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June 6, 2001


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


This is a civil enforcement action brought by the Securities Exchange Commission ("the Commission") against Enterprises Solutions, Inc. ("ESI" or "the company"), its president and CEO John A. Solomon, and Herbert S. Cannon, whom the Commission alleges controlled the company. The Commission suspended trading of ESI stock on March 30, 2000, and instituted this suit shortly thereafter. The Commission named Rowen House, Ltd. and Montville, Ltd., both Gibraltar corporations, as relief defendants, alleging that they were also controlled by Cannon and used by him to sell thousands of shares of ESI stock at inflated prices. On May 1, 2000. I granted the Commission's motion to freeze the assets of Rowen House and Montville held by the Manhattan brokerage firm Wall Street Equities, Inc. S.E.C. v. Enterprises Solutions, Inc., No. 97 Civ. 0883 (MGC) (S.D.N.Y. May 1, 2000) (order granting preliminary injunction).

The Commission alleges that ESI violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, by knowingly and intentionally failing to disclose in its November 18, 1999 Form 10-SB Registration Statement (the "Registration Statement") Cannon's involvement with the company, and the fact that C.E.A., Inc. had gone into bankruptcy while Solomon was its CEO. The Commission also alleges that ESI made material misrepresentations in press releases issued on March 14, 2000 and March 28, 2000, and on the ESI website. The Commission asserts both primary and control person liability against Solomon and Cannon for these violations.

On October 12, a consent judgment was entered against ESI, enjoining it from committing further securities violations. In connection with the consent judgment, ESI agreed, among other things, to produce documents and make witnesses available to the Commission. S.E.C. v. Enterprises Solutions, Inc., No. 00 Civ. 2685 (S.D.N.Y. Oct. 12, 2000) (Consent Judgment against Enterprises Solutions, Inc.).

From January 8, 2001 through January 16, 2001, I conducted a bench trial of the Commission's claims against defendants Cannon and Solomon. The Commission presented as witnesses John Solomon, Jack Skidell, owner of the brokerage firm Colin Winthrop & Co., Inc., and Salvatore Cerruto, a stock trader at Wall Street Equities. In addition to the live testimony, the Commission submitted excerpts, agreed to by all parties, from the depositions of Herbert Cannon; Nina Cannon, former secretary and director of ESI and Herbert Cannon's daughter; Roger Schell, executive vice president and head of engineering at ESI; and Neal Milch, a free-lance investor who had considered investing in ESI in late 1999 and early 2000. Defendant Cannon's deposition testimony consisted of invocations of the Fifth Amendment privilege against self-incrimination.

Defendants presented no witnesses.


After examining all of the evidence, observing the demeanor of the witnesses who testified in the courtroom, and considering the credibility and plausibility of all the testimony, I make the following findings of fact.


ESI is a Nevada corporation that was originally incorporated in 1987 under the name Sedgewicke Business Alliance, Inc. In 1994, the company changed its name to American Casinos International, Inc. ("ACII") and entered the casino gaming business. In March 1999, the company changed its name to ESI. Following the change of its name to ESI, the company purported to be in the business of internet security software. Until the summer or early fall of 1999, however, ESI was merely a corporate shell with no employees or facilities. Wayne Kight was the nominal president of the company, but Herbert Cannon made most of the managerial decisions.

Herbert Cannon is the principal of HSC Consulting, Inc., a consulting firm based in Boca Raton, Florida. Until March 20, 2000, ESI retained Cannon and HSC Consulting to provide consulting services, for which Cannon received $3,000 a month.

At the time that the Registration Statement was filed with the Commission, Cannon owned an undisclosed number of shares of ESI common stock through his ownership of Worldnet Communications, Inc. and Romsley Ltd. The Commission proved by a preponderance of the credible evidence that, in addition to these shares, Cannon was the beneficial owner of a large number of ESI shares held by Rowen House, Ltd., Humphrey, Ltd., Montville, Ltd., Effingham, Ltd. and Coltmill, Ltd., Gibraltar companies that share an address at 1 Coral Road, Suite 2A, Gibraltar (collectively the "Gibraltar entities")

