Quatlosers > Terry Neal

Quatlosers Hall of Shame

Terry Neal

These special-editions Quatloos commemorates those who have made a name for themselves in their particular business endeavors.

50 Q
Terry Neal

Our 50Q Znoo chip commemorates infamous offshore scam artists.

Unlike, say, the blazing arrogance of Jerome Schneider, author Terry Neal who wrote “The Offshore Advantage” is a very likeable guy who burst on the offshore scene around 1997 and wooed several high-profile asset protection planners to send clients to his Nevis American Trust, an offshore service provider in Nevis.

Warning signs about Terry came early enough. In 1999, the SEC filed a fraud case against Terry and several of his employees for alleged securities fraud involving “Itex Corporation”, which claimed to be involved in the barter exchange business. The SEC claimed that Terry created a series of sham barter deals involving “mysterious offshore entities” to inflate the company’s value and thus defraud shareholders (see Litigation Release 16305 below). A federal judge subsequently barred Neal from serving as an officer of any publicly-traded company and ordered him to disgorge $2.3 million in “ill-gotten gains” and pay a $200,000 penalty.

Amazingly, Neal’s involvement in the ITEX fraud was viewed by the asset protection gurus who enjoyed his cheap services as some sort of U.S. government overreaching, and they continued to use Nevis American Trust. At some point, Nevis American Trust basically started holding itself out as basically a “bank” and Nevis Financial Services took issue. Around this same time, Neal began boasting to colleagues about having a “compound” in Oregon and that he was ready to slip across the U.S. border into Canada at any time.

Finally, on Friday, December 27, Neal was arrested in Portland, Oregon, on charges of tax evasion.

Although Terry is a nice and personable guy, he typifies the “Hide Your Money” mentality of the 1990’s offshore planning. While preaching secrecy and stealth, he maintained a very high profile, writing books and lecturing at seminars about ways to screw the U.S. and Canadian governments – things sure to draw attention to his activities. We suspect that the IRS and Revenue Canada will hold Terry and “milk him” for information about those who have done business with Nevis American Trust and his other companies, just as they did when they got their hands on the owner of Guardian Bank in Cayman (which has since netted the IRS over $1 billion in back taxes, penalties, and interests, and resulted in dozens of convictions and felony plea-bargains).

In retrospect, Terry readers will wish his book had been called the “Offshore Disadvantage”. Oh well.

November 1, 2004 WILTON MAN SENTENCED FOR FILING FALSE TAX RETURN

Kevin J. O’Connor, United States Attorney for the District of Connecticut, today announced that BRIAN M. O’CONNELL, age 50, of Wilton, Connecticut, has been sentenced to four years of probation, the first six months of which must be served in home confinement, for willfully aiding and assisting in the filing of a false 1999 tax return for his corporation, the O’Connell Group, Inc. During sentencing proceedings on Friday, October 29, in New Haven federal court, Senior United States District Judge Peter C. Dorsey furthered ordered O’CONNELL to pay a fine in the amount of $7,500, and to perform 300 hours of community service during the first two years of his probation. In addition, O’CONNELL was ordered to file all tax returns and resolve all tax arrearage and penalties. On April 19, 2004, O’CONNELL pleaded guilty to the charge.

According to documents filed with the Court and to statements made in court, O’CONNELL is the operator of The O’Connell Group, Inc., which is an executive recruiting business. In 1999, after reading the book “The Offshore Advantage” by Terry Neal, O’CONNELL contacted Offshore Corporate Services and Terry Neal for advice regarding protection of personal assets. With the assistance of Neal and others, and through the Nevis American Trust Company, O’CONNELL set up three international business corporations (International Recruiters Cooperative, Leading Edge Recruiting Network and Eagle Capital Finance Corporation) and one corporation in Nevada (Private Source Lending). O’CONNELL then used these corporations to divert corporate funds offshore and to bring funds back into the United States as fictitious loans.

