Company Name: Aura Systems, Inc.
Public Availability Date: 07-08-1994
INQUIRY LETTERPILLSBURY MADISON & SUTRO
SUITE 1100
600 ANTON BOULEVARD
COSTA MESA, CALIFORNIA 92626
June 03, 1994 Securities Act of 1933
Sections 3 (a) (10) and 4 (1)
Rule 144 Office of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20459 Re:Aura Systems, Inc.
(In Re: Aura Systems, Inc.
Civil Action No. 92-3388-CBM
United States District Court,
Central District of California) Dear Ladies and Gentlemen:
On behalf of Aura Systems, Inc. ("Aura" or the "Company"), we respectfully
request the written advice of the staff of the Division of Corporation Finance
(the "Division") that it will not recommend enforcement action to the Securities
and Exchange Commission (the "Commission") based upon the following facts and
that the staff concurs with our opinions that (i) the Company may issue shares
(the "Settlement Shares") of its common stock in exchange for the claims of
members of the plaintiff class (the "Settlement Class") and their counsel
("Class Counsel") without registration under the Securities Act of 1933, as
amended (the "Act") in reliance upon the exemption from registration provided
under section 3 (a) (10) thereof; (ii) the Settlement Shares as so issued will
not be deemed to be "restricted securities" within the meaning of Rule 144(a)(3)
under the act; and (iii) the Settlement Shares as so issued will be freely
transferable by the Settlement Class and Class Counsel, except that if any such
transferee is deemed to be an "affiliate" of the Company within the meaning of
Rule 144(a)(1) under the Act, any public sale of Settlement Shares by such
person without registration under the Act will be required to comply with the
provisions of Rule 144 except for the rule's holding period requirement.
I. The Background
A. The Company Aura Systems, Inc. is a Delaware corporation with its principal executive
offices located in El Segundo, California. The Company listed is a reporting
company under the Securities and Exchange Act of 1934, as amended (the "Exchange
Act"), with the common stock of the Company on the Nasdaq National Market.
B. The Litigation Commencing in early June 1992, nine class action complaints were filed in the
United States District Court for the Central District of California (the
"Court") against the Company and other defendants. All of the purported class
actions were consolidated pursuant to Court Order dated August 20, 1992, and a
Consolidated Amended Complaint was filed on September 14, 1992. The defendants
in the consolidated case (the "Class Action"), captioned Michael Haltman, et al.
v. Aura Systems, Inc. et al., No. 92-3388-CBM, include the Company, Zvi Kurtzman,
Arthur J. Schwartz, Francis J. Phalen. Joseph F. Bevacqua, Peter C. Jaquith,
Neil B. Kaufman, Charles Rogers Saxon, Cipora Kurtzman, Tilal Corp., Westar
Capital Corporation and First Hanover Securities, Inc. (collectively, the
"Defendants"). The class is defined as purchasers of Aura common stock during
the period from August 20, 1990 through and including July 12, 1992. Defendants
subsequently filed a motion to dismiss, and the Court granted that motion and
dismissed the case without prejudice on March 15, 1993. Class Plaintiffs filed a
second amended consolidated complaint and defendants moved to dismiss that as
well but there has been no resolution of the motion pending settlement of the
cases. Two derivative complaints were filed in June 1992 on behlaf of the Company (the
"Derivative Actions"). A motion to consolidate the Derivative Actions is
currently pending before the Court. Generally, in the Class Action and the Derivative Actions, plaintiffs allege
inter alia that statements made publicly by the Defendants, or for which they
were responsible, were materially false and misleading in failing to describe
truthfully and accurately the Company's financial condition. The complaint
alleged violations of Sections 10(b) and 20 of the Exchange Act, and fraud and
negligent misrepresentation under California common law. The Defendants continue to deny all liablility and all allegations of wrongdoing
directed at them in the Class Action and the Derivative Actions. However, the
Company and the other Defendenats desire to settle the lawsuits on the terms
described below in order to avoid further expense, inconvenience, distraction
and delay, to finally dispose of the litigiation and to avoid the risks and
uncertainties inherent in complex litigation.