The documents establishing the accounts of the Gibraltar entities with the brokerage firms Colin Winthrop and Wall Street Equities were signed by "Elizabeth A. Plummer." Nevertheless, Jack Skidell and Salvatore Cerruto, the stock brokers who handled the accounts, testified that Cannon directed nearly all the purchases and sales of securities for those accounts. In addition, the signatures on several of the documents purportedly signed by Plummer are suspiciously different. of the documents that were notarized, most were notarized in Palm Beach County, Florida, some by Cannon's wife. The most persuasive evidence of Cannon's ownership of the Gibraltar entities is a resolution of the ESI Board of Directors on February 7, 2000, which approved the issuance of 198,500 shares of restricted common stock to Rowen House "in repayment of the $198,500 loaned to the company, including the loan from HSC Consulting Inc." Thus, ESI repaid a loan from Cannon's consulting firm by issuing stock to Rowen House. When asked at his deposition whether he owned any equity interest in the Gibraltar entities, Cannon invoked the Fifth Amendment privilege against self-incrimination.*fn1 Further, Neal Milch testified that while he was considering investing in ESI in early 2000, Cannon told him that he owned 500,000 of ESI's 5,200,000 outstanding common shares and 500,000 warrants to buy additional common shares.*fn2 As no other evidence has been offered to explain the manner in which Cannon owned those shares, the inference that he owned them through the Gibraltar entities is strengthened.

When ESI filed the Registration Statement with the Commission, Humphrey owned 275,001 shares, 5.9% of the outstanding common stock, and was the largest shareholder of ESI. Rowen House owned 244,168 common shares, 5.2% of the outstanding common stock.

Cannon has a history that precluded him from openly serving as an officer or director of ESI. In 1985, Cannon pleaded guilty to a charge of conspiracy to defraud the United States in the collection of income tax. In 1987, he was convicted under New York's larceny statute in connection with the mishandling of funds of a chartered bank, and he also pleaded guilty in those proceedings to two counts of failure to pay state income tax. In 1988, Cannon again pleaded guilty to one count of conspiracy to defraud the federal government. In 1994, he was sentenced by the United States District Court for the District of New Jersey to five years probation and 500 hours of community service, and ordered to pay $10,000 in court costs, for selling fraudulent coal mine tax shelters to investors. The coal mines at issue did not engage in any actual mining operations. In 1988 and 1993, the Commission obtained civil judgments against Cannon enjoining him from further violating provisions of the securities laws. In addition, in August of 1987, the Commission issued an order barring Cannon from the securities industry.

John A. Solomon is the current president and chief executive officer of ESI. He began his employment with ESI on October 14, 1999. Prior to his employment with ESI, Solomon's principal management experience was with a private software company called CEA, Inc., for which he served as senior vice president of operations and, later, as chief executive officer. CEA went into bankruptcy in 1995, while Solomon was the CEO. Solomon personally entered bankruptcy shortly thereafter.

Between 1995 and 1999, Solomon worked as a consultant. In November 1996, he filed a disability claim for depression and anxiety with UNUM Life Insurance Co. of America and received approximately $6,400 per month in disability payments until at least April 2000. In late December 1999, despite having been nominally employed by ESI for more than two months, Solomon submitted an "Insured's Progress Statement" to UNUM in connection with his disability claim in which he represented that he had not engaged in any occupation since his last report. On an April 17, 2000 Insured's Progress Statement, Solomon stated that he was "participat[ing] in running a high tech company" on a "part time basis." From October 1999 until at least April 2000, Solomon received disability payments from UNUM as well as compensation from ESI.

Organization of ESI

In the summer of 1999, while working on network security applications for Novell, Inc., Roger Schell, Rich Lee and Gary Baker put together an engineering plan to design internet security software. Schell was the senior engineer and had extensive experience in the field of computer security. He taught computer science at the Naval Postgraduate School after receiving his Ph.D. in 1971. He then served as deputy director of the Department of Defense ("DOD") Computer Securities Center. After leaving the DOD, he helped form Gemini Computers, a company specializing in computer security. He left Gemini in 1993 and, in 1994, joined Novell, Inc., a network operating system company. Lee and Baker worked under him at Novell.

The engineering plan involved taking existing security technology developed by Gemini and Novell and redesigning it for the Internet. After an unsuccessful relationship with Sistex, a wholly owned subsidiary of Infotex, a company for which Cannon had been a consultant, Schell was advised by Bob Pollock, president of Sistex, to talk to Cannon about obtaining capital from investors. Pollock also served ESI as a consultant.