Nevis American Trust Company of Nevis, West Indies, establishes offshore bank accounts in Nevis and other foreign countries in order for its clients to conduct financial transactions in secret, and to hide income and assets from the Internal Revenue Service.

In order to move money offshore, O’CONNELL created false invoices from International Recruiters Cooperative to The O’Connell Group to justify the payments that were made to the offshore corporation. Amounts sent offshore were then taken as false deductions on The O’Connell Group’s Corporate Tax Return. International Recruiters Cooperative then transferred most of its money to Leading Edge Recruiting Network for fictitious business expenses. Leading Edge Recruiting Network then loaned money to Eagle Capital Finance Corporation, which loaned money to Private Source Lending. O’CONNELL then loaned himself money from Private Source Lending in the form of a mortgage that was secured by his personal residence. O’CONNELL also took false deductions on his personal income tax return for interest paid on that fictitious mortgage loan.

Through this scheme, the tax loss to the Government was $143,718.

Due to O’CONNELL’s cooperation with the Government in its investigation and prosecution of the promoters of this tax evasion scheme, Judge Dorsey departed downward from the Sentencing Guideline range of 15 to 21 months of imprisonment.

On April 13, 2004, Neal pleaded guilty to conspiracy to defraud the United States by impeding the Internal Revenue Service.

This case was investigated by special agents of the Internal Revenue Service - Criminal Investigation.

CONTACT:

U.S. ATTORNEY'S OFFICE
Tom Carson
(203) 821-3722
thomas.carson@usdoj.gov

Source http://www.usdoj.gov/usao/ct/Press2004/20041101-1.html

TWO PROMOTERS OF OFFSHORE TAX FRAUD SCHEME
PLEAD GUILTY IN OREGON

Scheme Involved Nevada Corporations, Bogus Insurance and
Consulting Expenses, "Warehouse Bank," and Offshore Credit Cards

WASHINGTON D.C. - Eileen J. O'Connor, Assistant Attorney General for the Tax Division, United States Department of Justice; Karin J. Immergut, U.S. Attorney for the District of Oregon; and Mark W. Everson, Commissioner, Internal Revenue Service, announced that at the federal courthouse in Portland, Oregon, Terry L. Neal and Aaron Young each pled guilty to felony tax charges. Mr. Neal pled guilty to a charge of conspiracy to defraud the United States by impeding the IRS (18 U.S.C. §371). Mr. Young pled guilty to a charge of aiding and assisting in the preparation of a fraudulent tax return (26 U.S.C. §7206(2)).

Conspiracy carries a maximum penalty of five years imprisonment, a $250,000 fine, or both, and three years of supervised release following imprisonment. Preparing a fraudulent tax return carries a maximum penalty of three years imprisonment, a $250,000 fine, or both, and three years of supervised release following imprisonment. As conditions of their respective plea agreements, both defendants stipulated that the maximum applicable sentence would be appropriate.

"This is one of many pending criminal prosecutions involving schemes to hide income and assets from the IRS," said Assistant Attorney General Eileen J. O'Connor. "People who promote or use fraudulent tax schemes face federal prison, along with civil penalties and interest on any unpaid taxes."

"With the April 15 tax deadline looming, it is important for people to have confidence that when they pay their taxes, their neighbors and competitors will do the same," said IRS Commissioner Mark W. Everson. "Terry Neal and his associates will be held accountable for their efforts to secretly funnel money offshore and undermine our tax system. The government will not tolerate these types of offshore schemes in which people illegally evade their tax obligations."

