SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 15898 / September 24, 1998
S.E.C. v. International Automated Systems, Inc. et al., Docket No. 2:98CV-0687B (U.S.D.C., D.Ut.)
The Securities and Exchange Commission announced the filing of a Complaint in the United States District Court for the District of Utah, on September 23, 1998, seeking a permanent injunction, disgorgement, civil penalties and other relief against International Automated Systems, Inc. and Neldon P. Johnson. The complaint also names three of Neldon Johnson’s adult children, Donnel Robert Johnson, Randale Paul Johnson and Brenda Marie Smith, as relief defendants and seeks disgorgement from those individuals.
The Commission alleges that for approximately one year, from June 1995 through June 1996, IAS, a microcap issuer based in American Fork, Utah, whose stock is quoted on the OTC Bulletin Board, and Neldon Johnson, the company’s president, chairman and majority owner, issued a series of false press releases and published them in over 50 advertisements in Investors Business Daily and Barrons. It is further alleged that during this period, the price of the company’s stock rose from $3.50 to over $40 a share. The complaint alleges that the press releases claimed IAS had developed a new data transmission technology called Digital Wave Modulation ("DWM") and related products which would revolutionize electronic communications. It is alleged the rise in the price of IAS stock correlates closely with publication of the advertisements themselves and activity on Internet bulletin boards generated by the advertisements. The complaint also alleges the price of IAS stock began to collapse the day after IAS failed to produce, at a heavily promoted June 27, 1996, press conference, a promised prototype of a 6,000,000 baud modem based on the DWM technology. On May 29, 1996, when IAS’ stock price peaked at $53.50 a share, the company’s market capitalization was nearly $1 billion.
The complaint further alleges that from July 1995 through June 1996, approximately 150,000 shares of IAS stock were sold from brokerage accounts maintained by Neldon Johnson, Donnel Johnson, Randale Johnson and Brenda Smith, for gross proceeds approximately $3 million. The proceeds from these stock sales were distributed, directly or indirectly, to Neldon Johnson, IAS, Donnel Johnson, Randale Johnson and Smith, and possibly others.
The Complaint alleges that, by this conduct, IAS and Neldon Johnson violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.