May 3 – May 10, 2007 Edition

SEC Seeks to Compel

Former AMS Execs

To Testify in Fraud Case

SAN DIEGO, CA/4/30/07–The Securities and Exchange Commission April 27 filed a subpoena in the U.S. District Court of Southern California to force Michael Nicita, former CEO of the now bankrupt American Marketing Services, and Edward Leonard, the company’s former Chief Financial Officer to testify in the SEC’S ongoing investigation of possible fraudulent schemes to manipulate the earnings of the San Diego-based book wholesaler.

In recent months, most of the company’s assets have been sold or assigned under Delaware’s U. S. Bankruptcy Court, yet the SEC investigation continues into AMS’s manipulation of earnings in order to meet Wall Street Analysts’ expectations. The SEC charges that AMS made misleading disclosures in its periodic reports through at least two fraudulent schemes related to its advertising services at the time when Nicita and Leonard headed the company.

For more than five months, both Nicita and Leonard have refused to appear for testimony or to produce non-privileged documents in the case. Both claim they are not obligated to comply because the documents the Commission seeks purportedly are protected by attorney-client privilege.

According to court records, the SEC says that AMS improperly inflated its earnings through at least two fraudulent schemes involving AMS’s advertising department. Based on the evidence the Commission has already filed two civil injunctive actions against two advertising department employees. Both schemes involved AMS’s co-op advertising program. The company apparently billed publishers for higher costs of printing and mailing on co-op advertising than in fact it incurred. In another scheme, AMS falsely increased its income by inappropriately reversing certain accrued liabilities. Apparently advertising funds collected from publishers and held by AMS were never credited to retailers, and were then shifted to AMS’s earnings.

The SEC says it has “serious concerns” about Nicita’s and Leonard’s assertion of client-attorney privileges and that the two have no basis for refusing to appear or producing non-privileged documents. The SEC told the court that the information they seek from Nicta and Leonard “is relevant to the Commission staff’s investigation.”

The Court has set a hearing on the order at 10:30 a.m. May 22 at which time the Court can direct Nicita and Leonard to comply and to provide sworn testimony to the Commission staff. The pair has until May 14 the show any reasons why they should not comply with the court order.

Meanwhile, two foreign segments of PGW, the distribution arm of AMS, have been sold–the UK unit to PGW’s UK subsidiary, headed by Medwyn Hughes and Cathy Parsons, and the Australian unit to Brumby Books in Melbourne. PGW’s US assets were assigned by the bankruptcy court earlier this year to Perseus Books Group.