On April 23, 2003, a thirteen-count indictment was returned against Messrs. Neal and Young, along with Lee Morgan and James Fontano. It alleged that, since at least 1995, the defendants and other unindicted co-conspirators conspired to hide assets, income and expenditures from the IRS, for themselves and their clients. The defendants allegedly established foreign and domestic "shelf" corporations for themselves and their clients. A "shelf" corporation has no employees or business premises and conducts no business. The defendants allegedly established domestic and foreign bank and securities accounts for the corporations, and devised a variety of ways they and their co-conspirators could use the funds in the United States without making the funds easily traceable to the true owner or paying taxes on them. These methods allegedly included "income stripping," use of "warehouse banks," offshore credit or debit cards, false mortgage loans, false insurance policies, and offshore brokerage accounts.

According to the indictment, "income stripping" involved setting up a Nevada corporation, which then billed the client's legitimate business for fictitious consulting or other services. The legitimate business would allegedly fraudulently deduct the payments as a business expense on its tax return. A "warehouse bank" account is a bank account at a regular commercial bank in which all clients' funds are commingled or pooled, for the purpose of concealing the client's ownership of the funds. Clients would allegedly send instructions to Neal or his coconspirators, who would conduct the transactions at their direction. Similarly, offshore bank accounts were allegedly used to conceal a client's funds, with credit or debit cards issued by an offshore bank used as one means for repatriating monies as needed.

According to the indictment, the defendants also advised clients to purchase an "insurance policy" from a fictitious foreign insurance company. The client's legitimate business would allegedly deduct the insurance premium as a business expense on its tax return. The money would allegedly be sent offshore to defendants, who kept six to nine percent as their fee. After a year, the balance of the funds would allegedly be deposited to one of the client's foreign bank accounts and would again be available to the client.

According to the indictment, in order to further conceal the scheme, the defendants prepared false, fictitious, and fraudulent documents to create a veneer of legitimacy to their clients' tax evasion. These documents included alleged false invoices for "consulting" or "services," promissory notes, consulting agreements, and insurance policies. They also allegedly prepared and filed false tax returns for the clients' Nevada corporations, which returns usually showed little or no tax due. When clients were contacted by the IRS, the defendants allegedly advised the clients to lie about their connection to the Nevada and Nevis corporations and to destroy documents. The defendants allegedly charged substantial fees for their services.

Assistant Attorney General O'Connor, U.S. Attorney Immergut, and Commissioner Everson also announced that, in addition to these promoters and their alleged co-conspirators, prosecutions will continue against clients who used the offshore tax fraud schemes.

Assistant Attorney General O'Connor, U.S. Attorney Immergut, and Commissioner Everson thanked Assistant U.S. Attorney Robert B. Ross and Tax Division Trial Attorneys Mark S. Determan and Amanda B. Cruser, who assisted in the prosecution of this case. They also thanked the special agents of the Internal Revenue Service, whose assistance was essential to the successful investigation and prosecution of this complex case.

Messrs. Morgan and Fontano are awaiting trial on the indictment. The charges contained in an indictment are only allegations. In the American justice system, a person is presumed innocent unless and until he or she is proven guilty in a court of law.
________________________________________________

The Oregonian
April 1, 2004

Gresham marketer of tax schemes admits guilt - Terry Neal, long an IRS suspect, may get five years for conspiring to defraud the government
By Jeff Manning

For the better part of a decade, controversial Gresham business executive Terry Neal has openly and aggressively promoted his prowess at lowering and even avoiding federal tax obligations.

Neal's adept marketing attracted the interest and money of hundreds of wealthy individuals. It also earned him the near-constant scrutiny of federal investigators.
Neal's days in the tax-avoidance business ended Monday when he pleaded guilty to one count of conspiring to defraud the United States, a plea that could get him a five-year prison sentence. Aaron Young, one of Neal's co-workers, also pleaded guilty Monday to a charge of counseling a client to file a false tax return.

Neal's son-in-law, Lee Morgan, is expected to plead guilty to related charges Wednesday, prosecutors said.

Authorities also are pursuing Neal's former clients. Three pleaded guilty to charges of filing false tax returns Monday, when IRS officials said they expect as many as 14 former clients eventually to make plea deals.