C. The Proposed Settlement The parties in the Class Action and the Derivative Actions entered into a
Stipulation and Agreement of Compromise and Settlement (the "Stipulation of
Settlement") dated as of May 19, 1994, and the Court preliminarily approved the
settlement by order dated May 24, 1994 (the "Preliminary Order"). We have
included with this letter a copy of the Court's Order and the Stipulation of
Settlement for the Division's information. The Settlement provides inter alia that the Defendants, in full settlement of
any and all claims, individual and representative, that are, could have been, or
might in the future be asserted against the Defendants in connection with the
Class Action and the Derivative Actions, have caused to be paid a total of
$2,000,000 in cash and will pay $4,000,000 in cash or Settlement Shares, at the
Company's sole option (the total being the "Settlement Proceeds"), which shall
be allocated to settle the Class Action (the "Class Settlement Fund") and the
Derivative Actions (the "Derivative Settlement Fund"). The Settlement Proceeds
shall be paid as follows:
1. The Defendants have already paid or caused to be paid $2,000,000 in cash into
an interest-bearing escrow account with Bank of America, Larkspur Branch, as
escrow agent (the "Escrow Agent"). Of that amount $1,550,000 million (plus
investment proceed is allocated to the Class Settlement Fund and $450,000 (plus
investment proceeds) is allocated to the Derivative Settlement Fund.
2. The Company will pay to the Class Settlement Fund an additional $4,000,000 in
the form of cash and/or Settlement Shares, at the Company's sole discretion, as
follows: (a) By August 31, 1994, the Company shall elect either to (i) deposit $2,500,000
in cash into the Bank of America Account; or (ii) designate that $2,500,000
worth of Settlement Shares will be added later to the fund. If the latter, then
the number of shares to be added to the fund will be determined based on the
average daily Nasdaq National Market closing price of Aura common stock for the
20 trading days preceding August 31, 1994. The number of shares to be added to
the fund will be determined by dividing $2,500,000 by this average price.
(b) By November 30, 1994, the Company shall elect either to (i) deposit
$1,500,000 in cash into the Bank of America Account or (ii) designate that
$1,500,000 worth of Settlement Shares will be added later to the fund. If the
latter, then the number of shares to be added to the fund will be determined
based on the average daily Nasdaq National Market closing price of Aura common
stock for the 20 trading days preceding November 30, 1994. The number of shares
to be added to the fund will be determined by dividing $1,500,000 by this
average price. 3. The actual number of Settlement Shares, if any Aura common stock will be
added to the Class Settlement Fund, will be corrected to reflect any changes due
to stock splits that occur prior to distribution.
4. There will be no allocation of Settlement Shares, if any, to the Derivative
Settlement fund. 5. Payments from the Class Settlement Fund will be made as follows:
(i) After entry of the Final Judgment and Order of Dismissal (the "Final
Judgment") and an order of the Court awarding attorneys' fees and reimbursement
of legal expenses, Class Counsel shall be paid that percentage of the Class
Settlement Fund awarded by the Court for fees and expenses as soon as
practicable after the events in 2(a) and 2(b) have occurred. Class Counsel shall
be paid in cash and Settlement Shares, if any, in an amount not to exceed 30% of
the Class Settlement Fund, and in the same proportion as cash and Settlement
Shares, if any, is to be paid to the Settlement Class. (ii) After November 30, 1994, the remainder of the Class Settlement Fund,
including cash and Settlment Shares if the Company has so elected, will be
distributed pro rata in cash and Settlement Shares to members of the Settlement
Class as provided in the Stipulation. Cash proceeds will be distributed by the
Escrow Agent and Settlement Shares, if any, will be issued by the Company to its
transfer agent for immediate distribution directly to qualified members of the
Settlement Class and Class Counsel. The "Effective Date" is defined in the Stipulation of Settlement as the date
when the Final Judgment shall have been entered by the Court, the stipulated
time to appeal from the Final Judgment has expired and the Division has
confirmed its "no-action" postion with respect to this letter.
