The Securities and Exchange Commission yesterday charged that a New York securities dealer violated federal law by failing to verify the accuracy of a prospectus that an Israeli model-airplane manufacturer distributed to potential investors last fall.
The agency said the firm, Hamilton Grant & Co., and its chairman, Mark G. Ross, failed to review adequately the prospectus issued by Balsa Donde USA to investors interested in buying the firm's initial public shares, the SEC said. Hamilton Grant was the underwriter for Balsa Donde's initial public offering.
The prospectus later was found to be misleading, according to the agency.
Balsa Donde's wholly owned Israeli subsidiary, which manufactures flying toys and airframe components for remotely piloted vehicles used by the Israeli army, is deeply in debt and has since been placed in receivership by an Israeli court.
As part of a settlement with the SEC, Hamilton Grant and Ross did not admit or deny the SEC's charges, but they agreed to a series of sanctions, including the suspension of Ross from the securities business for 90 days. The firm was also ordered to establish procedures to verify the accuracy of registration statements it is involved with.
Securities law experts said that investors, through the threat of lawsuits, have long held underwriters to strict standards in verifying the representations made by companies issuing stock. But they said the SEC's action yesterday represented a relatively rare instance in which the government itself sought to hold underwriters to those standards.
Harry Weiss, an SEC attorney working on the case, said the agency's action "shows that the commission is going to hold the professionals responsible for the registration statement accountable ... to investors."
Balsa Donde has been suffering financial problems in recent years, reporting losses of $263,367 on sales of $259,786 in the fiscal year ending March 1986, the most recent figures available. To raise new capital, the company approached Hamilton Grant in 1986 to underwrite an initial stock offering.
Although the company's toy business had provided the bulk of revenue since the firm was founded in 1977, Hamilton Grant's Ross urged the company to emphasize its manufacture of devices used for remotely piloted vehicles (RPVs) in its registration statement describing the public offering, according to an SEC statement yesterday. Ross knew that the Israeli use of such drones in the Lebanon conflict in 1982 showed that they were useful battlefield weapons, according to the SEC.
Moreover, Balsa Donde management had represented that it was the sole supplier of airframe components to the Israeli company that developed these drones, and that the U.S. Navy had recently placed a large order for the RPVs from the company. Both these representations were part of the company's registration statement and prospectus for investors, and the offering was an immediate success.
In fact, however, Balsa Donde had recently lost its status as sole supplier, and the Navy contract was not as significant as the company implied, the SEC said. As a result, the commission in December forced the company to rescind the offering and give investors their money back.
The commission said yesterday that Hamilton Grant violated securities laws "by failing to exercise anything approaching the degree of care reasonable under the circumstances to assure the substantial accuracy of representations" made in the prospectus.
Ross was unavailable for comment and another official with Hamilton Grant declined comment