Robert Ross, an assistant U.S. attorney leading the prosecution, said the clients played an instrumental role in firming up the government's case against Neal and his proteges. Federal prosecutors from the Justice Department worked closely with IRS criminal investigators on the case.

"Terry Neal and his associates will be held accountable for their efforts to secretly funnel money offshore and undermine our tax system," IRS Commissioner Mark Everson said.
Neal, who through his attorney declined to comment, has clashed with regulators before. The U.S. Securities and Exchange Commission sued him in September 1999 for his work at Itex, a former Portland barter firm.

Since his departure from Itex, Neal had emerged as a prominent force in the antitax movement. He wrote "The Offshore Advantage" and four other books, many of them primers on lowering tax obligations.

Neal liked to call himself a political moderate and patriot. But he argued that the country was in the midst of a "class revolution."

"This revolution is not about blood and bullets," he wrote in his newsletter, also called "The Offshore Advantage."

"It is about education and economics. Those that take the time to learn something beyond the party line and carefully . . . act upon their new-found knowledge will move rapidly beyond the rank and file and literally become members of a new class of enlightened, self-directed, financially solvent, independent free citizens."

Deal for small-business owners

Neal's system worked best for owners of small, closely held businesses not normally subject to annual audits, Ross said. At its most basic, it worked this way:
Neal's organization formed corporations for a client, some based in Nevada and some based offshore. The corporations were shells. They had no employees and no physical office, and they conducted no business.

Neither Neal's nor his clients' names appeared in the corporate records. Rather, Neal and his people found stand-in officers and directors.

The phony corporation then billed the client's legitimate business for fictitious consulting, advertising or other services. The clients' legitimate business then sent payments to the phony corporation and deducted them as business expenses, thus lowering the legitimate company's tax obligation.

Another phony corporation, this one in a tax haven such the Caribbean island of Nevis, where Neal lived part time, sometimes billed the phony Nevada corporation for services that were never provided. The Nevada corporation then sent the clients' money to the offshore corporation -- theoretically, beyond the reach of the IRS.

Neal's organization created "a veneer of legitimacy" for the transactions, the government stated, by preparing bogus supporting documents, invoices, consulting agreements and insurance policies.

Federal regulators have worked intensely for nearly two years to bring charges against Neal and bust his organization, which ranged from posh offices in the U.S. Bancorp Tower in downtown Portland to Carson City, Nev., to Nevis.

Three make plea deal

Neal, Young and Morgan, as well as a fourth defendant, James Fontano, were indicted on April 23, 2003. The four initially pleaded not guilty. But with their trial date approaching later this spring, Neal, Young and Morgan agreed to change their pleas and cooperate with government prosecutors. Fontano's status could not be ascertained Monday.

As part of Neal's plea deal, he agreed to shut down all operations and file accurate personal and corporate tax returns for the years 1994 to 2003.

The scale of Neal's operation is hard to gauge. Between March 1998 and March 2000, investigators said, $115 million flowed into a single bank account at the Exchange Bank & Trust, a Vancouver, B.C., bank that Neal controlled. His clients numbered about 350, according to public documents.

________________________________________________

FOR IMMEDIATE RELEASE

Alleged Promoters of Offshore Credit Card Schemes
Indicted for Conspiracy to Defraud the IRS

Terry L. Neal, Lee E. Morgan, James Fontano and Aaron Young
allegedly sold packages to client’s telling them how to avoid paying taxes

Portland, Oregon – April 23, 2003 – Michael W. Mosman, United States Attorney for the District of Oregon, Eileen J. O’Connor, Assistant Attorney General for the Tax Division, and David B. Palmer, Chief, Internal Revenue Service (IRS) Criminal Investigation, announced today that a federal grand jury returned an thirteen count indictment against TERRY L. NEAL, LEE E. MORGAN, JAMES FONTANO and AARON YOUNG. It is alleged that NEAL, MORGAN, FONTANO and YOUNG conspired to defraud the Internal Revenue Service by promoting and selling various tax evasion schemes since at least 1995.

