed materially misleading quarterly and current reports with the Commission. 120. 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-11 and 13a-13 thereunder [17 C.F.R. §§ 240. 12b-20, 240.l3a-ll and 240.13a-13]. 121. Lewis knew or was severely reckless in not knowing ofNorthWestern's violations of Section 13(a) ofthe Exchange Act and Rules 12b-20. 13a-ll and 13a-13 thereunder and substantially assisted NorthWestern in committing these violations. 122. Lewis aided and abetted NorthWestern's violations of Section 13(a) ofthe Exchange Act and Rules 12b-20, 13a-l1 and 13a-13 thereunder, and unless restrained and enjoined will continue to aid and abet violations of these provisions.
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SEVENTH CLAIM FOR RELIEF (Aiding and Abetting NorthWestern's Violation of Section 13(b)(2)(A) of the Exchange Act 115 U.s.C. § 78m(b)(2)(AlD 123. reference. 124. NorthWestern failed to make and keep books, records, and accounts, Paragraphs I through 102 are hereby realleged and incorporated by
which, in reasonable detail, accurately and fairly reflected the company's transactions and dispositions of its assets. 125. By reason of the foregoing, NorthWestern violated Section 13(b)(2)(A) of
the Exchange Act (I5 U.S.C. § 78m(b)(2)(A»). 126. Lewis 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. 127. Lewis 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.
EIGHTH CLAIM FOR RELIEF
(Aiding and Abetting NorthWestern's Violation of Section
13(b)(2)CB) of the Exchange Act [15 U.S.C. § 78mCb)(2)(BHl
128. reference. 129. NorthWestern failed to devise and maintain a system ofintemal Paragraphs 1 through 102 are hereby realleged and incorporated by
accounting controls sufficient to provide reasonable assurances that transactions are recorded as necessary to pennit preparation of financial statements in conformity with
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generally accepted accounting principles or any other criteria applicable to such statements and to maintain accountability for
130.
ass~ts.
By reason of the foregoing, NorthWestern violated Section 13(b)(2)(B) of
the Exchange Act [15 U.S.C. § 78m(b)(2)(B)]. 131. Lewis knew or was severely reckless in not knowing of NorthWestem's
violations of Section 13(b)(2)(B) of the Exchange Act and substantially assisted NorthWestern in committing these violations. 132. Lewis aided and abetted NorthWestern's violations of Section 13(b)(2)(B)
ofthe Exchange Act, and unless restrained and enjoined will continue to aid and abet violations of these provisions.
PRAYER FOR RELIEF
WHEREFORE, the Commission respectfully requests that the Court:
1.
Find that Lewis committed the violations alleged.
II.
Enter an Injunction, in a fonn consistent with Rule 65(d) of the Federal Rules of Civil Procedure, permanently restraining and enjoining Lewis from violating, directly or indirectly, the provisions oflaw and rules alleged in this complaint.
III.
Issue an Order requiring Lewis to pay a $150,000 civil penalty pursuant to Section 20(d) of the Securities Act [IS U.S.C. § 77t(d)] and Section 21(d) of the Exchange Act [15 U.S,C. § 78u(d)].
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IV.
Issue an Order pursuant to Exchange Act Section 21 (d)(2), as amended by Section 305 of the Sarbanes-Oxley Act. [15 U.S.C. 78u(d)(2)], or pursuant to the equitable authority of the court, barring Lewis from serving as an officer and director of any public company for five years following the date ofthe entry of a Final Judgment against him.
v.
Grant such other reI ief as this Court may deem just or appropriate. Dated: ApriY::1.2007. Respectfully submitted,
KURT L. GOTTSCHALL
~4~
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
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UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
SECURITIES AND EXCHANGE COMMISSION, Plaintiff.
Civil Action Number:
01 -. l\ V;- l
CONSENT OF
MERLE D. LEWIS
v.
MERLE D. LEWIS,
Defendant.
1.