The Preliminary Order and/or the Stipulation of Settlement also provide for the
following: 1. The Court has ordered that the class be certified for settlement purposes.
2. The costs of providing notice of the proposed settlement to the Settlement
Class, locating members of the Settlement Class and administering and
distributing the Settlement Proceeds shall be paid out of the Class Settlement
Fund. An award of attorneys' fees or reimbursement of expenses and costs to
Class Counsel must be approved by the Court and will be paid out of the Class
Settlment Fund as described above.
3. The Settlement Proceeds, including cash and Settlemetn Shares (if any), net
of the payments described above, will be allocated and distributed to each
member of the Settlement Class who submits a valid proof of claim and release
along with proper documentation and who does not request exclusion.
4. The Court's Preliminary Order of May 24, 1994, (a) preliminarily approved the
settlement as fair, just, reasonable and adequate as to the Settling Parties;
(b) approved the form and manner of the notice to be provided to members of the
Settlement Class; (c) directed that the notice of settlement and of the
Settlement Hearing be mailed to all members of the Settlement Class who can
reasonably be identified by individual notice and by summary notice to be
published once in The Los Angeles Times and once in the national edition of The
Wall Street Journal; (d) set forth the procedures for the filing of objections
to the proposed settlement, and provided that any member of the Settlement Class
who has not requested exclusion and has filed timely written objections may
appear at the Settlement Hearing to show cause why the proposed settlement of
the Actions should or should not be approved as fair, reasonable and adequate;
and (e) scheduled the Settlement Hearing to occur on August 1, 1994 to finally
determine, pursuant to Rules 23 and 23.1 of the Federal Rules of Civil
Procedure, whether the proposed settlement is fair, just, reasonable, and
adequate and should be approved by the Court. The Preliminary Order and the proposed form for the Final Judgment each provide
that if the Court approves the proposed settlement, the Settlement Shares issued
as part of the settlement will not be required to be registered under the Act
pursuant to the exemption contained in Section 3(a)(10) of the Act.
Based on the $8.75 per share closing sale price of Aura common stock on the
Nasdaq National Market on June 2, 1993, the day prior to the submission of this
no-action letter request, up to a total of 457, 143 Settlement Shares would be
issued by the Company pursuant to the settlement. The Company presently has a
total of 33,890,286 shares of common stock outstanding. Based on such recent
market value and the number of shares outstanding, the Company expects that the
maximum number of Settlement Shares upon issuance would constitute less than
1.35% of the Company's then outstanding shares of common stock.
II. DISCUSSION
A. The Section 3(a)(10) Exemption
Section 3(a)(10) of the Act provides an exemption from registration under the
Act for "... any security which is issued in exchange for one or more bona fide
outstanding securities, claims or property interests, or partly in such exchange
and partly for cash, where the terms and conditions of such issuance and
exchange are approved, after a hearing upon the fairness of such terms and
conditions at which all persons to whom it is proposed to issue securities in
such exchange shall have the right to appear, by any court ...."