“Identifying and prosecuting promoters of tax evasion is one of our highest priorities,” said Assistant Attorney General Eileen J. O’Conner, head of the Justice Department’s Tax Division. “People who transfer assets offshore to conceal them from the IRS will be held accountable.”

The indictment alleges that the defendants and other unindicted co-conspirators conspired to hide assets and conceal income and expenditures from the IRS through deceitful and dishonest means. NEAL, MORGAN, FONTANO and YOUNG established foreign and domestic corporations for themselves and their clients. The corporations had no employees, no business premises and conducted no business. The defendants established domestic and foreign bank and securities accounts for the corporations. They would then devise ways for the funds to be used in the United States by themselves and the co-conspirators without being easily traceable to the true owner of the funds, and without taxes being paid on the funds. These methods include income stripping, use of warehouse banks, offshore credit or debit cards, false mortgage loans, false insurance policies, and offshore brokerage accounts.

According to the indictment, the defendants charged fees for their services, including, but not limited to: setting up domestic and foreign corporations and keeping them actively registered within their respective jurisdiction; setting up and maintaining bank accounts; providing false documentation for mortgage loans and insurance policies; and arranging for the preparation of tax returns for the client’s Nevada-based corporations. The defendants also created and employed domestic and foreign corporations, bank accounts, brokerage accounts, credit cards and mortgages for their own benefit and to hide income and evade the assessment and collection of taxes.

“The average person doesn’t need an offshore credit card, but promoters are encouraging many people to get them to help evade taxes,” said David B. Palmer, Chief, IRS Criminal Investigation. “Because debit and credit cards provide easy access to offshore accounts in tax haven countries, this type of scheme is particularly egregious and a high priority for IRS Criminal Investigation.”

Also included in this indictment are charges that NEAL and MORGAN knowingly filed false federal income tax returns. NEAL is charged with three counts of filing false federal income tax returns for tax years 1994, 1995 and 1996 and with corruptly obstructing or impeding the due administration of the Internal Revenue Code. MORGAN is charged with four counts of filing false federal income tax returns for tax years 1996, 1997, 1998 and 1999. The indictment further charges NEAL, MORGAN and YOUNG with four counts of aiding and abetting and filing false federal income tax returns for clients for the tax years 1999 and 2000.

Prior to this indictment, on December 27, 2002, search warrants were executed on the offices of Laughlin International, previously known as Morgan, Carter & Young, and on the offices of Privatech Group, LLC (Privatech), owned by MORGAN, YOUNG and FONTANO. Search warrants were again executed at Privatech on April 21, 2003, for additional information. Also on December 27, 2002, NEAL was arrested on tax charges related to this case; he is currently free on bond while awaiting trail.

Dwight Sparlin, Special Agent in Charge, IRS Criminal Investigation, said, “as with this investigation, we are vigorously pursuing not only those who promote these offshore tax schemes, but those who utilize the offshore tax schemes as well.”

This case is being investigated by the IRS Criminal Investigation and prosecuted by AUSA Robert Ross and Trial Attorney Amanda Cruser of the United States Department of Justice, Tax Division, Criminal Enforcement Section.

Indictments are not evidence of guilt, and all defendants are presumed innocent until and unless proven guilty.

For additional information, please contact Robert Ross, Assistant United States Attorney at 503-727-1000 or Dwight Sparlin, Special Agent in Charge, IRS Criminal Investigation at 503-793-4043. For additional information about abusive offshore schemes, visit www.irs.gov.

###

________________________________________________

REPOST FROM JOHNDOES FORUM
by Les L. French

Long time fraudster Terry Neal, who traded a promising career as CEO of ITEX Corporation, then the world's largest barter and trade exchange organization, for a life of swindle and conmanship in the penny stock market and the offshore bank scam business, was arrested and hauled off earlier today on various charges, according to an informed source.