Defendant Merle D. Lewis ("Defendant") waives service of a summons and the
complaint in this action, enters a general appearance, and admits the Court's jurisdiction over
Defendant and over the subject matter of this action. 2. Without admitting or denying the allegations ofthe complaint (except as to
personal ap.d subject matter jurisdiction, which Defendant admits), Defendant hereby consents to the entry of the [mal Judgment in the fonn attached hereto (the "Final Judgment") and
incorporated by reference herein, which, among other things:
(a) permanently enjoins and restrains Defendant from violation of Section 17(a)
of the Securities Act of 1933 ("Securities Act") [15 U.S.C. § 77q(a)], and Sections 10(b} and 13(b}(5} of the Securities Exchange Act of 1934 ("Exchange Act'') [15 U.S.C. §§ 78j(b) and 78m(b)(5)] and Rules IOb-5, 13b2-1 and 13b2-2 thereunder [17 C.F.R. §§
1
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240.10b-5, 240.13b2-1 and 240.13b2-2]; and aiding and abetting violations of Sections 13(a), 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 13a-13 thereunder (17 C.F.R. §§ 240.12b-20, 240. 13a-ll and 240. 13a-13J; and (b) orders Defendant to pay a civil penalty in the amount of $150,000 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)].
3.
Defendant agrees that he shall Dot seek or accept, directly or indirectly,
reimbursement or indemnification from any source, including but not limited to payment made pursuant to any insurance policy, with regard to any civil penalty amounts that Defendant pays pursuant to the Final Judgment, regardless of whether such penalty amounts or any part thereof are added to a distribution fund or otherwise used for the benefit of investors. Defendant further agrees that he shall not claim, assert, or apply for a tax deduction or tax credit with regard to any federal, state, or local tax for any penalty amounts that Defendant pays pursuant to the Final Judgment, regardless of whether such penalty amounts or any part thereof are added to a distribution fund or otherwise used for the benefit of investors.
4.
Defendant waives the entry of findings of fact and conclusions oflaw pursuant to
Rule 52 oftbe Federal Rules of Civil Procedure.
5.
Defendant waives the right, if any, to a jury trial and to appeal from the entry of
the Final Judgment. 6. Defendant enters into this Consent voluntarily and represents that no threats,
offers, promises, or inducements of any kind have been made by the Commission or any
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,
.'
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member, officer, employee, agent, or representative of the Commission to induce Defendant to enter into this Consent. 7. Defendant agrees that this Consent shall be incorporated into the Final Judgment
with the same force and effect as if fully set forth therein.
8. Defendant will not oppose the enforcement of the Final Judgment on the ground,
if any exists, that it fails to comply with Rule 65(d) ofthe Federal Rules of Civil Procedure, and hereby waives any objection based thereon. 9. Defendant waives service ofthe Final Judgment and agrees that entry ofthe Final
Judgment by the Court and filing with the Clerk of the Court will constitute notice to Defendant of its terms and conditions. Defendant further agrees to provide counsel for the Commission, within thirty days after the Final Judgment is filed with the Clerk of the Court, with an affidavit or declaration stating that Defendant has received and read a copy of the Final Judgment.
1.0.
Consistent with 17 C.F.R. 202.5(f), this Consent resolves only the claims asserted
against Defendant in this civil proceeding. Defendant acknowledges that no promise or representation has been made by the Commission or any member, officer, employee, agent, or representative of the Commission with regard to any criminal liability that may have arisen or may arise from the facts underlying this action or immunity from any such criminal liability. Defendant waives any claim ofDouble Jeopardy based upon the settlement of this proceeding, including the imposition of any remedy or civil penalty herein. Defendant further acknowledges that the Court's entry of a pennanent injunction may have collateral consequences under federal or state law and the rules and regulations of self-regulatory organizations, licensing boards, and other regulatory organizations. Such collateral consequences include, but are not limited to, a statutory disqualification with respect to membership or participation in, or association with a
3
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member of, a self-regulatory organization. This statutory disqualification has consequences that are separate from any sanction imposed in an administrative proceeding. In addition, in any disciplinary proceeding before the Commission based on the entry of the injunction in this action, Defendant understands that he shall not be pennitted to contest the factual allegations of the complaint in this action.
11.