The priciple that the Section 3(a)(10) exemption is available for securities
distributed by an issuer pursuant to the settlement of a class action which has
been approved by a court as fair and reasonable in accordance with the Federal
Rules of Civil Procedure is well established. See, e.g.,
Western Digital
Corporation (May 5, 1994);
Coeur d'Alene Mines Corporation (March 4, 1994);
Coventry Corporation (December 23, 1993);
Intellicall, Inc. (August 10, 1993);
Medical Imaging Centers of America, Inc. (March 12, 1993); L.A. Gear, Inc
(November 16, 1992); Newbridge Networks Corporation (July 27, 1992); Windmere
Corporation (May 20, 1992); Riverbend International Corporation (March 30,
1990); Pacific Scientific Company (July 31, 1989); Memory Metal, Inc. (December
9, 1988); Cavanagh Communities Corporation (July 22, 1987); Anacomp Inc. (July
24, 1985); and Koracorp Industries, Inc. (July 22, 1976). The Division has articulated the following four requirements that must be met in
order for the Section 3(a)(10) exemption to be available to an issuer that
issues securities in settlement of pending class action litigation: (i) the
Court must hold a hearing on the fairness of the terms and conditions of the
issuance of all such securities; (ii) the persons to whom such securities are to
be issued must receive notice of the hearing and of the right to be heard; (iii)
the Court must be advised prior to the hearing that if the terms and conditions
of the settlement are approved, registration of the securities will not be
required under the Act by virtue of the court's approval; and (iv) the Court
must approve the fairness of the terms and conditions of the settlement. See,
e.g., Coer d' Alene Mines Corporation,
Intellical, Inc., Cavanagh Communities
Corporations, and Koracorp Industries, Inc., supra. The circumstances under which the Settlement Shares will be issued by the
Company in connection with the proposed settlement will satisfy these
requirements. First, pursuant to Rule 23(e) of the Federal Rules of Civil
Procedure, the Court will hold the Settlement Hearing to determine whether the
terms and conditions of the proposed settlement (including the issuance of the
Settlement Shares to the Settlement Class) are fair, reasonable and adequate.
Second, the Settlement Class will have received notice of the Settlement Hearing
and will have the right to appear at the Settlement Hearing. Notice of the
Settlement Hearing will be given by mail to all members of the Settlement Class
who can be identified through reasonable effort and will also be given by
publication in The Los Angeles Times and The Wall Street Journal. Pursuant to
Rule 23(e) of the Federal Rules of Civil Procedure, these notification
procedures have been approved by the Court in the Preliminary Order. Third, the
Court has been informed that, if it approves the proposed settlement, the
Settlement Shares will not be required to be registered under the Act pursuant
to the Section 3(a)(10) exemption. Finally, in order for the Stipulation of
Settlement to be binding, the Court must find that the terms and conditions of
the proposed settlement are fair, reasonable and adequate and in the best
interests of all those who will be affected by it. Based upon the foregoing, and assuming that the settlement is approved by the
Court in accordance with the procedures described herein, the Company believes
the issuance of the Settlement Shares by the Company in connection with the
settlement would be exempt from the registration requirements of the Act under
Section 3(a)(10). B. Public Resale of Settlement Shares
The Division has also taken the position that securities issued without
registration pursuant to Section 3(a)(10) are not "restricted securities" under
Rule 144 and, accordingly, (i) in the case of securities issued to persons who
are not affiliates of the issuer, may be resold without registration under the
Act in reliance on the exemption contained in Section 4(1) of the Act and
without compliance with Rule 144 under the Act, and (ii) in the case of
securities issued to person who are affiliates of the issuer, may be resold in
compliance with Rule 144 under the Act, without regard to the holding period
requirement of that Rule. See, e.g.,
Medical Imaging Centers of America, Inc.,
Newbridge Networks Corporation, Riverbend International Corporation, and Pacific
Scientific Company, supra. The Stipulation of Settlement provides that Class Counsel may apply to the Court
for an award of attorneys' fees and expenses. The amount awarded will be paid in
cash and Settlement Shares (the latter if the Company elects to contribute stock
to the fund) in the same portion of cash and Settlement Shares as will be
distributed to members of the Settlement Class. The exact amount of the award of
attorneys' fees that will be made in this case is not known at this time, but it
has been agreed that plaintiffs' counsel in the Class Action will seek an amount
not more than 30% of the Class Settlement Fund. Derivative Counsel will receive
no shares of Settlement Shares under the settlement terms. The Division has
taken the position that, in situations where plaintiffs' counsel receives up to
one-third of the securities issued in connection with a settlement, such
securities are not "restricted securities" for purposes of Rule 144 and may be
freely resold without registration, although any person receiving securities in
a settlement, including counsel, who is deemed to be an affiliate must make
resales in compliance with Rule 144, without regard to the holding period
requirement of that Rule. See
Western Digital Corporation,
Coeur d'Alene Mines
Corporation, Intellicall, Inc.,
Newbridge Networks Corporation and Riverbend
International Corporation, supra. Based upon the foregoing, and assuming that the settlement is approved by the
Court in accordance with the procedures described herein, the Company also
believes that the Settlement Shares to be issued to the memebers of the
Settlement Class or to Class Counsel in the settlement will not be "restricted
securities" as defined in Rule 144(a)(3) under the Act and that, accordingly,
(i) members of the Settlement Class, or Class Counsel, who acquire the
Settlement Shares and who are not deemed to be affiliates of the Company may
freely resell such shares without registration under the Act in reliance on the
exemption contained in Section 4(1) of the Act, and that (ii) members of the
Settlement Class, or Class Counsel, who are deemed to be affiliates of the
Company may resell such shares in compliance with Rule 144 under the Act,
without regard to the holding period requirement of that Rule.