Details are not available, but according to Brent Mudry of Stockwatch Canada, several individuals related to the Neal/Exchange Bank & Trust case are spending the holidays behind bars. If the charges against Neal bare (no pun intended) any similarity to the charges against the others, Neal is looking at Rico charges of money laundering, including money laundering for individuals with Mafia ties, tax evasion, and securities fraud, to mention a few possibilities.

Recently indicted and arrested were Neal associates Mr. Jerome Schneider and L.A. attorney Eric Whitmeyer. The indictments were sealed, so it was impossible to know if Neal was on the list or not.

Terry Neal has been in the midst of secretly constructing a new multi-million dollar home and property near Portland, Oregon. Ever since the security lockdown of Sept. 11, 2001, he has curtailed his visits to the U.S. Previously, he would slip accross the Canadian border near Vancouver, B.C., driving a Cadillac with British Columbia plates registered to others. Lately, he has been hanging out in the Portland area, using an alias. His secretary would deny that he was in town, and even state that she had never heard of him.

One enterprise in which Neal was recently involved was "rich" in questionable activity, according to one former employee, who requests to remain anonymous. Everyone in the office was using aliases, and setting up accounts for very questionable people, according to this source.

Neal allegedly was also running a business registration and incorporation service out of Carson City Nevada, managed by Neal associate Gerald Pitts, according to other sources. The Nevada corporation service allegedly would not only set up corporations, but provide nominee officers and directors. It allegedly acted as an entrance portal to Neal's offshore banking enterprise.

Neal's alleged criminal and civil charges, including a civil action brought against him from the S.E.C., have left scars on the struggling ITEX Corporation from which the small company has never recovered. Neal still controls a large percentage of the stock of the company, and it has been alleged that Neal has ties to former CEO's Graham Norris and Collie Christensen. Mr. Christensen is still a director of the company, although he was fired from his CEO position earlier this year by the board. Altogether, Neal, Norris, and Christenen could muster sufficient votes to elect board members. An annual shareholders meeting is being held on January 28, 2003.

For more information on Neal/EBT, you can visit the Stockwatch Cananda site at www.stockwatch.com

--------------------

Best regards to all,

Les

___________________________________

BCSC-known EBT founder Neal arrested in Portland

2002-12-31 17:02 PT - Street Wire

by Brent Mudry

Offshore financier Terry L. Neal, best known as the head of Nevis-based Exchange Bank and Trust, an offshore money-laundering account based in a downtown Vancouver bank, and the mastermind of the Itex Corp. fraud, has been arrested and jailed in his hometown of Portland, Ore., for alleged false statements in personal tax returns filed with the Internal Revenue Service.

Mr. Neal was arrested Friday, Dec. 27, on a criminal complaint and arrest warrant signed and sealed on Boxing Day by Judge John Jelderks of United States District Court for the District of Oregon. He made a brief first court appearance later that day and was remanded without bail.

Mr. Neal faces an initial detention hearing on Thursday in Portland. While U.S. officials are expected to oppose bail on the basis of flight risk, courts in Oregon generally have a catch-and-release policy, unlike Florida, New York and other jurisdictions with more experience with alleged white-collar criminals.

The arrest follows an extensive probe by the Criminal Investigation Division of the IRS in Portland.

Under federal court rules, the U.S. Attorney's Office has 30 days from Mr. Neal's first appearance to seek a grand jury indictment. After that, speedy trial rules allow for a trial within 70 days, although complex white collar and tax cases such as Mr. Neal's usually take six to nine months to go to trial, once the discovery and evidence argument phases are completed.