Defendant understands and agrees to comply with the Commission's policy "not
to pennit a defendant or respondent to consent to a judgment or order that imposes a sanction while denying the allegation in the complaint or order for proceedings." 17 C.F.R. § 2~.5. In compliance with this policy, Defendant agrees: (i) not to take any action or to make or permit to be made any public statement denying, directly or indirectly, any allegation in the complaint or creating the impression that the complaint is without factual basis; and (ii) that upon the filing of this Consent, Defendant hereby withdraws any papers filed in this action to the extent that they deny any allegation in the complaint. If Defendant breaches this agreement, the Commission may petition the Court to vacate the Final Judgment and restore this action to its active docket. Nothing in this paragraph affects Defendant's: (i) testimonial obligations; or (ii) right to take legal or factual positions in litigation or other legal proceedings in which the Commission is not a party. 12. Defendant hereby waives any rights under the Equal Access to Justice Act, the
Small Business Regulatory Enforcement Fairness Act of 1996, or any other provision of law to seek from the United States, or any agency, or any official of the United States acting in his or her official capacity, directly or indirectly, reimbursement ofattorney's fees or other fees, expenses, or costs expended by Defendant to defend against this action. For these purposes,
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Defendant agrees that Defendant is not the prevailing party in this action since the parties have reached a good faith settlement. 13.
In cOIUlection with this action and any related judicial or administrative
proceeding or investigation corrunenced by the Commission or to which the Conunission is a party, Defendant: (i) agrees to appear and be interviewed by Commission staff at such times and places as the staffrequests upon reasonable notice; (ii) will accept service by mail or facsimile transmission ofnotices or subpoenas issued by the Commission for documents or testimony at depositions, hearings, or trials, or in connection with any related investigation by Commission staff; (iii) appoints Defendant's undersigned attorney as agent to receive service of such notices and subpoenas; (iv) with respect to such notices and subpoenas, waives the territorial limits on service contained in Rule 45 ofthe Federal Rules of Civil Procedure and any applicable local rules, provide
Court for signature and entry without further notice.
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15.
Defendant agrees that this Court shall retain jurisdiction over this matter for the
purpose of enforcing the terms of the Final Judgment.
,
Dated:-----:3:.....,.L..,!-.L7:.-'--'IaL.T-l _ _
On 1 ,2007, a person known to me, personally appeared before me and acknowledged executing the foregoing Consent.
~
~ ..
,
Notary Public Commission expires:
~lllIIIIIlIlWliIIIMlIIl""'WW"'.
MICHAEL G. TAYLOR
NOTARY PUBlIC·MINNESOTA E ..... Jan, 3', 201D
"QlNiIIiOIl
I
_"IIlMIlIWWllMf/NIj~W¥.
6
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UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
Civil Action Number:
v.
MERLE D. LEWIS,
Defendant.
I
FINAL JUDGMENT AS TO DEFENDANT MERLE D. LEWIS
I
1
'j
!
I
The Securities and Exchange Commission having filed a Complaint and Defendant Merle D. Lewis ("Defendant") having entered a general appearance; consented to the Court's jurisdiction over Defendant and the subject matter oHms action; consented to entry of this Final Judgment without admitting or denying the allegations ofthe Complain.t (except as to jurisdiction); waived fmdings of fact and conclusions of law; and waived any right to appeal from this Final Judgment:
I.
IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that Defend~t and Defendant's agents, servants, employees, attorneys, and all persons in active concert or participation with them who receive actual notice of this Final Judgment by personal service or
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otheIWise are pennanently restrained and enjoined from violating, directly or indirectly, Section 17(a) ofthe Securities Act of 1933 [15 U.S.C. § 77q(a)], by using any means or instruments of transportation or conummication in interstate commerce or by using the mails, directly or . indirectly: (a) (b) to employ any device, scheme, or artifice to defraud, or to obtain money or property by means of any untrue statement of a material fact or
any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or (c) to engage in any transaction, practice, or course of business which operates or
would operate as a fraud or deceit upon the purchaser.
II. IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that Defendant and Defendant's agents, servants, employees, attorneys, and all persons in active concert or participation with them who receive actual notice of this Final Judgment by personal service or othetwise are permanently restrained and enjoined from violating, directly or indirectly, Section
IO(b) ofthe Securities Exchange Act of1934 (the "Exchange Act") [15 U.S.C. § 78j(b)] and
Rule 10b-5 promulgated thereunder [17 C.F.R. § 240.10b-5], by using any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange, in connection with the purchase or sale of any security: (a) to employ any device, scheme, or artifice to defraud;
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(b)
to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light ofthe circumstances under which they were made, not misleading; or
(c)
to engage in any act, practice, or course ofbusiness whic
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