III. REQUEST FOR ADVICE We respectfully request the written advice of the Division staff that it will
not recommend enforcement action to the Commission based upon the facts
described above and that it concurs with our opinions that (i) the Company may
issue the Settlement Shares in exhange for the claims of the Settlement Class
without registration under the Securities Act of 1933, as amended (the "Act") in
reliance upon the exemption from registration provided under section 3(a)(10)
thereof; (ii) the Settlement Shares as so issued will not be deemed to be
"restricted securities" within the meaning of Rule 144(a)(3) under the Act; and
(iii) the Settlement Shares as so issued will be freely transferable by members
of the Settlement Class and Class Counsel, except that if any such transferee is
deemed to be an "affiliate" of the Company within the meaning of Rule 144(a)(1)
under the Act, any public sale of Settlement Shares by such person without
registration under the Act will be required to comply with the provisions of
Rule 144 except for the rule's holding period requirement. In the event the Division staff should reach a preliminary conclusion that it
will be unable to take the no-action position we are requesting, we would
appreciate an opportunity to discuss the matter futher prior to the issuance of
a formal response. If you have any questions in connection with this matter or
if additional information is required, please call the undersigned at (714)
436-6848 or Michael J. Bettinger of this firm at (415) 983-1379.
We respectfully request that the Division staff respond to this letter as soon
as possible so we will be in a position to advise the Court of this matter at
the hearing which is scheduled to be held on August 1, 1994. In accordance with
Release No. 33-6269, seven additional copies of this letter are enclosed.
Very truly yours,
L. William Caraccio Encs. July 8, 1994
RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF CORPORATION FINANCERe: Aura Systems, Inc. (the "Company") Incoming letter dated June 3, 1994
Based upon the facts presented in your letter and contingent upon approval of
the Settlement by the Court, the Division will not recommend any enforcement
action to the Commission if the Company, in reliance upon your opinion as
counsel that registration is not required, issues shares of the Company's Common
Stock (the "Settlement Stock") in connection with the settlement of the Class
Action and Derivative Actions (both as defined in your letter) pending against
the Company, as described in your letter, without registration under the
Securities Act of 1933. Recipients of Settlement Stock who are not affiliates of
the Company may resell such Settlement Stock for their own accounts without
regard to Rule 144. Recipients of such Settlement Stock who are affiliates of
the Company may resell pursuant to Rule 144. Because the shares of Settlement
Stock will not be restricted securities, the holding period requirement of Rule
144(d) is inapplicable. Because these positions are based on the representations made to the Division in
your letter, it should be noted that any different facts or conditions might
require another conclusion. Further, this response only expresses the Division's
position on enforcement action and does not purport to express any legal
conclusion on the questions presented. Sincerely,
William H. Carter
Special Counsel
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