__________________________________

SECURITIES AND EXCHANGE COMMISSION

LITIGATION RELEASE NO. 16305 / SEPTEMBER 28, 1999

ACCOUNTING AND AUDITING ENFORCEMENT
RELEASE NO. 1175

SEC V. ITEX CORPORATION, TERRY L. NEAL, MICHAEL T. BAER, GRAHAM H. NORRIS, CYNTHIA PFALTZGRAFF AND JOSEPH M. MORRIS, CIV. NO. 99-1361 (HA) (D. Ore. September 27, 1999)

SEC FILES FRAUD CASE AGAINST ITEX CORPORATION

On September 27, 1999, the Securities and Exchange Commission filed a civil fraud action in the United States District Court for the District of Oregon against Itex Corporation ("Itex"), Terry L. Neal, Michael T. Baer, Graham H. Norris, Cynthia Pfaltzgraff and Joseph M. Morris (Civil Action 99-1361-HA). The Commission's complaint alleges that from at least December 1993 through February 1998, Itex, a company engaged in the barter exchange business and formerly listed on the NASDAQ Small Cap Market, materially inflated its revenues and earnings in financial statements filed with the Commission and in other disclosures made to the investing public. The Complaint alleges that Terry Neal, Itex's founder and control person orchestrated and implemented a broad-ranging fraudulent scheme by making materially false and misleading disclosures about the company's business and by failing to disclose numerous suspect and in many cases sham barter deals between Itex and various mysterious offshore entities related to and/or controlled by Neal. Neal was assisted in the fraud scheme by various people who, at the time, were members of Itex management, specifically, Michael Baer, Graham Norris, Joseph Morris and Cynthia Pfaltzgraff.

The Complaint alleges that the defendants defrauded Itex investors by bartering assets of little or no value and by designating the value of many of Itex's assets and transactions in "trade dollars" rather than their far lower U.S.-dollar fair market values on its financial statements. On the Itex Exchange, members trade goods and services. In lieu of trading (or bartering) such goods and services directly, Exchange members use Itex trade dollars, issued to them by the Itex Exchange. Itex corruptly took advantage of the process, however, by orchestrating numerous bogus barter deals, in which the goods and services exchanged were grossly overvalued, and then reported in Itex public filings as income and/or assets, thus facilitating the fraud.

The Complaint alleges that Itex reported substantial revenue from sham barter transactions as a principal in its own name or through its Swiss-based subsidiary, Associated Reciprocal Traders ("ART"). In fiscal years 1994 through 1997, approximately 56%, 56%, 43% and 60%, respectively, of Itex's reported revenues derived from such barter transactions. Almost all of the Itex barter transactions were suspect inside deals involving Neal himself. The barter deals involved difficult-to-value assets, such as artwork, pre-paid advertising due bills, and worthless stocks in public companies. Some Itex deals involved purely bogus assets such as leases on vacant property, a non-existent stamp collection, and highly-questionable unpatented and undeveloped mineral claims.

The Complaint alleges that without the fabricated barter earnings from Neal's transactions, Itex would have reported losses rather than profits for fiscal years 1994 through 1997. Itex's materially overstated financial condition and results of operation were reported in its financial reports for this period and touted in numerous press releases. Riding this wave of financial misinformation, Itex's stock price rose from $2.25 to $12.50 per share from January 1994 through February 1996.

The Complaint alleges that to cash-in on their fraud, Neal and Baer both sold Itex stock to the market throughout this period, realizing profits of approximately $6.3 million and $1.4 million, respectively. Morris exercised stock options during this period and realized profits of approximately $45,000.

The Complaint also alleges that while Itex managed to inflate its income statement from barter transactions conducted and reported in trade dollars, it needed cash to pay its operating expenses. Since the company had in reality been losing money from fiscal 1995 through the present, it made up the operating shortfall with $11.7 million in proceeds from the sale of its common and preferred stock. To facilitate the fraud, the bulk of the shares, approximately 1.2 million, were initially sold at substantial discounts to offshore entities secretly controlled by Neal, under cover of Regulation S (which allows offshore sales to foreign investors who have no present intention to sell them back into the U.S. market). Neal, however, quickly sold the stock back into the U.S. market, and used the approximately $10.7 million in gross proceeds to, among other things, fund Itex and to enrich himself and his family members. During the same period, Neal received an additional half million shares and/or options from Itex in exchange for services and for certain barter transactions.