In approximately June of 1999, Schell met with Cannon in Florida. At that meeting, Schell described his engineering plan to Cannon. Schell hoped to develop an Internet security product that could be certified by the National Security Agency at the highest security level, "A1," within two years. The theory was that the product would be so secure that an insurer would issue a bond guaranteeing the information the product was securing. Schell's plan referred to the fully evaluated and certified security product as "bondable." Schell also hoped to develop certain "pre-release products" within a period of 12 to 16 months. These products would not be certified, but could be sold to customers as part of the process of developing a certified product. He estimated that the project would require an initial investment of $5 million for the first year and $10 to 30 million for further development. Cannon said that he knew of individuals who would be willing to invest in the project. It was Schell's understanding that Cannon and his associates would supply the initial investment, and that the company would seek outside investment for further funding.

Cannon proposed using ESI as the corporate entity through which the project would be funded. Cannon described ESI as a corporate shell with no employees, no facilities and no chief executive. Although he described himself as a consultant to ESI, Cannon said that he would provide management leadership for the company until a chief executive could be found. He offered Schell the position of chief executive, but Schell declined because he preferred to focus on engineering, which he believed was the key to the success of the project. Cannon referred to a board of directors, but described it as a "temporary transitional board" and described the directors as place holders. Schell testified that it was his understanding that Cannon would be his boss if he was hired by ESI. Cannon did not disclose his criminal convictions or regulatory problems to Schell.

Schell testified that these engineering requirements were never met while he was with the company. The company entered into a teaming agreement with Gemini, pursuant to which ESI was authorized to distribute Gemini products under its own label. That agreement did not provide ESI with access to Gemini's source code. Further, under the teaming agreement all enhancements and developments of Gemini products would be owned exclusively by Gemini. ESI, through Cannon, was in the process of negotiating an acquisition of Gemini, but that transaction fell through after the Commission suspended trading of ESI stock.

Schell further testified that during his employment with ESI, no actual product development took place because the company never acquired access to the necessary Gemini and Novell intellectual property and never obtained the technical tools required to develop products. The company's only product to date, ESIGuard, is actually a 1995 Gemini product called GemGuard marketed under the ESI label. GemGuard was an adaptation of an earlier Gemini product. The earlier product had received A1 certification at the time, but the GemGuard product had never been evaluated. In Schell's opinion, neither GemGuard nor ESIGuard was a "bondable" product. Although certain potential customers, AIG Insurance and Market Data, had tested the product, they never purchased it, and no product was sold by ESI. Schell, who initially maintained the financial records of the company, testified that he was told not to expect any revenue from the AIG and Market Data relationships.

Following his June 1999 meeting with Schell, Cannon met briefly with Lee and Baker. Shortly thereafter Cannon distributed proposed employment agreements to Schell, Lee and Baker. The terms of the employment agreements had been negotiated by Cannon and Schell at the June 1999 meeting. Schell, Lee and Baker accepted employment and began working for ESI in August 1999. Schell's title was executive vice president and head of engineering; Lee and Baker were vice presidents. They worked in an independent division of ESI called the Secure Systems Solutions division.

In August of 1999, Cannon contacted Solomon regarding the chief executive position with ESI. Solomon was recommended to Cannon by Jeffrey Moritz, treasurer and director of ESI at that time, with whom Solomon was acquainted. Cannon invited Solomon to New York and they met at the Waldorf Astoria Hotel in early September. At that meeting, Cannon identified himself as the senior management consultant to ESI and told Solomon that he had past problems that prohibited him from being an officer or director. Cannon then briefly described the business of ESI. Solomon, in turn, described his background, including the fact that his prior company, CEA, had gone into bankruptcy. He then stated his compensation terms: a three year contract, salary of $200,000 per year with the possibility of raises up to $500,000, stock in the company, profit sharing of up to 7% and a credit line of up to $750,000. Cannon approved of these terms and told Solomon that if the company did well, the board would not deny him anything. Following this meeting, Solomon had brief telephone conversations with Wayne Kight and Moritz. He was then notified that he had been hired. Solomon rejected the first contract, which did not provide for the $750,000 line of credit. Shortly after, Kight sent him a new contract that contained the line of credit provision. That contract was executed on September 15, 1999.

When Solomon joined ESI, the company had $328 in revenue and assets of approximately $30,000. Solomon worked out of his residence in Massachusetts. Wayne Kight, who then held the position of vice president of operations and was in charge of the company's finances, operated out of Boca Raton, Florida. The engineering department, headed by Schell, was in Monterey, California. The Board of Directors consisted of Wayne Kight, Jeffrey Moritz and Nina Cannon Anthony, Cannon's daughter. Solomon testified that he was not aware that Anthony was Cannon's daughter until sometime later. The company had no source of revenue and paid salaries and expenses through the sale of stock and loans from stockholders. Company records at that time showed ...

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