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S.E.C. v. DCI TELECOMMUNICATIONS

December 5, 2000

SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF,
V.
DCI TELECOMMUNICATIONS, INC., JOSEPH J. MURPHY, AND RUSSELL B. HINTZ, DEFENDANTS. AND GRACE P. MURPHY, RELIEF DEFENDANT.



The opinion of the court was delivered by: Sweet, District Judge.

  OPINION

Defendants DCI Telecommunications, Inc. ("DCI"), Joseph J. Murphy ("Murphy"), Russell B. Hintz ("Hintz"), and relief defendant Grace P. Murphy (collectively "Defendants") have moved to dismiss the First, Second, and Sixth Claims of the complaint in their entirety and the Fifth and Seventh Claims in part, pursuant to Rule 12(b)(6), Fed.R.Civ.P. For the reasons set forth below, the motion is denied.

The Parties

Plaintiff Securities and Exchange Commission ("SEC") is a governmental agency charged with the task of ensuring compliance with federal securities laws.

DCI is a Colorado corporation headquartered in Stratford, Connecticut.

Murphy, a Connecticut resident, is the Chairman of the Board, Chief Executive Officer, President, and a major shareholder of DCI.

Hintz, a Connecticut resident, is the Chief Financial Officer of DCI.

Grace Murphy resides in Connecticut with her husband, Joseph Murphy.

Background

This case involves alleged violations of Generally Acceptable Accounting Principles ("GAAP") which, if true, may constitute violations of the books and records provisions and the reporting provisions of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b), 78t(a), (the "Exchange Act"), as well as the anti-fraud provisions of the Securities Act of 1933, 15 U.S.C. § 77q (a)(2) & (3), (the "Securities Act").

Specifically, the complaint alleges that the Defendants improperly accounted for seven acquisitions and grossly overvalued a purported $15 million contract and $5 million promissory note, which caused the financial statements in five Forms 10-K and twelve Forms 10-Q that DCI filed with the SEC over a five-year period to be materially false and misleading. DCI's SEC filings allegedly overstated their assets by 40% to 1408% during this period. In addition, the complaint alleges that DCI unlawfully raised additional funds by causing its employees to sell S-8 stock to the public and then "kick back" sales proceeds to DCI.

On August 18, 2000, Defendants moved to dismiss the First, Second, and Sixth Claims in the Complaint in their entirety, and to dismiss the control person elements of the Fifth and Seventh Claims. In brief, the defendants contend that because the Complaint fails to aver that the alleged GAAP violations were intended to, or did, have any impact on DCI's stock price, the fraud allegations fail to state a claim as a matter of law. With regard to the sale of unregistered securities claim, Defendants contend that the SEC has failed to allege the necessary element of a preexisting plan to ensure DCI received the benefit of its employees' sale of S-8 stock to the public.

The SEC filed a memorandum in response on September 19, 2000, and the motion was deemed fully submitted upon the filing of the Defendants' ...


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