The Complaint alleges that the defendants violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, as well as certain reporting, internal controls and record-keeping provisions of the federal securities laws. The Complaint alleges that Itex and Neal violated the securities registration provisions of Section 5 of the Securities Act and that Neal violated Sections 13(d) and 16(a) of the Exchange Act of 1934, and Baer violated Section 13(d), by failing to make filings disclosing their beneficial interest and changes in their interest in the securities of Itex.

The Commission is seeking injunctive relief, civil penalties, disgorgement of Neal, Baer and Morris' ill-gotten gains, and officer and director bars against Neal, Baer and Morris.

http://www.sec.gov/litigation/litreleases/lr16305.htm

___________________________________

SECURITIES AND EXCHANGE COMMISSION
Washington, DC

LITIGATION RELEASE NO. 16708 / September 18, 2000

ACCOUNTING AND AUDITING ENFORCEMENT 1302 / September 18, 2000

SEC V. ITEX CORPORATION, TERRY L. NEAL, MICHAEL T. BAER, GRAHAM H. NORRIS, CYNTHIA PFALTZGRAFF AND JOSEPH M. MORRIS, CV 99-1361 BR (D. Ore. September 27, 1999)

SEC SETTLES FRAUD CASE AGAINST TERRY L. NEAL

The Securities and Exchange Commission today announced that on September 13, 2000, the United States District Court for the District of Oregon permanently enjoined Terry L. Neal from committing securities fraud and violating certain other provisions of the federal securities laws, barred him from serving as an officer or director of a public company, and ordered him to disgorge $2,300,000 in ill-gotten gains, including prejudgment interest, and a $200,000 civil penalty.

The Complaint alleged that, among other things, Neal devised a comprehensive scheme to materially overstate Itex's financial condition and results of operations. Neal caused Itex to enter into sham barter transactions, which inflated assets, revenues and earnings during fiscal 1994, 1995 and 1996. Neal caused press releases to be issued touting Itex's extraordinary gains in financial condition and results of operation, causing the price of the stock to rise from $1.25 per share to $12.50 per share in eighteen months. The fraudulent scheme included the issuance of unregistered Itex stock to Neal-related entities and family members at substantial discounts or in exchange for grossly overvalued assets, after which the stock was then resold in the U.S. public market for an estimated $1.6 million in profits.

Neal consented to the entry of the judgment without admitting or denying the allegations against him. In addition to the disgorgement and civil penalty, the judgment permanently enjoined Neal from violating Sections 5 and 17(a) of the Securities Act, Sections 10(b), 13(d) and 16(a) of the Exchange Act and Rules 10b-5, 13b2-1, 13d-1, 13d-3, 16a-2 and 16a-3 thereunder Section 17(a) of the Securities Act of 1933 and Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 13b2-1 and 13b2-2 thereunder.

With the entry of this judgment, five of the six defendants in this proceeding have settled with the Commission. At the time of this release, Michael T. Baer is the only defendant who has not yet settled with the Commission.

For further information, see LR-16305 (announcing complaint), LR-16430 (settlement with Morris), LR-16437 (settlement with Itex), and LR-16536 (settlements with Norris and Pfaltzgraff). All of these releases are available at the Commission's website at http://www.sec.gov/enforce/litig.htm

http://www.sec.gov/litigation/litreleases/lr16708.htm

AFFIDAVIT FOR A CRIMINAL ARREST WARRANT
AFFIDAVIT FOR A SEARCH WARRANT
INDICTMENT

Comment on this!

Back to Quatlosers Exhibit